Neusteter v. District Court In and For City and County of Denver

• Decision Date: 09 January 1984
• Docket Number: No. 83SA151,83SA151
• Citation: 675 P.2d 1
• Parties: Myron D. NEUSTETER; Shirley R. Neusteter; Myron D. Neusteter, Jr.; William H. Neusteter; Cynthia N. Auer, individuals; the Neusteter Realty Company; Stetco, Inc.; and the Neusteter Company, Colorado corporations, Petitioners, v. The DISTRICT COURT In and For the CITY AND COUNTY OF DENVER, State of Colorado, the Honorable Roger Cisneros, one of the Judges thereof, Respondents.
• Court: Colorado Supreme Court

Page 1

675 P.2d 1

Myron D. NEUSTETER; Shirley R. Neusteter; Myron D Neusteter, Jr.; William H. Neusteter; Cynthia N. Auer individuals; the Neusteter Realty Company; Stetco, Inc. and the Neusteter Company, Colorado corporations, Petitioners, v. The DISTRICT COURT In and For the CITY AND COUNTY OF DENVER State of Colorado, the Honorable Roger Cisneros, one of the Judges thereof, Respondents.

No. 83SA151.

Supreme Court of Colorado, En Banc.

Jan. 9, 1984.

Brownstein, Hyatt, Farber & Madden, Mark F. Leonard, Denver, for petitioners.

Holme, Roberts & Owen, Donald K. Bain, Denver, Berndt Lohr-Schmidt, Los Angeles, Cal., for respondents.

LOHR, Justice.

The petitioners, defendants in the action below, seek relief under C.A.R. 21 to prevent the Denver District Court from enforcing an order compelling testimony and the production of documents allegedly falling within the accountant-client privilege, section 13-90-107(1)(f), C.R.S.1973. Recognizing that the disclosure of privileged information might cause irreparable harm to the defendants, we issued a rule to show cause why a writ should not be issued. We now hold that the communications are not privileged in the context of this litigation, and discharge the rule.

I.

We glean the facts relevant to this proceeding from the amended and supplemental complaint. ¹ The defendants-petitioners consist of five individuals and three Colorado corporations. The corporations are The Neusteter Company (store company), The Neusteter Realty Company (realty company), and Stetco Inc., a wholly-owned subsidiary of the realty company. The five individual petitioners are Myron D. Neusteter, his wife and his three children (collectively, the Neusteters), who together hold the controlling interests in the store company and the realty company. The store company operates a downtown Denver store. Stetco, Inc., owns real estate in Denver and Colorado Springs.

The plaintiffs are minority shareholders in the two corporations. They are Miriam N. Lackner, who is the younger sister of Myron D. Neusteter, and her four children (collectively, the Lackners). In their complaint, the Lackners allege that the Neusteters have violated their fiduciary duties as officers, directors, and controlling shareholders of the realty company. The Lackners brought the action both individually and derivatively on behalf of the realty company. They seek relief including compensatory and punitive damages for themselves and the realty company from the Neusteters, imposition of a constructive trust on a small number of shares determining control of the realty company, an accounting, and dissolution and liquidation of the realty company.

The Neusteters control 51.11% of the common stock and 47.59% of the preferred stock of the realty company, as well as 71.39% of the common stock ² and 75.46% of the preferred stock of the store company. The remainder of the common and preferred stock in these corporations is owned legally and beneficially by the Lackners. Since the death of the father of Myron D. Neusteter and Miriam N. Lackner, the Neusteters have utilized their stock ownership to elect themselves to positions as directors and officers of the realty company and the store company and have thereby controlled those corporations.

The Lackners allege that Myron D. Neusteter improperly purchased 250 shares of the common stock of the realty company from his father's estate and caused the realty company to purchase and redeem other shares of its stock while he was both executor of the estate and president of the realty company. Neusteter's purpose in taking this action, the Lackners aver, was to secure to the Neusteters a controlling interest in the realty company and to deprive the Lackners of control. The Lackners ask that a constructive trust be imposed on 125 of the 250 shares for their benefit. They also aver that, when the store company encountered financial difficulties during the past few years, the Neusteters utilized realty company credit for store company benefit, encumbered realty company assets to obtain credit for the store company, and used realty company funds to pay store company debt, among other improper activities calculated to benefit the store company to the detriment of the realty company. Damages for such acts would ordinarily accrue to the realty company in a shareholders' derivative suit. However, since the Lackners also allege that the Neusteters have persistently engaged in illegal, oppressive and fraudulent acts that have involved misapplication and waste of the assets of the realty company, the Lackners request that the realty company be dissolved and that their share of the damages that would accrue to the realty company be distributed to them in liquidation.

The Lackners issued a notice of deposition and a subpoena duces tecum seeking to depose members of the accounting firm retained by the store company and the realty company, and to examine their records. ³ At the scheduled deposition, the accountant did not produce the subpoenaed records and, on advice of counsel, terminated the deposition after preliminary questioning, claiming that the information sought was protected by the accountant-client privilege, section 13-90-107(1)(f), C.R.S.1973. The Lackners moved to compel discovery, and the defendants moved for protective orders. The trial court held a hearing, granted the motion to produce, and denied the request for protective orders. The court reasoned that the accountant-client privilege does not apply in a shareholders' derivative action brought in good faith, notwithstanding the presence of individual claims by the shareholders who initiated the derivative suit. The petitioners then brought this original proceeding challenging that ruling.

II.

Exercise of this court's original jurisdiction is discretionary and is governed by the circumstances of each case. E.g., Sanchez v. District Court, 624 P.2d 1314 (Colo.1981). Generally, pretrial discovery issues are to be resolved by the trial court, exercising its sound discretion. Appeal, not an original proceeding, is the appropriate mechanism for review. However, when a discovery ruling "will have a significant effect on a party's ability to litigate the merits of the controversy and the damage to a party could not be cured on appeal," we may entertain an original proceeding. Kerwin v. District Court, 649 P.2d 1086, 1088 (Colo.1982). Accord, e.g., Caldwell v. District Court, 644 P.2d 26 (Colo.1982); Hawkins v. District Court, 638 P.2d 1372 (Colo.1982). Because in the present case there would be no effective way to undo the breach of the asserted privilege if the trial court's ruling were to be held erroneous on appeal, and substantial interests are at stake, we elected to issue a rule to show cause.

III.

The accountant-client privilege is established by section 13-90-107(1)(f), C.R.S.1973, which provides that: "A certified public accountant shall not be examined without the consent of his client as to any communication made by the client to him ..., or his advice, reports, or working papers given or made thereon in the course of professional employment ...." In Pattie Lea, Inc. v. District Court, 161 Colo. 493, 423 P.2d 27 (1967), we held that the accountant-client privilege "does not protect a corporation from being required to disclose to its own stockholders in a derivative suit brought in good faith against the corporation, communications made by the corporation to its certified public accountant." Id. at 498, 423 P.2d at 30. The district court in the present case ruled that this was a good-faith shareholders' derivative suit, and that Pattie Lea was dispositive. The petitioners argue that Pattie Lea is distinguishable on three grounds: they assert that the shareholders' derivative suit is not brought in good faith, that the minority shareholders are also pursuing individual claims, and that these individual claims are inconsistent with the derivative claims. As part of their argument that this is not a good faith derivative action, the petitioners assert that the plaintiffs have not satisfied the special requirements of C.R.C.P. 23.1 with respect to such suits. We first consider the standards to be utilized in determining the applicability of the accountant-client privilege, next apply those standards to the facts of the present case, and finally address the specific objections advanced by the petitioners.

A.

The statutory accountant-client privilege is analogous to the attorney-client privilege, long established at common law and now codified at section 13-90-107(1)(b), C.R.S.1973 (1982 Supp.). The accountant-client privilege encourages full and frank communication between certified public accountants and their clients so that professional advice may be given on the basis of complete information, free from the consequences or the apprehension of disclosure. Cf. Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 682, 66 L.Ed.2d 584 (1981) (discussing the foundations of the attorney-client privilege); Losavio v. District Court, 188 Colo. 127, 533 P.2d 32 (1975) (explaining the background and purposes of the attorney-client privilege). Conflicting policy considerations are introduced, however, when the client is a corporation and the parties seeking disclosure of a communication between a certified public accountant and the corporation are shareholders in that legal entity. We faced that precise situation in Pattie Lea, where an action was brought by a shareholder "in his capacity as a minority stockholder of the various [defendant] corporations ... on behalf of himself and all other stockholders similarly situated." Id. 161 Colo. at 495, 423 P.2d at 28. ⁴ In that case, we permitted the shareholder to take the deposition of a certified public accountant concerning communications with all defendant corporations in which the shareholder held stock, rejecting the claim of the corporations that the...