Plummer v. American Institute of Certified Public Accountants
| Decision Date | 07 October 1996 |
| Docket Number | No. 95-2677,95-2677 |
| Citation | 97 F.3d 220 |
| Parties | Ray E. PLUMMER, Plaintiff-Appellant, v. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Karl J. Veracco, Larry L. Barnard (argued), Miller, Carson, Boxberger & Murphy, Fort Wayne, IN, Paul D. Refior, Warsaw, IN, for Plaintiff-Appellant.
John C. Hamilton (argued), John E. Doran, Doran, Blackmond, Ready, Hamilton & Williams, South Bend, IN, for Defendant-Appellee.
Before POSNER, Chief Judge, COFFEY and KANNE, Circuit Judges.
This appeal arises from a disciplinary action taken against Ray E. Plummer by the American Institute of Certified Public Accountants ("AICPA"). The AICPA claimed that Plummer, while acting in his capacity as an accountant, violated the organization's ethical rules concerning conflicts of interest by performing an audit of real estate that belonged to a trust of which he was a co-trustee. The AICPA disciplined Plummer for his misconduct pursuant to the organization's Bylaws. Plummer requested that the district court (1) declare the AICPA's disciplinary actions arbitrary, capricious, and contrary to Indiana law, and (2) enjoin the AICPA from publishing its disciplinary findings. The court denied Plummer's request for declaratory and injunctive relief. We affirm.
The plaintiff, Ray E. Plummer, is a certified public accountant ("CPA") and is licensed to practice his profession in the state of Indiana. 1 Since 1973, he has been a member of two voluntary professional associations, the Indiana Society of Certified Public Accountants and its national counterpart, the appellee AICPA. The broad purpose of the AICPA is to promote and maintain high professional standards among its membership. Accountants who join the AICPA agree to comply with the organization's Code of Professional Conduct ("the AICPA Code"), as well as the organization's rules and Bylaws. We briefly set forth the portions of the AICPA Code concerning conflicts of interest in the accounting profession.
Like many professional codes of conduct, the AICPA Code sets forth both guiding principles and specific rules. Among the general principles of the Code is that:
A Member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice 2 should be independent in fact and appearance when providing auditing and other attestation services.
AICPA Code (1991), Article IV, "Objectivity and Independence."
Rule 101 sets forth this principle of independence in mandatory rather than precatory language. It states that "A member in public practice shall be independent in the performance of professional services...." AICPA Code (1991), Section II, Rule 101 (emphasis added). The commentary accompanying and explaining this rule includes the following example:
Independence shall be considered to be impaired if ... a member had any of the following transactions, interests or relationships:
A. During the period of a professional engagement or at the time of expressing an opinion, a member or a member's firm
....
2. Was a trustee of any trust ... if such trust ... had any direct or indirect financial interest in the enterprise [for which professional services were performed].
AICPA Code (1991), Section II, Interpretation 101-1 (emphasis added).
The ethical charges against Plummer stem from accounting work that he performed in 1989-90 in connection with MidTown Estates, an apartment complex in Elkhart, Indiana. Plummer, according to the AICPA, had a conflict of interest because he conducted an audit of MidTown Estates while serving as co-trustee of a trust that was the sole owner of the property.
Frank Saemann and his wife, Irene, along with another couple, Tom and Susan Smith, purchased MidTown Estates in 1981. They obtained a loan for this purpose from the United States Department of Housing and Urban Development ("HUD"), assuming in exchange a HUD note and mortgage. HUD, the mortgagor, also insured the property and thus received copies of relevant financial documents, including the results of any audits on the property. Shortly after purchasing MidTown Estates, the Saemanns "bought out" the Smiths' interest in the property and acquired title as tenants-by-the-entirety. 3
In 1983, a trust was established in Frank Saemann's name ("the Franklin I. Saemann Trust" or "the Trust"), with a minimal amount of funding. Mr. Saemann himself was named the sole trustee.
By the summer of 1986, Mr. Saemann was eighty years of age and in failing health, suffering from advanced Parkinson's disease. His daughter filed a petition with the Kosciusko, Indiana County Circuit Court asserting that Mr. Saemann was "unable to maintain and care for his financial affairs" and requesting the appointment of a temporary guardian. The court granted the petition and appointed the First National Bank of Warsaw, Indiana as temporary guardian. The temporary guardian proceeded to marshall the assets of Mr. Saemann, including MidTown Estates, and received assistance from Ray Plummer, who had been the Saemanns' accountant since the early 1980's.
In early Fall 1986, the court took measures to transfer Mr. Saemann's assets from the temporary guardian to the Saemann Trust, after determining that it would be in the best interest of Mr. Saemann and his wife for the Trust to manage Mr. Saemann's finances. First, the court ordered Mr. Saemann to resign as trustee of the Trust. Three co-trustees were appointed to succeed Saemann: the First National Bank of Elkhart, Indiana, an individual named P.J. Brannen, and the appellant, Ray Plummer. At the request of the temporary guardian, the court also appointed the First National Bank of Elkhart as a successor temporary guardian. The court then ordered the successor temporary guardian to "execute and deliver deeds and instruments necessary to convey all the property held for the benefit of or in the name of Franklin I. Saemann to the successor trustees of the ... Trust." The court made no distinction between properties owned by Mr. Saemann individually and those owned by Saemann and his wife jointly as tenants-by-the-entirety. The successor temporary guardian, in compliance with the court's order, provided, inter alia, a warranty deed (executed October 10, 1986) purporting to transfer MidTown Estates to the Trust. After having arranged for the transfer of Frank Saemann's property to the Trust, the court terminated the guardianship proceedings and discharged the First National Bank of Elkhart as successor temporary guardian.
Frank Saemann died on July 26, 1987, some nine months following the transfer of MidTown Estates to the Trust. Subsequently, Irene Saemann asked Plummer and Company, Inc. (Ray Plummer was the sole owner and partner of this firm) to perform an audit of MidTown Estates. At this time, Plummer was serving as a co-trustee of the Trust, the legal owner of MidTown Estates. Nevertheless, Plummer agreed to conduct the audit and confirmed the auditing agreement with a letter to Irene Saemann dated November 27, 1987. In this letter, Plummer stated that "as co-trustee of the Franklin I. Saemann Declaration of Trust I will not discuss, vote, or take part in any actions of the ... Trust concerning MidTown Estates." Plummer explained that he was taking this action in order that he might "preserve [his] independence as an auditor," even though MidTown Estates represented only a small portion of the Trust assets. The "field work" for the audit of MidTown Estates was performed in 1989 and early 1990, and on February 21, 1990 Plummer submitted the audit results to the Trust (not to Irene Saemann). The audit covered the two-year period ending December 31, 1989.
When HUD, in its capacity as mortgagor and insurer of the MidTown Estates property, received a copy of Plummer's February 21, 1990 audit, it reviewed the contents of the audit report and supporting documents, to ascertain whether the property was operating on a financially-sound basis. Upon review, HUD detected an apparent conflict of interest on Plummer's part, for it was evident that Plummer had performed the audit of MidTown Estates and submitted his report while serving as a cotrustee of the Trust, the owner of the property. HUD wrote Plummer protesting what appeared to be an ethical violation arising out of Plummer's lack of independence from the auditee. Plummer responded on July 17, 1990, stating that HUD need not be concerned with this apparent conflict of interest because he had neither discussed, voted, nor taken part in any action of the Trust concerning MidTown Estates. 4
In a second letter to HUD, dated August 22, 1990, Plummer advanced another justification for his actions. He notified the Regional Inspector General of HUD that "two weeks ago it came to light that the MidTown Estates property is actually owned by Irene L. Saemann, and not the ... Trust." This, according to Plummer "[made] the independence issue moot with Irene L. Saemann personally owning the MidTown Estates property." HUD disagreed and filed a complaint with the AICPA that led to disciplinary proceedings against Plummer.
On August 13, 1991, Irene Saemann petitioned for a reopening of the guardianship proceedings "in order to clarify and adjust certain actions taken pursuant to a prior Court order." Specifically, her petition sought to have the circuit court invalidate conveyances to the Trust (in 1986) of certain properties (including MidTown Estates) jointly owned by herself and her late husband, Frank Saemann. The Kosciusko County Circuit Court granted the petition and, in an order dated October 7, 1991, declared that the "instruments executed by the temporary...
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