Eriks v. Denver

824 P.2d 1207, 118 Wash. 2d 451, 1992 Wash. LEXIS 45

• Court: Washington Supreme Court
• Decided: February 20, 1992
• Docket: 57235-6
• Status: Published

Opinions

Utter, J.

The promoters of a tax shelter scheme hired attorney William Denver to provide joint legal defense for all investors and promoters in audits before the Internal Revenue Service (hereinafter IRS) and in tax court cases. The investors later brought a class action suit against Denver alleging that he violated the former Code of Professional Responsibihty (hereinafter CPR) by representing both investors and promoters in the tax shelter and that his representation of multiple clients violated the Consumer Protection Act. The investors moved for partial summary judgment and the trial court ruled as a matter of law that Denver's multiple representation of clients with conflicting interests violated the CPR. The court ordered Denver to disgorge all fees paid in conjunction with representing the class members plus prejudgment interest. The trial court ruled against the class on the issue of the Consumer Protection Act's application to Denver's multiple representation. The investors then moved to recertify the class. The trial court denied the investors' motion. Denver appealed and the class cross-appealed. We affirm all of the trial court's rulings and the order requiring Denver to disgorge all fees paid in conjunction with representing the class members, plus prejudgment interest.

In 1977, Cliff Johnston, Percy Goodwin, and others (hereinafter the promoters) began selling investments in master sound recordings as tax shelters. By 1981, the IRS was challenging the tax credits and deductions taken by the investors. The promoters then formed the Master Recording Trust Fund (hereinafter MRTF) to provide joint legal defense of the investors and promoters in the anticipated audits and tax court cases.

The promoters hired attorney William Denver to represent those who contributed to the MRTF. Denver shared an office and support staff with the promoters. The promoters solicited contributions to MRTF from investors, and eventually over 240 investors contributed approximately $400 each to the MRTF.

Prior to starting his work for the MRTF, Denver knew that the IRS was, as a matter of policy, automatically rejecting all tax credits and deductions based on investments in master sound recordings. Denver knew that every investor would be audited and believed that the credits and deductions would be disallowed. Both prior to and during his representation of MRTF clients, Denver knew of no such tax credit or deduction that had been allowed after an IRS audit.

At the time he undertook the MRTF representation, Denver knew that his investor clients potentially could have civil claims against his promoter clients. Denver discussed all his potential conflicts of interest with his promoter clients, but did not do so with his investor clients.

A tax court hearing was held in March 1983. Widespread title and appraisal problems with the master sound recordings were found. In spite of these problems, Denver continued to represent some of the MRTF members without advising them of their rights vis-a-vis the promoters. Denver later advised the MRTF investors to settle with the IRS and obtain independent legal counsel if they had questions about remedies that they might have against the promoters.

In 1985, the investors filed a class action suit alleging that Denver was negligent in his representation of them. The complaint also alleged that Denver's representation of both promoters and investors was a breach of his fiduciary duty to the investors and was an unfair or deceptive act under the Consumer Protection Act. The court certified the class under CR 23(b)(3). The court later denied defendant's motion to decertify the class and ordered the trial bifurcated into two phases, one phase to address issues common to all parties, the other phase to address all individual claims of negligence and malpractice.

In 1988, the trial court granted the investors' motion for partial summary judgment on the issue of Denver's alleged breach of fiduciary duty, ruling as a matter of law that by October 1981 there was an actual conflict of interest between Denver's investor clients and promoter clients. The judge then ruled that Denver's failure to disclose the conflict of interest to his investor clients violated former CPR DR 5-105, and that such a violation was a breach of Denver's fiduciary duty to his investor clients. The judge then ordered Denver to disgorge all fees paid in conjunction with representing the class members, plus prejudgment interest.

The investors' motion for a summary judgment awarding them treble damages for violation of the Consumer Protection Act (hereinafter CPA) was denied, the trial court ruling that trebling the amount to be disgorged was not appropriate under the CPA. The investors then moved to recertify the class from a CR 23(b)(3) class to a CR 23(b)(2) class, arguing that disgorgement of fees was relief that was equitable in nature. The trial court denied the motion to recertify the class and ruled that it was improper to recertify the class after already granting affirmative relief. After the Court of Appeals certified the case to this court pursuant to RAP 4.3, we granted review of all three of the trial court's rulings.

I

The first issue in this case is whether the trial court properly concluded that, as a matter of law, Denver violated the CPR.¹ Since the trial court decided this case on a motion for summary judgment, this court must view all of the facts and reasonable inferences from them in the light, most favorable to the nonmoving party. Wood v. Seattle, 57 Wn.2d 469, 473, 358 P.2d 140 (1960). Summary judgment is appropriate:

"if the pleadings, depositions, [answers to interrogatories,] and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

Hartley v. State, 103 Wn.2d 768, 774, 698 P.2d 77 (1985) (quoting CR 56(c)). A material fact is "one upon which the outcome of the litigation depends". Barrie v. Hosts of Am., Inc., 94 Wn.2d 640, 642, 618 P.2d 96 (1980).

Denver argues that it was improper to grant summary judgment in the face of two expert affidavits opining that his actions did not give rise to a conflict of interest.² Since an expert opinion on an "ultimate issue of fact" is sufficient to defeat a motion for summary judgment (italics ours), Lamon v. McDonnell Douglas Corp., 91 Wn.2d 345, 352, 588 P.2d 1346 (1979), Denver's argument on this issue is based on the assumption that the determination of whether a conflict of interest exists is a question of fact. There are Court of Appeals cases that indicate that this determination is a question of law. In Marquardt v. Fein, 25 Wn. App. 651, 612 P.2d 378 (1980), an attorney was hired to represent a class of defendants against an action brought by the insurance commissioner. The attorney also represented other defendants who had different interests from the class members. The trial court found as a matter of law that the attorney had a conflict of interest. 25 Wn. App. at 656. The Court of Appeals upheld the trial court without any comment on the issue of whether the determination of whether the attorney violated the CPR was a question of law or fact. Later, in Stroud v. Beck, 49 Wn. App. 279, 742 P.2d 735 (1987), the Court of Appeals specifically held that the question of whether an attorney has breached his fiduciary duty to a client is a question of law. 49 Wn. App. at 288.

We have never addressed the question of whether the determination of a violation of the CPR is a question of law or fact. Since an attorney's fiduciary duty to a client arises from the same rules of conduct that proscribe an attorney from representing multiple parties with conflicting interests, it is logical to extend the holdings from Marquardt and Stroud to the determination of whether an attorney's conduct violates the relevant Rules of Professional Conduct. Thus, we hold that the question of whether an attorney's conduct violates the relevant Rules of Professional Conduct is a question of law.³ See, e.g., Burnette v. Morgan, 303 Ark. 150, 794 S.W.2d 145 (1990); McCall v. District Court, 783 P.2d 1223 (Colo. 1989); Attorney Grievance Comm'n v. Korotki, 318 Md. 646, 569 A.2d 1224 (1990); State v. Romero, 563 N.E.2d 134 (Ind. Ct. App. 1990); Bonanza Motors, Inc. v. Webb, 104 Idaho 234, 657 P.2d 1102 (Ct. App. 1983).

As a result of our holding, we decline to accept Denver's position. When a trial court is presented with a question of law, the court may properly disregard expert affidavits that contain conclusions of law. Charlton v. Day Island Marina, Inc., 46 Wn. App. 784, 788, 732 P.2d 1008 (1987). See State v. O'Connell, 83 Wn.2d 797, 816, 523 P.2d 872, 77 A.L.R.2d 874 (1974) (the issue of whether an attorney must disclose his fee-sharing arrangements is a question of law and that expert opinion on the matter is therefore improper). Thus, the trial court was entitled to give as much weight as it thought proper, or no weight at all, to the affidavits. Summary judgment was not inappropriate because the affidavits did not express an expert opinion on "ultimate issues of fact."

CPR DR 5-105(A) and (B) are the rules at issue. Those rules require an attorney to refuse employment, or to discontinue multiple employment,

if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, except to the extent permitted under section (C).

CPR DR 5-105(B). CPR DR 5-105(C) allows multiple representation where (1) it is obvious the lawyer can adequately represent each chent, and (2) each client consents to the multiple representation "after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment". The purpose of the CPR and the disciplinary rules is to protect the public from attorney misconduct. In re McNerthney, 95 Wn.2d 38, 41, 621 P.2d 731 (1980). We will construe the CPR broadly to achieve that purpose. In re McGlothlen, 99 Wn.2d 515, 522, 663 P.2d 1330 (1983). Thus, CPR DR 5-105 is interpreted broadly to protect the public from the evils of multiple representation of clients with potentially conflicting interests.

The Ethical Considerations (hereinafter EC) illustrate the problems inherent in such representation.

If a lawyer accepted such employment and the interests did become actually differing, he would have to withdraw from employment with likelihood of resulting hardship on the clients . . ..

CPR EC 5-15. That is exactly what happened in this case. After the IRS denied several investor clients' deductions, those clients asked Denver whether they had any legal recourse against the promoters. Denver's response was:

I. . . made it quite clear. . . that they should obtain independent counsel if they wished to pursue any actions against other parties in this matter and I did not advise them as to possible recourse against the persons who sold them their Master Sound Recordings.

Respondents' Clerk's Papers, at 34. Thus the evil the rules were designed to prevent actually came about in this case. Denver could not advise his clients as to an appropriate course of action. His inability to properly advise his clients violated Denver's duty of loyalty to those clients. Model Rules of Professional Conduct, Rule 1.7 comment, at 73 (1984).⁴ Both the investor and promoter clients were forced to obtain new counsel, with all the resulting hardships and expenses such actions inevitably entail.

The Ethical Considerations to the CPR make it clear the rules disfavor multiple representation anytime there is even a potential conflict of interest. CPR DR 5-105 applies not only when there is an actual conflict, but when the various clients' interest "may" be merely "inconsistent, diverse, or otherwise discordant." (Italics ours.) CPR EC 5-14. An attorney should resolve all doubts concerning whether the multiple representation might affect his judgment against undertaking the representation. CPR EC 5-15.

Even where an attorney is justified in accepting multiple representation of clients with differing interests,

it is nevertheless essential that each client be given the opportunity to evaluate his need for representation free of any potential conflict and to obtain other counsel if he so desires.

CPR EC 5-16. Denver provided that opportunity to his promoter clients, but denied it to his investor clients. In so doing Denver violated his duty to explain any circumstances that might cause a client to doubt Denver's loyalty. CPR EC 5-19. Therefore, as a matter of law, Denver violated the CPR.

In this case, there are no material facts in dispute. Denver recognized from the beginning that a potential conflict of interest existed.⁵ The source of that potential conflict is obvious. When Denver undertook the joint representation, he knew the IRS was disallowing these types of tax shelters. He knew the IRS would audit every investor, and he believed the IRS would disallow the tax credits and deductions. Most importantly, he knew that if the IRS disallowed the tax credits, his investor clients would potentially have claims against his promoter clients, and the potential for a conflict of interest would be enhanced. Respondents' Clerk's Papers, at 87, 91.

Although it is clear that a potential conflict of interest existed prior to Denver undertaking the joint representation, and that Denver was aware of that conflict, that fact alone does not mandate a finding that Denver violated the CPR. An attorney may represent multiple clients with potentially conflicting interests where (1) it is obvious the attorney can adequately represent each client; and (2) each client consents to the multiple representation after full disclosure of the potential conflict. CPR DR 5-105(C). Denver did discuss the potential conflict of interest with his promoter clients (including his father-in-law) prior to undertaking the representation. Respondents' Clerk's Papers, at 86-87; Appellants'. Clerk's Papers, at 366. He did not, however, discuss the conflict with his investor clients. Thus, with respect to his investor clients, Denver violated the terms of CPR DR 5-105(C).

Denver does not contest the fact that he represented both investors and promoters, and he does not assert that he advised investors of potential conflicts of interest. There simply are no material facts in dispute. The trial court properly granted the investors' motion for partial summary judgment since it correctly concluded that, as a matter of law, Denver violated the CPR.

Our decision requires an attorney who is aware of potential conflicts to fulfill his or her duty under the CPR by fully disclosing those conflicts before undertaking the multiple representation. The attorney must also discuss the dangers inherent in multiple representation and allow the clients the opportunity to decide whether their interests are best served by independent representation. Today, we reaffirm this court's commitment to interpreting attorney discipline rules for the benefit of the public. An attorney must discuss all potential conflicts of interest of which he or she is aware prior to undertaking the multiple representation.

II

The trial court ordered Denver to return all of the fees, plus prejudgment interest, paid by his investor clients. Denver maintains that the court's order is in error absent a finding of damages and causation. The only Washington case Denver cites for the proposition that the court must find damage and causation before ordering return of fees is Sherry v. Diercks, 29 Wn. App. 433, 628 P.2d 1336, review denied, 96 Wn.2d 1003 (1981). However, Diercks only holds that causation and damage must be shown to establish a legal malpractice claim against an attorney. 29 Wn. App. at 437-38.

The trial court did not decide that Denver committed malpractice. The trial court ruled as a matter of law that, because of the conflict of interest, Denver could not adequately represent both investors and promoters. The malpractice and negligence issues were reserved for phase two of the trial. Thus, Denver's reliance on malpractice cases is misplaced.

The trial court specifically relied on Woods v. City Nat'l Bank & Trust Co., 312 U.S. 262, 85 L. Ed. 820, 61 S. Ct. 493 (1941) and Silbiger v. Prudence Bonds Corp., 180 F.2d 917 (2d Cir. 1950), cert. denied, 340 U.S. 831, 95 L. Ed. 610, 71 S. Ct. 37 (1950) in ordering disgorgement. In Woods a unanimous Court noted:

Where [an attorney] . . . was serving more than one master or was subject to conflicting interests, he should be denied compensation. It is no answer to say that fraud or unfairness were not shown to have resulted. . . .

... A fiduciary who represents [multiple parties] . . . may not perfect his claim to compensation by insisting that, although he had conflicting interests, he served his several masters equally well .... Only strict adherence to these equitable principles can keep the standard of conduct for fiduciaries "at a level higher than that trodden by the crowd." See Mr. Justice Cardozo in Meinhard v. Salmon, 249 N. Y. 458, 464; 164 N. E. 545 [(1928)].

Woods, 312 U.S. at 268-69. The general principle that a breach of ethical duties may result in denial or disgorgement of fees is well recognized. S. Gillers & N. Dorsen, Regulation of Lawyers: Problems of Law and Ethics 265 (2d ed. 1989); Ross v. Scannell, 97 Wn.2d 598, 610, 647 P.2d 1004 (1982) ("[pjrofessional misconduct may be grounds for denying an attorney his fees").* **⁶

The trial court found that Denver violated the CPR and breached his fiduciary duty to his clients. Disgorgement of fees is a reasonable way to "discipline specific breaches of professional responsibility, and to deter future misconduct of a similar type." In re Eastern Sugar Antitrust Litig., 697 F.2d 524, 533 (3d Cir. 1982). Such an order is within the inherent power of the trial court to fashion judgments. Allen v. American Land Research, 95 Wn.2d 841, 852, 631 P.2d 930 (1981). Therefore, the trial court's order is affirmed.

Ill

The investors filed a cross appeal challenging the trial court's ruling concerning the application of the Consumer Protection Act.⁷ In the trial court the investors brought a motion for summary judgment seeking a declaration that Denver's acts violated the CPA as a matter of law. The court denied the motion for summary judgment.

We must first determine whether the CPA applies at all on the facts of the case. To establish a CPA violation the claimant must prove the defendant's act or practice (1) is unfair or deceptive, (2) occurs in the conduct of trade or commerce, (3) affects the public interest, and (4) causes (5) injury to the plaintiff in his or her business or property. Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 784-85, 719 P.2d 531 (1986). Thus, the CPA only applies to acts occurring in trade or commerce.

The provision of legal services does not generally fall within the definition of "trade or commerce", except as those services relate to the "entrepreneurial aspects" of the practice of law. Short v. Demopolis, 103 Wn.2d 52, 60-61, 691 P.2d 163 (1984); Demopolis v. Peoples Nat'l Bank, 59 Wn. App. 105, 796 P.2d 426 (1990). The entrepreneurial aspects of legal practice are those related to:

how the price of legal services is determined, billed, and collected and the way a law firm obtains, retains, and dismisses clients.

Short, 103 Wn.2d at 61. Claims for malpractice and negligence are not subject to the CPA, since those claims go to the competence and strategy of lawyers, and not to the entrepreneurial aspects of practice. Short, 103 Wn.2d at 61-62. This is true even where other remedies available are inadequate. Short, 103 Wn.2d at 62.

The trial court found, as a matter of law, that Denver violated the Code of Professional Responsibility and therefore breached his fiduciary duty to his investor clients. The investors claim that Denver's concurrent representation of clients with conflicting interests was an unfair or deceptive practice. They reason that, but for Denver's deceptive concealment of the conflict, the investor clients would not have engaged Denver. Therefore his deceptive act relates to the way he obtained his clients, and is part of the entrepreneurial aspect of practice.

The investors cite Quimby v. Fine, 45 Wn. App. 175, 724 P.2d 403 (1986), review denied, 107 Wn.2d 1032 (1987) to support their position. In Quimby plaintiffs alleged that a doctor substituted one medical procedure for another without the patient's informed consent. Quimby sued the doctor alleging, among other things, a violation of the CPA. The trial court denied defendant's motion for summary judgment on the CPA claim. In affirming the denial of the summary judgment motion, the Court of Appeals held the doctor's acts would be covered by the CPA if those acts involved the entrepreneurial aspects of practice. 45 Wn. App. at 181. The court held that if the plaintiff proved the doctor acted for the purpose of increasing profits or gaining clients, then his acts were entrepreneurial in nature. 45 Wn. App. at 181-82.

Applying Quimby's reasoning to this case, Denver's acts only violated the CPA if he failed to disclose the conflict for the purpose of obtaining clients or increasing profits. Determining whether he acted for entrepreneurial purposes is a question of fact. Quimby, 45 Wn. App. at 182. It is a material fact because the outcome of the litigation depends on its resolution. Barrie v. Hosts of Am., Inc., 94 Wn.2d 640, 642, 618 P.2d 96 (1980). The fact is certainly disputed by the parties. Therefore, there is a material fact in dispute, and the trial court's denial of summary judgment was proper.

The investors also maintain the trial court erred in refusing to treble the amount disgorged, and to award attorney's fees under the CPA. Since the trial court found no CPA violation, there was no error. Even if there were a CPA violation, the amount of attorney’s fees and costs awarded the prevailing party is within the discretion of the trial court. State v. Ralph Williams' North West Chrysler Plymouth, Inc., 87 Wn.2d 298, 314, 553 P.2d 423 (1976), appeal dismissed, 430 U.S. 952 (1977). The trial court's determination will not be overturned on appeal absent a manifest abuse of discretion. 87 Wn.2d at 314. No such abuse of discretion is present in this case.

IV

This case was originally certified in 1986 as a CR 23(b)(3) class. In 1989, several months after the trial court granted the investors' motion for partial summary judgment, the investors moved to recertify the class to a CR 23(b)(2) class. The trial court denied the motion, ruling that:

I simply feel [this motion] comes too late. . . .

Because of the fact that the Court has granted affirmative relief with respect to the disgorgement of fees, and because of the language of the rule, I do not think it is equitable that I grant the motion to amend the class order ....

Report of Proceedings (Feb. 1, 1989), at 27.

The investors argue the court should have recertified the class after the court bifurcated the trial. The court bifurcated the trial with one phase determining those issues common to all members (phase one) and one phase determining individual issues of damages and malpractice (phase two). At that point, the investors argue, the court should have recertified phase one under CR 23(b)(2). CR 23(b)(2) applies where:

The party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole . . .[.]

The investors argue Denver's violation of the CPR affected the class as a whole. They further argue the trial court's order for a return of fees is akin to restitution, and therefore is injunctive in nature. The investors conclude that the disgorgement claim is common to all members of the class, and therefore the class should be recertified.

Denver contends, however, the trial court erred in denying his motion to decertify the class. He argues individual questions predominate over common ones, and that other forums were more appropriate for settling these claims.

A trial court's decision to certify a class is discretionary. Washington Educ. Ass'n v. Shelton Sch. Dist. 309, 93 Wn.2d 783, 790, 613 P.2d 769 (1980). The court's decision will not be overturned absent a manifest abuse of discretion. Mullen v. North Pac. Bank, 25 Wn. App. 864, 879, 610 P.2d 949, review denied, 94 Wn.2d 1009 (1980).

There is no manifest abuse of discretion in this case. CR 23(b)(2) is limited to injunctive or declaratory relief. 3A L. Orland, Wash. Prac., Rules Practice § 5263, at 427 (3d ed. 1980). The investors did not request, and the trial court did not grant, injunctive relief. The court did grant declaratory relief, in the sense that it declared Denver's actions violated the CPR. However, the court's order of disgorgement is monetary relief. Where the declaration merely forms the basis for monetary relief, a CR 23(b)(2) action is not appropriate. See McDonnell Douglas Corp. v. United States Dist. Court, 523 F.2d 1083 (9th Cir. 1975), cert. denied, 425 U.S. 911, 47 L. Ed. 2d 761, 96 S. Ct. 1506 (1976); 7A C. Wright, A. Miller & M. Kane, Federal Practice § 1775 (1986).

Even if the investors are correct that the class could have been certified under CR 23(b)(2), the question for this court is whether it was an abuse of discretion for the court to not recertify the class. It was the investors who initially requested the CR 23(b)(3) certification. They did not request recertification until after a determination of the case on the merits.⁸ There was no abuse of discretion.

As to Denver's assignment of error, a trial court's class certification will be upheld if it appears from the record that the court considered all of the criteria of CR 23. Washington Educ. Ass'n, 93 Wn.2d at 793. Here the trial judge specifically concluded there were common questions of fact and that "the interests of justice would be impaired by requiring MRTF members to proceed individually." The judge also incorporated by reference the authorities and arguments cited in the investors' brief. Therefore, it is obvious the judge considered all of the criteria of CR 23. The trial court committed no error in denying Denver's motion to decertify the class.

Dore, C.J., and Brachtenbach, Durham, Smith, and Guy, JJ., concur.

1 The Rules of Professional Conduct replaced the Code of Professional Responsibility effective September 1, 1985. See Official Rules of Court (1985-1986). All of the allegations relating to Denver's conflict of interest are based on events that occurred in 1981 to 1983. Therefore, the CPR governs Denver's conduct.

2 Denver submitted affidavits from University of Puget Sound law professor David Boemer and Seattle tax practitioner Robert Kaplan.

3 The court's holding today does not contradict the decision in Halvorsen v. Halvorsen, 3 Wn. App. 827, 479 P.2d 161 (1970), review denied, 78 Wn.2d 996 (1971). In Halvorsen, an attorney represented both parties in a property settlement agreement stemming from an uncontested divorce, but informed the parties of the potential conflicts of interest and advised them to seek independent counsel. Halvorsen should be read as holding that once the court determines as a matter of law that an attorney complied with the CPR, then whether the attorney's subsequent multiple representation is reasonable is a question of fact.

4 Although this comment is not part of the CPR, its reasoning applies equally to those rules.

5 The following colloquy from Denver's deposition highlights this point.

"Q: When did [the potential for a conflict of interest] first become apparent to you?

"A: The potential for a conflict [of interest] between Mr. Johnston and his clients —

"Q: Goodwin and Johnston?

"A: Goodwin and Johnston, the sellers of these masters, existed on or about the 15th of October [1981]."

Respondents' Clerk's Papers, at 46-47. October 15, 1981, was the date Denver undertook the multiple representation.

6 See also In re Eastern Sugar Antitrust Litig., 697 F.2d 524 (3d Cir. 1982); Frank v. Bloom, 634 F.2d 1245 (10th Cir. 1980); United States v. Apple, 292 F. 935 (8th Cir. 1923); Moses v. McGarvey, 614 P.2d 1363 (Alaska 1980); In re Hansen, 586 P.2d 413 (Utah 1978).

7 RCW 19.86.

8 Investors now seek recertification so that Denver will have to return the fees to those people who opted out of the CR 23(b)(3) litigation. Reply Brief of Respondents, at 8-9.