IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DOUGLAS M. DEWAR, No. 69701-3-1 Respondent, (consolidated with f-O C=3 No. 70190-8-1) v.
DIVISION ONE KENNETH SMITH and JANE DOE SMITH, husband and wife, and the marital community composed PUBLISHED OPINION «jD thereof; TRANER SMITH & CO. PLLC, a Washington professional limited liability company, FILED: January 26, 2015 Petitioners.
Leach, J. — On discretionary review, we consider the extent of an
accountant's duty to a third party. Certified public accountant (CPA) Kenneth
Smith and the accounting firm Traner Smith & Company PLLC (collectively
Smith) challenge the trial court's summary award of a $1,375,930.86 judgment to
Douglas Dewar for Smith's alleged negligent misrepresentations about a client's
tax return and related activities. Smith also challenges the denial of his request
for summary judgment on contract claims. Dewar asks this court to allow him to
supplement the record with information not considered by the trial court.
We agree that Smith breached a duty he owed to Dewar. But Dewar has
not established as a matter of law that Smith's negligent misrepresentation No. 69701-3-1 (consol. with No. 70190-8-1)/2
proximately caused his damages, and disputed issues of material fact preclude
summary judgment on the remaining issues considered by the trial court. We
deny Dewar's motion to supplement the record. We reverse and remand for
further proceedings consistent with this opinion.
FACTS
Bradley Beddall, a real estate developer, and Dewar, Beddall's financier
and accountant, participated over the years in many real estate joint ventures.
Around 2006, Dewar and Beddall began a condominium conversion project for
the Lea Hill Condominiums. The details of the documentation of their respective
obligations and the associated entities they used for the project are not important
to our analysis. Therefore, we will describe all transactions and documents as
taking place directly between Dewar and Beddall.
By 2009, the local real estate market had declined, the project had
floundered, Beddall owed to Dewar about $3,900,000, and Beddall could no
longer meet his obligations. In July 2009, Beddall told Dewar that he wanted out
of the project and all associated obligations that he owed Dewar. Dewar would
not release Beddall. In late 2009, Dewar sued Beddall for breach of loan
documents. The parties then discussed settlement for several months.
-2- No. 69701-3-1 (consol. with No. 70190-8-1)/3
In January 2010, Beddall signed a quit claim deed conveying the Lea Hill
property to Dewar. This deed stated it was effective December 29, 2009, and
preserved Beddall's liability to Dewar. In March 2010, Dewar and Beddall signed
a settlement agreement, also having a stated effective date of December 29,
2009. Beddall's attorney, Jonathan Hatch, also signed the agreement and
agreed to be bound by it. Critical to the agreement was Dewar's belief that
Beddall could obtain a large tax refund based upon his losses from the project.
As a result, the agreement required that Beddall transfer title to the Lea
Hill property, which generated losses, to Dewar and hire the accounting firm of
Traner Smith to timely file Beddall's 2009 tax return, seeking a refund of not less
than $1,000,000. The agreement gave Dewar the right of "review, evaluation,
and approval" of the tax return in his "sole and absolute discretion." Beddall
"irrevocably and permanently" assigned the tax refund to Dewar. The agreement
contained provisions intended to ensure Dewar's receipt of the tax refund, which
the Internal Revenue Service (IRS) would issue in Beddall's name.
Beddall signed an "irrevocable" power of attorney and appropriate IRS
Form 2848 authorizing attorney Hatch to sign the tax return, receive and
negotiate the refund check, and deliver the funds to Dewar. Hatch agreed to sign No. 69701-3-1 (consol. with No. 70190-8-1)/4
and file the return after Dewar approved it. He also agreed to deliver all refund
proceeds to Dewar.
Smith was not a party to the settlement agreement and did not sign it.
Smith's engagement letter to Beddall does not mention Dewar. But Kenneth
Smith knew the content of the settlement agreement and its purpose. During his
preparation of Beddall's tax return, Smith had a copy of the agreement.
Consistent with the Hatch-Beddall power of attorney and IRS forms, Smith
prepared the return for Hatch's signature.
On April 15, 2010, Hatch signed the completed tax return, which had
Beddall's address on it. As the settlement agreement required, Smith transmitted
the return to Dewar for his review. The same day, Dewar notified Smith that the
return contained three errors: the omission of Beddall's foreign bank accounts, a
missing entry for Beddall's sale of an apartment house, and the return address,
which the settlement agreement required to be Hatch's, not Beddall's. Dewar
concluded, "The only change I insist on is the address change."1 After Smith
changed the address, Hatch returned to Smith's office to sign the amended
return, which Smith filed the same day.
1 In an e-mail earlier that day, in which he asked about the tax return, Dewar instructed Smith, "Be sure to use Hatch's address." -4- No. 69701-3-1 (consol. with No. 70190-8-1)/5
Shortly after Smith filed the return, Beddall instructed him to stop
discussing the matter with Hatch and to communicate about the return only with
Beddall. In May 2010, after Beddall asked about the status of the refund, Smith
placed a conference call between Beddall, Smith, and an IRS representative via
an IRS practitioner's hotline. During the call, Beddall asked the IRS
representative to change the address on his tax return from Hatch's address to
Smith's address. This changed the address to which the IRS would send any
refund from Hatch's to Smith's. Smith was on the line but did not participate in
the conversation.
In early June, Dewar learned that he could no longer access Beddall's tax
return online. He sent an e-mail to Hatch, with a copy to Smith, asking Hatch to
confirm with Smith Dewar's right to review the tax return. Dewar also asked that
Hatch or Smith contact the IRS about the status of the refund. In response,
Smith forwarded to Dewar a copy of the original tax return with Hatch's address.
Smith did not tell Dewar or Hatch that Beddall had amended the address on the
return or in any manner indicate that the copy he provided was not currently
correct in all aspects. From both the settlement agreement and the events of
April 15, Smith knew about the importance of the return address to Dewar. No. 69701-3-1 (consol. with No. 70190-8-1)/6
In July 2010, the IRS sent four refund checks totaling $1,206,703.32 to
Smith's office. Smith notified Beddall, who instructed him to deliver the checks to
Beddall's son-in-law, Ron Rubin. Smith did so.
On August 16, 2010, Beddall sent an e-mail to Dewar and Hatch. He
stated that he had the tax refund money in Thailand, offered to pay Dewar
$500,000 "right now," and offered to "set up an account with $200,000 for
future/current legal costs or judgments." Beddall forwarded this e-mail to Smith
and also called Jonathan Hatch that day. Smith withdrew from his engagement
with Beddall.
Dewar sued Traner Smith and Kenneth Smith for conversion, civil
conspiracy, tortious interference with contractual relationship, breach of implied
contract, breach of duty owed to third-party beneficiary, breach of fiduciary
duties, and violation of the Consumer Protection Act, chapter 19.86 RCW. On
November 9, 2012, the trial court granted Dewar's motion for partial summary
judgment to establish that Smith owed Dewar a duty of care. The court also
concluded that Smith committed negligent misrepresentation when the address
on the tax return was changed, he received the checks, and he gave them to
Rubin without disclosing these actions to Dewar and Hatch. On the same day, No. 69701-3-1 (consol. with No. 70190-8-1)/7
the trial court denied Smith's motion for partial summary judgment to dismiss
contract claims. Smith filed a motion for discretionary review in this court.
On March 21, 2013, the trial court granted Dewar's motion for partial
summary judgment as to Dewar's damages caused by Smith's negligent
misrepresentation. The court concluded that Dewar "has been damaged as a
direct, undisputed, proximate cause of [Smith's] negligent misrepresentation in
the principal amount of $1,375,930.86."2 Smith again petitioned this court for
discretionary review. On May 23, 2013, the trial court struck the parties' trial date
pending appellate review. On the same day, Dewar voluntarily dismissed some
remaining claims without prejudice.
On August 2, 2013, a commissioner of this court granted discretionary
review, consolidating Smith's two petitions. On January 30, 2014, Dewar filed a
motion to supplement the record with a January 2014 stipulation and agreed
order between Kenneth Smith and the Board of Accountancy in disciplinary
proceedings.
2 In the same order, the court denied without prejudice Dewar's motion for entry of a final judgment under CR 54(b). -7- No. 69701-3-1 (consol. with No. 70190-8-1)/8
STANDARD OF REVIEW
This court reviews a partial summary judgment order de novo, engaging in
the same inquiry as the trial court.3 It considers the evidence in the light most
favorable to the nonmoving party and draws all reasonable inferences in that
party's favor.4 Summary judgment is appropriate where there are no genuine
issues of material fact and the moving party is entitled to judgment as a matter of
law.5
ANALYSIS
Federal Preemption
Smith contends that federal law preempts the trial court's decision
because federal statutes prohibit him from making any disclosures about
Beddall's tax return without Beddall's express consent. To support this
contention, Smith cites 26 U.S.C. § 6713(a) (1989), which imposes penalties on
a tax return preparer who "(1) discloses any information furnished to him for, or in
connection with, the preparation of any such return, or (2) uses any such
information for any purpose other than to prepare, or assist in preparing, any
3 Macias v. Saberhaqen Holdings, Inc., 175 Wn.2d 402, 407, 282 P.3d 1069 (2012); Woo v. Fireman's Fund Ins. Co., 161 Wn.2d 43, 52, 164 P.3d 454 (2007). 4 Lakev v. Puqet Sound Energy, Inc., 176 Wn.2d 909, 922, 296 P.3d 860 (2013). 5 CR 56(c). -8- No. 69701-3-1 (consol. with No. 70190-8-1)/9
such return." Similarly, 26 U.S.C. § 7216(a) (1989) provides that a tax return
preparer who "knowingly or recklessly" discloses or uses tax return information
"shall be guilty of a misdemeanor" and subject to criminal penalties. Smith points
out that federal law defines "tax return information" as "including, but not limited
to, a taxpayer's name, address, or identifying number, which is furnished in any
form or manner for, or in connection with, the preparation of a tax return of the
taxpayer."6
Dewar responds that Smith knew about the property settlement
agreement and, with Beddall's consent, gave opinions and freely shared
information among Beddall, Dewar, and Hatch as contemplated by the
agreement. This included Smith's transmission of the completed tax return to
Dewar for his prefiling review and approval. Dewar argues that Smith should not
be able to "waive the confidential relationship when they so desire and as
contemplated by the contract" and then later "use it as a sword in their defense of
what they in fact did." Smith responds that by the time Dewar inquired about the
status of the refund and requested a copy of Beddall's tax return, Beddall had
instructed him (Smith) not to discuss the tax return with anyone but Beddall.
Therefore, Smith was no longer authorized to disclose any of Beddall's tax return
information.
6Treas. Reg. § 301.7216-1(b)(3)(i) (2008). -9- No. 69701-3-1 (consol. with No. 70190-8-1)/10
We agree with Smith that once Beddall revoked his consent, federal law
prohibited Smith from disclosing confidential tax information, including
addresses.7 This federal prohibition preempts any state law tort duty to disclose.
But when Dewar requested a copy of Beddall's return, Smith had choices
besides disclosing taxpayer information in violation of federal law or transmitting
the misleading original return. He could have requested Beddall's consent to
share the amended return. If, as expected, Beddall refused, Smith could have
told Dewar that he couldn't share any further information because Beddall had
revoked his consent to disclosure. As Dewar noted at oral argument, Smith
could also have made a "noisy withdrawal" of representation after Beddall
changed the return address. Neither response would convey to Dewar the false
assurance that the return still contained Hatch's address, and neither would have
violated any legal or professional requirements. Smith's federal preemption
argument fails because federal law did not require him to make the misleading
response he provided.
7 26 U.S.C. § 7216(a); Treas. Reg. § 301.7216-1 (b)(3)(i); WAC 4-30- 050(3) (Accountants "must not without the specific consent of the client or the heirs, successors, or authorized representatives of the client disclose any confidential communication or information pertaining to the client obtained in the course of performing professional services."). -10- No. 69701-3-1 (consol. with No. 70190-8-1)/11
The Duty of Care and Trask v. Butler8
Smith challenges the trial court's decision that Smith owed Dewar a duty.
He argues that neither statutory nor common law, including our Supreme Court's
decision in Trask v. Butler, establishes any accountant's duty to third parties.
Federal and state laws and regulations, as well as the American Institute
of Certified Public Accountants Code of Professional Conduct (AICPA Code),
define the duties of certified public accountants.9 The AICPA Code states that
accountant members have the obligation to serve the public interest10 and
"should perform all professional responsibilities with the highest sense of
integrity," which "can accommodate the inadvertent error and the honest
difference of opinion [but] cannot accommodate deceit or subordination of
principle." "Integrity also requires a member to observe the principles of
objectivity and independence and of due care."11 Washington laws regulating
accountancy also emphasize the policy and purpose of protecting the public
interest.12 In the context of financial statements and records, a CPA violates the
8 123 Wn.2d 835, 872 P.2d 1080 (1994). 9See WAC 4-30-048, recognizing AICPA as an "[authoritative bod[y]" governing CPAs; http://www.aicpa.org/Research/Standards/CodeofConduct/ DownloadableDocuments/2009CodeofProfessionalConduct.pdf. This link is to the June 1, 2009, version of the code, which is the version in force at the time of most of the events described here. 10 AICPA Code of Professional Conduct ET § 53 (art. II). 11 AICPA Code of Professional Conduct ET § 54 (art. III). 12 RCW 18.04.015(b). -11- No. 69701-3-1 (consol. with No. 70190-8-1)/12
code of conduct by making or permitting a transmission of "materially false and
misleading information."13
The AICPA Code and Treasury Department Circular No. 230 also prohibit
a practitioner, including a CPA, from representing a client before the IRS if that
representation would involve a conflict of interest. Circular 230 defines a conflict
of interest as a situation where "[t]here is a significant risk that the
representation . . . will be materially limited by the practitioner's responsibilities to
another client, a former client or a third person, or by a personal interest of the
practitioner."14 Under state and federal law, CPAs also have a duty of
confidentiality.15
A CPA may rely in good faith on information furnished by the client.16 A
tax preparer "may not, however, ignore the implications of information furnished
to, or actually known by, the practitioner, and must make reasonable inquiries if
13 AICPA Code of Professional Conduct ET § 102.02 (102-1). 14 31 C.F.R. § 10.29(a)(2) (2007). This section also appears in Circular 230 § 10.29(a)(2). A practitioner may represent a client despite a conflict of interest if the practitioner reasonably believes that he or she will be able to represent both clients, the representation is not prohibited by law, and both clients expressly waive the conflict and give informed consent in writing at the time the existence of the conflict is known. 31 C.F.R. § 10.29(b); see also WAC 4-30-040; AICPA Code of Professional Conduct ET § 102.03 (102-2). 15 26 U.S.C. §§ 7216(a), 6713; 26 C.F.R. § 301.7216-3(a) (2008); WAC 4- 30-050(3). 16 31 C.F.R. § 10.34(d) (2007); Treasury Department Circular No. 230 § 10.34(d). -12- No. 69701-3-1 (consol. with No. 70190-8-1)/13
the information as furnished appears to be incorrect, inconsistent with an
important fact or another factual assumption, or incomplete."17
Washington courts have imposed a duty of care to third parties on several
classes of professionals. In ESCA Corp. v. KPMG Peat Marwick,18 our Supreme
Court identified circumstances where accountants had this duty. ESCA hired
accounting firm KPMG to perform audits and prepare financial statements in
support of ESCA's application for loans and a line of credit.19 These financial
statements mischaracterized ESCA's financial health, and the lending bank
sustained substantial losses when ESCA could not repay the loans.20 The bank
sued KPMG for negligent representation.21 Our Supreme Court held that the
third-party bank could sue KPMG for negligent misrepresentation where the bank
justifiably relied on KPMG's representations and audit information to make its
business decisions.22
Our Supreme Court imposed a similar duty on an engineering firm. In
Donatelli v. D.R. Strong Consulting Engineers, Inc.,23 a developer brought a
negligent misrepresentation claim against an engineering firm after delays and
17 31 C.F.R. § 10.34(d); Treasury Department Circular No. 230 § 10.34(d). 18 135 Wn.2d 820, 959 P.2d 651 (1998). 19 ESCA, 135 Wn.2d at 823-24. 20 ESCA, 135Wn.2dat825. 21 ESCA, 135Wn.2dat825. 22 ESCA, 135Wn.2dat828. 23 179 Wn.2d 84, 86-87, 312 P.3d 620 (2013). -13- No. 69701-3-1 (consol. with No. 70190-8-l)/14
cost overruns contributed to the developer's loss of the property in foreclosure.
The court held that the engineering firm had a duty arising independently of its
client contract to avoid negligent misrepresentations. Therefore, the developers
could assert tort as well as contract claims.24
These statutes, rules, and Washington cases involving a professional's
duty support the trial court's conclusion that Smith owed Dewar a duty of care.
Smith had a statutory and common law duty of care to act in the public interest.
And because he knew the relevant terms of the settlement agreement, he knew
Beddall intended Smith's professional services and the resultant tax refund to
benefit Dewar. From Dewar's critique of the original return, Smith knew the
importance to Dewar of the taxpayer address shown on the return. This
knowledge gave Smith a responsibility to a third person, Dewar, not to mislead
him about the return. Given the settlement agreement provisions for the sharing
of taxpayer information between Smith and nonclient Dewar and the history of
Smith's compliance with those provisions, Dewar justifiably relied on the
accuracy of Smith's later representations. As in ESCA and Donatelli, Smith
owed a professional duty to avoid misrepresentations to third-party Dewar.
Smith attempts to distinguish ESCA because it involved financial
statements intended for review by third parties, not confidential tax information.
24 Donatelli, 179 Wn.2d at 98. -14- No. 69701-3-1 (consol. with No. 70190-8-1)/15
But Smith offers no persuasive reason to distinguish between misleading
financial statements and misleading taxpayer information provided to a third
party.
Our Supreme Court has also imposed a duty of care to certain third
parties on attorneys. In Trask v. Butler, the court adopted a multifactor balancing
test to determine when an attorney owes a duty of care to a nonclient. Under this
test, a court must consider:
1. the extent to which the transaction was intended to benefit the plaintiff;
2. the foreseeability of harm to the plaintiff;
3. the degree of certainty that the plaintiff suffered injury;
4. the closeness of the connection between the defendant's conduct and the injury;
5. the policy of preventing future harm; and
6. the extent to which the profession would be unduly burdened by a finding of liability.125'
The first factor presents the threshold inquiry. If the attorney's client did not
intend the representation to benefit a nonclient, that nonclient has no standing to
sue.26
25 Trask, 123 Wn.2d at 843. 26 Trask, 123 Wn.2d at 842-43. -15- No. 69701-3-1 (consol. with No. 70190-8-l)/16
Here, the trial court accepted Dewar's position that Trask supports the
conclusion that Smith owed a duty to Dewar. Smith argues that the trial court
improperly extended Trask to establish an accountant's duty of care to third
parties. He contends that Dewar "failed to present any authority or evidence for
the application of the Trask multi-factor test to CPAs and Traner Smith."
Although Washington courts have not applied the Trask analysis to CPAs,
courts in other jurisdictions have done so. In Glenn K. Jackson, Inc. v. Roe,27 the
Ninth Circuit addressed a legal auditor's duty of care using a similar multifactor
test. Surveying cases, the court in Glenn K. Jackson noted an "objective
standard that looks to the specific circumstances to ascertain whether a supplier
of information has undertaken to inform and guide a third party with respect to an
identified transaction or type of transaction. If such a specific undertaking has
been made, liability is imposed on the supplier."28 And courts in Illinois, whose
third-party beneficiary test our Supreme Court followed to create the Trask
factors,29 have explicitly held that an accountant may be liable to nonclient third
parties when "'the purpose and intent of the accountant-client relationship was to
benefit or influence the third-party plaintiff.'"30
27 273 F.3d 1192, 1195 (9th Cir. 2001). 28 Glenn K. Jackson, 273 F.3d at 1200 n.3. 29 Trask, 123 Wn.2d at 840, 842. 30 Builders Bank v. Barry Finkel & Assocs., 339 III. App. 3d 1, 8, 790 N.E.2d 30, 273 III. Dec. 888 (2003) (quoting Brumlev v. Touche, Ross & Co., 139 -16- No. 69701-3-1 (consol. with No. 70190-8-l)/17
Application of the Trask factors to this case supports our conclusion that
Smith owed Dewar a duty as a third party. First, Beddall and Dewar expressly
intended the tax return prepared by Smith to benefit Dewar. Second, Smith knew
of the settlement agreement, which required Smith's employment. He had
complied with the disclosure and review provisions of the settlement agreement.
He knew or should have known that Beddall's address change on the return
conflicted with his agreement with Dewar. The harm—diversion of the refund
from Hatch, who agreed to deliver the refund proceeds to Dewar—was
foreseeable. Third, in losing the benefit of his bargain, Dewar claims to have
suffered injury. Fourth, because of Smith's action, Dewar remained ignorant of
the changed address. He did not receive inquiry notice of a need to act to
protect his interests before Beddall took possession of the refund checks.
Therefore, a close connection exists between Smith's conduct and Dewar's
claimed harm. Fifth and sixth, a policy to prevent future harm would support
enforcing the duty of care that the AICPA Code, Washington case law, and state
III. App. 3d 831, 836, 487 N.E.2d 641, 93 III. Dec. 816 (1985)): see also Kopka v. Kamenskv, 354 III. App. 3d 930, 935, 821 N.E.2d 719, 290 III. Dec. 407 (2004); 225 III. Comp. Stat. 450/30.1 (2004) (under Illinois Public Accounting Act, accountant may be held liable to third party when accountant is "aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action"). -17- No. 69701-3-1 (consol. with No. 70190-8-l)/18
and federal law and regulations already impose on public accountants. Thus,
imposing a duty would not unduly burden the accounting profession.
Smith emphasizes that he was not a party to the Dewar-Beddall
settlement agreement and that his engagement letter with Beddall did not
incorporate the agreement. In a statement of additional authorities, Smith cites
two recent cases in support of his position, Stewart Title Guaranty Co. v. Sterling
Savings Bank31 and Clark County Fire District No. 5 v. Bullivant Houser Bailey
P.C.32
In Stewart Title, our Supreme Court held that neither the attorney nor the
client intended the plaintiff title insurance company to be a beneficiary of an
attorney-client contract created when the insurance company hired an attorney to
defend its insured-client.33 As a result, the title company could not satisfy the
threshold first element of the Trask test. The court also held that an attorney's
limited duty to inform a nonclient third-party payer does not give rise to a broad
duty of care that would support a malpractice claim.34 Similarly, in Clark County
Fire District No. 5, Division Two held that the district and the attorney hired by the
31 178Wn.2d 561, 311 P.3d 1 (2013). 32 180 Wn. App. 689, 324 P.3d 743, review denied, 181 Wn.2d 1008 (2014). 33 Stewart Title, 178 Wn.2d at 567. 34 Stewart Title, 178 Wn.2d at 569. -18- No. 69701-3-1 (consol. with No. 70190-8-1)/19
district's insurance company to defend the district did not intend the resulting
legal representation of the fire district to benefit the insurer.35
These cases are inapposite. In Stewart Title and Clark County Fire
District No. 5, an insurance company hired an attorney to defend its insured and
paid for that attorney, as presumably required by an underlying insurance policy.
In contrast, Dewar had no preexisting obligation to provide accounting services
for Beddall and was not a third-party payer who hired Smith to provide those
services to Beddall. The settlement agreement required that Beddall hire Smith
to prepare a tax return producing the tax refund that Beddall transferred to Dewar
in the same agreement. Smith knew the agreement's material provisions. Thus,
he knew that Dewar and Beddall intended that Smith's engagement would
benefit Dewar. By including Dewar in the preparation and review of the tax
return and later providing a copy of a tax return, Smith supplied information "to
inform and guide a third party with respect to an identified transaction."36 We
affirm the trial court's conclusion that Smith owed Dewar a duty of care.
Negligent Misrepresentation
The trial court also concluded that Smith breached the duty he owed to
Dewar:
35 Clark County Fire District No. 5, 180 Wn. App. at 694. 36 Glenn K. Jackson. 273 F.3d at 1200 n.3. -19- No. 69701-3-1 (consol. with No. 70190-8-l)/20
The Court concludes as a matter of law that the Defendants in changing the address for which the Beddall 2009 tax return was to go from the offices of Edmonds attorney Jonathan Hatch to the Defendants' own office and further transmitting those checks to the taxpayer Brad Beddall's son-in-law and failing to disclose to Plaintiff and Jonathan Hatch the change of address, the receipt of the tax refunds, and the turning over of the tax refunds to Beddall's son-in- law is a negligent misrepresentation as a matter of law.
Smith contends that Dewar failed to establish all the elements of negligent
misrepresentation, specifically challenging the trial court's decision about
proximate cause and damages.
To prove negligent misrepresentation, a party must establish by clear,
cogent, and convincing evidence that (1) the defendant supplied information that
was false for the guidance of the plaintiff in a business transaction, (2) the
defendant knew or should have known that the information was for the purpose
of guiding the plaintiff in a business transaction, (3) the defendant was negligent
in obtaining or communicating the false information, (4) the plaintiff relied on the
information, (5) the plaintiff's reliance was reasonable, and (6) the false
information proximately caused the plaintiff damages.37
Smith claims that he cannot have committed misrepresentation by
"silence" because "[w]here there is no duty to disclose, there can be no
misrepresentation." But Dewar does not rely on Smith's "silence" to establish his
37 Donatelli, 179 Wn.2d at 95 n.3; Restatement (Second) of Torts § 552 (1977). -20- No. 69701-3-1 (consol. with No. 70190-8-I)/21
claim. Rather, the core of Dewar's claim is an undisputed fact not mentioned in
the trial court's order: Smith's knowing transmission of a misleading version of
Beddall's tax return. At oral argument, Smith maintained that he fulfilled any duty
he owed Dewar by securing Beddall's specific permission to disclose exactly
what Dewar requested: the tax return Smith had originally prepared for Beddall.
This assertion does not persuade us.
A supplier of information for the guidance of others must refrain not only
from misrepresenting facts but also from communicating accurate information in
a way that misleads.38 Beddall's limited consent did not give Smith freedom to
mislead Dewar; it only limited the ways he could avoid misleading him.
The record contains undisputed evidence that establishes the breach of
duty and reliance elements of negligent misrepresentation. First, Smith supplied
the misleading tax return for Dewar's guidance in business. Second, Smith knew
the material terms of the settlement agreement and knew or should have known
that the tax return would guide Dewar in business decisions related to the
settlement agreement. Third, Smith conveyed the tax return under
circumstances he knew to be misleading. Fourth, Dewar relied on this
misleading information, remained ignorant of Beddall's breach of the agreement,
and so did not act to protect his own interests. Fifth, given the history of open
38 Restatement (Second) of Torts § 552 cmt. f. -21- No. 69701-3-1 (consol. with No. 70190-8-l)/22
communication about the return among all parties, Dewar reasonably relied on
the information Smith provided.
However, Dewar does not establish as a matter of law the sixth element,
proximate causation between Smith's misrepresentation and his injury.
"Proximate cause has two elements: cause in fact and legal causation."39
"Cause in fact" is the actual, "but for," cause of the injury.40 "Legal causation"
focuses on whether, as a matter of policy, the connection between the ultimate
result and the tortfeasor's act is too remote or attenuated to impose liability.41
The court may determine proximate cause as a matter of law where the facts are
undisputed and "reasonable minds could not differ."42 But proximate cause is
usually the province of the jury because it involves determining what actually
occurred.43
Smith's undisputed misrepresentation kept Dewar from knowing that
Beddall had changed the return address and, thus, the refund recipient. Dewar's
39 Schoolev v. Pinch's Deli Mkt., Inc.. 134 Wn.2d 468, 474, 951 P.2d 749 (1998). 40 Michaels v. CH2M Hill, Inc., 171 Wn.2d 587, 609-10, 257 P.3d 532 (2011). 41 Michaels, 171 Wn.2d at 611. 42Hertog v. City of Seattle, 138 Wn.2d 265, 275, 979 P.2d 400 (1999); Schoolev, 134 Wn.2d at 478; Brust v. Newton, 70 Wn. App. 286, 291-92, 852 P.2d 1092(1993). 43 Michaels, 171 Wn.2d at 610; Brust, 70 Wn. App. at 291-92. -22- No. 69701-3-1 (consol. with No. 70190-8-l)/23
injury is not in dispute. But we cannot say as a matter of law that without Smith's
misrepresentation, Dewar would have avoided those damages.
Correct information from Smith—either a "noisy withdrawal" or notice to
Dewar that Beddall had revoked his authority to disclose—should have alerted
Dewar that he needed to act to protect his interests. He could have demanded
information from Beddall or sought to enforce the settlement agreement in court.
But, as the taxpayer, Beddall had the authority to amend his own tax return or
revoke Hatch's power of attorney44 and direct the delivery of his refund. At the
time of Smith's misrepresentation, Beddall lived in Thailand. In short, Dewar has
not yet presented evidence, much less undisputed evidence, that Smith's
exercise of reasonable care would have allowed Dewar to prevent delivery of the
refund to Beddall. The trial court erred when it resolved the issue of proximate
cause in fact on summary judgment.
The trial court also determined on summary judgment the amount of
damages caused by Smith's negligent misrepresentation, $1,375,930.96. The
record does not support this decision. Beddall's August 16, 2010, e-mail to
Dewar included an offer to give him $500,000.00 of the refund. Therefore, the
record contains some evidence that Dewar failed to mitigate his damages.
44 26 C.F.R. § 601.505(a)(2) (1992). -23- No. 69701-3-1 (consol. with No. 70190-8-l)/24
Smith argues that the trial court's damages ruling was wrong for two
additional reasons. First, he contends that because Beddall's losses for tax
purposes didn't occur until 2010, when he transferred the Lea Hill property to
Dewar, Beddall could not claim these losses on his 2009 tax return. Therefore,
he argues, Dewar's damages are illusory. We reject this argument. Smith
identifies no evidence in the record showing any IRS challenge to Beddall's 2009
return. And even if the IRS at some point attempted to recoup the refund as
erroneous or fraudulent, it would pursue Beddall as the taxpayer, not Dewar.
Second, Smith argues that the settlement agreement is unenforceable
because tax law does not permit the assignment of tax refunds. We disagree.
Under federal law, a taxpayer may name a representative to sign a tax return or
receive a refund.45 On the version of the IRS Form 2848 that Beddall signed, the
taxpayer had the option to initial a paragraph limiting the authority of the named
representative "to receive, BUT NOT TO ENDORSE OR CASH, refund checks."
Beddall did not initial this section to prevent Hatch from endorsing or cashing the
refund checks. This was consistent with the settlement agreement, which
provided that Hatch would "endorse and convert [the tax refund] to good and
available funds" and "immediately disburse" it to Dewar. Federal law also
45 26 C.F.R. § 601.503, .504(a)(5), .506 (1992); IRS Form 2848, Power of Attorney and Declaration of Representative. -24- No. 69701-3-1 (consol. with No. 70190-8-1)/25
permits a representative named in a power of attorney to endorse tax refund
checks.46 The settlement agreement relied upon authorized procedures to
accomplish a transfer of Beddall's refund to Dewar.
Although Smith fails to show that Dewar's damages are illusory, Dewar
does not establish as a matter of law that Smith's misrepresentation proximately
caused all of Dewar's claimed damages. The trial court erred in granting
summary judgment on this issue.
Third-Party Beneficiary Contract
Finally, Smith argues that because Dewar was not intended to be a direct
beneficiary of the engagement between Beddall and Smith, Dewar's claim for
breach of a third-party beneficiary contract fails as a matter of law. Therefore,
Smith asserts that the trial court erred in denying his motion for summary
judgment on this claim. But the context of the contract between Beddall and
Smith permits the inference that they both intended that contract to specifically
benefit Dewar. This precludes summary judgment on this issue.
Dewar's Motion To Supplement the Record under RAP 9.11
Citing RAP 9.11,47 Dewar seeks an order admitting a January 8, 2014,
stipulation and agreed order between Kenneth Smith and the Washington State
46 31 C.F.R. §240.13(2004). 47 RAP 9.11 allows the appellate court to admit additional evidence on the merits of a case under certain circumstances. -25- No. 69701-3-1 (consol. with No. 70190-8-1)/26
Board of Accountancy. We deny Dewar's motion. RAP 9.12 limits this court's
review of a trial court order granting or denying summary judgment to evidence
presented to the trial court. Because the trial court did not have the board's
order, we cannot consider it on appeal. Our decision does not prevent Dewar
from asking the trial court to consider this evidence and the legal theories it may
support on remand.
CONCLUSION
We affirm the trial court's ruling that Smith owed Dewar a duty of care and
its denial of Smith's motion for summary judgment on contract claims. Because
Dewar has not established that Smith's negligent misrepresentation proximately
caused his damages or the amount of any damages, we reverse and remand for
/jsZjtjf} A WE CONCUR:
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