[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
FEB 15 2001
THOMAS K. KAHN
CLERK
No. 99-2289
D. C. Docket No. 94-00051-CIV-J-16A
H. BOONE PORTER, III, in his capacity as individual co-
trustee of the H. Boone Porter Trust created under Deed of Trust
dated 8/1/60 as amended by amendment dated 5/14/68, and
individually, and in his capacity as Executor of the Estate of
Rev. H. Boone Porter, COMMERCE BANK, N.A., a
national banking association, in its capacity as corporate
co-trustees of the H. Boone Porter Trust created under Deed
of Trust dated 8/1/60, as amended by amendment dated 5/14/68;
Plaintiffs-Appellants, Cross-Appellees,
versus
OGDEN, NEWELL & WELCH, a Kentucky general
partnership, RICHARD F. NEWELL, et al.,
Defendants-Appellees, Cross-Appellants.
Appeals from the United States District Court
for the Middle District of Florida
(February 15, 2001)
Before TJOFLAT, BIRCH and DUBINA, Circuit Judges.
DUBINA, Circuit Judge:
The Trustees of the Estate of H. Boone Porter appeal the district court’s order
finding that a legal malpractice action against the Defendants had not accrued under
Florida law because no injury had occurred. Also appealed are an order of a
magistrate judge denying the Trustees’ motion to compel and an order of the
magistrate judge permitting the Trustees to obtain financial worth documents. We
affirm in part and reverse in part.
I. BACKGROUND
This case revolves around H. Boone Porter’s (“H. Boone”) will and deed of
trust. In 1960, the law firms of Rogers, Towers & Baily, (the “Bailey firm”), and
Ogden, Newell, & Welch, (the “Ogden firm”),1 jointly prepared a will and deed of
trust for H. Boone. The law firms drafted the deed of trust to create a “double
generation skipping trust” that would benefit H. Boone during his lifetime, then his
wife and his son, Reverend Porter, and finally Reverend Porter’s children and
grandchildren. Although H. Boone’s estate included the trust corpus in his taxable
estate, the generation skipping trust would provide great tax advantage to H. Boone
by protecting the trust’s corpus from taxation until the death of H. Boone’s great-
grandchildren.
1
Hereinafter, we refer to the Bailey firm and the Ogden firm collectively as “Defendants.”
2
In order to create a “double generation skipping trust,” one must comply with
the relevant tax laws, rules, and regulations. Here, the Ogden firm reviewed the initial
deed of trust drafted by the Bailey firm and made suggestions to ensure compliance
with the Internal Revenue Code (“IRC”). The Bailey firm made the suggested
changes. One of these changes created a provision permitting Reverend Porter to
assume a co-trustee position with the corporate trustee. Furthermore, at some point
during the revision of the deed of trust, paragraph 8 of the deed of trust was drafted
to state as follows:
8. The Trustee is authorized to pay, out of principal of the trust
property, to or for the benefit of any beneficiary who at the time is
entitled to receive income from the trust property, hospital, nursing, and
medical expense of any such beneficiary, and also such amounts as may
be considered advisable for the maintenance, support and welfare of any
such beneficiary; but the amount or amounts of any such payments shall
be determined by the Trustee in its sole discretion.
(Emphasis added). Plaintiffs complain that the inclusion of the word “welfare” in the
above paragraph has caused the “double generation skipping trust” to fail.
Under current tax law, when a trust beneficiary holds a general power of
appointment, the trust corpus must be included in his taxable estate. See I.R.C. §
2041(a)(2). A trust beneficiary has a “general power of appointment” if he has the
power to distribute the corpus to himself as a beneficiary, except if the trust limits this
power “by an ascertainable standard relating to the health, education, support or
3
maintenance” of the beneficiary. See I.R.C. § 2041(b)(1). According to Treasury
Regulation § 20.2041-1(c)(2), “[a] power to use property for the comfort, welfare or
happiness of the holder of the power is not limited by the requisite standard.” Thus,
a provision in a trust instrument which allows for the paying out of the corpus to the
beneficiary for his or her welfare is not limited and is treated as a general power of
appointment. As a result, the Trustees believe that, upon the death of Reverend
Porter, the trust corpus may be included in his estate for tax purposes because the deed
of trust permits Reverend Porter to distribute funds for his welfare.
Reverend Porter discovered this potential problem in 1990 and attempted to
remedy it. Reverend Porter’s law firm informed him that federal tax law examines
state law to determine whether the word “welfare” has an ascertainable standard. At
that time, Florida law was unsettled as to the meaning of the word “welfare.” In order
to ensure favorable treatment under Florida law, Reverend Porter lobbied the Florida
Legislature to change the law. He succeeded and the Florida Legislature changed the
law so that the inclusion of the word “welfare” in a Florida trust instrument does not
give the trustee the ability to do more than disperse limited amounts of the corpus,
thereby complying with the limiting requirements of the tax laws.
After the change in Florida law, Reverend Porter hired the law firm of Miller
& Chevalier to request a private letter ruling from the Internal Revenue Service
4
(“IRS”). The law firm gave the IRS the facts of the case, including the changes in the
Florida law, and requested its opinion. In response, the IRS stated that it would not
find the trust to be a part of the Reverend’s estate.2 See Priv. Ltr. Rul. 9510065.
Because this letter ruling depended on the recently enacted Florida law, Reverend
Porter took two other actions designed to ensure that the trust would achieve the
generation-skipping result even if Florida changed its law. First, Reverend Porter
succeeded in seeking a judicial reformation of the trust instrument to remove the word
“welfare” from Paragraph 8, on the ground that the word’s presence was a scrivener’s
error. Second, he sought another private letter ruling from the IRS. In response to
Reverend Porter’s inquiry, the IRS stated that the judicial reformation would not
trigger any adverse tax consequences. See Priv. Ltr. Rul. 199942016.
Subsequently, the Trustees of Reverend Porter’s estate brought this legal
malpractice action to recover the costs expended in their efforts to avoid the general
power of appointment problem.3 The Trustees also sought a declaratory judgment
requiring the Defendants to indemnify the Trustees for any adverse tax consequences
2
A taxpayer ordinarily may rely upon a private letter ruling received from the IRS. See
26
C.F.R. § 601.201(l). Only in the rare and unusual circumstance will the IRS revoke or modify a
private letter ruling and retroactively apply the change to the taxpayer who originally received the
letter ruling. See 26 C.F. R. § 601.201(l)(5).
3
Reverend Porter died on June 5, 1999. The value of the Trust on that date was
approximately $55 million, which would yield a federal estate tax of approximately $ 30 million if
the corpus was included in Reverend Porter’s estate.
5
resulting from the drafting error. In addition, the Trustees sought punitive damages
pursuant to Florida Stat. § 768.72. On cross-motions for summary judgment, the
district court dismissed the Trustees’ complaint without prejudice on the ground that
it was premature. The district court based its order on the conclusion that under
Florida law, a tort action does not commence until damages have accrued, and that the
Trustees have not suffered any damages because the IRS has not attempted to levy an
estate tax on the trust’s corpus. In the same order, the district court affirmed the
magistrate judge’s order permitting the Trustees to obtain confidential financial worth
documents from the Defendants in support of the Trustees’ punitive damages claim.
In a previous order, the magistrate judge denied the Trustees’ motion to compel
answers to deposition questions prompted by two letters between the Ogden firm and
its insurance carrier. On appeal, the Trustee’s and Defendants challenge these orders.
II. ISSUES
(1) Whether the district court erred in dismissing as not ripe the Trustees’ suit to
recover the costs taken to avoid a potential consequence of Defendants’ alleged
malpractice.
6
(2) Whether the magistrate judge erred in denying the Trustee’s motion to compel
answers to deposition questions prompted by two letters between the Ogden
firm and its insurance carrier.
(3) Whether the district court erred in affirming the magistrate judge’s order
permitting the Trustees to obtain confidential financial worth documents from
the Defendants in support of the Trustees’ punitive damages claim.
III. STANDARDS OF REVIEW
This court reviews de novo a district court’s determination that a case is not ripe
for determination. See Southeast Fla. Cable, Inc. v. Martin County,
173 F.3d 1332,
1335 n. 5 (11th Cir. 1999). We review a district court’s discovery orders and
evidentiary rulings for abuse of discretion. See Goulah v. Ford Motor Co.,
118 F.3d
1478, 1483 (11th Cir. 1997).
IV. DISCUSSION
The Trustees argue that the district court erred in two respects. First, the
Trustees contend that expenses incurred to avoid the possible consequences of the
alleged malpractice constitute damages, thereby allowing their claim to ripen.4
Second, the Trustees assert that the magistrate judge abused his discretion by not
4
Plaintiffs do not argue that the district court erred in dismissing their claim for a declaratory
judgment requiring the defendants to indemnify them for any adverse tax consequences.
7
requiring Defendants to answer certain deposition questions prompted by two letters
between the Ogden firm and its insurance carrier. Defendants present one issue in
their cross-appeal. They argue that the district court erred in permitting the Trustees
to obtain confidential financial information from the Defendants in support of their
punitive damages claim.
A. Ripeness
Under Florida law, “[g]enerally, a cause of action for negligence does not
accrue until the existence of a redressable harm or injury has been established and the
injured party knows or should know of either the injury or the negligent act.” Peat,
Marwick, Mitchell & Co. v. Lane,
565 So.2d 1323, 1325 (Fla. 1990). When a plaintiff
bases a malpractice action on errors committed in the course of litigation, and the
litigation proceeds to judgment, the redressable harm is not established until final
judgment is rendered. See Silverstrone v. Edell,
721 So.2d 1173, 1175 (Fla. 1998).
The present case, however, does not involve litigation malpractice, but transactional
malpractice. The district court construed Florida law as stating that in a transactional
malpractice case, redressable harm is not established until the documents or legal
items fail to achieve their designated purpose.
The district court, however, misconstrued Florida law. Instead of setting a fine-
line, Florida courts hold that a malpractice action accrues when “it is reasonably clear
8
that the client has actually suffered some damage from legal advice or services.” See
Throneburg, III v. Boose, Casey, Ciklin, Lubitz, Martens, McBane & O’Connell, P.A.,
659 So.2d 1134, 1136 (Fla. App. 4 District 1995). The district court correctly noted
that most of the Florida cases hold that the cause of action in issue does not accrue
until a court holds that the documents or legal items failed to achieve their designated
purpose. Those cases are distinguishable from the case at bar, however, because in
those cases, no concrete injury arose until a final court decision. In contrast, here the
Trustees have suffered a concrete injury as to the expenses they incurred to remedy
the alleged malpractice.
For example, in Peat, Marwick,
565 So. 2d 1323, the Lanes claimed some
deductions based on their accountants’ recommendations for which the IRS
subsequently issued a notice of deficiency challenging the claimed deductions.
Following Peat, Marwick’s advice, the Lanes challenged the determination in tax
court, but ultimately agreed to an entry of a stipulated order which required them to
pay a tax deficiency. As a result, the Lanes filed a malpractice suit against Peat,
Marwick, who raised a statute of limitations defense. The Florida Supreme Court held
that the Lanes’ cause of action did not accrue when they received the IRS deficiency
notice because the Lanes challenged the notice and, thus, did not suffer any injury at
that time. See Peat, Marwick,
565 So. 2d at 1326. Instead, the Florida Supreme Court
9
held that the injury arose when the tax court entered judgment against the Lanes who
in turn had a legal obligation to pay the tax deficiency. See
id. at 1327.
Similarly, in Thorneburg, the court held that a claim against an attorney for
failure to amend properly a declaration of covenants on property did not accrue merely
because the association thought the amendment ineffective. See 659 So.2d at 1136.
Instead, the court held that the claim accrued when a state court ruled that the
amendment was invalid in an action involving the same association and a different
owner. See
id.
Both Thorneburg and Peat, Marwick “draw a distinction between knowledge
of actual harm from legal malpractice and knowledge of potential harm.”
Id. In both
cases, the plaintiffs followed the advice of the defendant professionals, even though
others thought that the advice was wrong. Because they followed the incorrect advice,
the harm did not become an actuality until a court rendered a judgment holding that
the legal instruments failed to fulfill their purpose. In contrast, the Trustees here did
not follow the advice of the Defendants, and instead, took steps to cure the potential
problem prior to any IRS action or any court determination. By attempting to mitigate
the potential problem, the Trustees realized an actual harm – the cost of remedying the
potential malpractice.
10
Moreover, the Florida case of Coble v. Aronson,
647 So.2d 968 (Fla. App. 4
Dist. 1994), supports this conclusion. In Coble, a law firm incorrectly prepared notes
that were part of a sales agreement. The law firm’s client sued for reformation of the
contract and the case settled. In turn, the client sued the law firm for malpractice. The
court stated that a cause of action had accrued even though the client had settled the
reformation case because the existence of a redressable harm did not depend upon the
outcome of the litigation. See
id. at 970-71. Instead, the court found that the
negligent preparation of the notes “could potentially be the cause of redressable harm
or financial loss to [the client], especially in the nature of costs and attorney’s fees.”
Id. at 971. Similarly, the redressable harm in the present case need not depend upon
the outcome of any litigation because the negligent preparation of the will could
potentially be the cause of the financial loss that the Trustees incurred in reforming
the trust. Thus, we hold that the district court erred in dismissing the case as
premature.5
Of course, the Trustees’ task of proving malpractice and proving that the
malpractice proximately caused the loss may be difficult because the Trustees cured
the problem prior to any indication from the IRS that the trust would fail. However,
5
The parties also discuss in their briefs whether the actions taken by the Trustees were
reasonable. The district court did not address the issue and the record is not developed enough for
us to do so either.
11
we need not address these causation issues, since the district court did not address
them. See Singleton v. Wulff,
428 U.S. 106 (“It is the general rule, of course, that a
federal appellate court does not consider an issue not passed upon below.”).
B. Discovery of Letters
Likewise, we need not address the issue of whether the magistrate judge erred
in denying the Trustee’s motion to compel because the district court did not address
this issue. See
id. Although the Trustees timely filed a Fed.R.Civ.P. 72 objection to
the magistrate judge’s ruling, the district court dismissed the complaint before ruling
on the objection. Accordingly, we decline to consider this issue for the first time on
appeal. See id.; see also Fed. R. Civ. P. 72(a).
C. Discovery of Financial Worth Documents
Finally, the Defendants argue that the district court erred in affirming the
magistrate judge’s order permitting the Trustees to obtain confidential financial worth
documents from the Defendants in support of the Trustees’ punitive damages claim.
First, Defendants argue that the magistrate failed to make an affirmative finding that
a reasonable basis existed for the Trustees’ punitive damages claim as required by
Florida Stat. § 768.72. However, after reviewing the record, we are persuaded
otherwise. Second, the Defendants argue that the Trustees failed to establish a
reasonable basis because they did not allege any facts outside of the complaint and,
12
alternatively, did not allege sufficient facts to support a punitive damages claim. We
disagree.
This court has held that the pleading rules set forth in Fed.R.Civ.P. 8(a)(3)
preempt § 768.72’s requirement that a plaintiff must obtain leave from the court
before including a prayer for punitive damages. See Cohen v. Office Depot, Inc.,
184
F.3d 1292, 1299 (11th Cir. 1999), vacated in part,
204 F.3d 1069 (11th Cir. 2000).
However, § 768.72 also has a discovery component which states that “[n]o discovery
of financial worth shall proceed until after the pleading concerning punitive damages
is permitted.”
Fla. Stat. § 768.72. Prior to allowing discovery of financial net worth
information, Defendants argue that § 768.72 requires a plaintiff who has made a claim
for punitive damages to produce evidence or make a proffer of evidence that shows
a reasonable basis for the punitive damages claim. This court, in Cohen, did not
decide whether or not federal discovery rules preempt this rule. Likewise, we need
not answer this question here because the record indicates that the Trustees made a
proffer of evidence that reasonably supports their claim.
The Florida courts do not require a fact intensive investigation into the merits.
Instead, the Florida courts entertain the punitive damage issue by way of a motion to
dismiss or a motion to strike, not a summary judgment motion. See Will v. Systems
Eng’g Consultants, Inc.,
554 So.2d 591, 592 (Fla. App. 3 Dist. 1989); see also Solis
13
v. Calvo,
689 So.2d 366 (Fla. App. 3 Dist. 1997) (“Pursuant to Florida Statute section
768.72 (1995), a punitive damage claim can be supported by a proffer of evidence. A
formal evidentiary hearing is not mandated by the statute.”). Under Florida law,
merely setting forth conclusory allegations in the complaint is insufficient to entitle
a claimant to recover punitive damages. See T.W.M. v. American Medical Sys., Inc.,
886 F. Supp. 842, 845 (N.D. Fla. 1995); Bankest Imports, Inc. v. ISCA Corp.,
717 F.
Supp. 1537, 1542-43 (S.D. Fla.1989). Instead, a plaintiff must plead specific acts
committed by a defendant. See Bankest Imports,
717 F. Supp. at 1542-43.
Applying these legal standards, the magistrate judge found that the Trustees
pled and proffered evidence of specific acts committed by the Defendants that
provided a reasonable basis to support the Trustees’ punitive damages claim. The
district court affirmed this finding. After reviewing the record, we see no abuse of
discretion in these rulings.
V. CONCLUSION
We hold that the district court incorrectly found that the Trustees’ claim had not
accrued. The Plaintiffs have suffered losses in fixing the potential problems with the
trust. Thus, the Plaintiffs have suffered an injury. Accordingly, we reverse that part
of the district court’s judgment. Next, we decline to address whether the magistrate
judge erred in denying the Trustees’ motion to compel because the district court did
14
not address that issue. Finally, we hold that the district court did not abuse its
discretion in affirming the magistrate judge’s order permitting the Trustees to obtain
confidential financial worth documents. Therefore, we affirm that part of the district
court’s judgment.6
AFFIRMED IN PART, REVERSED IN PART AND REMANDED.
6
All pending motions in this case are DENIED.
15
