Tuzman v. Leventhal , 174 Ga. App. 297 ( 1985 )

Beasley, Judge,

dissenting.

Appellants Dr. and Mrs. Tuzman filed a breach of contract suit seeking $35,000 which represented taxes paid to IRS, attorney fees incurring in resisting the IRS tax claim, and attorney fees and expenses incurred in enforcing the contract.

The contract document, about which there is no dispute, provided in substance that, in consideration of the settlement and dismissal of certain federal lawsuits which had been brought by the Tuzmans against appellees and others, the appellees as indemnitors would indemnify and hold the Tuzmans harmless from any taxes that might have to be paid if the loss they claimed in their 1974 income tax return was disallowed by IRS, and any expenses the Tuzmans incurred in defending against the disallowance. This was tied to the further provision that indemnitors agreed to defend the Tuzmans against the government’s claims and would employ attorneys and accountants of their own selection to appear and defend “on behalf of Tuzman at the expense of indemnitors,” and would have “sole authority for the direction of the defense,” and would be “the sole judge of the acceptability of any compromise settlement” of any tax claim “against Tuzman.” Indemnitors also agreed to pay interest in any amount paid by the Tuzmans until indemnified. The Tuzmans also had a contractual right to sue piecemeal to enforce the agreement and to be reimbursed reasonable attorney fees for such enforcement. All of this was conditional on the Tuzmans claiming the business loss “properly” on their tax return in the first place, and there is no dispute that that was done.

There is thus somewhat of an inconsistency, in that the indemni-tors agreed to indemnify the Tuzmans for their expenses in fighting the disallowance but also undertook, themselves, to defend directly and totally against the disallowance at their own expense, “on behalf of Tuzman.” At any rate, it is apparent from considering the whole document that there was in the mind of everyone a fear that the IRS might not allow the deduction, that a challenge to the disallowance would be undertaken, and that the Tuzmans should suffer no monetary losses from this whole matter.

When the IRS did in fact disallow the deduction, the Tuzmans called on the indemnitors to perform their obligations under the contract and stated they would cooperate. The indemnitors began to have some doubts as to their liability under the contract, stating they had some information suggesting that the Tuzmans had breached the agreement, and they sought to have the Tuzmans sign a “reservation of right” agreement by which the indemnitors would challenge the government’s claim on behalf of the Tuzmans but would still be able to say they, the indemnitors, were not liable to Tuzman for whatever expenses were incurred and for whatever taxes ultimately had to be paid. According to the record, the tax attorney proposed by the in-demnitors, although he had a different typed address on his letterhead in October when he wrote to the Tuzmans’ attorney outlining the impasse that had developed, was a member of the firm representing the indemnitors in the agreement transactions in the first place and representing them when they began to balk. The correspondence and affidavits indicate that the Tuzmans refused to agree to this condition and insisted that the attorney representing them in connection with trying to reduce or eliminate the tax disallowance do so in conformity with certain standards in the disciplinary rules of the State Bar of Georgia (Standards 28, 29, 35, 36, 37 & 41; see 241 Ga. 721, 735-737), which were described by the Tuzmans as constituting or effecting an attorney-client relationship between the Tuzmans and the tax attorney. The indemnitors refused to be so bound, taking the position that the formation of an attorney-client relationship between the tax attorney and the Tuzmans would be contrary to the agreement which gave control of selection of attorney, direction of defense, and acceptability of any settlement to the indemnitors.

As a result of the positions taken by each side, Tuzman’s own attorney rather than the indemnitors’ attorney ultimately represented the Tuzmans in challenging the disallowance, incurred fees in this connection, and ended up settling the matter for a tax which the Tuzmans paid.

The indemnity contract did not contain any reservation of right. Nor did it contain any language showing that the parties intended that indemnitors could maintain a position antagonistic to that of the Tuzmans with respect to the indemnitors’ liability to the Tuzmans at the same time the indemnitors were resisting the tax disallowance on behalf of the Tuzmans. Instead, the short agreement contemplates an identity of interest, that the indemnitors and the Tuzmans shared the common desire to eliminate or mitigate as far as possible the monetary losses which would be a consequence of IRS’ disallowance of the “tax shelter” business loss to the Tuzmans from the Georgia Kentucky Coal Company partnership operation. When the indemnitors insisted on the reservation of right, they introduced a new condition into the contract. They raised a new issue not covered by the contract, saying we have an interest which is contrary to yours. Instead of the situtation that has developed being two-sided, i.e., indemnitors and taxpayers versus IRS, it is three-sided, i.e., indemnitors and taxpayers versus IRS but indemnitors also versus taxpayers.

The conversations and negotiations by and between and among the parties to the agreement not being fully set out in the correspondence and affidavits, the facts are not adequately developed for summary judgment. If the indemnitors’ attorney had a conflict of interest, as appears might be the case from the fact that the attorney would have an eye on the ultimate non-liability of the indemnitors, his clients, for the tax he was fighting on behalf of the Tuzmans, the fight would obviously be less vigorous than if the indemnitors accepted their liability to pay for the end result, as provided in the contract. It was the Tuzmans’ initial liability he was to advocate wholeheartedly against. Whether he and the indemnitors were justified under the contract in maintaining that the contract superseded the disciplinary rules so that the indemnitors could reserve the right to say it was not only the Tuzmans’ initial liability but also the Tuzmans’ liability ultimately, to pay the tax and bear the expense of fighting it, and that they would not provide an attorney subject to the stated standards, is not clear. A fundamental fact which is not covered by the contract, is whether the parties intended that the indemnitors could select as the attorney to represent the Tuzmans in their challenge to the disallowance the same attorney or firm who would represent the indemnitors in denying their liability to the Tuzmans. I do not believe the contract must be construed as a matter of law in favor of the indemnitors on this point regarding the selection of counsel. Whether, in the circumstances of the relationship here, “attorneys ... of their own selection” would embrace counsel who, there is some evidence to support, had a conflict of interest because of a dispute between indemnitor and indemnitee not involving the condition precedent, is not established by the record thus far.

I am authorized to state that Chief Judge Banke and Judge Pope, join in this dissent.

Decided March 15, 1985 Rehearing denied March 29, 1985 Joel D. Burns, for appellants. J. Randolph Evans, Jeffrey M. Smith, for appellees.