Connie Potter v. Joseph Michael Gaffney ( 2016 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
SUSAN B. PAULSELL, a single woman
in her individual capacity, No. 74744-4-1
Plaintiff, DIVISION ONE
CONNIE POTTER and SUSAN UNPUBLISHED OPINION
PAULSELL, Trustees of the Amended
and Restated Frederick 0. Paulsell,
Jr. Living Trust dated December 22,
2002,
C~:-
Appellants,
v.
JOSEPH MICHAEL GAFFNEY and
JANE DOE GAFFNEY, his wife, and
DORSEY & WHITNEY, LLP, a
Minnesota Limited Liability Partnership,
FILED: December 19, 2016
Respondents.
Trickey, A.C.J. — A trust, through its co-trustees, Connie Potter and Susan
Paulsell, appeals the dismissal on summary judgment of its claims for legal
malpractice and breach of fiduciary duty against attorney Joseph Gaffney and his
law firm, Dorsey &Whitney, LLP. Gaffney successfully sought summary judgment
on the basis that all the damages the trust sought were unrecoverable attorney
fees under the American Rule. Because the trust did not raise a genuine issue of
material fact that some of the damages sought fell outside the rule, we affirm the
trial court's grant of summary judgment on the legal malpractice claim.
But, because genuine issues of material fact remain whether the trust is
entitled to disgorgement of the attorney fees it paid to Gaffney, we reverse the trial
court's dismissal of the trust's breach of fiduciary duty claim.
No. 74744-4-1 / 2
FACTS
Attorney Joseph Gaffney is a member of the law firm Dorsey & Whitney,
LLP, who works in the firm's Seattle office. Gaffney provided estate planning
services to Frederick O. Paulsell Jr. (Fred Jr.)1 in the 1980s and 1990s, including
setting up a trust for Fred Jr. in 1987. Gaffney prepared an amended living trust
for Fred Jr. in 1997.
Fred Jr. married Susan B. Paulsell in 1998. Susan had four children from
a previous marriage. Fred Jr. also had children from a previous marriage, including
his son Frederick O. Paulsell III (Fred III).
Fred Jr. wrote a new will without the assistance of counsel in April 2002.
Fred Jr. died in October 2002. The will left all of Fred Jr.'s material possessions
to Susan, and on Susan's death, to be "passed on to both her natural children and
[his] natural children in equal proportions" and named Susan and Fred III as co
trustees of his estate.2
After Fred Jr's death, Fred III and Susan sought legal advice from Gaffney.
Gaffney asserts he advised them as co-personal representatives of Fred Jr.'s
estate and not in their individual capacities. Gaffney believed that the new will
created uncertainty about which of Fred Jr.'s assets were trust assets and which
were estate assets and would not allow Susan to take advantage of the federal
estate tax's marital deduction. Gaffney prepared a binding non-judicial dispute
resolution agreement to address any conflicts between the trusts and the will, and
1 Because many of the parties share the last name Paulsell, we refer to them by their first
names. We intend no disrespect.
2 Clerk's Papers (CP) at 100.
No. 74744-4-1 / 3
to ensure that Susan could take advantage of the marital deduction. All of the
beneficiaries, including Susan and Fred III, signed that agreement.
The agreement created a new trust, the "Amended and Restated Frederick
O. Paulsell, Jr. Living Trust" (the Trust).3 The new Trust named Susan and Fred
III as co-trustees. The Trust directed the trustees to pay all income from the trust
to Susan and, if the income was not sufficient to provide for Susan's "support in
her accustomed manner of living," to distribute "such sums of principal" as the
trustees deemed advisable.4 On Susan's death, the remaining trust assets, not
consumed by estate taxes, would be shared equally by Susan's and Fred Jr.'s
children.
Over the next five years, Gaffney provided some advice about the Trust's
administration and performed "various services" for the Trust, including drafting a
distribution agreement. But neither he nor his firm handled the day-to-day
administration of the Trust.
Conflict arose between Susan and Fred III when he objected to her
spending habits and the fact that she was distributing trust assets to her biological
children but not to him and his biological siblings. In 2008, in an effort to resolve
their disputes, Susan and Fred III asked Gaffney and another Dorsey & Whitney
employee to help them prepare an accounting and reconciliation. They completed
the reconciliation in March 2009. The reconciliation stated that Susan owed the
trust over $3 million. The Trust paid Dorsey & Whitney $73,407.35 for its
3CPat80, 147-53.
4 CP at 149.
No. 74744-4-1 / 4
"accounting and other trust work."5
Afraid that she would have to reimburse the Trust the money, Susan sought
independent legal advice in the spring of 2009. In September 2009, Fred III froze
the Trust's accounts. Shortly after, Susan, in her capacity as trustee, distributee,
and beneficiary of the Trust, filed a declaratory judgment in Multnomah County
Circuit Court, Oregon, where she resided, against Fred III as co-trustee and
against all the contingent beneficiaries of the Trust. She sought a declaration that
the primary purpose of the Trust was to support her in her accustomed manner of
living during her lifetime.
In November 2009, Susan and Fred III hired the firm Beagle Burke &
Associates to perform a new accounting. In April 2010, the court appointed Jeffrey
Thede as an interim co-trustee. The Trust paid Thede nearly $50,000.
Susan ultimately prevailed at trial. The Oregon court ordered Fred III to pay
approximately $500,000 of Susan's attorney fees. But the court ordered the Trust
to pay attorney fees for Susan's children in the amount of $57,701.09, Fred Jr.'s
children in the amount of $47,037.34, and Fred III in the amount of $160,000. The
Trust itself paid over $200,000 in attorney fees for its own representation.
The Oregon court removed Fred III as a co-trustee and appointed Connie
Potter, a professional trustee. As of January 2015, the Trust had paid $22,900 in
other trustees' fees. Those fees are continuing.
5 CP at 243. Neither party has directed our attention to anything in the record that
segregates the fees paid for the accounting work from other attorney fees paid to Dorsey
6 Whitney. The approximately $70,000 also includes legal work Dorsey & Whitney
undertook to sell some of the Trust's property on Whidbey Island, Washington. The Trust
has not alleged any breach of fiduciary duties in that sale.
No. 74744-4-1 / 5
In March 2012, the Trust, with Susan and Potter acting as co-trustees, sued
Gaffney, his wife, and Dorsey & Whitney for legal malpractice and breach of
fiduciary duties. The amended complaint claimed damages for all the attorney
fees the Trust had paid as a result of the Oregon litigation, as well as all the
professional trustees' fees, accounting fees, and attorney fees paid to Dorsey &
Whitney.
In January 2015, Gaffney moved for summary judgment, arguing primarily
that the only damages the Trust sought were litigation expenses and, therefore,
not available under the American Rule. The Trust noted that Gaffney's motion for
summary judgment did not address that it sought disgorgement of the attorney
fees it had paid to Dorsey & Whitney. It provided declarations from Potter and
Susan's trial attorney, opining that the parties would not have become involved in
the Oregon litigation without Gaffney's negligent accounting and reconciliation.
The trial court granted Gaffney's motion.
The Trust sought direct review in the Supreme Court. The Supreme Court
transferred the case to this court.
ANALYSIS
Summary Judgment
The Trust argues that the trial court erred by granting Gaffney's motion for
summary judgment on both its legal malpractice and breach of fiduciary duty
claims. Because Gaffney is not entitled to judgment as a matter of law on some
of the Trust's claims, we reverse in part.
The trial court grants summary judgment to a party when there is no genuine
No. 74744-4-1 / 6
issue as to any material fact and the moving party is entitled to judgment as a
matter of law. CR 56(c). "'A material fact is one that affects the outcome of the
litigation.'" Eicon Const.. Inc. v. E. Wash. Univ., 174 Wn.2d 157,164, 273 P.3d 965(2012) (quoting Owen v. Burlington N. Santa Fe R.R.. 153 Wn.2d 780, 789, 108
P.3d 1220 (2005)).
We review summary judgment orders de novo, and view "all facts and
reasonable inferences in the light most favorable to the nonmoving party." Eicon
Const.. 174 Wn.2d at 164. We address the breach of fiduciary duty and legal
malpractice claims in turn.
Fiduciary Duty
The Trust argues that the trial court erred by dismissing its breach of
fiduciary duty cause of action. Gaffney argues that the Trust cannot raise this issue
on appeal because it did not raise it below. Ordinarily, this court does not review
arguments raised for the first time on appeal. RAP 2.5(a). But the Trust did raise
its breach of fiduciary duty claim below. The Trust alleged in its amended
complaint that Gaffney breached his fiduciary duties. It listed that breach as a
separate cause of action. It also pointed out, in its response to Gaffney's motion
for summary judgment, that breach of a fiduciary duty gives rise to a separate claim
for disgorgement. In that response, the Trust relied on Eriks v. Denver, the same
case it relies on in this appeal. 118 Wn.2d 451, 462-63, 824 P.2d 1207 (1992).
Gaffney points out that the Trust did not cite specific Rules of Professional
Conduct (RPC) until its brief before this court. But he cites to no authority requiring
the Trust to do so to survive summary judgment. The Trust's complaint and citation
No. 74744-4-1 / 7
to Eriks was enough to preserve this issue for appeal.
Gaffney also argues that the Trust has abandoned its claims because it
failed to mention them in its statement of grounds for direct review. RAP 4.2(c)(2)
requires the party seeking direct review to include a "statement of each issue the
party intends to present for review" in its statement. But, under RAP 12.1, this
court bases its decisions on matters raised in the parties' briefs. The Trust
adequately briefed this issue.
A plaintiff may use an attorney's violations of the RPCs as evidence in a
claim that an attorney breached a fiduciary duty. Behnke v. Ahrens. 172 Wn. App.
281, 297, 294 P.3d 729 (2012). Disgorgement of fees is an appropriate remedy
for a breach of fiduciary duties. Eriks. 118 Wn.2d at 463. An order to disgorge
attorney fees does not require a showing of causation or damages by the
complaining party. Behnke. 172 Wn. App. at 298.
An attorney has a concurrent conflict of interest when "there is a significant
risk that the representation of one or more clients will be materially limited by the
lawyer's responsibilities to another client." RPC 1.7(a)(2). The attorney may
represent these clients only if "each affected client gives informed consent,
confirmed in writing." RPC 1.7(b)(4). An attorney must also act "with reasonable
diligence and promptness in representing a client." RPC 1.3.
Gaffney contends that the Trust cannot bring a claim of breach of fiduciary
duty related to his representation in 2002 because he owed no duty to the Trust in
2002. Specifically, he argues that the Trust is alleging that he violated his duties
to Susan in 2002, who is not a party to this lawsuit in her individual capacity. But,
No. 74744-4-1 / 8
in its amended complaint, the Trust alleged that Gaffney represented all of the
Trust beneficiaries when they formed the Trust, despite the conflicts of interest
between the heirs and potential beneficiaries. The Trust responded to Gaffney's
motion for summary judgment with declarations from an expert that Gaffneyshould
have advised Susan and Fred III to retain independent legal counsel at the outset
of the representation.
And, as Gaffney set out in his motion for summary judgment, Fred Jr.'s will
named "Susan and Fred III as joint 'trustees' of his estate."6 "In that role, Susan
and Fred III hired Dorsey [& Whitney] to advise them about the administration of
Fred Jr.'s estate."7 Moreover, the Trust paid the attorney fees for that
representation. Accordingly, there is at least a genuine issue of material fact
whether Gaffney represented Susan as a trustee in 2002.
Gaffney also argues that the Trust's claim for disgorgement relating to the
2002 representation is time barred. The Trust brought this action in 2012, more
than three years after 2002. The Trust argues that Gaffney's representation was
continuous. We conclude there are genuine issues of fact on this question as well.
The statute of limitations for a breach of fiduciary duty claim is three years.
RCW 4.16.080(3); Hudson v. Condon. 101 Wn. App. 866, 872-73, 6 P.3d 615(2000). The statute of limitations begins to run when the client discovers "or in the
exercise of reasonable diligence should have discovered" all the facts necessary
to support each element of its cause of action. Janicki Logging & Const. Co.. Inc.
v. Scwabe. Williamson. & Wvatt. P.C.. 109 Wn. App. 655, 659-60, 37 P.3d 3096 CP at 50.
7 CP at 50.
8
No. 74744-4-1 / 9
(2001). If the same attorney has continuously represented the client, in the same
matter, the statute of limitations does not begin to run until the end of the
representation. Janicki. 109 Wn. App. at 663-64. One factor in determining
whether the attorney has continued to work on the same matter is whether the
attorney could "have remedied [the] error or mitigated the damage it caused."
Cawdrev v. Handson Baker Ludlow Drumheller. P.S.. 129 Wn. App. 810, 820, 120
P.3d 605 (2005). Whether the representation was continuous is often a question
of fact. Hippie v. McFadden. 161 Wn. App. 550, 558, 561, 255 P.3d 730 (2011).
In 2002, Gaffney created the current version of the Trust, allegedly while
breaching his fiduciary duties. He advised Susan and Fred III on how to "distribute
the Estate and Trust assets" as late as 2005, including specific advice on how
much of the Trust principal the Trust should distribute to Susan.8 He advised that,
if Susan's distributions exceeded a certain amount, the parties, including him,
"should review the facts and circumstances to determine whether Susan should
repay the trust for any living expense distributions."9
In 2008, when concerns about Susan's trust management and spending
arose, Gaffney stepped in to help Susan and Fred III sort them out. Gaffney
opened a new billing matter number for his work in 2008 and 2009. Even with the
new billing matter number, a reasonable person could conclude that Gaffney's
work in creating the Trust was sufficiently related to his advice in how to manage
the Trust and that it would be the same matter. There are genuine issues of fact
over whether Gaffney's representation was continuous.
8 CP at 80-82.
9 CP at 82.
No. 74744-4-1/10
The Trust has also provided enough evidence to raise a genuine dispute of
a material fact over whether Gaffney's 2008 and 2009 representation violated his
fiduciary duties to the Trust. Through a declaration from Susan's attorney in the
Oregon litigation, the Trust offered evidence that Gaffney had a conflict of interest
in 2008 and 2009 because he represented Fred III and Susan during the
accounting and reconciliation, and that Gaffney's preparation of the reconciliation
negligently stated that Susan owed the Trust over $3 million. Gaffney does not
dispute that the Trust paid the firm for its work on the reconciliation and accounting.
The trial court erred by granting Gaffney's summary judgment on the disgorgement
claims.
Legal Malpractice
The Trust alleges the trial court erred by dismissing its claim for legal
malpractice. Gaffney argues that the Trust's malpractice claim fails because the
only damages the Trust seeks are not compensable under Washington law.
To sustain a claim for legal malpractice, the plaintiff must prove:
(1) The existence of an attorney-client relationship which gives rise
to a duty of care on the part of the attorney to the client;
(2) an act or omission by the attorney in breach of the duty of care;
(3) damage to the client; and
(4) proximate causation between the attorney's breach of the duty
and the damage incurred.
Hizev v. Carpenter. 119 Wn.2d 251, 260-61, 830 P.2d 646 (1992). Gaffney
appears to accept that there are at least genuine issues of material fact for the first
two elements. Thus, our discussion focuses on damages.
In our state's version of the American Rule, parties are responsible for their
"own litigation expenses." Colorado Structures. Inc. v. Ins. Co. of the W.. 161
10
No. 74744-4-1 /11
Wn.2d 577, 621, 167 P.3d 1125 (2007) (Alexander, C.J., concurrence/dissent).
Thus, parties usually cannot recover attorney fees as "costs or damages." City of
Seattle v. McCreadv. 131 Wn.2d 266, 275, 931 P.2d 156 (1997).
But a party may seek attorney fees when authorized by a "contract, statute,
or recognized ground of equity." Newport Yacht Basin Ass'n of Condo. Owners v.
Supreme Nw.. Inc.. 168 Wn. App. 86, 97, 285 P.3d 70 (2012). One recognized
ground of equity is equitable indemnification, commonly called the ABC Rule.
Newport Yacht. 168 Wn. App. at 104 n.11. In LK Operating. LLC v. Collection
Group. LLC, the Washington State Supreme Court recognized the ABC Rule as
an exception to the American Rule in legal malpractice cases. 181 Wn.2d 117,
123-24, 330 P.3d 190(2014).
The ABC Rule applies when an attorney (A), represents a client (B), and as
a result of A's malpractice, B becomes involved in separate litigation with a third
party (C). If B sues A for malpractice, B can claim as consequential damages the
attorney fees B incurred in the litigation with C, but only if C was not connected to
the original representation. LK Operating. 181 Wn.2d at 123.
In addition, in order for B to recover from A under this rule, A's actions must
be the sole cause of the litigation between B and C.10 Blueberry Place
Homeowners Ass'n v. Northward Homes. Inc.. 126 Wn. App. 352, 358-59, 110
P.3d 1145 (2005). "[E]ven if it is possible to apportion attorneys' fees related to a
10 Below, Gaffney argued that the Trust was estopped from asserting that Gaffney was the
proximate cause of the Oregon litigation. On appeal, Gaffney clarifies that his position is
that the Trust is estopped from claiming that his representation was the "sole" cause of
the Oregon litigation. Because the Trust does not argue, even on appeal, that Gaffney's
alleged misconduct was the sole cause, we do not address whether the Trust would be
estopped from doing so.
11
No. 74744-4-1 /12
particular claim, where there are additional reasons why the party seeking fees
was sued, fees are not available under the theory of equitable indemnity."
Blueberry Place. 126 Wn. App. at 361.
The Trust concedes that many of its claimed damages are not available
under the ABC Rule and the American Rule.11 But the Trust asks this court to
reconsider the Supreme Court's holding in LK Operating. This court cannot
reconsider a Supreme Court decision because Washington State Supreme Court
decisions are binding on this court. Godefrov v. Reillv. 146 Wash. 257, 259, 262
P. 639(1928).
Gaffney claims that all of the Trust's claimed damages are litigation
expenses and are, therefore, subject to the American Rule. The Trust argues that,
even assuming the American Rule and the ABC Rule apply, it can still recover
some damages from Gaffney. The Trust contends that over $260,000 in third-
party attorney fees,12 the professional trustees' fees, and the accounting fees it
paid are outside the rule. Relying on RAP 9.12, Gaffney argues that the Trust
cannot make this argument on appeal because it failed to do so at the trial court
level.
When reviewing orders granting summary judgment, this court will review
"only evidence and issues called to the attention of the trial court." RAP 9.12; see.
e.g., Silverhawk. LLC v. KevBank Nat'l Ass'n. 165 Wn. App. 258, 265-66, 268 P.3d
11 As stated in its introduction, "The ABC Rule, however, appears to bar recovery of a large
portion of these litigation expenses." Br. of Appellant at 2. This concession is consistent
with the Trust's request to have the Supreme Court revisit its holding in LK Operating.
12 The Multnomah County Superior Court ordered the Trust to reimburse the attorney fees
incurred by Susan's children and Fred Jr's children, including Fred Ill's.
12
No. 74744-4-1/13
958 (2011) (declining to consider contract analysis not presented to trial court);
1519-1525 Lakeview Blvd. Condo. Ass'n v. Apartment Sales Corp., 101 Wn. App.
923, 932, 6 P.3d 74 (2000) (declining to consider argument that one party fell
outside of statute's protection because it did not raise it to the trial court).
Gaffney moved for summary judgment on all of the Trust's claims, arguing
that the Trust sought only attorney fees and expenses, which were not available
under the ABC Rule exception to the American Rule.13 In its response, the Trust
mentioned several times that "the majority of [its] claimed damages [were] not
attorney fees or costs that [it] incurred in the Multnomah County litigation," but it
never articulated any basis for distinguishing between the attorney fees it incurred
and attorney fees for which it had to reimburse third parties.14 We decline to
consider this distinction because the Trust did not argue it to the trial court.
Similarly, on appeal, the Trust claims that Gaffney's negligently prepared
accounting and reconciliation created the need for a new accounting by Beagle
Burke & Associates, and that the new accounting was not a "mere product of
litigation."15 But, again, the Trust did not raise this distinction to the trial court. We
decline to consider it for the first time on appeal.
Because we conclude that the Trust did not raise a genuine issue of material
fact whether it suffered legally compensable damages, we do not reach the issue
of proximate cause.
13 Gaffney included all of the categories of damages in his motion.
14 CP at 225.
15 Br. of Appellant at 43.
13
No. 74744-4-1 /14
We affirm in part and reverse in part, and remand to the trial court for further
proceedings consistent with this opinion.
^v
WE CONCUR:
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14