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.
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
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
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.
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).
CPR DR 5-105(B). CPR DR 5-105(C) allows multiple representation where (1) it is obvious the lawyer can adequately
The Ethical Considerations (hereinafter EC) illustrate the problems inherent in such representation.
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:
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).
Even where an attorney is justified in accepting multiple representation of clients with differing interests,
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.
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.
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.
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,
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.
The investors filed a cross appeal challenging the trial court's ruling concerning the application of the Consumer Protection Act.
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
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.
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.
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:
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
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.
DORE, C.J., and BRACHTENBACH, DURHAM, SMITH, and GUY, JJ., concur. JOHNSON, J. (dissenting in part, concurring in part)
The majority affirms the trial court's summary judgment ruling that William James Denver violated DR 5-105 of the former Code of Professional Responsibility (CPR). In so holding, the majority concludes that CPR DR 5-105 may be violated whenever a "potential" conflict of interest exists, even though the rule is written in terms of "likely" conflicts of interest. The majority's unfortunate extension of CPR DR 5-105's clear language greatly burdens the attorneys of this state, for "potential" conflicts of interest exist in almost every case of multiple representation. I also disagree with
Disciplinary Rule 5-105 of the former Code of Professional Responsibility reads in relevant part as follows:
This rule makes clear that the mere possibility of an adverse effect on the attorney's judgment does not constitute a disciplinary violation. A violation can occur only if the attorney's judgment is at least likely to be affected. Yet the majority holds that a "potential" conflict of interest can amount to a violation of CPR DR 5-105. Majority, at 460-61.
Nothing in the majority's analysis justifies this departure from the rule's express language. The majority maintains that its result is justified under a broad construction of the attorney disciplinary rules. Majority, at 458-59. Unambiguous language, however, must be construed according to its
The majority's reliance on the Ethical Considerations underlying DR 5-105 is likewise improper here. The former CPR's Ethical Considerations were aspirational objectives toward which an attorney should strive, while the Disciplinary Rules represented "the minimum level of conduct below which no lawyer [could] fall without being subject to disciplinary action". See CPR Preliminary Statement. Although at times the Ethical Considerations may be used in interpreting language of the Disciplinary Rules, they should not be so used when they depart from a clear standard of conduct expressly and repeatedly stated in the Disciplinary Rules.
The majority's adoption of a standard involving "potential" conflicts of interest has severe consequences. Under the majority's interpretation, an attorney could be required to return fees even in cases where the chances of a conflict of interest are remote and unforeseeable. The consequences are especially severe when an attorney undertakes to jointly represent two or more clients. A potential conflict of interest would exist whenever an attorney jointly represented multiple clients, whether they be husbands and wives, general and limited partners, or corporate officers and shareholders. An attorney cannot foresee every possible situation that might arise when undertaking such a joint representation. Yet the majority's standard places exactly this burden on the attorney.
I also cannot concur in the majority's conclusion that determining whether CPR DR 5-105 has been violated involves only questions of law. See majority, at 457-58. Attorney disciplinary rules are to be interpreted according to the general principles of statutory interpretation. See In re McGlothlen, 99 Wn.2d 515, 522, 663 P.2d 1330 (1983). Whether a statute is violated involves mixed questions of
This much was recognized in Halvorsen v. Halvorsen, 3 Wn.App. 827, 830-31, 479 P.2d 161 (1970), review denied, 78 Wn.2d 996 (1971), where the Court of Appeals held that whether an attorney has a conflict of interest "is a fact question to be determined by looking to the reasonableness of the activity, under the whole circumstances of the case." See also Johnson v. Continental Cas. Co., 57 Wn.App. 359, 362-63, 788 P.2d 598 (1990) (discussing the appropriateness of summary judgment in terms of disputes as to material issues of fact).
Moreover, issues of fact are particularly involved given the rule here at issue. CPR DR 5-105's language shows that the foreseeability of future events is key to determining whether the rule is violated. When deciding whether to represent potential clients, an attorney must predict what issues are likely to arise and predict further what positions the attorney will likely have to take on those issues. Foreseeability issues, like these, involve questions of fact. See Bernethy v. Walt Failor's, Inc., 97 Wn.2d 929, 933, 653 P.2d 280 (1982); Anderson v. Dreis & Krump Mfg. Corp., 48 Wn.App. 432,
The majority concludes that the evidence shows "potential" conflicts of interest existed from the outset of Denver's representation of the promoters and investors. Majority, at 460. Because I believe the proper standard is whether "likely" conflicts of interest existed, I will review the majority's analysis of the evidence to show that it does not establish a likely conflict of interest.
The majority bases its conclusion first on the fact that "Denver recognized from the beginning that a potential conflict of interest existed." Majority, at 460. Denver did state in his deposition that he knew buyers could assert claims against sellers if problems with their sale later developed. This statement establishes merely the possibility of future conflicts of interest, not their likelihood.
Moreover, Denver's deposition testimony makes clear that although he initially recognized the existence of a potential conflict of interest, he considered this possibility "nebulous" and "remote". Respondents' Clerk's Papers, at 46-47, 86-87, 91, 96. He filed an affidavit explaining this point further:
(Italics mine.) Appellants' Clerk's Papers, at 393.
The majority also bases its conclusion on the following depiction of Denver's state of mind:
Majority, at 460-61.
These statements are not fully supported by the record. First, while the majority implies that Denver knew the IRS was denying the tax benefits in all similar cases, the record reveals merely that he knew the IRS was "almost" automatically denying these benefits. Respondents' Clerk's Papers, at 52. Second, Denver did not indicate the IRS would audit every investor, rather Denver merely agreed with a statement in an exhibit to the effect that "[e]ven if you are not now under audit, you should assume that you may come under audit sooner or later." (Italics mine.) Respondents' Clerk's Papers, at 78. When Denver undertook the representation, only a small portion of the investors were then being audited, although he believed it was likely that "more" would be audited in the future. Respondents' Clerk's Papers, at 68. Although my reading of the record on these points does not differ markedly from that of the majority's, these differences do come into play in determining if factual issues exist.
Of greater significance is the majority's statement that Denver believed the tax benefits in this case were sure to be denied. This statement finds no support in the record. Denver never admitted to any such belief, and in fact he agreed to represent the MRTF only after reviewing tax laws and after determining that the transactions did not suffer from the documentation deficiencies that had prevented previous programs from receiving the desired tax benefits:
Respondents' Supplemental Clerk's Papers, at 29.
Thus, factual issues remain unresolved even on the question of whether the tax benefits in this case were likely to be denied when Denver began representing the promoters and investors.
Yet further factual issues exist. Even if the record did establish that Denver believed the benefits would be denied, the investors would not have proven a likely conflict of interest. This is because the interests of the promoters and the investors were identical with respect to the granting or denying of tax benefits. The promoters as well as the investors had purchased the master sound recordings, and they all wanted to obtain an IRS determination that their investments were entitled to credits and deductions. Each of the MRTF members opted to participate in the fund's hiring of a single attorney to pursue this goal. In this regard, the promoters and the investors were all similarly situated when Denver agreed to represent them. Expert affidavits from two prominent attorneys establish that under these circumstances no conflict of interest arises. Appellants' Clerk's Papers, at 384-85, 388-89.
Nor have the plaintiffs established that any future events were likely to cause these interests to diverge. Widespread title and appraisal problems were not discovered until a year and a half after Denver undertook representation of these clients, and the investors do not even allege that Denver had any reason to know about these problems earlier.
The plaintiffs have also speculated that as the negotiations with the IRS proceeded without immediate resolution, the interests of the promoters and investors began to diverge as to the speed with which the negotiations were
I believe in light of the foregoing discussion that genuine issues of material fact remain on the plaintiffs' CPR DR 5-105 claim. Even though very few of the facts presented by the plaintiffs have been contradicted by Denver, the inferences flowing from those facts are certainly open to different interpretations. Specifically, reasonable minds could differ as to the foreseeability, as measured at the outset of Denver's representation, that events causing a divergence of interests between the investors and promoters were likely to occur. Summary judgment is improper, even if the basic facts are not in dispute, if those facts are reasonably subject to conflicting inferences. See Coffel v. Clallam Cy., 58 Wn.App. 517, 520, 794 P.2d 513 (1990); Southside Tabernacle v. Pentecostal Church of God, Pac. Northwest Dist., Inc., 32 Wn.App. 814, 821, 650 P.2d 231 (1982).
The parties have also appealed from various trial court rulings addressing both the Consumer Protection Act (CPA) and certification of the class action. I concur in the majority's resolution of these issues, except for a portion of its analysis of the CPA.
The majority holds that a genuine issue of material fact exists regarding application of the CPA. Majority, at
RCW 19.86.090 expressly provides that a trial court's decision whether to treble damages is discretionary. I agree with the majority that discretion was not abused on this point.
I disagree with the majority, however, with respect to the attorney fee issue. Under RCW 19.86.090, a prevailing CPA plaintiff is entitled to reasonable attorney fees incurred in pursuing the CPA action. The trial court has discretion in setting the amount of the attorney fees, see 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), but not in deciding whether attorney fees should be awarded in the first place. See State v. Black, 100 Wn.2d 793, 805, 676 P.2d 963 (1984) (concluding that the award of attorney fees in a private action under RCW 19.86.090 is mandatory, while the award of fees in an Attorney General action under RCW 19.86.080 is discretionary).
The majority errs in allowing the trial court to deny attorney fees as a matter of discretion. I would reverse the trial court's denial of attorney fees. The plaintiffs should be granted attorney fees if they prevail on their CPA claim at trial on remand.
In sum, I would reverse the trial court's summary judgment ruling that CPR DR 5-105 had been violated; I would reverse in part and affirm in part the trial court's summary judgment rulings concerning the CPA; and I would affirm the trial court's rulings regarding the class certification issues. I would remand the case for further proceedings.
DOLLIVER and ANDERSEN, JJ., concur with JOHNSON, J.
Respondents' Clerk's Papers, at 46-47. October 15, 1981, was the date Denver undertook the multiple representation.