STATE OF MINNESOTA
IN COURT OF APPEALS
Lehrman, Lehrman & Flom, et al.,
Filed October 13, 1998
Affirmed in part, reversed in part, and remanded
Hennepin County District Court
File No. 96-14109
John F. Bonner III, Leona E. Lewis, Malkerson Gilliland Martin L.L.P., 1500 AT&T Tower, 901 Marquette Ave., Minneapolis, MN 55402 (for appellant)
Bradley M. Jones, Mark Bloomquist, Meagher & Geer, P.L.L.P., 4200 Multifoods Tower, 33 S. Sixth St., Minneapolis, MN 55402 (for respondents)
Considered and decided by Crippen, Presiding Judge, Klaphake, Judge, and Shumaker, Judge.
Appellant Joyce Witzman (Witzman) sued respondents Harvey Flom, his accounting firm, and its individual partners (Flom), alleging professional negligence, negligent misrepresentation, aiding and abetting or joint-concerted-tortious conduct, and racketeering in violation of the RICO Act. She appeals from the district court's grant of summary judgment to Flom and denial of her motion to amend her complaint. Because Witzman was not Flom's client and owed no duty to Witzman, we affirm the grant of summary judgment on Witzman's professional negligence and negligent misrepresentation claims. Because Witzman's complaint and proposed amended complaint, although inartfully drafted, can be read to allege a viable fraud claim, we reverse the order denying her motion to amend and the summary judgment on the RICO and joint-concerted-tortious conduct claims, and remand for further proceedings.
Witzman was a beneficiary under three testamentary trusts established by her father and mother, who died in 1968 and 1992, respectively. Her brother, Blair Wolfson, was also a beneficiary and served as personal representative of their father's estate and as trustee after their mother died. Flom provided accounting services to Wolfson while he served as personal representative and later as trustee.
Witzman brought this action against Flom. In response to Flom's motion to dismiss under Minn. R. Civ. P. 12.02(e) and 56.03, Witzman moved to amend her complaint to add a breach of trust claim against Flom individually, to add Wolfson as a party defendant, and to expand her factual allegations.
The district court denied Witzman's motion to amend her complaint and granted Flom's motion for summary judgment. This appeal followed entry of final judgment.(1)
Flom's motion was initially characterized as a motion to dismiss for failure to state a claim upon which relief can be granted under Minn. R. Civ. P. 12.02(e). Because the district court received and considered evidence beyond the complaint itself, the motion was properly converted to one for summary judgment. See Minn. R. Civ. P. 12.02(f), 56.03. While Witzman challenges this conversion, under either a summary judgment or rule 12.02 standard, we apply the same analysis and allow dismissal of an action "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Handeen v. Lemaire, 112 F.3d 1339, 1347 (8th Cir. 1997). Accordingly, we consider the factual allegations stated in both the original and proposed amended complaint.
When a trust beneficiary's claims against a third-party tortfeasor are derivative in nature because they involve a tort or other wrong with respect to the trust property, the beneficiary generally cannot maintain an action at law in his or her own name against the third party. Uselman v. Uselman, 464 N.W.2d 130, 137 (Minn. 1990). Although the trustee has a duty to take reasonable steps to compel the tortfeasor to redress these types of injuries, if the trustee fails to bring suit against the tortfeasor, "the beneficiaries may properly bring an action against the trustees and third parties as co-defendants." Id. at 127-38.
To distinguish between a direct and a derivative claim, we must consider whether the injury to the individual plaintiff is separate and distinct from the injury to other persons in a similar situation as the plaintiff. Northwest Racquet Swim & Health Clubs, Inc. v. Deloitte & Touche, 535 N.W.2d 612, 617 (Minn. 1995). In analyzing whether claims are derivative, we look to the body of a complaint, not the nomenclature used by a plaintiff. In re Sunrise Sec. Litigation, 916 F.2d 874, 882 (3rd Cir. 1990) (cited with approval by Northwest Racquet, 535 N.W.2d at 618).
In this case, Witzman alleges (1) Flom prepared various financial documents for Wolfson that "failed to disclose and/or concealed" Wolfson's conversion of trust assets, and (2) Flom's actions enabled Wolfson to receive excessive trustee and management fees, engage in a course of self-dealing, and breach his fiduciary duty. Witzman's claimed injuries include: depletion of the trust assets; substantial reduction in the amount to be paid her in satisfaction of her beneficiary interest; and inducement of her "forbearance" from commencing an action against Wolfson to remove him as trustee and thereby allow him "to continue to maintain unfettered control of the [trust] assets * * * and to thereby deplete the assets." These injuries arguably are not unique to Witzman and would be common to any other trust beneficiaries.
Witzman further alleges that Flom's negligent preparation of one of the trusts' tax returns resulted in her having to file an amended tax return "which led to an IRS audit, causing [her to incur] additional accounting fees and costs." Her proposed amended complaint includes additional factual allegations that suggest the trust accountings provided by Flom fraudulently omitted estate assets which were never conveyed to the trusts, and that Witzman relied on these accountings in deciding to settle her claims against Wolfson for breach of his fiduciary duties. Because the supreme court in Uselman failed to specify the procedure that should be followed in a case such as this where the trustee allegedly has refused to sue the tortfeasor and where the beneficiary alleges that she was fraudulently induced into settling with the trustee, we conclude that Witzman is not precluded from bringing a direct action against Flom, an alleged third-party tortfeasor. Cf. Handeen, 112 F.3d at 1354 (plaintiff alleged sufficient injury to sustain RICO action against defendants' attorneys, even though he had settled with defendants, based on his claim to recover attorney fees incurred in objecting to defendants' fraudulent claims).
Even though we conclude that Witzman can maintain this action against Flom, we still must determine whether summary judgment was properly granted.
Accountants are held to the same standard of reasonable care as lawyers, and a plaintiff in an accounting malpractice action must prove the same elements for a legal malpractice action. Vernon J. Rockler & Co. v. Glickman, Isenberg, Lurie & Co. 273 N.W.2d 647, 650 (Minn. 1978). One of those elements is duty, or the existence of an accountant-client relationship. Id.
In limited circumstances, a nonclient may sue a professional for malpractice where the nonclient is "an intended third-party beneficiary" and the client's "sole purpose in retaining the [professional] is to benefit the nonclient directly." Goldberger v. Kaplan, Strangis & Kaplan, P.A., 534 N.W.2d 734, 738 (Minn. App. 1995), review denied (Minn. Sept. 28, 1995). Similar to the estate beneficiary in Goldberger, Witzman was only an "incidental beneficiary" of Flom's services; the direct beneficiary was the trust itself. Allowing a beneficiary to sue a trustee or a personal representative's attorney or accountant could subject those professionals to impermissible conflicts of interest. Id. at 739; see also L & H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372, 378 (Minn. 1989) ("Any duty imposed upon an attorney to protect an interest of the client's adversary would necessarily conflict with the duty owed by the attorney to his or her client"). Thus, the district court did not err in granting summary judgment to Flom on Witzman's professional negligence claim.
Witzman nevertheless argues that privity is not required to establish an accountant's liability to a third party for negligent misrepresentation, citing Bonhiver v. Graff, 311 Minn. 111, 248 N.W.2d 291 (1976). In Bonhiver, an accountant shared his negligently prepared work papers with the insurance commissioner, who was investigating the solvency of an insurance company. Based on these papers, the commissioner assured an insurance agent that the company was healthy, and the agent suffered monetary losses when he continued to sell the company's products. In holding the accountant liable to the agent, the supreme court observed that the case was a "most unusual one" and emphasized that the accountant knew that the commissioner was relying on his papers, that the commissioner actually relied upon those papers, and that the third party's "[p]ersonal reliance, indirect though it may be through the commissioner, was reasonable." Id. at 130-31, 248 N.W.2d at 303.
Although Bonhiver may allow accountant liability for negligent misrepresentation to a third party under limited circumstances, we do not believe that it does so here. Witzman attempts to fit her situation within the confines of Bonhiver: she insists that Flom had actual knowledge that Witzman personally would rely on his work because each annual accounting Flom prepared included the statement: "This report is intended solely for the information and use of the Trustee, the beneficiaries and the District Court[.]" These documents, however, were prepared by Flom at Wolfson's request only after Witzman filed her probate petitions seeking Wolfson's removal; their preparation during the course of litigation is factually far different than in Bonhiver, where the accountant knew that the commissioner was relying on his work papers to determine whether an insurance company was solvent. In addition, because these documents were examined, criticized, and challenged by Witzman's own accountants, Witzman personally relied not on Flom's negligently prepared documents, but on her own accountants' reading of those documents. Thus, summary judgment was properly granted on Witzman's negligent misrepresentation claim.
Liability under 18 U.S.C. § 1862(c) (1994) extends to those persons associated with or employed by an enterprise who "conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." RICO is not intended to be a "surrogate for professional malpractice actions." Handeen, 112 F.3d at 1348. Thus, an accountant "does not conduct an enterprise's affairs through run-of-the-mill provision of professional services"; nor does an accountant become liable under RICO merely by providing "materially deficient financial services." Id.
Many of Witzman's allegations involve nothing more than the negligent provision of professional services, including Flom's preparation of financial statements, tax returns, and other documents and accounting entries that are all part of an accountant's professional services. Other allegations and facts, however, suggest that Flom may have been directly involved in a plan to defraud Witzman. Because Flom served not only as Wolfson's accountant while he was the personal representative of the estate but also while he was trustee, Flom had knowledge of estate assets and should have been able to determine whether those assets had been properly transferred to the trusts. Flom also was the accountant for the various corporations and partnerships held by the trusts, which Witzman claims were improperly commingled between Wolfson and the trusts. Under these circumstances, Witzman's allegations arise to the level of sham debts, false promissory notes, and other fraudulent plans alleged in Handeen, which the Eighth Circuit concluded could withstand a motion to dismiss for failure to state a claim. Id., 112 F.3d at 1350. The district court therefore erred in granting summary judgment on Witzman's RICO claim.
To sustain a cause of action under the theory of joint concerted tortious conduct, the defendant must "know of the plan and its purpose and take affirmative steps to encourage the achievement of the tortious result." D.W. v. Radisson Plaza Hotel Rochester, 958 F. Supp. 1368, 1380-81 (D. Minn. 1997) (quoting Lind v. Slowinski, 450 N.W.2d 353, 357 (Minn. App. 1990), review denied (Minn. Feb. 21, 1990)). Because Witzman alleges facts upon which it could be found that Flom had knowledge of or participated in a plan to harm her personally, the district court erred in granting summary judgment on this claim.
A trial court should freely grant motions to amend a complaint when justice so requires. Minn. R. Civ. P. 15.01; Hunt v. University of Minn., 465 N.W.2d 88, 95 (Minn. App. 1991). Although inartfully drafted, Witzman's proposed amended complaint includes factual allegations that sound in fraud. In particular, she alleges that Flom represented that his trust accountings included all of the estate assets, when in fact some estate assets were never conveyed to the trusts. See Davis v. Re-Trac Mfg. Corp., 276 Minn. 116, 117, 149 N.W.2d 37, 38-9 (1967) (setting forth elements of fraud claim).
Although accountants are not liable to third parties for negligence, they are liable if their malpractice involves fraud. Bonhiver, 311 Minn. at 126-27, 248 N.W.2d at 301 (quoting Ultramares Corp. v. Touche, 174 N.E. 441, 444 (N.Y. 1931)). A duty to disclose exists when disclosure is "necessary to clarify information already disclosed, which would otherwise be misleading." L & H Airco, 446 N.W.2d at 380. Thus, we conclude that because Witzman's amended complaint states a cognizable claim alleging fraud, the district court abused its discretion in denying Witzman's motion for leave to amend her complaint.
The district court's grant of summary judgment to Flom on Witzman's professional negligence and negligent misrepresentation claims is affirmed. Its denial of Witzman's motion to amend and its grant of summary judgment to Flom on the RICO and joint-concerted-tortious conduct claims are reversed, and the matter is remanded for further proceedings consistent with this opinion.
Affirmed in part, reversed in part, and remanded.
1. This is just one of many actions that Witzman has brought in connection with these trusts. In December 1993, she filed three separate probate petitions in which she claimed Wolfson had breached his duties as trustee; these petitions were dismissed after she entered into a settlement agreement with Wolfson. A year later, the district court rejected Witzman's challenge to the settlement agreement. In September 1996, she brought this action against Flom and a similar action against Wolfson's attorney; the Eighth Circuit recently affirmed the federal district court's grant of summary judgment to the attorney. Witzman v. Gross, No. 97-3057 (8th Cir., July 7, 1998). In 1997, she sued Wolfson for fraudulent inducement and breach of the settlement agreement; on appeal, this court has reversed the summary judgment in favor of Wolfson, concluding that genuine issues of material fact exist. Witzman v. Wolfson, C7-98-421 (Minn. App. Oct. 13, 1998). Finally, in February 1998, Witzman filed a probate petition seeking appointment as co-trustee; the district court recently denied Wolfson's motion for summary judgment and continued the matter in an attempt to resolve the issues.