Douglas M. Dewar, Respondent
Kenneth Smith et al., Petitioners
Oral Argument, November 5, 2014
Appeal from Snohomish Superior Court. Docket No: 11-2-02662-9. Judgment or order under review. Judge signing: Honorable Michael T Downes. Date filed: 11/09/2012.
Sam B. Franklin and Timothy D. Shea (of Lee Smart PS ), for petitioners.
Robert B. Gould (of Law Office of Robert B. Gould ), for respondent.
Authored by J. Robert Leach. Concurring: Linda Lau, Ronald Cox.
J. Robert Leach,
[185 Wn.App. 548] [¶1] On discretionary review, we consider the extent of an accountant's duty to a third party. Certified public accountant (CPA) Kenneth Smith and the accounting firm Traner Smith & Company PLLC (collectively Smith) challenge the trial court's summary award of a $1,375,930.86 judgment to Douglas Dewar for Smith's alleged negligent misrepresentations about a client's tax return and related activities. Smith also challenges the denial of his request for summary judgment on contract claims. Dewar asks this court to allow him to supplement the record with information not considered by the trial court.
[¶2] We agree that Smith breached a duty he owed to Dewar. But Dewar has not established as a matter of law that Smith's negligent misrepresentation proximately caused his damages, and disputed issues of material fact preclude summary judgment on the remaining issues considered by the trial court. We deny Dewar's motion to supplement the record. We reverse and remand for further proceedings consistent with this opinion.
[¶3] Bradley Beddall, a real estate developer, and Dewar, Beddall's financier and accountant, participated over the [185 Wn.App. 549] years in many real estate joint ventures. Around 2006, Dewar and Beddall began a condominium conversion project for the Lea Hill Condominiums. The details of the documentation of their respective obligations and the associated entities they used for the project are not important to our analysis. Therefore, we will describe all transactions and documents as taking place directly between Dewar and Beddall.
[¶4] By 2009, the local real estate market had declined, the project had floundered, Beddall owed to Dewar about $3,900,000, and Beddall could no longer meet his obligations. In July 2009, Beddall told Dewar that he wanted out of the project and all associated obligations that he owed Dewar. Dewar would not release Beddall. In late 2009, Dewar sued Beddall for breach of loan documents. The parties then discussed settlement for several months.
[¶5] In January 2010, Beddall signed a quitclaim deed conveying the Lea Hill property to Dewar. This deed stated it was effective December 29, 2009, and preserved Beddall's liability to Dewar. In March 2010, Dewar and Beddall signed a settlement agreement, also having a stated effective date of December 29, 2009. Beddall's attorney, Jonathan Hatch, also signed the agreement and agreed to be bound by it. Critical to the agreement was Dewar's belief that Beddall could obtain a large tax refund based on his losses from the project.
[¶6] As a result, the agreement required that Beddall transfer title to the Lea Hill property, which generated losses, to Dewar and hire the accounting firm of Traner Smith to timely file Beddall's 2009 tax return, seeking a refund of not less than $1,000,000. The agreement gave Dewar the right of " review, evaluation, and approval" of the tax return in his " sole and absolute discretion." Beddall " irrevocably and permanently" assigned the tax refund to Dewar. The agreement contained provisions intended to ensure Dewar's receipt of the tax refund, which the United States Internal Revenue Service (IRS) would issue in Beddall's name.
[185 Wn.App. 550] [¶7] Beddall signed an " irrevocable" power of attorney and appropriate IRS form 2848 authorizing attorney Hatch to sign the tax return, receive and negotiate the refund check, and deliver the funds to Dewar. Hatch agreed to sign and file the return after Dewar approved it. He also agreed to deliver all refund proceeds to Dewar.
[¶8] Smith was not a party to the settlement agreement and did not sign it. Smith's engagement letter to Beddall does not mention Dewar. But Kenneth Smith knew the content of the settlement agreement and its purpose. During his preparation of Beddall's tax return, Smith had a copy of the agreement. Consistent with the Hatch-Beddall power of attorney and IRS forms, Smith prepared the return for Hatch's signature.
[¶ 9] On April 15, 2010, Hatch signed the completed tax return, which had Beddall's address on it. As the settlement agreement required, Smith transmitted the return to Dewar for his review. The same day, Dewar notified Smith that the return contained three errors: the omission of Beddall's foreign bank accounts, a missing entry for Beddall's sale of an apartment house, and the return address, which the settlement agreement required to be Hatch's, not Beddall's. Dewar concluded, " The only change I insist on is the address change."  After Smith changed the address, Hatch returned to Smith's office to sign the amended return, which Smith filed the same day.
[¶10] Shortly after Smith filed the return, Beddall instructed him to stop discussing the matter with Hatch and to communicate about the return only with Beddall. In May 2010, after Beddall asked about the status of the refund, Smith placed a conference call between Beddall, Smith, and an IRS representative via an IRS practitioner's hotline. During the call, Beddall asked the IRS representative to change the address on his tax return from Hatch's address [185 Wn.App. 551] to Smith's address. This changed the address to which the IRS would send any refund from Hatch's to Smith's. Smith was on the line but did not participate in the conversation.
[¶11] In early June, Dewar learned that he could no longer access Beddall's tax return online. He sent an e-mail to Hatch, with a copy to Smith, asking Hatch to confirm with Smith Dewar's right to review the tax return. Dewar also asked that Hatch or Smith contact the IRS about the status of the refund. In response, Smith forwarded to Dewar a copy of the original tax return with Hatch's address. Smith did not tell Dewar or Hatch that Beddall had amended the address on the return or in any manner indicate that the copy he provided was not currently correct in all aspects. From both the settlement agreement and the events of April 15, Smith knew about the importance of the return address to Dewar.
[¶12] In July 2010, the IRS sent four refund checks totaling $1,206,703.32 to Smith's office. Smith notified Beddall, who instructed him to deliver the checks to Beddall's son-in-law, Ron Rubin. Smith did so.
[¶13] On August 16, 2010, Beddall sent an e-mail to Dewar and Hatch. He stated that he had the tax refund money in Thailand, offered to pay Dewar $500,000 " right now," and offered to " set up an account with $200,000 for future/current legal costs or judgments." Beddall forwarded this e-mail to Smith and also called Hatch that day. Smith withdrew from his engagement with Beddall.
[¶14] Dewar sued Traner Smith and Kenneth Smith for conversion, civil conspiracy, tortious interference with contractual relationship, breach of implied contract, breach of duty owed to third-party beneficiary, breach of fiduciary duties, and violation of the Consumer Protection Act, chapter 19.86 RCW. On November 9, 2012, the trial court granted Dewar's motion for partial summary judgment to establish that Smith owed Dewar a duty of care. The court also concluded that Smith committed negligent misrepresentation when the address on the tax return was changed, [185 Wn.App. 552] he received the checks, and he gave them to Rubin without disclosing these actions to Dewar and Hatch. On the same day, the trial court denied Smith's motion for partial summary judgment to dismiss contract claims. Smith filed a motion for discretionary review in this court.
[¶15] On March 21, 2013, the trial court granted Dewar's motion for partial summary judgment as to Dewar's damages caused by Smith's negligent misrepresentation. The court concluded that Dewar " has been damaged as a direct, undisputed, proximate cause of [Smith's] negligent misrepresentation in the principal amount of $1,375,930.86."  Smith again petitioned this court for discretionary review. On May 23, 2013, the trial court struck the parties' trial date pending appellate review. On the same day, Dewar
voluntarily dismissed some remaining claims ...