Shimko v. Guenther

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

TIMOTHY A. SHIMKO, SR.; SHIMKO 
& PISCITELLI,
No. 05-16847
Plaintiffs-Appellees,
v.  D.C. No.
CV-04-00078-FJM
MILTON GUENTHER; KATHI
OPINION
GUENTHER,
Defendants-Appellants.

Appeal from the United States District Court
for the District of Arizona
Frederick J. Martone, District Judge, Presiding

Submitted September 4, 2007*
San Francisco, California

Filed October 12, 2007

Before: Jay S. Bybee and Milan D. Smith, Jr.,
Circuit Judges, and J. Michael Seabright,** District Judge.

Opinion by Judge Milan D. Smith, Jr.

*The panel finds this case appropriate for submission without oral argu-
ment pursuant to Federal Rule of Appellate Procedure 34(a)(2).
**The Honorable J. Michael Seabright, United States District Judge for
the District of Hawaii, sitting by designation.

13885
13888 SHIMKO v. GUENTHER

COUNSEL

Richard J. McDaniel, Phoenix, Arizona, for the defendants-
appellants.

Timothy A. Shimko, Timothy A. Shimko & Associates,
Cleveland, Ohio, for the plaintiffs-appellees.

OPINION

MILAN D. SMITH, JR., Circuit Judge:

Appellants Milton and Kathi Guenther (collectively, “the
Guenthers”), appeal a judgment awarding $359,668.00 in
attorneys’ fees to Appellees Timothy Shimko, and his law
firm, Shimko & Piscitelli (the law firm and its partners collec-
tively, “Shimko”) in payment for certain legal services alleg-
edly provided to Arizona limited partnerships,
Comprehensive Outpatient Rehabilitation Facility (“CORF”)
Licensing Services, L.P., and CORF Management Services,
L.P. (collectively, “CORF entities”), and their limited part-
ners. The organic documents of both the CORF entities list
Milton Guenther (individually, “Guenther”) as a limited part-
ner, not as a general partner.

On appeal, Shimko argues that it reasonably believed
Guenther to be a general, rather than a limited partner, and
that, as a result, the Guenthers are liable for the legal fees of
the CORF entities under Arizona Revised Statutes (“A.R.S.”)
§ 29-319. We disagree. Shimko is not an ordinary creditor.
 SHIMKO v. GUENTHER 13889
Shimko is a law firm hired to defend the CORF entities and
its limited partners against a significant number of multi-
million dollar claims filed across the country, primarily alleg-
ing fraud. We hold that because Shimko owed a fiduciary
duty of care to its clients, it is chargeable under the facts of
this case with knowledge of the contents of the CORF enti-
ties’ organic documents, whether or not it actually examined
them, and, consequently, that it was not reasonable for
Shimko to believe that Guenther was a general partner of
either of the CORF entities. Accordingly, Shimko may not
recover from the Guenthers the legal fees owed by the CORF
entities to Shimko.

We reverse in part, affirm in part, and remand for further
proceedings on the Guenthers’ liability for legal fees incurred
as a result of Shimko’s representation of the Guenthers per-
sonally.

I. Background and Prior Proceedings

Richard Ross, David Goldfarb, Paul Woodcock, and Guen-
ther (collectively, “Defendants”) were limited partners of the
CORF entities.1 The CORF entities offered clients consulting
and management services to help them establish and operate
Medicare-compliant outpatient treatment facilities. Upon
commencement of the CORF entities’ operations, Guenther
was in charge of field operations, actively lectured at CORF
marketing seminars, and helped find locations and medical
directors for CORF clients.
1
The defendants named in Shimko’s complaint also included Joel Brill
and Fred Ritchie, officers of the CORF entities, and each defendant’s
spouse. Brill and Ritchie stipulated to a dismissal of Shimko’s complaint
and appeal. The district court dismissed the suit as to all spouses except
the spouses of Woodcock and Guenther because Arizona is a community
property state where the community may be held liable for the debts of a
partnership in which one spouse participated.
13890 SHIMKO v. GUENTHER
During the period from late 2001 to 2003, a number of the
CORF entities’ clients located in various parts of the country
threatened to file or did file complaints against the CORF
entities, as well as against the Defendants in their individual
capacities, alleging fraud and other causes of action.

According to Shimko’s Response Brief filed in this case,
“Shimko was asked to advise Dr. Guenther and the other
owners on the extent of their individual and personal expo-
sure, if any, beyond the protection offered to them by the lim-
ited partnership structure under which they owned and
operated [the CORF entities].” Although the district found
otherwise, Shimko claims it did not represent the CORF enti-
ties and billed them only because it was requested to do so by
the Defendants. Neither the CORF entities nor the Defendants
paid Shimko for its services during the period from October
2002 to April 2003. In April 2003, Shimko stopped represent-
ing the CORF entities and the Defendants, and shortly there-
after, it filed suit in district court,2 alleging “action on an
account, breach of contract, passing bad checks, and quantum
meruit and fraud” and seeking payment of legal fees in the
sum of $359,668.00.

Shimko filed a motion for summary judgment against all
Defendants. Ross and Goldfarb filed a joint cross-motion for
summary judgment. The Guenthers did not file a response to
Shimko’s motion for summary judgment.

The district court partially granted Ross and Goldfarbs’
cross-motion for summary judgment, and dismissed them
from the suit.3 Shimko’s claims for passing bad checks and
2
The complaint was originally filed in the Northern District of Ohio.
Venue was first transferred to Tucson and then to Phoenix, both in the
District of Arizona.
3
Shimko appealed to this court the district court’s grant of summary
judgment in favor of Ross and Goldfarb. We issued a memorandum dispo-
sition in Shimko v. Goldfarb, No. 05-15009, on August 31, 2007, remand-
ing the case to the district court for further proceedings.
 SHIMKO v. GUENTHER 13891
fraud were also dismissed. Woodcock filed for bankruptcy,
staying the suit as to him. Shimko’s remaining claims against
the Guenthers for breach of contract, action on account, and
quantum meruit then proceeded to trial. Following a one day
bench trial, the district court held that Guenther, as a limited
partner in control, and his spouse, were liable for the entirety
of Shimko’s unpaid attorneys’ fees.

In its Findings and Conclusions, the district court found
that Shimko was retained to represent the CORF entities as
well as its individual principals. It found that the Guenthers
were personally represented by Shimko, that they personally
agreed to this representation, and that they were liable for
legal services performed for them personally. The district
court also found that Guenther participated in the control of
the CORF entities as a general partner, along with his col-
leagues, and that due to his substantial involvement in the
operations of the CORF entities, “it was reasonable for
Shimko to believe that he was dealing with a general partner.”
The court then found in favor of Shimko on the action on
account and contract causes of action and found the Guen-
thers liable for all unpaid legal fees charged to the CORF enti-
ties, mooting the claim for unjust enrichment.

Though the court ultimately ruled only on the action on
account and contract causes of action, it commented that had
it ruled on the unjust enrichment claim, it would have found
in favor of Shimko because the Guenthers benefitted from
Shimko’s legal services. However, it noted that the contract
damages would have been reduced “since the representation
of Guenther was only a part of the scope of the services ren-
dered.” Had it ruled solely based upon unjust enrichment, it
would have reduced “damages by an allocation of work sim-
ply to Guenther, and we would reduce the fee from the con-
tracted amount of $350.00 an hour to a lesser, more
reasonable amount.”

The Guenthers filed a motion for reconsideration and/or a
new trial, which the district court denied. The Guenthers now
13892 SHIMKO v. GUENTHER
appeal both the judgment and the denial of their post-trial
motion.

II. Standard of Review and Jurisdiction

On appeal following a bench trial, the district court’s find-
ings of fact “shall not be set aside unless clearly erroneous
. . . .” Fed. R. Civ. P. 52(a). “The clear error standard also
‘applies to the results of “essentially factual” inquiries apply-
ing the law to the facts.’ ” Zivkovic v. S. Cal. Edison Co., 302
F.3d 1080, 1088 (9th Cir. 2002) (citing Saltarelli v. Bob
Baker Group Med. Trust, 35 F.3d 382, 384 (9th Cir. 1994)).
The district court’s conclusions of law are reviewed de novo.
Id. (citing Saltarelli, 35 F.3d at 385).

A district court’s denial of a motion for reconsideration and
for a new trial is reviewed for abuse of discretion. Dorn v.
Burlington N. Santa Fe R.R. Co., 397 F.3d 1183, 1189 (9th
Cir. 2005) (citing Jorgensen v. Cassiday, 320 F.3d 906, 918
(9th Cir. 2003)).

We have jurisdiction under 28 U.S.C. § 1291.

III. Discussion

A. Arizona Revised Statutes § 29-319

A.R.S. § 29-319(A) states, in pertinent part:

[A] limited partner is not liable for the obligations of
a limited partnership unless he is also a general part-
ner or, in addition to the exercise of his rights and
powers as a limited partner, he participates in the
control of the business. However, if the limited part-
ner participates in the control of the business, he is
liable only to persons who transact business with the
limited partnership reasonably believing, based on
 SHIMKO v. GUENTHER 13893
the limited partner’s conduct, that the limited partner
is a general partner.

[1] Thus, a limited partner may be held liable to a third
party for the debts of the partnership if the limited partner is
either a general partner or a participant in the control of the
business and the third party reasonably believes that the lim-
ited partner is a general partner. A.R.S. § 29-301(5) defines a
general partner as “a person who has been admitted to a lim-
ited partnership as a general partner in accordance with the
partnership agreement and named in the certificate of limited
partnership as a general partner.” Guenther was not a general
partner, as defined by A.R.S. § 29-301(5), of either CORF
entity. The district court found, however, that Guenther par-
ticipated in the control of the business. We review this factual
finding for clear error, and we find none.

[2] This determination, however, does not complete our
inquiry. Guenther can only be held liable as a general partner
to persons who “transact business with the limited partnership
reasonably believing, based on the limited partner’s conduct,
that the limited partner is a general partner.” A.R.S. § 29-
319(A) (emphasis added). This statute, derived from § 303 of
the Revised Uniform Limited Partnership Act (“RULPA”), is
related to the same legal principle as the agency concept of
apparent authority. See, e.g., Restatement (Third) of Agency
§§ 2.03, 3.03. Someone who actually knows (or should know,
by virtue of the nature of his relationship with the person) that
a person is not a general partner cannot transmute that person
into a general partner of the limited partnership based upon
that person’s conduct. Both the evolution of A.R.S. § 29-319
and § 303 of the RULPA (amended 1985) on which it is based
support this reading of the statute. The original version of
A.R.S. § 29-319 was almost identical to the 1976 version of
RULPA § 303(a). Gateway Potato Sales v. G.B. Inv. Co., 822
P.2d 490, 496 (Ariz. App. 1991). In 1982, the second sentence
of A.R.S. § 29-319(a) provided:
13894 SHIMKO v. GUENTHER
However, if the limited partner’s participation in the
control of the business is not substantially the same
as the exercise of the powers of a general partner, he
is liable only to persons who transact business with
the limited partnership with actual knowledge of his
participation in control.

Thus, under the 1982 statute, if a limited partner exercised
substantially the same powers as a general partner, he could
be liable as a general partner. See Gateway Potato Sales, 822
P.2d at 497.

[3] Following Gateway Potato Sales, however, the Arizona
legislature amended A.R.S. § 29-319(A) to conform with the
1985 version of § 303(a) of RULPA. The current version sub-
stantially changed the second sentence of the former statute.
The drafters of RULPA explained:

[The 1985 version of § 303] was adopted partly
because of the difficulty of determining when the
“control” line has been overstepped, but also (and
more importantly) because of the determination that
it is not sound public policy to hold a limited partner
who is not also a general partner liable for the obli-
gations of the partnership except to persons who
have done business with the limited partnership rea-
sonably believing, based on the limited partner’s
conduct, that he is a general partner.

RULPA § 303 cmt. By adopting the language “reasonably
believing . . . that the limited partner is a general partner,” the
drafters restricted the liability of limited partners to third party
creditors to situations where the third party was misled about
the limited partner’s actual status and potential liability.

[4] Were a different creditor involved, Guenther’s conduct
may have been enough to support the conclusion that a third
party reasonably believed that he was a general partner of the
 SHIMKO v. GUENTHER 13895
CORF entities. Here, however, such a holding would be per-
verse because Shimko acted as legal counsel to both the
CORF entities and the Guenthers, and owed a fiduciary duty
of care to each.

Timothy Shimko and other members of his law firm are
members of the Ohio State Bar Association, but the record
shows that at least Timothy Shimko was also admitted pro
hac vice in Arizona to defend the CORF entities and the
Defendants. According to A.R.S. Rules of the Supreme Court
of Arizona, Rule 46(b), by being admitted pro hac vice, Tim-
othy Shimko and Shimko agreed to abide by the rules applica-
ble to members of the State Bar of Arizona.

It is well-settled under the rules of both the Arizona and
Ohio bars that a lawyer owes his or her client a fiduciary duty.
See, e.g., In re Piatt, 951 P.2d 889, 891 (Ariz. 1997) (“A law-
yer is a fiduciary with a duty of loyalty, care, and obedience
to the client.”); Adams v. Fleck, 154 N.E.2d 794, 799-800
(Ohio Prob. 1958) (“The very existence of the relationship of
attorney and client raises a presumption that relations of trust
and confidence exist between the parties, and a presumption
of invalidity arises where an undue advantage is obtained by
an attorney over his client.”). The contours of this duty are
laid out in the ethical rules governing the State Bar of Arizona
and the Ohio State Bar Association, and, particularly relevant
here, address competent representation, diligence, and neces-
sary disclosures when conflicts of interest arise. See, e.g., Ari-
zona ER 1.1, 1.3, 1.7; A.R.S. Sup. Ct. R. 46(b); Ohio Rules
Prof’l Conduct 1.1, 1.3, 1.7.4
4
We note, without deciding, that the relevant state bar rules of ethics
may preclude recovery where an attorney fails to adequately disclose a
conflict of interest among clients. The record in this case is not clear
whether Shimko obtained written waivers of conflict from the Guenthers,
the CORF entities and the other Defendants in this case. The district court
may wish to take these ethical rules into consideration when determining
the recovery to which Shimko is entitled, if any.
13896 SHIMKO v. GUENTHER
[5] In this case, Appellees’ Response Brief states: “Shimko
was asked to advise Dr. Guenther and the other owners on the
extent of their individual and personal exposure, if any,
beyond the protection offered to them by the limited partner-
ship structure under which they owned and operated [the
CORF entities].” One of the first acts of any competent law-
yer or law firm hired under those circumstances should have
been to review the organic documents of the potentially liable
limited partnerships to determine whether all legal formalities
had been followed and whether any limited partner, by his
previous or current actions, might have exposed himself to
liability under A.R.S. § 29-319. Had Shimko examined the
CORF entities’ organic documents, it would have observed
that Guenther was listed as a limited partner, not as a general
partner. Although Timothy Shimko claimed at trial that he
never examined those documents, Shimko is chargeable with
the knowledge of their contents. An attorney or law firm may
not breach their fiduciary duty of care to their client and then
hide behind their failure to fulfill that duty in order to qualify
for a monetary recovery against their former client. Shimko
knew (or by discharging the duty of care it owed to Guenther,
would have known) that Guenther did not meet the definition
of general partner as set forth in A.R.S. § 29-301(5).

[6] Because Shimko knew, or should have learned by the
discharge of his duty of care to his client, Guenther’s actual
status as a limited partner, we hold that Shimko could not
have reasonably believed that Guenther was a general partner,
whatever role Guenther played in the control of the business.
We reverse the district court’s finding that Guenther is liable
as a general partner of either of the CORF entities. Accord-
ingly, Guenther and his spouse are not personally liable for
those attorneys’ fees properly chargeable to the CORF enti-
ties.

B. Contract and Unjust Enrichment Claims for Personal
Liability

[7] Though the Guenthers are not personally liable for the
debts of the CORF entities or its other limited partners, they
 SHIMKO v. GUENTHER 13897
remain liable (to the degree appropriate under the ethical rules
of the Arizona and Ohio bars) for any legal fees properly
charged by Shimko to them for legal services performed for
them as individuals. The district court noted in its Findings
and Conclusions that the Guenthers’ liability would be
reduced under this theory of liability. We remand the determi-
nation of the Guenthers’ personal liability to Shimko to the
district court for further proceedings consistent with this opin-
ion.

C. Motion for Reconsideration and/or New Trial

In light of our holding, we need not reach the denial of the
Guenthers’ motion for reconsideration.

[8] We find no abuse of discretion by the district court with
respect to its denial of the Guenthers’ motion for a new trial.
“[Federal Rule of Civil Procedure] Rule 59 does not specify
the grounds on which a motion for a new trial may be grant-
ed,” but allows new trials to be granted for historically recog-
nized grounds. Molski v. M.J. Cable, Inc., 481 F.3d 724, 729
(9th Cir. 2007) (quoting Zhang v. Am. Gem Seafoods, Inc.,
339 F.3d 1020, 1035 (9th Cir. 2003)). “ ‘The trial court may
grant a new trial only if the verdict is contrary to the clear
weight of the evidence, is based upon false or perjurious evi-
dence, or to prevent a miscarriage of justice.’ ” Id. (quoting
Passantino v. Johnson & Johnson Consumer Prods., 212 F.3d
493, 510 n.15 (9th Cir. 2000)).

The Guenthers claim that the district court was prejudiced
by Shimko’s misrepresentation of the past amounts paid to the
law firm. However, it is clear that the district court based its
judgment on substantial evidence concerning the amount still
owed to Shimko by both the CORF entities and the Guen-
thers.

The district court’s denial of the Guenthers’ motion for a
new trial is affirmed.
13898 SHIMKO v. GUENTHER
IV. Conclusion

We reverse the district court’s holding that the Guenthers
are liable for legal fees owed by the CORF entities. We
remand to the district court for further proceedings consistent
with this opinion regarding Shimko’s claims against the
Guenthers for unjust enrichment and quantum meruit. We
affirm the district court’s denial of the Guenthers’ motion for
a new trial.

The parties shall each bear their own costs on appeal.

REVERSED in part, REMANDED in part, and
AFFIRMED in part.