Connie Potter v. Joseph Michael Gaffney

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION ONE

SUSAN B. PAULSELL, a single woman
in her individual capacity, No. 74744-4-1

Plaintiff, ORDER GRANTING MOTION
TO SUBSTITUTE PARTIES,
CONNIE POTTER and SUSAN WITHDRAWING OPINION AND
PAULSELL, Trustees of the Amended SUBSTITUTING OPINION
and Restated Frederick 0. Paulsell,
Jr. Living Trust dated December 22,
2002,

Appellants,

V.

JOSEPH MICHAEL GAFFNEY and
JANE DOE GAFFNEY, his wife, and
DORSEY & WHITNEY, LLP, a
Minnesota Limited Liability Partnership,

Respondents.

The appellant, Connie Potter, has filed a motion to substitute parties under

RAP 3.2., after the court's opinion was filed on December 19, 2016. Potter has

advised the court that co-trustee Susan Paulsell passed away on May 24, 2016,

and that Potter should be substituted as the only trustee. At the court's direction,

the respondents have filed a response and indicate no objections to the

substitution.

Now, therefore, it is hereby

ORDERED that the appellant's motion to substitute parties is granted and

that co-trustee Susan Paulsell be removed from the court's case caption; and, it is

further
No. 74744-4-1/2

ORDERED that the opinion filed on December 19, 2016, be withdrawn and

a substitute opinion be filed reflecting the substitution of parties.

DATED this I 'O
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 IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
SUSAN B. PAULSELL, a single woman )
in her individual capacity,t ) No. 74744-4-1
)
Plaintiff, ) DIVISION ONE
)
CONNIE POTTER,Trustee of the ) UNPUBLISHED OPINION
Amended and Restated Frederick 0. ) cy)
Paulsell, Jr. Living Trust dated )
December 22, 2002, ) -71

)
Appellant, )
)
v. ) c.,r!
) cc
JOSEPH MICHAEL GAFFNEY and )
JANE DOE GAFFNEY, his wife, and )
DORSEY & WHITNEY, LLP, a )
Minnesota Limited Liability Partnership, )
) FILED: September 18, 2017
Respondents. )

TRICKEY, A.C.J. — A trust, through its trustee, Connie Potter, 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.

t Susan B. Paulsell passed away during the pendency of this appeal. An order
has been entered substituting Connie Potter as the only trustee. We hereby order
the appellate case caption be amended consistent with that order.
No. 74744-4-1 /2

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.

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 0. Paulsell III (Fred 111).

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 111 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

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.

2
No. 74744-4-1 /3

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

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

0. Pau!sell, 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

3 CP at 80, 147-53.
4 CP at 149.
3
No. 74744-4-1 /4

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

"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

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
& 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.
4
No. 74744-4-1/ 5

Potter, a professional trustee. As of January 2015, the Trust had paid $22,900 in

other trustees'fees. Those fees are continuing.

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

5
No. 74744-4-1 /6

of the Trust's claims, we reverse in part.

The trial court grants summary judgment to a party when there is no genuine

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." Elcon 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." Elcon

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

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No. 74744-4-1 /7

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

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

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No. 74744-4-1/ 8

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,

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 Gaffney should

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 offact 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

6 CP at 50.
7 CP at 50.
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No. 74744-4-1 /9

to support each element of its cause of action. Janicki Logging & Const. Co., Inc.

v. Scwabe, Williamson, & Wyatt, P.C., 109 Wn. App. 655, 659-60, 37 P.3d 309

(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."

Cawdrey 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."8

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

8 CP at 80-82.
CP at 82.
9
No. 74744-4-1 / 10

the Trust and that it would be the same matter. There are genuine issues of fact

over whether Gaffney's representation was continuous.

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.

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No. 74744-4-1 / 11

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

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. McCready, 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.1° Blueberry Place

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.
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No. 74744-4-1/ 12

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

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. Reilly, 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 8260,000 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

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

"only evidence and issues called to the attention of the trial court." RAP 9.12; see,

e.g., Silverhawk, LLC v. KeyBank Nat'l Ass'n, 165 Wn. App. 258, 265-66,268 P.3d

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

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

of proximate cause.

We affirm in part and reverse in part, and remand to the trial court for further

proceedings consistent with this opinion.

ck Ac-J
WE CONCUR:

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