Case Name: Mary M. KNIGHT, Individual; and Knight Counseling, Inc. v. William DAY, an Individual
Court: Arkansas Supreme Court
Jurisdiction: Arkansas
Decision Date: 2001-01-25
Citations: 343 Ark. 402
Docket Number: 00-731
Parties: Mary M. KNIGHT, Individual; and Knight Counseling, Inc. v. William DAY, an Individual
Judges: Glaze, J., dissents.
Reporter: Arkansas Reports
Volume: 343
Pages: 402–413

Head Matter:
Mary M. KNIGHT, Individual; and Knight Counseling, Inc. v. William DAY, an Individual
00-731
36 S.W.3d 300
Supreme Court of Arkansas
Opinion delivered January 25, 2001
Harrington, Miller, Neihouse & Krug, P.A., by: Wayne Krug, for appellant.
Law Offices of John R. VanWinkle, by: John VanWinkle, for appellee.

Opinion:
W.H. "Dub" ARNOLD, Chief Justice.
The issue in this appeal is whether the appellee committee constructive fraud by allegedly engaging in the unauthorized practice of law. The trial court found no fraud. We agree with the trial court and hereby affirm.
The facts of the case are as follows. Appellants had hired appellee William Day to perform accounting services. Appellant Mary Knight, a licensed clinical social worker (L.C.S.W.), had started her own business entitled Knight Counseling, Inc. Ms. Knight was in the process of obtaining a contract with the State and needed to obtain a legal business entity for her practice. Ms. Knight had hired a tax attorney who established her company as a professional limited liability company (PLLC), but she later discovered that it was not going to be valid.
In late 1994, Ms. Knight consulted with appellee William Day upon another person's recommendation. Mr. Day holds no professional licenses or certificates; he acts as a tax practitioner. Ms. Knight testified that Mr. Day told her they needed to dissolve the PLLC and set up a Sub S Corporation. Ms. Knight testified that Mr. Day told her he had such experience and that he would be able to draft all the necessary documents. However, at their initial meeting, Mr. Day referred Ms. Knight to Mr. George Oleson and Mr. J.D. Moon, both attorneys. He later completed the necessary paperwork and dissolved the PLLC; Ms. Knight subsequently received a Certificate of Dissolution for the PLLC.
After the creation of the Sub S Corporation, Ms. Knight brought in another person, Brenda Baker, a licensed social worker (L.S.W), to work with her. Ms. Knight then discussed Ms. Baker's addition to the practice in terms of how to treat her for payroll purposes. Ms. Knight testified that she discussed with Mr. Day the fact that Ms. Baker could not be an owner or partner in the business, due to the State's regulations, and that if such occurred, Knight's license could be in jeopardy.
Ms. Knight testified that Mr. Day told her if Ms. Baker was a shareholder in the company, she would not be perceived as an owner and that she could be treated the same as Ms. Knight for tax purposes. Ms. Baker was so treated; and, in 1995, Mr. Day prepared Ms. Knight's personal and corporate tax returns for 1994. Later, in January or February of 1997, Mr. Day told Ms. Knight that he wanted to lighten his client base for personal reasons and referred her to Dan Downing, another accountant.
After meeting with Mr. Downing, he told Ms. Knight, after reviewing her tax documents, that they had not been prepared accurately and that she needed to have them amended to remove Ms. Baker as a shareholder. Mr. Downing did not make all of the suggested changes; Ms. Knight later hired Jack Bottoms, who filed amended tax returns and amended 941 forms on her behalf. Ms. Knight then filed a cause of action against William Day alleging accounting malpractice and illegal practice of law without a license.
Following a one-day trial on January 5, 2000, the trial court stated its failure to find that fraud or misrepresentation of fact had occurred; the court found that Ms. Knight failed on her complaint for accounting malpractice and also failed on her complaint for fraud and misrepresentation. The trial court issued its order on January 5, 2000 (filed on February 22, 2000) dismissing with prejudice both counts of accounting malpractice and fraud. It is from that order that the instant appeal is taken. Appellants assert as the only point on appeal that the trial court erred in finding that appellee had not committed constructive fraud by engaging in the unauthorized practice of law.
The standard of review on appeal for bench trials is whether the trial judge's findings were clearly erroneous or clearly against the preponderance of the evidence. See Ford Motor Credit Co. v. Ellison, 334 Ark. 357, 361, 974 S.W.2d 464, 467 (1998). This Court reviews the evidence in the light most favorable to the appellee, resolving all inferences in favor of the appellee. Id. Disputed facts and determinations of credibility of witnesses are within the province of the factfinder. Id.
Here, appellants assert that appellee committed constructive fraud. To establish fraud, a plaintiff must show: (1) a false representation of material fact; (2) knowledge that the representation is false or that there is insufficient evidence upon which to make the representation; (3) intent to induce action or inaction in refiance upon the representation; (4) justifiable rebanee on the representation; and (5) damage suffered as a result of the rebanee. Scollard v. Scollard, 329 Ark. 83, 947 S.W.2d 345 (1997); see also Farm Bureau Policy Holders & Members v. Farm Bureau Mut. Ins. Co. of Ark., Inc., 335 Ark. 285, 984 S.W.2d 6 (1998). Constructive fraud can exist in cases of rescission of contracts or deeds and breaches of fiduciary duties, but certainly a plaintiff must show a material misrepresentation of fact. Id.
Constructive fraud is defined as a breach of a legal or equitable duty which, irrespective of the moral guilt of the fraud feasor, the law declares fraudulent because of its tendency to deceive others. Neither actual dishonesty nor intent to deceive is an essential element. See RLI Ins. Co. v. Coe, 306 Ark. 337, 813 S.W.2d 783 (1991). The charge of fraud must be sustained by clear, strong, and satisfactory proof. Ark. State Hwy. Comm'n v. Clemmons, 244 Ark. 1124, 428 S.W.2d 280 (1968).
Appellants argue that appebee held himself out as having the requisite skill and ability to draft the necessary corporate documents. Appebants state that appebee's suggestion to have the documents reviewed by an attorney and have his or her name entered as corporate counsel did not come until six months after the corpora tion was improperly formed. Appellants assert that because the corporation was not properly formed under the Arkansas Professional Corporations Act, Mr. Day's holding himself out as competent to provide services in corporate consulting constituted the communication of a material misrepresentation "of the fact" and that he should have known that the representation was false.
Appellants allege that appellee intended to induce action in reliance on his representation such that Ms. Knight would employ him for the sum of $600.00. Appellants argue that Ms. Knight and her company suffered damages in that the corporation was improperly structured, including the sums paid to appellee for the improper corporation formation and all sums expended to correct the deficiencies.
Appellants further maintain that appellee committed constructive fraud when he discussed whether Brenda Baker was at a licensure level sufficient to be an officer, director, and shareholder in a professional corporation. Appellants assert that appellee held himself out as one capable of making this legal determination and that he knew or should have known that such a representation was false. Again, appellants allege that appellee intended to cause reliance on that representation and that Ms. Knight justifiably relied on what she thought was professional advice, such that she suffered damages, including considerable accounting fees in amending corporate returns and 941s, and incurred considerable penalties and interest with the late payment of payroll taxes.
Appellants conclude that the fact that appellee provided legal advice to appellants regarding ownership of stock in what should have been a professional corporation, and the fact that he held himself out as capable of properly preparing the corporation and drafting corporate documents, is sufficient improper action to constitute constructive fraud. In fact, appellants claim, there is such a danger to this type of activity, it should be deemed by the Court to be per se constructive fraud. We disagree with the assertions of the appellants.
In this case, appellants have failed to prove even the first element of fraud, that is, a false representation of material fact. Appellee never implied or stated that he was an attorney. Although appellant Mary Knight testified that Mr. Day did not tell her that he had an agreement with Mr. Oleson and Mr. Moon to review all of his documents, Mr. Day testified that he told her that all documents that were prepared from the beginning, including the dissolution, would need to be reviewed by an attorney. As stated above, disputed facts and the credibility of witnesses are squarely within the province of the factfinder, which was in this case the trial court. See Ford Motor Credit Co. v. Ellison, supra. The trial court clearly believed Mr. Day's testimony, as evidenced by the court's findings at trial:
He told her he was not a lawyer and she knew that he was not a lawyer. He gave them names of two lawyers to call and she calls one and chooses not to go in, and she sees Mr. Bond and doesn't have him review all of the papers and see that he has committed fraud. . . . Again, he's given her all kinds of opportunities to talk to lawyers, and if she chooses not to, I think she's hard-pressed to come in this court and say, "Judge, he pulled the wool over my eyes and he duped me and I didn't have any idea that I was getting ready to be taken to the cleaners because of his actions." And that's just not the facts the case show.
Additionally, appellee sent appellant Mary Knight a letter, dated June 10, 1995, which stated in part:
Enclosed is the By-laws and other necessary documents. If you have any questions please give me a call. It will be necessary to complete the following.
1. Obtain a corporate seal.
2. Obtain a desired specimen of stock and insert it in front of the documents entitled, "RESOLUTION FOR AUTHORIZATION OF CORPORATE LOAN(S)."
3. Obtain a book of choice to hold these documents.
4. Have these documents reviewed by your attorney and have his name as corporate counsel inserted into the proper location on the form titled, "CONSENT TO ACTION TAKEN IN LIEU OF ORGANIZATION MEETING," page, consent 1.
(Emphasis added.)
The record in this case clearly demonstrates that Mr. Day was preparing documents that were to be reviewed by an attorney and that appellants needed to discuss all legal ramifications of the corporation with an attorney. Appellee told appellant Mary Knight to have his work reviewed by an attorney, and presented Ms. Knight with the names of attorneys. Accordingly, we hold that the trial court did not clearly err when it found that appeEants faded to prove fraud, constructive or otherwise.
. For the above-stated reasons, we affirm the trial court's dismissal of appeEants' complaint for fraud and misrepresentation. However, given that the circumstances of this case involve aEegations of the unauthorized practice of law, we hereby direct the Clerk to forward a copy of this opinion to the Arkansas Supreme Court Committee on the Unauthorized Practice of Law.
Affirmed.
Glaze, J., dissents.
It seems that Ms. Knight received such notice from the State.
It appears that Mr. Day prepared the following corporate documents and presented them to Ms. Knight for her signature: the articles of incorporation, the corporate franchise tax form, an election by the corporation as a Subchapter S (Arkansas form 1103), a consent to action taken in lieu of an organizational meeting, minutes of a special meeting of directors, and the resolution for the authorization of corporate loans.
It should be noted that although appellants pled actual fraud in their complaint, they argued constructive fraud at trial, without objection by appellee.
In Farm Bureau, the Court inadvertently labeled these elements as those that must be established to prove constructive fraud, when they are actually the elements of fraud, rather than constructive fraud.