Court Opinion

ID: 75133
Source: CourtListenerOpinion
Date Created: 2010-04-26 09:05:30+00
Date Added: 2024-06-11T11:50:34.247243
License: Public Domain

[PUBLISH]

               IN THE UNITED STATES COURT OF APPEALS
                                                                   FILED
                        FOR THE ELEVENTH CIRCUIT           U.S. COURT OF APPEALS
                                                             ELEVENTH CIRCUIT
                                                                  FEB 15 2001
                                                              THOMAS K. KAHN
                                                                    CLERK
                                   No. 99-2289

                     D. C. Docket No. 94-00051-CIV-J-16A

H. BOONE PORTER, III, in his capacity as individual co-
trustee of the H. Boone Porter Trust created under Deed of Trust
dated 8/1/60 as amended by amendment dated 5/14/68, and
individually, and in his capacity as Executor of the Estate of
Rev. H. Boone Porter, COMMERCE BANK, N.A., a
national banking association, in its capacity as corporate
co-trustees of the H. Boone Porter Trust created under Deed
of Trust dated 8/1/60, as amended by amendment dated 5/14/68;

                                          Plaintiffs-Appellants, Cross-Appellees,

                                      versus

OGDEN, NEWELL & WELCH, a Kentucky general
partnership, RICHARD F. NEWELL, et al.,

                                        Defendants-Appellees, Cross-Appellants.

                  Appeals from the United States District Court
                       for the Middle District of Florida

                              (February 15, 2001)

Before TJOFLAT, BIRCH and DUBINA, Circuit Judges.
DUBINA, Circuit Judge:

      The Trustees of the Estate of H. Boone Porter appeal the district court’s order

finding that a legal malpractice action against the Defendants had not accrued under

Florida law because no injury had occurred. Also appealed are an order of a

magistrate judge denying the Trustees’ motion to compel and an order of the

magistrate judge permitting the Trustees to obtain financial worth documents. We

affirm in part and reverse in part.

                                   I. BACKGROUND

      This case revolves around H. Boone Porter’s (“H. Boone”) will and deed of

trust. In 1960, the law firms of Rogers, Towers & Baily, (the “Bailey firm”), and

Ogden, Newell, & Welch, (the “Ogden firm”),1 jointly prepared a will and deed of

trust for H. Boone. The law firms drafted the deed of trust to create a “double

generation skipping trust” that would benefit H. Boone during his lifetime, then his

wife and his son, Reverend Porter, and finally Reverend Porter’s children and

grandchildren. Although H. Boone’s estate included the trust corpus in his taxable

estate, the generation skipping trust would provide great tax advantage to H. Boone

by protecting the trust’s corpus from taxation until the death of H. Boone’s great-

grandchildren.

      1
       Hereinafter, we refer to the Bailey firm and the Ogden firm collectively as “Defendants.”

                                              2
       In order to create a “double generation skipping trust,” one must comply with

the relevant tax laws, rules, and regulations. Here, the Ogden firm reviewed the initial

deed of trust drafted by the Bailey firm and made suggestions to ensure compliance

with the Internal Revenue Code (“IRC”). The Bailey firm made the suggested

changes. One of these changes created a provision permitting Reverend Porter to

assume a co-trustee position with the corporate trustee. Furthermore, at some point

during the revision of the deed of trust, paragraph 8 of the deed of trust was drafted

to state as follows:

         8. The Trustee is authorized to pay, out of principal of the trust
       property, to or for the benefit of any beneficiary who at the time is
       entitled to receive income from the trust property, hospital, nursing, and
       medical expense of any such beneficiary, and also such amounts as may
       be considered advisable for the maintenance, support and welfare of any
       such beneficiary; but the amount or amounts of any such payments shall
       be determined by the Trustee in its sole discretion.

(Emphasis added). Plaintiffs complain that the inclusion of the word “welfare” in the

above paragraph has caused the “double generation skipping trust” to fail.

       Under current tax law, when a trust beneficiary holds a general power of

appointment, the trust corpus must be included in his taxable estate. See I.R.C. §

2041(a)(2). A trust beneficiary has a “general power of appointment” if he has the

power to distribute the corpus to himself as a beneficiary, except if the trust limits this

power “by an ascertainable standard relating to the health, education, support or

                                            3
maintenance” of the beneficiary. See I.R.C. § 2041(b)(1). According to Treasury

Regulation § 20.2041-1(c)(2), “[a] power to use property for the comfort, welfare or

happiness of the holder of the power is not limited by the requisite standard.” Thus,

a provision in a trust instrument which allows for the paying out of the corpus to the

beneficiary for his or her welfare is not limited and is treated as a general power of

appointment. As a result, the Trustees believe that, upon the death of Reverend

Porter, the trust corpus may be included in his estate for tax purposes because the deed

of trust permits Reverend Porter to distribute funds for his welfare.

      Reverend Porter discovered this potential problem in 1990 and attempted to

remedy it. Reverend Porter’s law firm informed him that federal tax law examines

state law to determine whether the word “welfare” has an ascertainable standard. At

that time, Florida law was unsettled as to the meaning of the word “welfare.” In order

to ensure favorable treatment under Florida law, Reverend Porter lobbied the Florida

Legislature to change the law. He succeeded and the Florida Legislature changed the

law so that the inclusion of the word “welfare” in a Florida trust instrument does not

give the trustee the ability to do more than disperse limited amounts of the corpus,

thereby complying with the limiting requirements of the tax laws.

      After the change in Florida law, Reverend Porter hired the law firm of Miller

& Chevalier to request a private letter ruling from the Internal Revenue Service

                                           4
(“IRS”). The law firm gave the IRS the facts of the case, including the changes in the

Florida law, and requested its opinion. In response, the IRS stated that it would not

find the trust to be a part of the Reverend’s estate.2 See Priv. Ltr. Rul. 9510065.

Because this letter ruling depended on the recently enacted Florida law, Reverend

Porter took two other actions designed to ensure that the trust would achieve the

generation-skipping result even if Florida changed its law. First, Reverend Porter

succeeded in seeking a judicial reformation of the trust instrument to remove the word

“welfare” from Paragraph 8, on the ground that the word’s presence was a scrivener’s

error. Second, he sought another private letter ruling from the IRS. In response to

Reverend Porter’s inquiry, the IRS stated that the judicial reformation would not

trigger any adverse tax consequences. See Priv. Ltr. Rul. 199942016.

       Subsequently, the Trustees of Reverend Porter’s estate brought this legal

malpractice action to recover the costs expended in their efforts to avoid the general

power of appointment problem.3 The Trustees also sought a declaratory judgment

requiring the Defendants to indemnify the Trustees for any adverse tax consequences

       2
          A taxpayer ordinarily may rely upon a private letter ruling received from the IRS. See 26
C.F.R. § 601.201(l). Only in the rare and unusual circumstance will the IRS revoke or modify a
private letter ruling and retroactively apply the change to the taxpayer who originally received the
letter ruling. See 26 C.F. R. § 601.201(l)(5).
       3
        Reverend Porter died on June 5, 1999. The value of the Trust on that date was
approximately $55 million, which would yield a federal estate tax of approximately $ 30 million if
the corpus was included in Reverend Porter’s estate.

                                                 5
resulting from the drafting error. In addition, the Trustees sought punitive damages

pursuant to Florida Stat. § 768.72. On cross-motions for summary judgment, the

district court dismissed the Trustees’ complaint without prejudice on the ground that

it was premature. The district court based its order on the conclusion that under

Florida law, a tort action does not commence until damages have accrued, and that the

Trustees have not suffered any damages because the IRS has not attempted to levy an

estate tax on the trust’s corpus. In the same order, the district court affirmed the

magistrate judge’s order permitting the Trustees to obtain confidential financial worth

documents from the Defendants in support of the Trustees’ punitive damages claim.

In a previous order, the magistrate judge denied the Trustees’ motion to compel

answers to deposition questions prompted by two letters between the Ogden firm and

its insurance carrier. On appeal, the Trustee’s and Defendants challenge these orders.

                                     II. ISSUES

(1)   Whether the district court erred in dismissing as not ripe the Trustees’ suit to

      recover the costs taken to avoid a potential consequence of Defendants’ alleged

      malpractice.

                                          6
(2)    Whether the magistrate judge erred in denying the Trustee’s motion to compel

       answers to deposition questions prompted by two letters between the Ogden

       firm and its insurance carrier.

(3)    Whether the district court erred in affirming the magistrate judge’s order

       permitting the Trustees to obtain confidential financial worth documents from

       the Defendants in support of the Trustees’ punitive damages claim.

                              III. STANDARDS OF REVIEW

       This court reviews de novo a district court’s determination that a case is not ripe

for determination. See Southeast Fla. Cable, Inc. v. Martin County, 173 F.3d 1332,

1335 n. 5 (11th Cir. 1999). We review a district court’s discovery orders and

evidentiary rulings for abuse of discretion. See Goulah v. Ford Motor Co., 118 F.3d

1478, 1483 (11th Cir. 1997).

                                       IV. DISCUSSION

       The Trustees argue that the district court erred in two respects. First, the

Trustees contend that expenses incurred to avoid the possible consequences of the

alleged malpractice constitute damages, thereby allowing their claim to ripen.4

Second, the Trustees assert that the magistrate judge abused his discretion by not

       4
       Plaintiffs do not argue that the district court erred in dismissing their claim for a declaratory
judgment requiring the defendants to indemnify them for any adverse tax consequences.

                                                   7
requiring Defendants to answer certain deposition questions prompted by two letters

between the Ogden firm and its insurance carrier. Defendants present one issue in

their cross-appeal. They argue that the district court erred in permitting the Trustees

to obtain confidential financial information from the Defendants in support of their

punitive damages claim.

      A.     Ripeness

      Under Florida law, “[g]enerally, a cause of action for negligence does not

accrue until the existence of a redressable harm or injury has been established and the

injured party knows or should know of either the injury or the negligent act.” Peat,

Marwick, Mitchell & Co. v. Lane, 565 So.2d 1323, 1325 (Fla. 1990). When a plaintiff

bases a malpractice action on errors committed in the course of litigation, and the

litigation proceeds to judgment, the redressable harm is not established until final

judgment is rendered. See Silverstrone v. Edell, 721 So.2d 1173, 1175 (Fla. 1998).

The present case, however, does not involve litigation malpractice, but transactional

malpractice. The district court construed Florida law as stating that in a transactional

malpractice case, redressable harm is not established until the documents or legal

items fail to achieve their designated purpose.

      The district court, however, misconstrued Florida law. Instead of setting a fine-

line, Florida courts hold that a malpractice action accrues when “it is reasonably clear

                                           8
that the client has actually suffered some damage from legal advice or services.” See

Throneburg, III v. Boose, Casey, Ciklin, Lubitz, Martens, McBane & O’Connell, P.A.,

659 So.2d 1134, 1136 (Fla. App. 4 District 1995). The district court correctly noted

that most of the Florida cases hold that the cause of action in issue does not accrue

until a court holds that the documents or legal items failed to achieve their designated

purpose. Those cases are distinguishable from the case at bar, however, because in

those cases, no concrete injury arose until a final court decision. In contrast, here the

Trustees have suffered a concrete injury as to the expenses they incurred to remedy

the alleged malpractice.

      For example, in Peat, Marwick, 565 So. 2d 1323, the Lanes claimed some

deductions based on their accountants’ recommendations for which the IRS

subsequently issued a notice of deficiency challenging the claimed deductions.

Following Peat, Marwick’s advice, the Lanes challenged the determination in tax

court, but ultimately agreed to an entry of a stipulated order which required them to

pay a tax deficiency. As a result, the Lanes filed a malpractice suit against Peat,

Marwick, who raised a statute of limitations defense. The Florida Supreme Court held

that the Lanes’ cause of action did not accrue when they received the IRS deficiency

notice because the Lanes challenged the notice and, thus, did not suffer any injury at

that time. See Peat, Marwick, 565 So. 2d at 1326. Instead, the Florida Supreme Court

                                           9
held that the injury arose when the tax court entered judgment against the Lanes who

in turn had a legal obligation to pay the tax deficiency. See id. at 1327.

      Similarly, in Thorneburg, the court held that a claim against an attorney for

failure to amend properly a declaration of covenants on property did not accrue merely

because the association thought the amendment ineffective. See 659 So.2d at 1136.

Instead, the court held that the claim accrued when a state court ruled that the

amendment was invalid in an action involving the same association and a different

owner. See id.

      Both Thorneburg and Peat, Marwick “draw a distinction between knowledge

of actual harm from legal malpractice and knowledge of potential harm.” Id. In both

cases, the plaintiffs followed the advice of the defendant professionals, even though

others thought that the advice was wrong. Because they followed the incorrect advice,

the harm did not become an actuality until a court rendered a judgment holding that

the legal instruments failed to fulfill their purpose. In contrast, the Trustees here did

not follow the advice of the Defendants, and instead, took steps to cure the potential

problem prior to any IRS action or any court determination. By attempting to mitigate

the potential problem, the Trustees realized an actual harm – the cost of remedying the

potential malpractice.

                                           10
       Moreover, the Florida case of Coble v. Aronson, 647 So.2d 968 (Fla. App. 4

Dist. 1994), supports this conclusion. In Coble, a law firm incorrectly prepared notes

that were part of a sales agreement. The law firm’s client sued for reformation of the

contract and the case settled. In turn, the client sued the law firm for malpractice. The

court stated that a cause of action had accrued even though the client had settled the

reformation case because the existence of a redressable harm did not depend upon the

outcome of the litigation. See id. at 970-71. Instead, the court found that the

negligent preparation of the notes “could potentially be the cause of redressable harm

or financial loss to [the client], especially in the nature of costs and attorney’s fees.”

Id. at 971. Similarly, the redressable harm in the present case need not depend upon

the outcome of any litigation because the negligent preparation of the will could

potentially be the cause of the financial loss that the Trustees incurred in reforming

the trust. Thus, we hold that the district court erred in dismissing the case as

premature.5

       Of course, the Trustees’ task of proving malpractice and proving that the

malpractice proximately caused the loss may be difficult because the Trustees cured

the problem prior to any indication from the IRS that the trust would fail. However,

       5
         The parties also discuss in their briefs whether the actions taken by the Trustees were
reasonable. The district court did not address the issue and the record is not developed enough for
us to do so either.

                                                11
we need not address these causation issues, since the district court did not address

them. See Singleton v. Wulff, 428 U.S. 106 (“It is the general rule, of course, that a

federal appellate court does not consider an issue not passed upon below.”).

      B. Discovery of Letters

      Likewise, we need not address the issue of whether the magistrate judge erred

in denying the Trustee’s motion to compel because the district court did not address

this issue. See id. Although the Trustees timely filed a Fed.R.Civ.P. 72 objection to

the magistrate judge’s ruling, the district court dismissed the complaint before ruling

on the objection. Accordingly, we decline to consider this issue for the first time on

appeal. See id.; see also Fed. R. Civ. P. 72(a).

      C. Discovery of Financial Worth Documents

      Finally, the Defendants argue that the district court erred in affirming the

magistrate judge’s order permitting the Trustees to obtain confidential financial worth

documents from the Defendants in support of the Trustees’ punitive damages claim.

First, Defendants argue that the magistrate failed to make an affirmative finding that

a reasonable basis existed for the Trustees’ punitive damages claim as required by

Florida Stat. § 768.72. However, after reviewing the record, we are persuaded

otherwise. Second, the Defendants argue that the Trustees failed to establish a

reasonable basis because they did not allege any facts outside of the complaint and,

                                          12
alternatively, did not allege sufficient facts to support a punitive damages claim. We

disagree.

      This court has held that the pleading rules set forth in Fed.R.Civ.P. 8(a)(3)

preempt § 768.72’s requirement that a plaintiff must obtain leave from the court

before including a prayer for punitive damages. See Cohen v. Office Depot, Inc., 184

F.3d 1292, 1299 (11th Cir. 1999), vacated in part, 204 F.3d 1069 (11th Cir. 2000).

However, § 768.72 also has a discovery component which states that “[n]o discovery

of financial worth shall proceed until after the pleading concerning punitive damages

is permitted.” Fla. Stat. § 768.72. Prior to allowing discovery of financial net worth

information, Defendants argue that § 768.72 requires a plaintiff who has made a claim

for punitive damages to produce evidence or make a proffer of evidence that shows

a reasonable basis for the punitive damages claim. This court, in Cohen, did not

decide whether or not federal discovery rules preempt this rule. Likewise, we need

not answer this question here because the record indicates that the Trustees made a

proffer of evidence that reasonably supports their claim.

      The Florida courts do not require a fact intensive investigation into the merits.

Instead, the Florida courts entertain the punitive damage issue by way of a motion to

dismiss or a motion to strike, not a summary judgment motion. See Will v. Systems

Eng’g Consultants, Inc., 554 So.2d 591, 592 (Fla. App. 3 Dist. 1989); see also Solis

                                          13
v. Calvo, 689 So.2d 366 (Fla. App. 3 Dist. 1997) (“Pursuant to Florida Statute section

768.72 (1995), a punitive damage claim can be supported by a proffer of evidence. A

formal evidentiary hearing is not mandated by the statute.”). Under Florida law,

merely setting forth conclusory allegations in the complaint is insufficient to entitle

a claimant to recover punitive damages. See T.W.M. v. American Medical Sys., Inc.,

886 F. Supp. 842, 845 (N.D. Fla. 1995); Bankest Imports, Inc. v. ISCA Corp., 717 F.

Supp. 1537, 1542-43 (S.D. Fla.1989). Instead, a plaintiff must plead specific acts

committed by a defendant. See Bankest Imports, 717 F. Supp. at 1542-43.

      Applying these legal standards, the magistrate judge found that the Trustees

pled and proffered evidence of specific acts committed by the Defendants that

provided a reasonable basis to support the Trustees’ punitive damages claim. The

district court affirmed this finding. After reviewing the record, we see no abuse of

discretion in these rulings.

                                V. CONCLUSION

      We hold that the district court incorrectly found that the Trustees’ claim had not

accrued. The Plaintiffs have suffered losses in fixing the potential problems with the

trust. Thus, the Plaintiffs have suffered an injury. Accordingly, we reverse that part

of the district court’s judgment. Next, we decline to address whether the magistrate

judge erred in denying the Trustees’ motion to compel because the district court did

                                          14
not address that issue. Finally, we hold that the district court did not abuse its

discretion in affirming the magistrate judge’s order permitting the Trustees to obtain

confidential financial worth documents. Therefore, we affirm that part of the district

court’s judgment.6

      AFFIRMED IN PART, REVERSED IN PART AND REMANDED.

      6
       All pending motions in this case are DENIED.

                                            15