Adams Financial Partners, LP et al v. Patke & Associates Ltd.

Filing 60

ORDER denying Defendant's 30 Motion for Summary Judgment. Signed by U.S. District Judge John C Coughenour. (PM)

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THE HONORABLE JOHN C. COUGHENOUR 1 2 3 4 5 6 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 7 8 9 ADAMS FINANCIAL PARTNERS, L.P., a Washington limited partnership, and ADAMS FINANCIAL CONCEPTS, LLC, a Washington limited liability company, 10 11 CASE NO. C16-0392-JCC ORDER DENYING SUMMARY JUDGMENT 12 Plaintiffs, 13 v. 14 PATKE ASSOCIATES LTD., an Illinois company, 15 Defendant. 16 17 This matter comes before the Court on the motion for summary judgment by Defendant 18 19 Patke Associates, Ltd. (Dkt. No. 30). Having thoroughly considered the parties’ briefing and the 20 relevant record, the Court finds oral argument unnecessary and hereby DENIES the motion for 21 the reasons explained herein. 22 I. BACKGROUND 23 Plaintiff Adams Financial Partners, LP (AFP) is a hedge fund that, along with Plaintiff 24 Adams Financial Concepts, LLC (AFC), was founded by investment advisor Michael Adams. 25 (Dkt. No. 38 at 2.) AFC is the general partner that manages AFP. (Id.) By agreement and by law, 26 AFP was required to have its financial statements audited and to produce those audits to its ORDER DENYING SUMMARY JUDGMENT PAGE - 1 1 2 investors. (Id.) In December 2009, Plaintiffs hired Defendant Patke Associates, Ltd. to conduct an audit 3 of AFP’s 2009 financials. (Id. at 6; Dkt. No. 38-1 at 124, 132.) Plaintiffs sent the financial 4 statements to Defendant in March 2010. (Dkt. No. 32 at 2.) In July 2011, although the 2009 audit 5 had not yet been completed, Plaintiffs signed a second contract that extended Defendant’s 6 services for the 2010 audit. (See Dkt. No. 38 at 10-11.) 7 The parties dispute the nature of each other’s contribution to the audits during the 8 ensuing four years. What is undisputed is that Defendant never produced an audit for 2009 or 9 2010. According to Defendant, this is because Plaintiffs failed to produce information about 10 loans made to entities closely related to Adams and his son, which were not disclosed to 11 investors and had questionable valuations in the financial statements. (Dkt. No. 30 at 3-4, 5-6.) 12 Plaintiffs adamantly dispute this, maintaining that they produced all information requested and 13 that the failure to produce the 2009 and 2010 audits was a result of Defendant’s own 14 mismanagement and negligence. (Dkt. No. 36 at 1-2, 18-19.) 15 In late 2013—at which time the 2009 and 2010 audits were still not produced—the 16 Washington Department of Financial Institutions (DFI) conducted a routine examination of AFC. 17 (Dkt. No. 38 at 12.) Based at least in part on the lack of audits, DFI issued a deficiency letter to 18 AFC and began investigating Plaintiffs. (Id. at 13.) DFI ultimately issued a draft order finding 19 that AFC and Adams had violated the Washington Securities Act, a finding that Plaintiffs 20 dispute. (Dkt. No. 31 at 3; Dkt. No. 36 at 2.) 21 On January 7, 2014, Plaintiffs reached an agreement with the DFI that, if AFC was able 22 to maintain its investment advisor license, Plaintiffs would voluntarily wind down the AFP 23 hedge fund. (Dkt. No. 38 at 14.) The next day, Plaintiffs instructed Defendant to suspend work 24 on the audits. (Id.) Defendant then disengaged as Plaintiffs’ auditor. (Dkt. No. 38-1 at 177.) 25 26 On March 17, 2016, Plaintiffs brought suit against Defendant, alleging breach of contract and breach of professional duties. (Dkt. No. 1 at 4.) Defendant now moves for summary ORDER DENYING SUMMARY JUDGMENT PAGE - 2 1 judgment dismissal of both claims. (Dkt. No. 30 at 1.) 2 II. DISCUSSION 3 A. Summary Judgment Standard 4 The Court shall grant summary judgment if the moving party shows that there is no 5 genuine dispute as to any material fact and that the moving party is entitled to judgment as a 6 matter of law. Fed. R. Civ. P. 56(a). In making such a determination, the Court must view the 7 facts and justifiable inferences to be drawn therefrom in the light most favorable to the 8 nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 255 (1986). Once a motion for 9 summary judgment is properly made and supported, the opposing party must present specific 10 facts showing that there is a genuine issue for trial. Fed. R. Civ. P. 56(e); Matsushita Elec. Indus. 11 Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Material facts are those that may affect the 12 outcome of the case, and a dispute about a material fact is genuine if there is sufficient evidence 13 for a reasonable jury to return a verdict for the non-moving party. Anderson, 477 U.S. at 248-49. 14 Ultimately, summary judgment is appropriate against a party who “fails to make a showing 15 sufficient to establish the existence of an element essential to that party’s case, and on which that 16 party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). 17 B. 18 Before addressing the legal issues posed by Defendant’s motion, the Court considers the 19 factual issue of whether Plaintiffs produced the necessary documents for Defendant to properly 20 perform the audit. This issue is central to much of the legal analysis. 21 Whether Plaintiffs Produced Documents Defendant states that it “repeatedly asked [Plaintiffs] for additional information regarding 22 the [loans to the closely-held entities] in an effort to confirm the value assigned to them was 23 appropriate.” (Dkt. No. 30 at 6.) According to Defendant, Plaintiffs “seldom provided the 24 requested information, but often either failed to provide what was requested, provided the wrong 25 documents, or provided documents and information that raised additional questions.” (Id.) To 26 support these allegations, Defendant submits a declaration from one of its shareholders, Ronald ORDER DENYING SUMMARY JUDGMENT PAGE - 3 1 Niemaszyk, stating this information essentially verbatim. (See Dkt. No. 32 at 1, 3.) The 2 declaration also provides details of the parties’ communications from December 2012 to 3 November 2013, with copies of the correspondence attached.1 (Id. at 3; Dkt. No. 32-1 at 13-68.) 4 For example, from late 2012 to mid-2013, Defendant sought information from Plaintiffs about 5 the loans in question. (Dkt. No. 32-1 at 14-56.) Defendant maintains that Plaintiffs’ responses 6 were incomplete and that the lack of information prevented it from completing the audit. (Dkt. 7 No. 30 at 6-8.) 8 9 According to Plaintiffs, this is a misrepresentation of the parties’ communications and Plaintiffs’ performance. (See Dkt. No. 36 at 21.) Plaintiffs maintain that Defendant omits 10 important events in the intervening three years between the parties’ initial agreement and these 11 later communications. (Id.) As support, Plaintiffs submit copies of the parties’ correspondence 12 and the documents produced by Plaintiffs from November 2010 to November 2011. (Dkt. No. 13 38-1 at 142-60, 165-75.) Plaintiffs also submit a declaration from Adams stating that, during this 14 time period, he provided all documents requested by Defendant, that he repeatedly asked for 15 updates, and that the delay was in fact due to Defendant’s own failure to diligently work on the 16 audit. (Dkt. No. 38 at 7-11.) For example, on December 29, 2010, Adams emailed Kevin 17 Hengtgen, Defendant’s junior employee who was assigned to Plaintiffs’ 2009 audit. (Id. at 165.) 18 Feeling that he heard little from Defendant since hiring the firm, Adams asked, “Would you 19 update me on the status of the audit?” (Id.; see also Dkt. No. 37-1 at 15, 17; Dkt. No. 36 at 9.) 20 On January 4, 2011, James Lensing, one of Defendant’s principal auditors, responded: 21 22 23 24 I apologize that we have not yet responded to you, Kevin is no longer with the firm, and I was going through his emails this evening and just noticed your message. I also noticed that you sent some additional information on December 7 and December 8 that I was not aware we had received, so [I] will go through this and get back to you as soon as possible. (Dkt. No. 38-1 at 167.) On July 18, 2011, Defendant emailed Adams requesting certain 25 1 26 No specific details or documentary evidence was provided regarding pre-December 2012 correspondence. (Compare Dkt. No. 32 at 3 with id. at 4-5.) ORDER DENYING SUMMARY JUDGMENT PAGE - 4 1 documents, which Adams produced on July 28, 2011. (Id. at 172.) On November 28, 2011, 2 Adams again emailed Defendant asking, “What remains to be done for the audit?” (Id. at 175.) 3 Given this evidence, the Court determines that there is a dispute of material fact as to the 4 cause for Defendant’s delay in conducting Plaintiffs’ audit. As will be discussed below, this 5 dispute renders summary judgment inappropriate on many of the legal issues presented. 6 C. 7 Another preliminary matter is the application of the in pari delicto, or equal fault, 8 9 In Pari Delicto (Equal Fault) doctrine. There are two issues at play: one legal, one factual. First, the parties dispute whether the in pari delicto doctrine is valid under Washington 10 law. Plaintiffs maintain that the doctrine has been abrogated in favor of comparative fault. (Dkt. 11 No. 36 at 23.) Defendant asserts that, while the in pari delicto doctrine is not as well-established, 12 Washington courts do apply it. (Dkt. No. 47 at 10.) 13 A review of Washington law reveals that neither party is precisely right or wrong. The 14 key question is not which doctrine is the prevailing standard, but whether the underlying claim 15 sounds in tort or contract. Comparative fault is the standard for the former; in pari delicto is 16 applicable to the latter. Compare Wash. Rev. Code § 4.22.005 (establishing comparative fault in 17 actions “seeking to recover damages for injury or death to person or harm to property”), and 18 ESCA Corp. v. KPMG Peat Marwick, 959 P.2d 651, 655-56 (Wash. 1998) (applying the 19 comparative fault statute in a tort case), with Golberg v. Sanglier, 639 P.2d 1347, 1352-53 20 (Wash. 1982) (discussing in pari delicto doctrine in contract case), and Fallahzadeh v. 21 Ghorbanian, 82 P.3d 684, 688 (Wash. Ct. App. 2004) (same), and Evans v. Luster, 928 P.2d 22 455, 458 (Wash. Ct. App. 1996) (same). Since the comparative fault statute was adopted in 1973, 23 Washington courts have discussed the in pari delicto doctrine in tort cases only as it applies to 24 indemnity between joint tort-feasors—not as a bar to a plaintiff’s recovery.2 Thus, the in pari 25 See Fortune View Condo. Ass’n v. Fortune Star Dev. Co., 90 P.3d 1062 (Wash. 2004); Herberg v. Swartz, 578 P.2d 17 (Wash. 1978); Toste v. Durham & Bates Agencies, Inc., 67 P.3d 506 (Wash. Ct. App. 2003); Sabey v. Howard Johnson & Co., 5 P.3d 730 (Wash. Ct. App. 2000); 26 2 ORDER DENYING SUMMARY JUDGMENT PAGE - 5 1 delicto doctrine would be inapplicable to Plaintiffs’ negligence claim, but could bar their contract 2 claim. 3 This leads to the factual issue. The in pari delicto doctrine would bar Plaintiffs’ contract 4 claim only if the parties were in fact at equal fault. As noted above, there is a factual dispute as to 5 where the blame lies. Thus, the Court cannot determine at this time whether Plaintiffs’ breach of 6 contract claim is precluded. 7 8 9 10 D. Breach of Contract Claim3 1. Lack of Explicit Timeframe Defendant first argues that no breach occurred because the parties’ contract contained no deadline and allowed Defendant to decline to issue an audit. (Dkt. No. 30 at 10-11.) 11 However, where a contract is silent as to the deadline for performance, the Court must 12 impose a reasonable time. Pepper & Tanner, Inc. v. Kedo, Inc., 535 P.2d 857, 859 (Wash. Ct. 13 App. 1975). “A reasonable time is to be determined by the nature of the contract, the positions of 14 the parties, their intent, and the circumstances surrounding performance.” Id. “Normally, a 15 determination of what constitutes a reasonable time is a question for the trier of fact.” Jarstad v. 16 Tacoma Outdoor Recreation, Inc., 519 P.2d 278, 283 (1974). 17 Such is the case here. There is a factual dispute as to what caused Defendant’s delay: its 18 own lack of diligence or Plaintiffs’ failure to produce evidence. Moreover, the parties’ contract 19 states: “Neither party shall be liable to the other for any delay . . . due to causes beyond its 20 21 22 23 24 25 26 Wagner v. Beech Aircraft Corp., 680 P.2d 425 (Wash. Ct. App. 1984); Massingale v. Nw. Cortez, Inc., 620 P.2d 1009 (Wash. Ct. App. 1980); Guard v. Town of Friday Harbor, 592 P.2d 652 (Wash. Ct. App. 1979); Weston v. New Bethel Missionary Baptist Church, 598 P.2d 411 (Wash. Ct. App. 1978). 3 In a footnote, Defendant appears to argue that it had a contractual duty to only AFP. (Dkt. No. 30 at 10 n.41.) “Relegating substantive arguments to footnotes is dangerous business.” F.D.I.C. v. Red Hot Corner, LLC, 2014 WL 5410712 at *1 (D. Nev. Oct. 22, 2014). “If an argument is worth making, a party should put the argument in the body of its brief.” Bach v. Forever Living Prods. U.S., Inc., 473 F. Supp. 2d 1127, 1132 (W.D. Wash. Feb. 13, 2007). The Court declines to consider that issue. ORDER DENYING SUMMARY JUDGMENT PAGE - 6 1 reasonable control.” (Dkt. No. 32-1 at 11.) Based on these and other circumstances in this case, it 2 is for the jury to determine a reasonable timeframe for Defendant’s performance, regardless of 3 whether that performance was production of an audit or declination to produce one. 2. Plaintiffs’ Performance 4 5 According to Defendant, any breach it committed was excused by Plaintiffs’ failure to 6 produce the information required to perform the audit. (Dkt. No. 30 at 13.) However, as noted 7 above, Plaintiffs’ alleged failure to perform is a factual dispute that must be resolved at trial. 8 Summary judgment on this issue would be premature. 3. Causal Link Between Defendant’s Actions and Plaintiffs’ Damages 9 10 Defendant argues that Plaintiffs cannot show that any of its action caused their damages. 11 (Dkt. No. 30 at 14.) Instead, Defendant asserts, Plaintiffs’ damages came from their own dilatory 12 conduct, violation of the Washington Securities Act, and decision to wind down the hedge fund. 13 (Id. at 15.) Plaintiffs respond that Defendant’s failure to timely produce an audit directly resulted 14 in Plaintiffs’ loss of existing and potential investors, as well as the DFI enforcement action. (Dkt. 15 No. 36 at 22.) Plaintiffs acknowledge that DFI did not require the hedge fund to wind down, but 16 note that they were essentially forced to in order to maintain AFC’s investment advisor license. 17 (Id. at 18.) 18 Again, as discussed above, there is a factual dispute as to the reason why no audit was 19 produced. In addition, Plaintiffs have produced declarations from investors stating that the lack 20 of audit caused them not to invest in the hedge fund. (Dkt. No. 44 at 3; Dkt. No. 45 at 3.) 21 Plaintiffs also present evidence that the lack of audit was a significant concern for DFI in its 22 investigation of AFP’s financials. (Dkt. No. 41 at 2.) 23 24 In sum, there is a factual dispute as to the cause of Plaintiffs’ damages. Summary judgment is not appropriate on this issue, nor on Plaintiffs’ contract claim as a whole. 25 // 26 // ORDER DENYING SUMMARY JUDGMENT PAGE - 7 1 2 3 4 5 E. Negligence Claim 1. Independent Duty Doctrine Defendant argues that the independent duty doctrine prevents Plaintiffs from bringing any negligence claim against it. (Dkt. No. 47 at 9.) Under this doctrine, a plaintiff can bring a tort claim for conduct arising out of a 6 contractual relationship if the defendant owed him or her a duty of care independent of the 7 contract. Eastwood v. Horse Harbor Found., Inc., 241 P.3d 1256, 1262 (Wash. 2010). This 8 doctrine superseded the previous “economic loss rule,” which “often barred a plaintiff from 9 bringing a [negligence] claim against a defendant who had contracted with the plaintiff against 10 potential economic liability.” Donatelli v. D.R. Strong Consulting Eng’rs, Inc., 312 P.3d 620, 11 625 (Wash. 2013). The independent duty doctrine has been applied “to a narrow class of cases, 12 primarily limiting its application to claims arising out of construction on real property and real 13 property sales.” Elcon Const., Inc. v. East. Wash. Univ., 273 P.3d 965, 969 (Wash. 2012). The 14 doctrine is not a rule of general application. Id. The Washington Supreme Court has specifically 15 directed that the doctrine should not apply “‘unless and until this court has, based upon 16 considerations of common sense, justice, policy and precedent, decided otherwise.’” Id. at 969- 17 70 (quoting Eastwood, 241 P.3d at 1276). The court “took great pains to limit” the doctrine and 18 to “clarify that it does not bar tort remedies except in fairly unusual circumstances.” Reading 19 Hosp. v. Anglepoint Grp., Inc., 2015 WL 13145347 at *3 (W.D. Wash. May 26, 2015) 20 (Coughenour, J.). 21 Based on this clear caution, as well as the lack of any Washington case law indicating 22 that the independent duty doctrine should apply to professional services such as auditors, the 23 Court declines to apply the doctrine to bar Plaintiffs’ negligence claim. 24 25 26 2. Independent Duty Owed to Plaintiffs Defendant further argues that it owed no independent duty to Plaintiffs. (Dkt. No. 30 at 15.) Defendant reasons that, as an auditor, its duty is to the public, meaning Plaintiffs cannot sue ORDER DENYING SUMMARY JUDGMENT PAGE - 8 1 2 for a breach of that duty. (Id. at 18.) The public duty doctrine protects defendants from suit where the duty breached was 3 owed to the public in general, “i.e., a duty to all is a duty to no one.” Bailey v. Town of Forks, 4 737 P.2d 1257, 1259 (Wash. 1987); see also Babcock v. Mason Cty. Fire Dist. No. 6, 30 P.3d 5 1261, 1267 (Wash. 2001) (“Whether the defendant is a governmental entity or a private person, 6 to be actionable, the duty must be one owed to the injured plaintiff, and not one owed to the 7 public in general.”). 8 As the United States Supreme Court has explained, an auditor serves as a “public 9 watchdog,” owing “complete fidelity to the public trust.” United States v. Arthur Young & Co., 10 465 U.S. 805, 817-18 (1984). For this reason, under Washington law, a public auditor does not 11 owe a fiduciary duty to its client. See Micro Enhancements Int’l, Inc. v. Coopers & Lybrand, 12 LLP, 40 P.3d 1206, 1218 (Wash. Ct. App. 2002). This makes good sense: an auditor’s job is to 13 accurately inform the public about its client’s financials, but disclosing such information might 14 not always be in the client’s best financial interest. 15 This does not mean, however, that an auditor is free from any duty to its client as a 16 provider of professional services. Specifically, Washington has a statutory scheme imposing 17 certain duties on professionals like accountants and auditors. See Wash. Rev. Code chap. 18.04; 18 see also Wash. Rev. Code § 18.04.025(18) (defining “[p]ractice of public accounting” as 19 “performing or offering to perform by a person or firm holding itself out to the public as a 20 licensee, for a client or potential client, one or more kinds of services involving the use of 21 accounting or auditing skills”). These include the duty to: undertake professional services only 22 when one “reasonably expect[s] to complete the service with professional competence,” Wash. 23 Admin. Code (WAC) 4-30-046; be “honest and objective” and not “misrepresent facts,” WAC 4- 24 30-040; and “comply with rules, regulations, and professional standards promulgated by the 25 appropriate bodies for each service undertaken,” including the American Institute of Certified 26 Public Accountants (AICPA), WAC 4-30-048. Again, this makes good sense. If, as Plaintiffs ORDER DENYING SUMMARY JUDGMENT PAGE - 9 1 allege, Defendant misrepresented its progress on the audit and failed to exercise diligence, it 2 would be fair to hold Defendant liable for the damages its lack of professionalism caused. Plaintiffs have produced evidence that Defendant’s performance fell below generally 3 4 accepted professional standards set forth by AICPA. Plaintiffs’ expert, Certified Public 5 Accountant (CPA) D. Paul Regan, opines that Defendant: (1) failed to promptly conduct its 2009 6 and 2010 audit services with the required due care, (Dkt. No. 40 at 14-31); (2) violated 7 requirements as to the supervision of its employees, (id. at 32-35); and (3) failed to show the 8 appropriate integrity in its communications with Plaintiffs, (id. at 35-42). Regan supports his 9 opinion with citations to the AICPA Code of Professional Conduct and generally accepted 10 auditing standards, as well as the record produced on summary judgment. 11 Defendant submits a conflicting expert declaration by CPA Michael Ueltzen. (Dkt. No. 12 31-1 at 24-64.) Ueltzen states that Defendant “complied with professional ethical or auditing 13 standards” in its work for Plaintiffs. (Id. at 60.) According to Ueltzen, the problem was that 14 Defendant “was unable to obtain sufficient appropriate audit evidence” from Plaintiffs. (Id.) 15 Without this necessary information, Defendant asserts, it would actually have been a breach of 16 professional standards to issue an audit. (Dkt. No. 30 at 18.) This argument goes back to the 17 factual issue of whether Plaintiffs provided the necessary information to conduct the audit. And, 18 the conflict between the expert declarations is an issue to be resolved at trial. Summary judgment 19 would be inappropriate on this issue. 20 3. Lack of Causal Link Between Alleged Breach and Damages 21 22 Finally, Defendant maintains that any breach of its professional duty did not cause Plaintiffs’ damages. (Dkt. No. 30 at 18.) But, as discussed above, this is factually disputed. The Court declines to grant summary judgment on Plaintiffs’ negligence claim. 23 24 25 26 III. CONCLUSION For the foregoing reasons, Defendant’s motion for summary judgment (Dkt. No. 30) is DENIED. ORDER DENYING SUMMARY JUDGMENT PAGE - 10 1 DATED this 31st day of July, 2017. 2 5 A 6 John C. Coughenour UNITED STATES DISTRICT JUDGE 3 4 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 ORDER DENYING SUMMARY JUDGMENT PAGE - 11

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