Shofer v. Stuart Hack Co.

STRAUSBERG, Judge, INTRODUCTION This case concerns a professional malpractice claim against a pension plan administrator. The appellant, plaintiff below, Richard Shofer (“Shofer”), was president of a used car dealership, Catalina Enterprises, Inc. (“Catalina”), trading as Crown Motors. Catalina had a pension plan, which was administered by appellee, defendant below, The Stuart Hack Company. Shofer sued The Stuart Hack Company and Stuart Hack, individually, (together, Hack) complaining that Hack was negligent in failing to give Shofer advice about the tax consequences of borrowing money from the pension fund.

This Court has previously described the dispute between the parties as a “never ending litigational odyssey,” on a continuous, “long, torturous trip.” Shofer v. Hack Co., 107 Md.App. 585, 589, 597 , 669 A.2d 201 (1996). This is the third appellate opinion along that bumpy journey. 1 ⁵²⁰ PROCEDURAL HISTORY I. A. Shofer I Shofer’s initial Complaint, in the Circuit Court for Baltimore City, charged Stuart Hack with (I) negligence; (II) breach of contract; and (III) common law breach of fiduciary duty. The Complaint was amended and a fourth count was added for (IV) breach of fiduciary duty under the Employees Retirement Income Security Act of 1974 (ERISA), as codified in 29 U.S.C. §§ 1001 et seq. Hack moved to dismiss count IV for lack of subject matter jurisdiction, which was later granted with leave to amend.

Shofer then amended his Complaint to include the original three claims and five other claims for damages due to Hacks failure to provide competent advice under ERISA specifically, 29 U.S.C. § 1132 (a)(1)(B). Hack moved for a dismissal of the Second Amended Complaint on the ground that ERISA claims fall under the exclusive jurisdiction of the federal courts. On October 12, 1990, the trial court dismissed the Second Amended Complaint on the ground that the claims were preempted by the federal ERISA statute. Shofer appealed to the Court of Special Appeals, and before the case was heard, the Court of Appeals issued a writ of certiorari, upon its own motion.

On September 17, 1991, the Court of Appeals (Rodowsky, J.), reversed in part and vacated in part, holding that the Maryland state law claims survived the ERISA claims because ERISA does not ,preempt traditional common law causes of action. Shofer v. Stuart Hack Company, 324 Md. 92 , 595 A.2d 1078 (1991), cert. denied, 502 U.S. 1096 , 112 S.Ct. 1174 , 117 L.Ed.2d 419 (1992){Shofer I). The Court of Appeals also held that Shofer could recover damages based on income tax penalties; however, the Court barred recovery of other claimed consequential damages, specifically, all pension-related damages including excise taxes, prohibited transaction penalties, and possible plan disqualification. The case was remanded for further proceedings on the remaining claims. ⁵²¹ B. Shofer II Shofer filed a Third Amended Complaint for negligence and breach of contract seeking damages for future additional income tax, excise tax, interest, penalties, attorneys fees, accountants fees, loss of income, prohibited transaction penalties and possible disqualification of the pension.

Hack moved for dismissal citing Shofer I, arguing that the Court of Appeals specifically held these damages non-recoverable for negligence and breach of contract actions. Shofer I, 324 Md. at 111 , 595 A.2d 1078 . The trial court, applying Shofer I , dismissed the damage claims for excise taxes, prohibited transactions, and plan disqualification under counts I and II of the Third Amended Complaint. The punitive damages and attorneys fees claims were also dismissed.

Shofer amended his Complaint and claimed damages from penalties arising out of his failure to follow proper procedures in borrowing from his pension, damages due to his inability to refinance his Virgin Islands property, lost salary, and lost business profits. Shofer v. Stuart Hack Company, 107 Md. App. 585, 590 , 669 A.2d 201 (1996) (Shofer II). Hack moved for summary judgment arguing preemption by ERISA, or, in the alternative, partial summary judgment as to damages. Partial summary judgment was granted as to certain damages claimed.

Subsequently, the trial court dismissed the damage claim for loss of sheltered earnings because it was too speculative and unforeseeable, but denied a motion to dismiss the tax penalties and interest damages. Shofer announced his intent to appeal the previous orders disallowing the damage claims regardless of the outcome of the trial. Pursuant to Maryland Rule 2-602(b), 2 the trial court entered a judgment as to all the ⁵²² rulings on damages, thereby giving its permission to Shofer to appeal the damage issues to this Court before the start of the trial on the merits. Shofer II, 107 Md.App. at 591 , 669 A.2d 201 .

This Court dismissed that appeal, holding that “the Circuit Court erred in certifying for appeal these interlocutory orders that were neither final judgments nor exceptions to the final judgment rule.” Id. at 586 , 669 A.2d 201 . We remanded the case for “trial on the remaining damage items.” Id. at 597 , 669 A.2d 201 .

II

Shofer’s Fourth Amended Complaint was filed after the. Shofer II decision. Shofer requested a jury trial for the first time and, pursuant to his interpretation of the Court of Appeals decision in Shofer I , reasserted all the previously dismissed damage claims to the original breach of contract and negligence counts. He also filed a Motion for Revision seeking a reversal of each of the prior damage rulings.

Hack filed a Motion to Strike the Fourth Amended Complaint on the grounds that Shofer was not entitled to a jury because the amended Complaint simply reformulated the original. Shofer amended his Complaint a fifth time, alleging negligence, breach of contract, and a new count for fraud and deceit. Hack filed a Motion to Strike the Complaint claiming the new count was time barred. Shofer then filed a new lawsuit alleging negligence, breach of contract, and fraud, asserting that the new case was viable because it requested damages for “excise taxes” that the IRS had recently assessed.

Hack moved for summary judgment as to the new suit on the grounds that Shofer I found these ⁵²³ damages unrecoverable. Hack also filed a Motion for Sanctions on the ground that the new lawsuit was filed in bad faith. The circuit court denied Shofers Motion for Revision of the prior damages rulings. The court granted Hacks Motion to Strike the Fourth and Fifth Amended Complaint and granted Hacks Motion for Summary Judgment with respect to the newly filed case.

The Motion for Sanctions against Shofer was denied. Finally, on June 26, 1997, a bench trial began on the remaining negligence and breach of contract claims. After a lengthy bench trial (Matricciani, J.), the lower court found in favor of Hack. The trial court concluded that Hack did not deviate from the acceptable standard of care, in large part based on the duty Hack owed Shofer under the particular circumstances of this case; that Hack did not cause Shofer’s damages; and that, in any event, Shofer was contributorily negligent.

Shofer appeals all of the pretrial rulings as well as the findings of fact and conclusions of law set forth in the Memorandum and Order dated September 5,1997. FACTUAL BACKGROUND Catalina, through Shofer, as president, established a pension plan (“Plan”) in the late 1960’s for its employees. The Hack Company, a pension consulting and administration firm, was hired by Catalina to administer the Plan. Stuart Hack was the owner and an employee of the Hack Company.

In the mid 1970’s, Shofers personal and business accounting firm, Grabush, Newman and Company (“Grabush”), suggested that Shofer contact Hack for revisions to the Plan in order to bring it into compliance with the newly-enacted federal legislation, ERISA. Hack performed these duties and continued as Catalinas Plan administrator until 1986. During this time, Hack renewed its contract with Catalina by letter addressed solely to “Catalina Enterprises, Inc.” In 1982, Shofer was under increased pressure from Maryland National Bank to improve the balance sheet of Catalina t/a Crown. Shofer began to contact Hack more frequently, ⁵²⁴ and inquired about using the Plan to finance Catalinas accounts receivable.

Shofer, in fact, did finance Catalinas accounts receivable with Plan funds. On August 3, 1984, Shofer called Hack, and in a brief telephone conversation inquired about three items: (1) whether the funds in the Catalina Enterprises Plan could be used as collateral for loans; (2) whether Shofer could borrow money from the Plan; and (3) whether Shofers voluntary account could be given special treatment for purposes of these loans. Shofer did not indicate the amount he intended to borrow, the number of loans, the reasons for obtaining the loans, or whether he intended to follow through with the inquiry. Hack informed Shofer that he could borrow up to 100% of his voluntary account.

Soon after, Hack contacted Barry Berman, a pension attorney at the law firm of Weinberg & Green, who confirmed that Shofer could borrow up to 100% of his voluntary account. Shofer called Hack again on August 7, 1984, and stated that he needed a letter confirming the advice Hack had provided in the previous telephone conversation, namely that: (1) Shofer could borrow up to 100% of his voluntary account, and (2) the voluntary account could be used as collateral for a bank loan. On August 9, 1984, before Shofer received Hacks confirmation letter, he borrowed $60,000 from the Plan to repay part of the debt he owed to Catalina t/a Crown, which could then, in turn, repay Maryland National Bank and receive a line of credit to purchase additional inventory. To process the loan, Shofer wrote himself a check from the pension, issued a pay-on-demand promissory note to the Plan, and set the interest rate himself.

At this point, he did not secure the loan nor did he inquire of Hack how much he could borrow. Shofer later repaid this initial loan. On August 9, 1984, Hack prepared the requested letter, which stated: You questioned whether assets of your money purchase pension plan and profit sharing plans can be used as collateral for loans, whether you can borrow against these plans ⁵²⁵ and whether there is any special treatment for your voluntary account under these plans. First of all, let’s distinguish between the voluntary account and the employer account.

The employer account cannot be put up as collateral for a loan, and loans to participants against their employer account are limited to a total of $50,000 for all plans up to a maximum of five years (For a longer period of time if used for the purchase or substantial improvement to a primary residence). Further, we would recommend that any loans against an employer account should be fully collateralized (this means collateral in addition to the value of the account itself). There is an entirely different treatment for voluntary accounts. First, there is no limit on the amount that can be borrowed against the account or the length of time for which it can be outstanding.

Also, the account itself can stand as collateral for a loan from a bank to another source. The loan agreement will have to include a provision that you cannot withdraw money from your voluntary account, and thus dissipate the collateral however. The law is pretty clear on the inability to use employer account values as collateral for a loan. There is no law on restrictions of using voluntary money for collateral for a loan.

The TEFRA provisions on the limits on loans apply only to employer accounts and specifically do not apply to employee voluntary accounts. In my opinion, you can use your voluntary account as collateral for a loan or you can borrow up to 100% of your voluntary account. The gravamen of Shofers complaint is that the letter fails to provide advice about the tax consequences of borrowing money from the pension fund. At the time the letter was written, Shofers voluntary account consisted of $76,000.

According to Hacks letter, Shofer could borrow $50,000 from the employer account and $76,000 or 100% of his voluntary account, for a total loan of $126,000. ⁵²⁶ Shofer took the following loans from the Plan between 1984 and 1986, totaling $315,000 (excluding the initial $60,000, which was repaid): 1. $150,000 on August 23, 1984,. to repay his debt to Catalina t/a Crown. 2. $50,000 on September 5, 1984, to repay his debt to Catalina t/a Crown. 3. $35,000 on February 21, 1985, as a down payment on two investment properties in the Virgin Islands. 4. $3,000 on February 25, 1985, also for the Virgin Islands properties. 5. $12,000 on July 30, 1985, to furnish the Virgin Islands properties. 6. $25,000 on August 13, 1985, to refurbish the Virgin Islands properties. 7. $5,000 on August 21, 1985, again to refurbish the Virgin Islands properties. 8. $35,000 on September 30,1986, to purchase a condominium at Harbor Court in Baltimore. Shofer did not inform Hack or Grabush about the loans he had taken from the Plan. Throughout, Grabush was the accounting firm for Shofer, individually, Catalina, and Catalinas pension plan. In the fall of 1986, Grabush prepared Shofer’s 1985 personal income tax returns and did not list the 1985 loans from the Plan as taxable income.

On June 17, 1985, Kenneth Larash (“Larash”), who prepared Shofer’s personal and income tax returns, was reviewing the general ledger of the pension plan and he learned of the loans taken in 1984 that were not reported as income.' He did not recommend that any action be taken nor did he advise Shofer that the loans should have been reported as income. This failure to report the loans was not discovered until 1986 when another Grabush accountant, Alan Marvel (“Marvel”), was reviewing Shofers file and noticed the omission. Larash, Shofer, and Marvel met. The two accountants suggested Shofer contact a pension attorney, ⁵²⁷ Nicholas Giampetro.

Shofer complied and also wrote to Hack requesting his assistance. At this point, Hack learned of Shofers loans for the first time. Another meeting was held in May 1987, between Shofer, Hack, Marvel, and Larash, in which Hack reaffirmed his position that the loans were not taxable. Hacks advice to Shofer was to refrain from amending his 1984 and 1985 tax returns, as the loans might not be detected by the IRS and the statute of limitations had almost run.

Marvel and Larash disagreed, advising Shofer to file amended returns reporting the loans as income. Shofer amended his 1984 and 1985 tax returns and reported the loans as income on his 1986 tax return. These actions resulted in additional federal and state taxes, penalties, and interest charges. The question presented in this appeal for our review is whether the trial court was clearly erroneous in concluding (1) Hack did not breach the standard of care in not advising Shofer about the tax consequences of his borrowings from the Catalina pension fund; (2) if there were a breach, it was not the proximate cause of Shofer’s losses; and (8) Shofer was eontributorily negligent in failing to inform Hack about the extent of the pension fund loans he was taking, and in failing to inform his accountants about his borrowings.

DISCUSSION On an appeal from a bench trial, Maryland Rule 8-131© provides that, “[w]hen an action has been tried without a jury, the appellate court will review the case on both the law