Tuesday, August 31, 2010

Accountants Did Not Breach Any Duty to Waiters for Allegedly Over-reporting Tip Income

Three waiters employed at a popular Los Angeles restaurant alleged that their income was negligently over-reported on W-2 forms prepared by the restaurant’s accountants. The waiters further alleged that the restaurant’s managers improperly allocated a percentage of the tips to themselves, and that the accountants included the tip money taken by the mangers as income received by the waiters. (Emanuele Giacometti, et al., v. Aulla, LLC et al. (2010) 2010 Cal.App. Lexis 1484).

The accountants were hired by the restaurant, not the waiters, to prepare year-end documents with respect to earnings and taxes. Hence, the waiters had no contract with the accountants; in legal terminology, the waiters were not in privity of contract with the waiters. As a general rule, privity of contract is required in order for a party-plaintiff to state a cause of action for professional negligence. Where a plaintiff is not in privity of contract, courts analyze professional negligence claims by considering a number of factors first articulated in the landmark case of Biakanja v. Irving (1958) 49 Cal.2d 647.

After taking the Biakanja factors into consideration, the Court of Appeal concluded the waiters had no case against the accountants because the accountants had not breached any duty to the waiters. In other words, the waiters were unsuccessful in convincing the Court of Appeal that the accountants owed a duty to accurately report the waiters’ income to the IRS.

The waiters’ case failed mainly because they did not allege, and apparently could not honestly allege, that the accountants knew about the alleged wrongdoing or had a duty to investigate the accuracy of the income reported by the restaurant. As pointed out by the Court of Appeal, “there is no allegation that the accountants were the sources of the inaccurate numbers or that they had an obligation to ascertain the accuracy of the income reported for each employee.” Reasoning from an analogous case concerning auditors, the Court of Appeal stated “an auditor is a watchdog, not a bloodhound.” Hence, the key to understanding the Court’s reasoning is fact that the record contained no evidence the accountants knew the restaurant managers were, allegedly, taking the waiter’s tips.

The Court’s holding in this case is important for clients of the Law Offices of James F. Lindsay for a number of reasons. (see www.jameslindsaylaw.com for more information). In any case potentially involving negligence it is absolutely necessary to show a duty owed by the defendants. A duty may arise from contract, or in the absence of a contract, from a special relationship between the plaintiff and the defendant, from a voluntary undertaking by the defendant, from the words of a statute, code or regulation, or from affirmative findings of the Biakanja factors. Under any of these legal theories of liability, proof of the defendant’s knowledge of, participation in, consent to, or aiding and abetting of the wrongdoing that caused harm to plaintiff will be crucial to holding the defendant liable for damages.

The opinion was filed on August 25, 2010. The accountants were ably represented by Randall Dean and Andrew Wright of Chapman, Glucksman, Dean, Roeb & Barger.

Friday, August 20, 2010

Lawyers Must Disgorge Fees From Ponzi Scheme

On Tuesday, the United States Court of Appeals for the Ninth Circuit affirmed the district court’s finding that a lawyer should have known that a $375,000.00 non-refundable flat fee received from his client was paid with the ill-gotten gains of a Ponzi scheme. As a result, the district court’s order imposing a constructive trust upon $238,300.00 of the fee was not an abuse of discretion or legally erroneous. (Federal Trade Commission v. Network Services Depot, Inc. (2010) 2010 U.S. App. Lexis 17080).

This is an important decision for clients of the Law Offices of James F. Lindsay who are trying to recover money lost as a result of unwittingly investing in a business that turns out to be a Ponzi scheme. (see www.jameslindsaylaw.com for more information). Far too often the principal perpetrator of the Ponzi scheme has squandered most of the funds invested in the scheme, so full recovery of the invested funds from the perpetrator is often impossible. However, where the perpetrator has tried to hide funds under the guise of payment of legal fees, Tuesday’s opinion provides the precedent for pursuing and recovering those fees from the perpetrator’s lawyer.

If it can be shown that the fees were paid from the proceeds of the Ponzi scheme, and the lawyer knew, or should have known, that the source of payment was from the scheme, then the lawyer will be required to disgorge all such fees.

Thursday, August 19, 2010

Prop. 8: A Long History or a New History?

Proponents of Proposition 8 recently asked the trial court to block same-sex marriages while they consider taking an appeal. In opposition to the request, attorneys for Gov. Arnold Schwarzenegger argued that allowing same-sex marriages “is consistent with California’s long history of treating all people and their relationships with equal dignity and respect.” Huh? Does California really have a long history of treating all people with equal dignity, or have the learned counsel for the Governor chosen to re-write history to justify their position?

Regarding the history of American Indians in California from 1849 to 1879, historian Hubert Howe Bancroft writes “that part of the early intercourse between aboriginal Americans and Europeans which belongs to history may be briefly given, short work was made of it in California. The savages were in the way; the miners and settlers were arrogant and impatient; there were no missionaries or others present with even the poor pretense of soul saving or civilizing. It was one of the last human hunts of civilization, and the basest and most brutal of them all.” (see www.nps.gov/history/history/online_books/5views/5views1c.htm).

The gold rush era was also a time of less-than-dignified treatment for Chinese-Americans. In 1886 the United States Supreme Court held that a City of San Francisco ordinance prohibiting laundries in wooden buildings, unless a permit was obtained, was applied in a discriminatory fashion against Chinese. (Yick Wo v. Hopkins (1886) 118 U.S. 356). Although most of the city’s wooden building laundries were owned by Chinese, not one of them were granted a permit whereas only one non-Chinese was denied a permit.

In 1946 the United States District Court for the Central District of California found that the Westminster school district’s segregation of Mexican-American schoolchildren into separate “Mexican schools” was unconstitutional. (Mendez v. Westminster, 64 F.Supp. 544 (C.D. Cal. 1946). The district court’s ruling was affirmed on appeal, aided in part by an amicus curiae brief by Thurgood Marshall, who later became Supreme Court Justice, and whose experience in this case contributed to the landmark holding in Brown v. Board of Education. (see Strum, Mendez v. Westminster: School Desegregation and Mexican-America Rights (2010), and Ettinger, A Leader in the Fight Against School Segregation, Daily Journal (July 8, 2010) p.6).

The war years also saw the mistreatment of Japanese-Americans, who were rounded-up and placed in internment camps. (see Korematsu v. United States, 323 U.S. 214 (1944). Inspired by a desire to prove their loyalty, many young Japanese-Americans enlisted in the armed forces, and the Japanese-American soldiers of the 442 Infantry Regiment became the most-decorated regiment in the history of the United States Armed Forces, earning 18,000 individual decorations. The 442nd and the 100th Battalion from Hawaii, another Japanese-American unit, earned a total of 21 Medals of Honor. The price these young men paid to overcome suspicion and earn equal dignity was high. The 442nd/100th sustained 9,486 wounded and over 600 killed, the highest casualty rate of any American unit during the war.

After WWII, the Cold War began. During this period one can recall the revisionist history proclaimed by Communist party leaders, a re-writing of history that was laughable. Today we have President Ahmadinejad of Iran denying that the Holocaust ever occurred. We just laughed at him, but now we have counselors wiping clean the pages of history in order to make their cause seem righteous by association with the past, a past that didn’t exist. Who’s laughing now?

Thursday, June 3, 2010

Faulty Rental Release Fails to Protect Scuba Shop

Last Wednesday the Second Appellate District of the Court of Appeal of the State of California held that an unambiguous release of liability applying to the use of rented scuba-diving gear for boat dives or multiple day rentals did not apply to a one-day rental of the scuba-diving equipment for use from shore. As a result, a summary judgment entered by the trial court in favor of the scuba-diving shop was an error; hence, the Court of Appeal reversed the judgment. Huverserian v. Catalina Scuba Luv, Inc. (2010) 2010 Cal.App.LEXIS 750.
The sad facts of the case concern a father and son who had rented scuba-dving equipement from Catalina Scuba Luv for a day of diving at the Casino Point underwater dive park in Avalon on Catalina Island. The father ran out of air at 60 feet. He was able to reach the surface by buddy-breathing with his son, but he went into cardiac arrest on shore. He died the next day at UCLA Medical Center.
There was no dispute over how the accident happend; rather, the scuba shop's liability depended on whether the rental release signed by the decedent fully protected the shop from any damages claim. In bold underlined letters, the pertinent language in the release stated: "Equipment rental agreement, liability release and assumption of risk of scuba & snorkel gear for boat dives or multiple day rentals."
Just about any experienced Southern California diver can see the problem with this language, as the usual use of rented scuba gear at the Casino dive park is for diving from shore and for just one day. Thus, a release that applies to boat dives or multiple-day dives would not apply. This was exactly the reasoning of the Court of Appeal.
The law provides that a written release may fully insulate a wrongdoer from damages due to negligence, but the release must be clear, unambiguous, and explicit in expressing the intent of the parties; otherwise, the release is ineffective.
In this case the Court held that the release was clear and unambiguous, as it explicitly stated that it applied to boat dives or multiple day dives, and since Huverserian rented the equipment for just one day use from shore at the dive park, he did not come within either the boat dive or multiuple-day dive categories specified in the release. Hence, the release did not apply to him.
As the Court stated, "a person reading the rental agreement who is neither a boat diver nor multiple day rentor could reasonably conclude that the exculpatory language following the limiting language did not apply to him or her."
Undoubtedly Catalina Scuba Luv, Inc. had hoped and intended for the release to cover all rentals, not just boat dives or multiple day use. As locals know, the bulk of the shop's rentals are used for one day shore dives at the dive park behind the Casino.
The lesson to be learned from the case is to be careful and precise in describing the scope of the release. The languge should be as broad and as all-encompassing as possible, covering all potential uses of the rented equipment. An inartfully drafted release, one that fails to cover the circumstances most often arising from the use of the rented equipment, can fail to protect the releasor.
Now that the Court of Appeal has reversed the judgement in favor of Catalina Scuba Luv, Inc., the case will go back to the trial court for further proceedings, including the possibility of a trial to determine the amount of damages, if any, that the shop may have to pay.