Sullivan v. Loden

COLLEEN H.A. SULLIVAN, individually and as Trustee of her Trust Agreement dated November 27, 1979, Plaintiff, v. ELLIOT H. LODEN, Defendant.

No. 21-cv-123-DKW-RT

United States District Court, D. Hawaii

May 4, 2022

ORDER (1) DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT ON COUNT I AND (2) GRANTING DEFENDANT'S EX PARTE MOTION TO SEAL EXHIBITS 7 AND 8 TO DEFENDANT'S CONCISE STATEMENT OF FACTS

Derrick K. Watson United States District Judge

Plaintiff Colleen Sullivan is the daughter of the late Joanna Sullivan matriarch of the Foodland Super Market family business. Colleen asserts a claim of legal malpractice (Count I) against Joanna's longtime estate planning attorney Defendant Elliot Loden, arising out of a 2011-2012 valuation of Foodland stock that Loden performed in the course of his work for Joanna. Colleen claims the valuation was inaccurate and that Joanna relied on it to the detriment of Colleen's inheritance.

Loden now moves for summary judgment on the malpractice claim, asserting that Colleen, who was never his client, lacks standing to bring this claim because he did not owe her a duty of care. Loden additionally asserts that Colleen is collaterally estopped from bringing her claim because the IRS thrice “accepted” his valuation.

Neither of Loden's bases for summary judgment has merit. First, there is at least a genuine issue of material fact as to whether Loden owed Colleen a duty of care as an intended beneficiary of the stock valuation. Second, collateral estoppel does not apply because Colleen was not a party nor in privity with any party to any IRS adjudication of the validity of the valuation. Thus, summary judgment as to Count I^[1] is DENIED.

LEGAL STANDARD

A court must grant a motion for summary judgment if “the evidence in the record” and “all reasonable inferences from that evidence, ” when viewed in the light most favorable to the non-moving party, show “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); Genzler v. Longanbach, 410 F.3d 630, 636 (9th Cir. 2005). The movant “bears the initial burden of . . . demonstrat[ing] the absence of a genuine issue of material fact.” Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). “To survive summary judgment, a plaintiff must set forth non-speculative evidence of specific facts, ” Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1061 (9th Cir. 2011), showing there is a “genuine issue for trial.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

RELEVANT UNDISPUTED MATERIAL FACTS AND PROCEDURAL BACKGROUND

I. Joanna transfers assets to her four children via gift and bequest.

In 1948, Joanna L. Sullivan (“Joanna”), together with her husband Maurice J. Sullivan (“Sully”), founded Foodland Super Market, the first modern-style grocery store chain in Hawai'i.^[2] Defendant's Concise Statement of Facts (DCSF) ¶¶ 4-5, Dkt. No. 58; Plaintiff's Concise Statement of Facts (PCSF) ¶¶ 4-5, Dkt. No. 84. Joanna and Sully had four children: Plaintiff Colleen H.A. Sullivan (“Colleen”), Maureen Jenai Sullivan Wall (“Jenai”), Kathleen W.A. Sullivan Wo (“Kitty”), and Patrick J. Sullivan (“Patrick”). DCSF ¶ 4; PCSF ¶ 4; Complaint ¶¶ 4-6, Dkt. No. 1. Sully died on February 28, 1998. DCSF ¶ 4.

Since 2001, of the four Sullivan children, only Jenai and Kitty have been directly involved with the family businesses.^[3] DCSF ¶¶ 6, 10; PCSF ¶¶ 6, 10; Declaration of Elliot Loden (“Loden Dec. 2016 Decl.”) ¶ 10, Dkt. No. 58-16. In late 2011 and early 2012, Joanna transferred her Foodland stock-221 common shares-to Jenai and Kitty to be divided equally between them.^[4] DCSF ¶¶ 7, 10; PCSF ¶¶ 7, 10.

Joanna reported the stock gift to the IRS by filing 2011 and 2012 Form 709 gift tax returns prepared by her longtime attorney, Defendant Elliot Loden (“Loden”).^[5] DCSF ¶¶ 11-12; PCSF ¶¶ 11-12. In order to report the value of the gift, Loden performed two appraisals of Foodland stock (the “Appraisals”): one on July 27, 2012 as of year-end 2011, and one on April 15, 2013 as of year-end 2012. The Appraisals valued the stock at $6, 152.88 per share for a total gift of $679, 350.00 to each daughter.^[6] See DCSF Ex. 7 at 4-7, Dkt. No. 58-9 and DCSF Ex. 8 at 4, 8-9, Dkt. No. 58-10 (showing gifts of $13, 598.00, $639, 100.00, and $26, 652.00 each to Jenai and Kitty). The IRS did not require any changes to the Form 709 returns.^[7] DCSF ¶ 18; PCSF ¶ 18.

Joanna died on September 2, 2015, leaving an estate worth approximately $192 million. DCSF ¶ 3; PCSF ¶ 3. Her estate plan-a trust dated August 15, 2013, and a pour-over will^[8]-provided for equal division of the majority of her assets among her four children with certain exceptions, including a cash bequest of $1 million each to only Colleen and Patrick.^[9] DCSF Ex. 5 (“JLS Trust”) Art. IV § 4.01(e), Dkt. No. 58-7; Loden Dec. 2016 Decl. ¶ 13; PCSF Ex. 15 (“Loden Notes”) at 7, 9, Dkt. No. 84-18.

Loden was named Personal Representative of the estate, see JLS Trust at 3, and probate was opened in the First Circuit Court for the State of Hawai'i on October 22, 2015. Defendant's Motion at 10, Dkt. No. 57-1; Estate of Joanna Lau Sullivan, P. No. 15-1-0698, Dkt. Nos. 1-6 (Haw. Prob. Ct. Oct. 22, 2015).

In 2016, Loden filed a Form 706 federal estate tax return on behalf of the estate. DCSF ¶ 18; PCSF ¶ 18; Declaration of Elliot Loden (“Loden Jan. 2022 Decl.”) ¶ 27, Dkt. No. 58-1. The IRS initiated an audit of the Form 706 return on July 6, 2017 and issued a closing “Account Transcript” on September 14, 2018, indicating that no adjustment was needed. DCSF ¶¶ 20-21; PCSF ¶¶ 20-21; Loden Jan. 2022 Decl. ¶¶ 28-30; DCSF Ex. 10, Dkt. No. 58-12; DCSF Ex. 11, Dkt. No. 58-13. The State of Hawai'i Department of Taxation also performed an audit of the estate tax return, which was closed on August 27, 2018, similarly without adjustment. DCSF ¶ 22; PCSF ¶ 22; Loden Jan. 2022 Decl. ¶ 31; DCSF Ex. 12, Dkt. No. 58-14.

II. Colleen expresses concern that her mother's testamentary intent was frustrated by faulty legal advice, and she pursues corrective action.

Colleen first learned about the 2011-2012 stock gifts to Jenai and Kitty in November 2015 after her mother's death. PCSF ¶ 28; Defendant's Separate Concise Statement of Facts (“DSCSF”) ¶ 28, Dkt. No. 87. Since then, Colleen has challenged the value assigned to the gifts by the Appraisals, along with the role she believes that value played in her mother's 2013 estate plan. Colleen asserts that her mother intended to treat her four children “more or less equally” in the disposition of her assets: if Joanna made a significant gift to one child, she would “equalize” it by giving a gift of commensurate value to the other children. See PCSF ¶¶ 23-26; PCSF Ex. 5 at 1, Dkt. No. 84-8. Colleen alleges that Joanna relied on the Appraisals in deciding how much of an equalizing gift to leave to Colleen and Patrick. PCSF ¶¶ 24-25, 27. She claims Loden's Appraisals far undervalued the 2011-2012 stock gift to Jenai and Kitty, ^[10] resulting in Joanna unwittingly leaving Colleen and Patrick a lesser gift than Joanna would have if she had known the true economic value of the stock gift. Id. ¶ 30.

In September 2016, through counsel, Colleen expressed her concern to Loden that Joanna had “received and relied upon false information that was material to her estate plan in attempting to equalize gifts among her children.” PCSF Ex. 5 at 2; see generally PCSF Exs. 5-8, Dkt. Nos. 84-8-11. She asked Loden to obtain a corrected valuation in order to “reallocate the residue of assets in Joanna's estate and/or trust if necessary to correct any imbalance in gifts among the children.” PCSF Ex. 5 at 2-3.

Colleen also requested that Loden voluntarily assign a neutral special administrator to obtain the new valuation because Loden had a conflict of interest in investigating his own Appraisals and evaluating the extent to which a malpractice claim may lie against himself. Id. She warned that a failure to correct the valuation and consequent gifts might leave Loden open to other causes of action, such as a breach of fiduciary duty. Id.; see Haw. Rev. Stat. § 560:3-614(2) (authorizing appointment of a special administrator “when necessary to preserve [an] estate or to secure its proper administration including . . . in circumstances where a general personal representative cannot or should not act” in any particular respect, such as when a conflict of interest exists).

In response, Loden defended the Appraisals' reliability and accuracy, ^[11] denied that there was a conflict of interest, and refused Colleen's request to assign a special administrator to perform a new valuation. See PCSF Exs. 6, 8. He also denied that Joanna relied on the Appraisals in divvying up her assets. Id.^[12] He claimed Joanna asked him to value the stock gift in the course of maximizing what she could give away under the unified tax credit exemption, thereby minimizing the estate's tax burden.^[13]

Loden's response caused Colleen to petition the Probate Court on November 3, 2016 to intervene and order a special administrator to evaluate the Appraisals. DCSF ¶ 14; PCSF ¶ 14; PCSF Ex. 9 ¶¶ 26-32, Dkt. No. 84-12. The Probate Court denied the petition, and Colleen appealed. DCSF ¶¶ 15-16; PCSF ¶¶ 15-16.

On March 20, 2020, the Intermediate Court of Appeals (“ICA”) vacated the Probate Court's decision and remanded for appointment of a special administrator. Estate of Sullivan, 463 P.3d at 1249-50. The ICA held that the Probate Court had abused its discretion in denying the petition because Loden had a conflict of interest and should not act on behalf of the estate...