Maese v. GarrettMaese v. Garrett
Lead Opinion
OPINION
{1} The formal opinion filed in this case on April 10, 2014, is hereby withdrawn, and this opinion is substituted in its place.
{2} Plaintiff brought suit against Defendants to recover taxes, penalties, and interest Plaintiff incurred in connection with the partial surrender of a deferred variable annuity.
BACKGROUND
{3} Defendants do not challenge the following facts found by the district court. Defendants provided financial services to Plaintiff, which included management of Plaintiff’s securities account. At all material times, Defendant David Garrett had primary financial advisory responsibility over Plaintiff’s account. At Garrett’s recommendation, Plaintiff purchased a deferred variable annuity. Plaintiff invested approximately $ 175,000 in after-tax dollars in the annuity. By October 2007, Plaintiffs contributions and investment gains in the annuity totaled over $300,000.
{4} Around this time, Plaintiff purchased an office building and needed approximately $140,000 to complete remodeling and to purchase equipment for his dental practice. Plaintiff contacted Garrett regarding whether he could withdraw monies from the annuity tax free and without incurring penalties in order to fund the remodeling. Garrett erroneously advised Plaintiff that because the contributions made to the annuity were “after-tax” dollars, Plaintiff could withdraw an amount equal to the amounts he had contributed to the annuity without incurring any additional tax liability. Plaintiff asked Garrett on one or two other occasions whether this advice was correct and was assured by Garrett that the amount he wanted to withdraw from the annuity was “well within” the amount he could withdraw tax free. Based on these representations, Plaintiff decided to withdraw the money needed to complete the remodeling from the annuity.
{5} Garrett’s advice was incorrect, however, because withdrawals from the annuity would first be considered withdrawals on gains from investments, not on amounts contributed, and they would therefore be subj ect to income tax. The advice was also incorrect because any withdrawals from the annuity before Plaintiff reached age fifty-nine-and-a-halfwere subject to an early withdrawal penalty equal to ten percent of the investment gains withdrawn from the account. Thus, after Plaintiff withdrew money from the annuity, Genworth, the annuity company, filed an IRS form indicating that the entire amount of the withdrawal was taxable income. Plaintiff did not receive the IRS form filed by Genworth and accordingly did not report the withdrawn amount on his income tax returns. Seventeen months later, the IRS notified Plaintiff that it was proposing to increase his tax liability by the amount withdrawn, though it was later modified to a slightly lower amount. As a result of the adjustment, Plaintiff was assessed a total of $77,623.06 in additional state and federal income taxes, interest, and penalties.
{6} After Plaintiff received the IRS notice, he met with Garrett and his accountant to determine why Genworth had reported the money as taxable. The parties spoke to a Genworth representative over the phone during the meeting, who explained why the withdrawal was properly reported to the IRS. After the meeting, Plaintiff and his accountant contacted the IRS to explore whether the IRS would abate the increased taxes, interest, and penalties. The IRS initially denied Plaintiffs request for abatement but later indicated that if Plaintiff could secure confirmation from Defendants that he had relied on erroneous information in withdrawing the money, the IRS would look more favorably on eliminating a portion of the penalties. Plaintiff contacted Defendants to request such a written confirmation. Defendants declined to provide one.
{7} Plaintiff brought suit against Defendants in district court. Following a two-day bench trial, the district court found in favor of Plaintiff on his claims of misrepresentation, breach of fiduciary duty, and violation of the UPA. The district court entered a judgment awarding Plaintiff $77,623 for the additional tax liability, plus attorney fees and costs. Defendants appeal.
DISCUSSION
I. The District Court’s Damages Award Was Correct
{8} Plaintiff withdrew approximately $142,000 from the annuity. Of that amount, $128,599 was attributable to investment gains realized by Plaintiff, against which $77,623 was levied in taxes, interest, and penalties. Defendants characterize the approximately $50,976 difference between the taxable investment gains and the tax liability as a “net investment gain” and argue that because Plaintiff realized a net investment gain, he did not sustain a compensable loss as a result of Garrett’s misrepresentations regarding the tax consequences' of the transaction. Defendants further argue that because they were not responsible for the interest and penalties the IRS assessed against Plaintiff, they should not be liable for those damages. We discuss these issues in turn. Because the parties do not dispute the facts, these issues raise questions of law, which we review de novo. Team Specialty Prods., Inc. v. N.M. Taxation & Revenue Dep’t,
A. Plaintiff Suffered a Compensable Loss
{9} In arguing that Plaintiff did not suffer a compensable loss, Defendants rely largely on cases holding that plaintiffs are generally precluded from recovering tax liabilities as damages because they have an obligation to pay taxes regardless of whether their failure to do so resulted from negligent financial advice. See DCD Programs, Ltd. v. Leighton,
{10} As explained in more detail below, we are unpersuaded by Defendants’ argument for two reasons. First, we conclude that Plaintiff met his burden to establish his damages with reasonable certainty when he established that he would not have incurred the additional tax liability but for Defendants’ erroneous advice. Second, to the extent Defendants argue that Plaintiff benefitted from the misrepresentation, we conclude that it was Defendants’ burden to prove what effect the tax implications or investment impact of any future withdrawal should have on Plaintiffs ability to recover damages resulting from the tax liability incurred on the actual withdrawal.
{11} We begin by examining the proper measure of damages in cases where negligent financial or tax advice has led to a plaintiff incurring additional tax liability. As O'Bryan and Leighton recognize, even where a plaintiff has received negligent tax advice, the plaintiff cannot recover as damages an otherwise valid tax obligation. O’Bryan,
{12} Under these circumstances, we agree with the court in Lien v. McGladrey & Pullen that the proper measure of damages should be the difference between what the plaintiff would have owed absent the negligence and what the plaintiff paid because of the negligence, plus incidental damages.
{13} In this case, Plaintiffs testimony that he would not have chosen to withdraw monies from the annuity but for Garrett’s misrepresentation that the withdrawal would be tax free was sufficient to establish that the full amount of the tax liability was avoidable and would not have been incurred but for Garrett’s advice. Cf. Eckert Cold Storage,
{14} In so concluding, we reject Defendants’ assertion that Plaintiff was required to prove that a future withdrawal would have lessened or avoided the amount of tax liability incurred and that the investment gains at the time of a speculative future withdrawal would have matched or exceeded the gain realized at the time of the actual withdrawal. While we acknowledge that it is never the purpose of compensatory damages to allow a plaintiff to profit from his or her loss, see McNeill,
B. Interest and Penalties Were Properly Included in the Damages Award
{15} Finally, although we have already concluded that the district court properly included interest incurred by Plaintiff in the damages award, we briefly address Defendants’ argument that Plaintiff is not entitled to recover the penalties and interest associated with the tax liability because Defendants were not the cause of Plaintiffs failure to timely pay the taxes. See Topmiller v. Cain,
II. Unfair Practices Act
{16} Defendants argue that the district court erred in concluding that the UPA applied under the facts of this case because the transaction at issue did not involve the sale of a good or service. More specifically, Defendants argue that Plaintiff never purchased goods or services from Defendants because Plaintiff did not pay Defendants for the incorrect financial advice or for the withdrawal from the annuity. Defendants also argue that to the extent the representations were found to be in connection with the purchase of the annuity four years earlier, the annuity — as a security — cannot be considered a “good” and is therefore not covered by the UPA. The question of whether the UPA applies in this case is a question of statutory construction that we review de novo. Truong v. Allstate Ins. Co.,
{17} “The UPA provides that unfair or deceptive trade practices and unconscionable trade practices in the conduct of any trade or commerce are unlawful.” Hicks v. Eller,
(1) the defendant made an oral or written statement, a visual description or a representation of any kind that was either false or misleading; (2) the false or misleading representation was knowingly made in connection with the sale, lease, rental, or loan of goods or services in the regular course of the defendant’s business; and (3) the representation was of the type that may, tends to, or does deceive or mislead any person.
Lohman v. Daimler-Chrysler Corp.,
{18} Consistent with the remedial purpose of the UPA and the corresponding liberal interpretation we accord to its provisions, our prior decisions have utilized a broad construction of the element “in connection with the sale of goods or services.” Lohman,
{19} Thus, given our liberal construction of the provisions of the UPA, we are unpersuaded by Defendants’ argument that the UPA does not apply because Plaintiff did not specifically compensate Defendants for the advice or the withdrawal from the annuity. The district court found that Defendants were compensated for the sale of financial products sold to Plaintiff and for Garrett’s provision of financial advising services. Defendants do not attack these findings, and it is sufficient for the UPA that Defendants received compensation for the goods and services provided to Plaintiff, even if the compensation was received at a time prior to the misrepresentation, provided that it occurred in .connection with the commercial relationship for which Defendants were compensated. See id. ¶ 32 (stating that the UPA merely “contemplates a plaintiff who seeks or acquires goods or services and a defendant who provides goods or services” (internal quotation marks and citation omitted)). Garrett’s misrepresentation occurred in the context of this broader commercial relationship, which included the provision of financial advice regarding investments Plaintiff made through Defendants. It is immaterial that Plaintiff did not specifically compensate Defendants for financial advising services where Defendants received compensation from third parties (e.g., from Genworth for the annuity in question) for investment advice that led to Plaintiff’s purchase of their products. Hicks,
{20} Defendants argue that, even if they provided financial advising services to Plaintiff, those services were not the main purpose of their commercial relationship with Plaintiff. Instead, they contend that the primary purpose was the sale of the Genworth annuity. We are not persuaded. In hiring Defendants to manage his securities account, Plaintiff was implicitly seeking Defendants’ advice about various investment products and, ultimately, their advice about the benefits of the annuity at issue. Defendants’ advice about the tax consequences of withdrawing funds from the annuity was interrelated with the overall investment advice that Defendants provided and that Plaintiff purchased in the course of their business relationship.
{21} We need not resolve Defendants’ second argument that the UPA does not apply because securities do not constitute “goods” under the UPA. Defendants note a number of cases supporting the assertion that consumer protection statutes do not apply to securities transactions. See, e.g., Bowen v. Ziasun Techs., Inc.,
CONCLUSION
{22} For the foregoing reasons, we affirm the district court’s judgment.
{23} IT IS SO ORDERED.
Notes
For convenience, we refer to Gerald Maese throughout this opinion as Plaintiff. Although both Gerald Maese and his wife, Jacqueline, suffered damages, Gerald appears, from the evidence, to be the active participant in the events that transpired.
Concurrence in Part
(concurring in part and dissenting in part).
{24} I concur in all but the majority’s UPA analysis and holding, with respect to which, I respectfully dissent.
{25} The tax advice at issue related to a variable annuity. The advice was not given to induce or consummate a sale of anything. There exists no evidence that the advice was given for any compensation or income growing out of the sale of the variable annuity. Furthermore, the advice was given long after the sale of the variable annuity.
{26} The tax advice unquestionably was not a “good.” It was not given in connection with the sale of goods. The variable annuity at issue is a security or is in the nature of a security. See Sec. & Exch. Comm’n v. Variable Annuity Life Ins. Co. of Am.,
{27} The majority hinges its UPA applicability on an analysis that connects the tax advice to the annuity transaction. Majority Op. ¶¶ 18-19.
{28} I am not aware of any New Mexico authority or a reasoned analysis of legislative intent that would support viewing such advice as being covered by the UPA. Cf. Grassie v. RoswellHosp. Corp.,
{29} I suspect that a study of case law will indicate that knowingly made misrepresentations
The district court adopted verbatim Plaintiffs requested finding that “Defendant. . . Garrett received financial compensation in connection with the sale of financial products” sold to Plaintiff and for Garrett’s provision of “financial advisor services}.]” The majority reads this finding to mean that “Defendants received compensation for the goods and services provided to Plaintiff}.]” Majority Op. ¶ 18. I see no basis on which to conclude from the district court’s broad, if not ambiguous, finding that the court found that Defendants received compensation in April 2002 (when the annuity purchase occurred) for any tax advice that might happen to be given some time in the future, here, five and one-half years later, in or about October 2007. The majority points out that Defendants did not specifically attack this unclear finding. MajorityOp. ¶ 18. In my view, reliance on file finding creates bad law — expansion of the UPA beyond its intended limit.
It does not appear that Defendants contested liability on the ground that the misrepresentations were not made “knowingly” and, thus, intentionally under Section 57-12-2(D).