Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. LC 085399, Michael Harwin, Judge.
Kousha Berokim for Plaintiffs and Appellants.
Perry Roshan-Zamir and Sanaz Yaghoobian for Defendant and Respondent.
FLIER, Acting P. J.
Appellants Farhad and Mahnaz Rashti, husband and wife, and Mike Rostami, Mahnaz’s brother, filed an action against Joseph Boodaie, All Century, Inc. (not parties to this appeal) and respondent David Gadoshian because the defendants allegedly converted over $3.5 million that appellants had entrusted to Boodaie and All Century, Inc. Respondent’s demurrer to the third amended complaint (hereafter the complaint) was sustained without leave to amend on October 29, 2009; the notice of appeal was filed on December 14, 2009; and judgment was entered on January 21, 2010. The notice of appeal is treated as filed immediately after the entry of judgment. (Cal. Rules of Court, rule 8.104(e)(1).)
“We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.” (Serrano v. Priest (1971) 5 Cal.3d 584, 591.)
The complaint alleges that in 2006 appellants purchased, as tenants in common, commercial real estate in Buena Park, California. In 2008, appellants sold the property and realized a profit of approximately $3.5 million. In round figures, $1.4 million of this belonged to the Rashtis and $2.1 million to Rostami.
Farhad and Mahnaz Rashti transferred their interests in the property to a revocable trust of which they were trustees.
The exact figures appear to have been $1,419,685.42 and $2,144,887.75.
Respondent, who is an accountant and a CPA, worked for the Rashtis. He advised the Rashtis that they could save on their taxes as much as $200,000, and Rostami could save $250,000, if they availed themselves of Treasury Regulation § 1.1031 (26 C.F.R. § 1.1031 et seq. (2010)) and purchased real property with the profits from the sale of their Buena Park property. Respondent referred appellants to Boodaie and his company, All Century, Inc., who, according to respondent, specialized in these types of transactions.
Appellants entered into agreements with Boodaie in September 2008 to effect the Regulation § 1.1031 transactions, which we will refer to from time to time as tax free exchanges. On September 18 and 22, 2008, appellants transmitted $1,419,685.42 (Rashtis) and $2,144,887.75 (Rostami) to Boodaie. Boodaie informed appellants that he would break these funds up into segments of $200,000 for deposits in different banks in order to make certain that these sums were covered by FDIC insurance.
Appellants’ suspicions were aroused when Boodaie failed to comply with their request to provide them with documentation showing where these deposits had been made. On October 22, 2008, appellants informed Boodaie that they no longer wanted Boodaie to oversee the tax free exchange. But Boodaie insisted that their funds were safe and that appellants should stay with him.
There now followed a series of meetings and conferences wherein appellants indicated that they wanted to purchase certain properties, Boodaie always advising against such purchases and instead offering to sell them two of his own properties, which turned out to be very undesirable.
On January 25, 2009, appellants requested that their funds be returned to them. In a series of meetings between January 25 and February 10, 2009, “Boodaie and [respondent] attempted to reassure [appellants] that their funds were safe with Defendant Boodaie, and that it was the financially sound decision to allow Defendant Boodaie to continue withholding the funds....”
Between March 17, 2009, and April 20, 2009, Boodaie made a series of payments to appellants. These payments were in the amounts of $25,000, $50,000, $30,000, $160,000, $265,000, $120,000 and $300,000.
On March 18, 2009, Boodaie confirmed in writing that he had received from appellants $1,419,685.42 and $2,144,887.75. On March 20, 2009, appellants demanded the entirety of their funds. “On March 22, 2009, [respondent] contacted [appellants] and told them that he had spoken with Defendant Boodaie. [Respondent] assured [appellants] that the funds were safe, that Boodaie was able to get high returns on the funds, and that it would be a sound decision to allow Boodaie to continue to withhold the funds.” “On March 27, 2009, Defendant... Boodaie contacted [appellants] and informed them that he no longer possessed the subject funds. He did not state what he done to the funds.”
THE COMPLAINT
The complaint alleges two causes of action against respondent. One is for professional negligence and the other alleges a breach of fiduciary duties.
The cause of action based on professional negligence alleges that as a “licensed CPA, [respondent] owed the duty of a professional to use such skill, prudence, and diligence as other members of his profession commonly possess and exercise.” (Original boldface and underscoring.)
This cause of action alleges four breaches on respondent’s part. They are: (1) Respondent knew that Boodaie was not able to effect the tax free exchange but nevertheless recommended Boodaie to appellants. (2) Even though Boodaie had converted appellants’ funds, respondent urged appellants not to take legal action against Boodaie. (3) Respondent told appellants that Boodaie was complying with the requirements of a tax free exchange even though respondent knew that this was not true. (4) Respondent counseled appellants to transmit substantial sums to the other defendants, and continued to assure appellants that the other defendants could be trusted, even though respondent knew that the other defendants would convert appellants’ money. The complaint goes on to allege that respondent was under a duty not to commit the foregoing acts of negligence. Finally, this cause of action alleges that as a result of respondent’s negligence, appellants lost substantial sums they had deposited with the other defendants. More specifically, the complaint also alleges that appellants’ losses were exacerbated because respondent counseled them not to take legal action.
The cause of action for breach of fiduciary duty is based essentially on the same allegations.
This cause of action alleges that respondent as a CPA and as appellants’ accountant owed appellants the duty to faithfully, loyally, honestly, etc., advise appellants as to their financial affairs and that respondent was a fiduciary bound to act honestly with appellants. It is alleged that respondent misrepresented to appellants Boodaie’s “credibility.” This cause of action alleges that respondent used his position as appellants’ accountant to further Boodaie’s illegal scheme for his personal gain. The allegation as to causation follow those set forth in the cause of action for professional negligence.
THE DEMURRER AND THE COURT’S RULING
We set forth the entirety of the trial court’s ruling: “Based on grounds as set forth in the moving papers, and good cause appearing, the Court finds that there is no duty and the demurrer is sustained without leave to amend as to this defendant [respondent].”
We summarize the points of the demurrer:
Professional Negligence
1. Appellants have “failed to allege breach.”
2. Appellants “merely allege[] conclusory statements regarding breach of the alleged duty, without stating which duties were owed to [appellant] and how such duties were breached.”
3. Appellants have failed to allege a causal connection between the negligent conduct and the resulting injury.
Breach of Fiduciary Duty
1. Appellants have failed to allege breach and a causal connection between the conduct and injury.
2. “Negligent referral is not a cause of action.”
It is worth noting that the demurrer is itself rather conclusory and short on analysis.
DISCUSSION
1. Respondent Owed a Duty of Due Care to Appellants
Accountants have been recognized as a skilled professional class subject generally to the same rules of liability for negligence in the practice of their profession as are members of other skilled professions. (Lindner v. Barlow, Davis & Wood (1962) 210 Cal.App.2d 660, 665.) “As members of a skilled profession they [accountants] are experts. The duty of experts is well expressed in Gagne v. Bertran (1954) 43 Cal.2d 481, 489: ‘The services of experts are sought because of their special skill. They have a duty to exercise the ordinary skill and competence of members of their profession, and a failure to discharge that duty will subject them to liability for negligence. Those who hire such persons are not justified in expecting infallibility, but can expect only reasonable care and competence. They purchase service, not insurance. [Citations.]” (Ibid.)
Unfortunately, the trial court did not explain why it concluded that there was “no duty.” In any event, this conclusion is erroneous both generally and specifically with reference to the facts of this case.
Generally, accountants are under a duty to use such skill, prudence and diligence as other members of the accounting profession commonly posses and exercise. (Lindner v. Barlow, Davis & Wood, supra, 210 Cal.App.2d at p. 665.) This is exactly what the complaint alleges. (See THE COMPLAINT, ante.)
Specifically with reference to the facts as they are alleged in the complaint, respondent’s actions centered on recommending Boodaie to appellants as a person who could orchestrate the tax free exchange. The question is whether this act falls within the purview of an accountant’s professional services.
There are three reasons why the answer to this question is yes.
First. It has long been recognized that work in the field of taxation falls within the range of professional services rendered by an accountant. The professional malpractice cases of Lindner v. Barlow, Davis & Wood, supra, 210 Cal.App.2d at pages 661-662 involved the preparation of tax returns, as did the well-known decision in International Engine Parts, Inc. v. Feddersen & Co. (1995) 9 Cal.4th 606 and the more recent case of Sahadi v. Scheaffer (2007) 155 Cal.App.4th 704. Thus, when respondent advised appellants about the tax free exchange, he was acting in his professional capacity, just as much as the accountants in the three cases we have cited. There is no difference between preparing a tax return when the accountant draws on his or her tax expertise and in counseling clients about the benefits of a tax free exchange, an exercise that draws on the same expertise.
Second. The complaint alleges, and there is no reason to doubt, that appellants went to respondent, among other reasons, for tax advice. It is similarly undisputed that he did give them such advice.
Third. In addition to alleging duty in general terms, the complaint also alleges that respondent was under a duty to refer appellants to someone who was able to implement a tax free exchange. One would think that this stands to reason; we return to this point in part 2, post. The complaint goes on to allege that respondent failed to do so.
But the facts do not stop short with the tax advice respondent gave appellants. Unfortunately, respondent played another quite fateful role. According to the complaint, he knew that Boodaie would convert appellants’ funds. It follows therefore that he should not have referred appellants to Boodaie, that he should not have continued to reassure them that their money was safe and that he should not have advised them against taking legal action. The complaint alleges that he did all of these three things in his professional capacity as an accountant. This certainly makes sense as appellants were looking to him as a professional accountant and not in any other capacity.
2. The Demurrer Should Have Been Overruled
Contrary to the demurrer, duty, breach and causation are more than adequately alleged in the complaint in both causes of action. In the instance of the cause of action for professional negligence, respondent’s alleged breaches are set forth quite explicitly.
Respondent’s contention, advanced in his demurrer, that “negligent referral is not a cause of action” may have been the source of the trial court’s misperception of this case. But this case does not boil down to a simple referral, as the trial court may have concluded.
In the first place, respondent was exercising his expertise and professional judgment when he advised appellants that they should consider a tax free exchange. The next step, the referral, also involved respondent’s expertise. Whether someone is effective in implementing this procedure requires an understanding of the procedure itself and the limitations under which it operates. In short, the whole bundle -- recommending the procedure and the person to implement it was an exercise of one set of respondent’s professional skills.
A referral can be critical, as this case so convincingly shows. As we have discussed, the referral in this case had to go to a person who was competent in the handling of a tax free exchange. As an illustration, one would think it ill advised and below the standard of care to refer a tax free exchange, especially one involving $3.5 million, to a realtor who has never handled one and who doesn’t know or understand how it works.
Finally, the demurrer should not have been sustained without leave to amend because appellants are not confined to causes of action for professional negligence and for breach of fiduciary duty. According to the allegations of the complaint, respondent conspired with the other defendants in the conversion of appellants’ funds. The third cause of action, from which respondent was explicitly exempted, is for conversion. Thus, a very simple amendment of the complaint, i.e., adding respondent as a defendant, would have sufficed to resurrect appellants’ action against respondent, even if the other two causes of action could not have been maintained.
3. Respondent’s Contentions on Appeal Are Without Merit
Respondent contends that the complaint does not allege that respondent acted as Rostami’s accountant. But of course Rostami relied on respondent’s professional skills, which we have described above. This defect, if it is a defect, can be easily cured by an amendment.
Respondent claims that he did not “owe a duty to Appellants in recommending or referring Appellants to Defendants Joseph Boodaie and All Century Inc. as accommodators to execute a §1.1031 exchange.” This is simply wrong. As we have explained, respondent was acting as a professional and in his professional capacity when he recommended a tax free exchange and the person to implement it.
Respondent states in his brief that “[f]or years, Respondent Gadoshian has offered general tax services to Appellants.” As this is not an allegation found in the complaint, we will ignore it. For the purposes of our point that respondent was acting in his professional capacity, it is interesting as background.
Respondent claims that because he is not an attorney, the fact that he advised against taking legal action is immaterial. Recommending or not recommending legal action is not to be confused with the implementation of the legal action. An accountant’s clients may well look to the accountant on the question whether they should see a lawyer. Certainly, according to the allegations of the complaint, it was a key aspect of respondent’s role as a coconspirator to stave off legal action as long as possible.
Respondent next contends that he was not under a duty to inquire whether Boodaie was competent to implement a tax free exchange. We do not agree for the reasons set forth in part 2, ante.
Respondent contends that he is not liable for the criminal acts of third parties. This is mistaken for two reasons. First, appellants seek to impose liability on respondent for his own failure to conform to the standard of care. Their theory is that if he had complied with the standard of care, the criminal act would not have occurred. Second. According to the complaint, respondent was a knowing participant in the criminal act.
Finally, we do not agree that appellants have failed to allege that respondent owed them a fiduciary duty. They did so very clearly. Whether the facts will show that respondent was acting in a fiduciary capacity is another question. We note that “[a]n agent is a fiduciary with respect to matters within the scope of his agency” (Rest.2d Agency, § 13) and that it is likely that respondent can be characterized as an agent in this transaction.
4. Conclusion
The trial court erred in sustaining the demurrer without leave to amend. But because there are some matters that may well require an amendment of the complaint, such as Rostami’s status as respondent’s client, we remand with directions to give leave to appellants to amend their complaint.
DISPOSITION
The judgment is reversed and remanded with directions to give appellants leave to amend their complaint. Appellants are to recover their costs on appeal.
We concur: GRIMES, J., O’CONNELL, J.
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.