Shimko v. Guenther

Citations: 505 F.3d 987; 2007 U.S. App. LEXIS 23924; 2007 WL 2964355Docket: 05-16847

Court: Court of Appeals for the Ninth Circuit; October 12, 2007; Federal Appellate Court

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The United States Court of Appeals for the Ninth Circuit reviewed the case involving Timothy A. Shimko, Sr. and his law firm against Milton and Kathi Guenther, concerning a judgment for $359,668.00 in attorneys' fees awarded to Shimko for legal services provided to two Arizona limited partnerships—Comprehensive Outpatient Rehabilitation Facility (CORF) Licensing Services, L.P. and CORF Management Services, L.P. The Guenthers, as limited partners, contended they should not be liable for these fees, arguing that Shimko erroneously believed Milton Guenther was a general partner. The court determined that Shimko, given its fiduciary duty to its clients, was presumed to know the contents of the CORF entities' organic documents and therefore could not reasonably believe Guenther was a general partner. Consequently, Shimko could not recover the legal fees from the Guenthers for the CORF entities' obligations. The court affirmed part of the lower court's decision, reversed another part, and remanded for further proceedings regarding the Guenthers' liability for fees incurred from Shimko's representation of them in their personal capacities. The background reveals that the CORF entities faced numerous fraud allegations, prompting Shimko's involvement to advise Guenther and other owners on their potential personal exposure beyond the limited partnership protections.

Shimko provided legal services to the CORF entities and their individual principals but was not compensated from October 2002 to April 2003. In April 2003, Shimko ceased representation and subsequently filed a lawsuit against the CORF entities and the Defendants, claiming unpaid legal fees totaling $359,668.00 and alleging causes including breach of contract and fraud. Shimko moved for summary judgment, while Ross and Goldfarb filed a joint cross-motion, which was partially granted, leading to their dismissal from the case. Claims for passing bad checks and fraud were dismissed as well. Woodcock declared bankruptcy, halting proceedings against him.

The trial proceeded against the Guenthers for breach of contract and other claims. The district court found both Guenther and his spouse liable for Shimko's unpaid fees, determining that they had personally retained Shimko and agreed to the legal representation. The court noted Guenther’s role as a general partner in the CORF entities justified Shimko's belief in his authority. Although the court ruled in favor of Shimko on the action on account and contract claims, it indicated that had it addressed unjust enrichment, it would have still found for Shimko but would have reduced damages based on the scope of services rendered.

The Guenthers' motion for reconsideration and a new trial was denied, prompting their appeal of both the judgment and the denial of the post-trial motion. The standard of review for factual findings in such appeals is clearly erroneous, while legal conclusions are reviewed de novo. The denial of motions for reconsideration or a new trial is evaluated for abuse of discretion. Jurisdiction is based on 28 U.S.C. § 1291.

A.R.S. 29-319(A) establishes that a limited partner is generally not liable for the obligations of a limited partnership unless they are also a general partner or actively participate in the control of the business. If a limited partner does participate in control, they can only be held liable to third parties who reasonably believe, based on the limited partner's actions, that they are a general partner. A general partner is defined under A.R.S. 29-301(5) as someone named in the partnership agreement and certificate of limited partnership. Guenther was determined not to be a general partner under this definition but was found by the district court to have participated in business control. This finding was affirmed upon review. Liability for Guenther stems solely from reasonable belief by third parties in his status as a general partner, paralleling principles of apparent authority in agency law. The statute's evolution reflects legislative intent to limit liability of limited partners not acting as general partners and to clarify the standards under which liability may be imposed, particularly emphasizing the necessity of third-party belief in the limited partner’s role. The 1985 amendments to the statute were made to address challenges in determining the limits of control and to align with public policy considerations.

The language "reasonably believing that the limited partner is a general partner" limits the liability of limited partners to instances where a third party is misled about their status. In this case, although Guenther's actions might have suggested he was a general partner to a different creditor, it would be unreasonable to conclude so here because Shimko, who represented both the CORF entities and the Guenthers, had a fiduciary duty to both parties. Timothy Shimko, a member of the Ohio State Bar and admitted pro hac vice in Arizona, was bound by the rules of both states, which establish that attorneys owe a fiduciary duty of loyalty, care, and obedience to clients. The attorney-client relationship presumes trust, and any undue advantage taken by an attorney is presumed invalid. Ethical rules in both jurisdictions emphasize the need for competent representation, diligence, and the disclosure of conflicts of interest. Shimko was tasked with advising Guenther and other owners on their personal liability outside the limited partnership protections. A competent attorney would have reviewed the partnership documents to confirm compliance and assess any potential liability. However, Shimko claimed he did not review these documents, even though he should have known that Guenther was a limited partner, not a general partner, under Arizona law. Consequently, Shimko could not have reasonably believed Guenther was a general partner, regardless of Guenther's involvement in business operations. The district court's finding of Guenther's liability as a general partner is reversed.

Guenther and his spouse are not personally liable for attorneys' fees associated with the CORF entities. However, they may be liable for legal fees incurred directly from services rendered to them as individuals by Shimko, subject to ethical rules from the Arizona and Ohio bars. The district court's findings indicate that their liability under this theory may be reduced, and the case is remanded for further proceedings regarding Shimko's claims of unjust enrichment and quantum meruit against the Guenthers.

The court also addressed the Guenthers' motion for reconsideration and/or a new trial, finding no abuse of discretion in the district court's denial of the new trial motion. The standards for granting a new trial were reiterated, emphasizing that it may only be granted for recognized grounds, such as a verdict being against the clear weight of the evidence or to prevent a miscarriage of justice. The Guenthers' assertion of bias due to Shimko's alleged misrepresentation was dismissed, as the district court's decision was based on substantial evidence regarding the amounts owed.

In conclusion, the appellate court reversed the ruling on liability for legal fees owed by the CORF entities, remanded for further proceedings on specific claims against the Guenthers, and affirmed the denial of the new trial motion. Each party is responsible for their own costs on appeal. The case was submitted without oral argument, and ethical considerations regarding conflict of interest disclosures were noted for potential impact on recovery claims.