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T.L. Wallace Construction, Inc. v. McArthur

Supreme Court of Mississippi

June 29, 2016

T.L. WALLACE CONSTRUCTION, INC., THOMAS WALLACE AND JANETTE WALLACE
v.
McARTHUR, THAMES, SLAY, AND DEWS, PLLC

          Date of Judgment: 09/23/2015

         COURT FROM WHICH APPEALED: MARION COUNTY CIRCUIT COURT HON. ANTHONY ALAN MOZINGO TRIAL JUDGE.

          TRIAL COURT ATTORNEYS: MICHAEL T. DAWKINS J. STEPHEN KENNEDY JOE SAM OWEN LAUREN RUTH HILLERY DAVID M. OTT WILLIAM A. WHITEHEAD, JR. KRISTOPHER ALAN POWELL EVERETT EAVES WHITE STEVEN JOEL JOHNSON BRAD ASHLEY TOUCHSTONE JOSEPH RANDLE TULLOS.

          ATTORNEYS FOR APPELLANTS: J. STEPHEN KENNEDY AMY LEWIS CHAMPAGNE SAMUEL DEUCALION GREGORY JOE SAM OWEN.

          ATTORNEYS FOR APPELLEE: DAVID M. OTT WILLIAM A. WHITEHEAD, JR. DONALD C. DORNAN, JR. KRISTOPHER ALAN POWELL LAUREN RUTH HILLERY.

          BEFORE WALLER, C.J., KING AND MAXWELL, JJ.

          KING, JUSTICE.

         ¶1. In this auditing malpractice case, Thomas L. Wallace and T.L. Wallace Construction, Inc. ("Wallace" or "Wallace Construction") appeal the Marion County Circuit Court's decision granting summary judgment in favor of McArthur, Thames, Slay, and Dews, PLLC ("McArthur Thames") for lack of causation. Wallace seeks to recover damages of approximately $14,000,000 allegedly suffered by him as a result of accounting work done by McArthur Thames.

         ¶2. Wallace filed suit against McArthur Thames, alleging that the accounting firm had negligently audited the financial statements of Wallace Construction and ultimately had caused the destruction of the company by failing to discover hundreds of personal credit card purchases by certain company employees, failing to discover transactions involving hundred of thousands of dollars spent by Wallace Construction to pay for personal home improvements of nonshareholder employees, and by failing to discover inappropriate accounting practices that resulted in an overstatement of income.

         ¶3. The trial court excluded the testimony of Wallace Construction's sole expert on causation, finding that his opinion was unreliable and insufficient to establish proximate cause. The trial court then held that, because expert testimony on causation was required in malpractice cases, Wallace Construction's complaint must fail as a matter of law. Wallace Construction appeals and asks this Court to reverse the trial court's decision to grant summary judgment. McArthur Thames cross-appeals and alleges that, in the alternative, the trial court erred in failing to dismiss Wallace Construction's complaint as barred by the statute of limitations, in limiting discovery of financial information to June 30, 2012, and in barring discovery of the Wallaces' personal accounts.

         ¶4. Because the trial court mistakenly believed that expert testimony establishing causation was required in all malpractice cases, and because Wallace Construction presented sufficient lay testimony to overcome summary judgment on the issue of causation, we affirm in part, reverse in part, and remand the case the trial court for further proceedings consistent with this opinion. In addition, we find that the trial court abused its discretion in disallowing reasonable access to the financial information of Wallace Construction subsequent to June 30, 2012, and in its denial of discovery of the Wallaces' personal accounts.

         FACTS

         ¶5. Thomas L. Wallace ("Wallace") founded T.L. Wallace Construction, Inc. ("Wallace Construction") in 1975 and was the sole owner and shareholder of the company until Construction Management Trust I and Construction Management Trust II took ownership in 2012. Wallace Construction, a multimillion-dollar enterprise based out of Columbia, Mississippi, specialized in heavy/civil construction and commercial transportation projects and specifically in road and highway construction. The company also served as a general contractor for utilities, disaster response, and public works projects throughout the Southeast.

         ¶6. Because Wallace Construction had engaged in large construction projects, it was required to obtain construction bonds. Bonding companies required audited financial statements before issuing a bond. McArthur Thames is a public accounting firm located in Hattiesburg. McArthur Thames conducted financial statement audits for Wallace Construction and prepared its federal income tax returns.[1] For each financial statement audit McArthur Thames conducted of Wallace Construction from December 31, 2007, through 2011, Raymond Polk served as McArthur Thames's certified public accountant in charge of the audits.[2] McArthur Thames prepared the Wallaces' personal financial statements and federal income tax returns as well.

         ¶7. Each year McArthur Thames had issued an unqualified opinion in a Report of Independent Certified Public Accountants to the Board of Directors of Wallace Construction. The opinion provided that the financial statements of Wallace Construction "present fairly, in all material respects, the financial position of" Wallace Construction as of each year end and "the results of operations and its cash flows" for each period audited "in conformity with accounting principles generally accepted in the United States of America." The balance sheets compiled by McArthur Thames showed Wallace's investment in Wallace Construction as an asset with a value equal to or derived from the audited net worth of the company.

         ¶8. Wallace Construction additionally employed its own in-house accounting staff. Each year, employees of the Wallace Construction accounting department certified that the information given to McArthur Thames for audit purposes fairly presented the financial position, results of operations, and cash flows of Wallace Construction. Each year Wallace Construction also represented that it had no knowledge of any fraud or suspected fraud affecting the company.

         ¶9. Wallace owned a hundred percent of the stock of Wallace Construction, and Wallace and his wife had paid their personal expenses through the business. Before 2012, the only credit cards that Wallace and his wife had owned were company credit cards. Wallace testified that he had considered the personal expenses to be distributions on which he would pay taxes at the end of the year. Wallace denied running personal expenses through his business to avoid paying taxes on them, but stated that it was just the way he did business. Although Wallace had not told anybody preparing his taxes that they needed to account for the personal expenses as money on which he would be taxed, Wallace testified that he had always run personal expenses through his company and had relied on his accountants to take those personal expenses out for tax purposes in their yearly audits. Wallace had a fifth-grade education and testified that he did not know how the bookkeeping department handled the personal expenses and that he thought he had been paying taxes on those expenses. Wallace stated that he had trusted the people that he had hired to correctly put expenses where they needed to go.

         ¶10. T.J. Dunaway had been in charge of bookkeeping and accounting at Wallace Construction since the 1990s. Alford, the accounting manager, testified that auditors would find personal expenses charged to the company in the 1990s and would reclassify them in adjusting journal entries.[3] Alford had been in accounting for thirty years and was aware that when she booked items under job costs, that was not where the expenses were supposed to go. Alford did not volunteer the information that Wallace ran personal expenses through the company but testified that she did not do anything that kept the auditors from finding the personal expenses. She stated that if the auditors found personal expenses and asked a question, that the bookkeeping staff would send the auditor to Dunaway. This would keep Alford "out of an awkward situation." Dena Arinder originally was the Accounts Receivable Clerk at Wallace Construction and then became the office manager. She testified that when Polk from McArthur Thames came to Wallace Construction to conduct the audit each year, he never asked about any expenses not being booked or mentioned that the expenses were not being recorded properly. Polk had asked questions only about jobs and how the jobs were progressing.

         ¶11. Wallace retired in 2006 and left the company to be run by the Board of Directors that he had appointed.[4] Wallace had known most of the Board members for years and had attended church with them. The six Board members were:

• Wallace – 100% shareholder of the company;
• James Carney – Wallace's brother-in-law and pastor – Chairman of the Board;[5]
• Jay Carney – Brother Carney's son and Wallace's nephew – President of Wallace Construction;
• T.J. Dunaway – Chief Financial Officer (CFO);
• Mike Wallace – Wallace's son; and
• Darryl Harris – hired in November 2009 as the Chief Operating Officer (COO).

         After retirement, Wallace continued to draw a salary from the company and continued to pay personal expenses through the company. From 2007 to 2009, Wallace's salary had averaged almost $800,000 each year and from 2010 to 2011, Wallace's salary was more than $500,000 a year. Wallace also had owned the property on which Wallace Construction was located and had collected more than $2.5 million in rent from the company. Wallace had put Jay and Dunaway in charge of the day-to-day running and operation of the company. Arinder testified that Dunaway had been in charge of the day-to-day decisions regarding the company and that Jay "did a lot of politicking." Company employees went to Jay and Dunaway for questions instead of to Wallace.

         ¶12. Wallace contends that, after his retirement, certain Wallace Construction employees had begun charging unauthorized personal expenses to the company. These personal expenses would then be added to job costs in the accounting system. Wallace alleged that between 2007 to 2011, approximately $3.7 million in personal expenses had been added to job costs.[6] During this time period, Wallace alleged that costs had been shifted among jobs in an apparent attempt to cover up personal and/or excessive expenses. Moreover, Wallace contended that management excessively had allocated indirect overhead to job costs, which had the effect of increasing the percent complete on jobs. This practice allowed more revenue and gross profit to be reported than otherwise should have been. Accounts receivable also had been booked when no basis existed to record the receivables, which resulted in overstated job profits. And Wallace alleged that company management had engaged in improper underbidding on jobs at levels that could not reasonably be expected to be profitable.

         ¶13. Certain Wallace Construction employees and members of Wallace's family had company credit cards, including: Mike Wallace, Tonya Wallace, Jay, Dunaway, Brother Carney, and Harris. Wallace testified that he had not reviewed his employees' credit card bills but stated that he would have had access to any information he wanted at the company if he had asked for it. However, he had trusted his employees completely and did not think there was any way that they would steal from him.

         ¶14. Around 2009, "shop accounts" were set up for certain employees, including each of the Board members.[7] A general account existed in the Wallace Construction accounting system called "shop." Each employee who had a shop account had a corresponding number to identify him or her. Shop accounts also existed for Wallace's farm, for his catfish pond, and for the improvements on his yard. Inside the shop accounts were detailed accounts that showed to whom the expenses had been coded, so the accounting department could generate a report at any time to see how much a particular individual had spent. Wallace contends that he had not known about the shop accounts. However, T.J. signed an affidavit stating:

In order to assure that Mr. T.L. Wallace who is the 100% shareholder of [Wallace Construction] could see how much of the funds of [Wallace Construction] were being diverted to each employee as he had directed, I set up certain accounts to track these expenditures that were on behalf of individuals and not for purposes of the ongoing business concern of [Wallace Construction].

         Before the shop accounts existed, Dunaway stated that personal expenses had been coded to other job costs or to jobs. Arinder was in charge of the accounts receivable and testified that she was unaware if Wallace knew about the shop accounts. Arinder testified that the accounting staff at Wallace Construction had never been told to track personal expenses to give them to the auditors for reclassification as distributions.

         ¶15. After Wallace's retirement, the company began to have financial problems. Arinder testified that Wallace Construction had cash flow problems even in 2009. She testified that the staff would have to hold checks and wait until Dunaway told them when to send a check to the vendors. Arinder testified that the whole accounting department, plus Jay and Harris, had known that checks had to be written and held. She stated that Polk also had known because he had to reverse them at the end of the year. She testified that it was a monthly thing and that some of the project managers also knew that checks were being held "because they would need supplies or whatever and come back and ask if we were holding a check." Arinder did not know if Wallace had been aware that checks had to be held.

         ¶16. Teah Thornhill, the office manager for the company, testified that in late 2011 or early 2012, the company had suffered a cash crisis and that bookkeeping began having daily meetings to discuss receivables, payables, who the company could pay and how much cash the company had.

         ¶17. On March 11, 2012, Dunaway, Brother Carney, Jay, and Harris went to Wallace's house to tell him that the company "could not go any further; they had to have revenue, and . . . they had exhausted all means." Wallace testified that he went into the office the next Monday morning "to try to figure out what was going on." In an attempt to provide enough immediate cash to save the company, Wallace sold a piece of property for $1.3 million. Wallace testified:

And Jay told T.J., said, Call Cecil Estes and tell him to come on. We can give him a half million dollars now. Well, that was another shock. I said, What do you owe Dixon & Bowen – this asphalt company. What do you owe them a half million dollars for? Man, half your money is gone. What's the deal? Well they said, Well, said – I said, What do you owe that for? Well, it's work that we had been getting asphalt from them to do different jobs. And I said, Well, is this all you owe them? They said, no, sir, we owe them about $900,000. I said, Man, you know, here I just give you a million 3 and you – I mean, what's the deal? How much more you owe?

         Employees of the company informed Wallace that the company had not paid its contractors in three months. Wallace stated that his attorney brought in an auditor at that point and that, after four days, his attorney told him that the company had been "broke" for three years.

         ¶18. Hartford had pulled bonding from Wallace Construction in 2011 and Arch had pulled bonding afterward. For approximately three months in 2012, Wallace Construction had been unable to bid on new jobs. Wallace testified that there was no way he could continue operating Wallace Construction in the spring of 2012 because of the amount of debt. Wallace testified that the more he dug, the more debt he found, and that there was no way to keep operating. Wallace's attorney also informed him that there was no way that Wallace could save the company.

         ¶19. In Spring 2012, prospective purchasers of the company, Thomas Duff and James Duff, conducted a valuation of the company and discovered that the company's net worth had been grossly overstated. Facing questions, McArthur Thames withdrew its 2011 audit of the company financial statements. The Duffs' CPA worked with Arinder to amend the company financial statements. Arinder had a bachelor's degree in finance with a minor in accounting, but she was not an accountant and did not hold any professional or certified licenses. Arinder was tasked with reclassifying the personal expenses that had been run through the company. Arinder identified costs that appeared to be personal in nature, examined the underlying invoices to determine whether they were legitimate business expenses, and then reclassified the expenses that in fact were personal in nature.

         ¶20. Arinder went back and revised the company job schedules from 2007 to 2011. Several jobs changed after personal expenses were taken out. Arinder found some personal expenses under certain jobs, including the B.P. oil spill account, and stated that the expenses had been coded to the jobs directly. Arinder additionally found personal expenses that had been run through the shop accounts under their individual cost codes. The adjustments to the financial statements showed a significantly lower value of the company.

         ¶21. Wallace personally had indemnified the bonds and stated that the Duffs had "stood the bonding companies off, and people, till we could get everything nailed down." On June 30, 2012, Wallace sold the company to the Duffs for $1,000. The Duffs additionally required Wallace to assume around $1.8 million in personal debt owed by Wallace Construction to Wallace's church, himself, his daughter's company, and to McArthur Thames. Wallace stated that he and his wife had lost everything and had been "broke."

         ¶22. The Wallaces began an investigation into the personal expenses of Wallace Construction employees. Wallace had authorized some of the personal expenses for certain employees as gifts. Conflicting testimony exists as to how much spending Wallace had known about and had authorized. Wallace contends that he did not know that his employees had been charging the company for personal expenses outside of the expenses that he specifically authorized. Wallace admittedly had authorized Wallace Construction to pay for the foundation and dirt work on Dunaway's and Jay's houses while they were being constructed. Wallace stated that he had not authorized anything outside of the foundation and dirt work and had expected that to cost around $50,000. Wallace did not tell anyone in the accounting department that he expressly had authorized those expenses but testified that he had told each individual person how much he was giving him.

         ¶23. Dunaway testified that Wallace had authorized the diversion of approximately $100,000 each of material, assets, and funds of Wallace Construction to Jay and himself to supplement their salaries "for the significantly increased amount of work and responsibility" that they were undertaking for the company. Thornhill was told that "management had a special arrangement with Mr. Wallace on those expenses." Dunaway also informed Alford of the "special arrangement" and told Alford that if she wanted to verify what he was telling her that she was free to speak with Wallace. Alford did not speak to Wallace about it.

         ¶24. As a result of his personal credit card purchases, Dunaway resigned from the company.[8] He signed an affidavit stating that:

Mr. T.L. Wallace was aware and not only consented to, but directed that these funds be diverted to pay employees in this manner for purposes of avoiding payment of income taxes both by himself and these employees.
I was discharged by [Wallace Construction] because of personal use of the company credit card. These charges were incurred based on the direction and understanding from Mr. Wallace that I was to utilize this method of paying myself bonuses consistent with his instructions.

         ¶25. The personal expenses had been recorded in the shop accounts for each person. Arinder testified that she had assumed that if Dunaway had been trying to steal from the company, he would have attempted to hide it. Anybody who wanted to look at the job cost could have seen what had been spent on Dunaway's house. Wallace testified that he had visited Dunaway's house while it was being built but that he never asked Dunaway how he had been able to afford the house even though he knew how much money Dunaway earned. Wallace likewise had visited Jay's house when it was being built and had seen an employee from Wallace Construction working on the house. Wallace stated that he had asked the employee what he was doing over there and the employee had stated that he was doing some odds and ends to get the house finished for Jay and his family to move in.

         ¶26. Jay testified that he had assumed that when Wallace had told Jay he would help him build his house that it would be in the $100,000 range. Jay testified that Wallace had been aware that work had taken place at his home and that Wallace had even ridden with Jay a couple of times to Jay's house and had seen some of what the workers were doing. Jay also testified that when he was out of town, Mike Wallace had called and said, "We took care of your road while you was out of town working" and that Mike had called Wallace and told him about the road.

         ¶27. Jay testified that there had been a misunderstanding between Wallace and himself and that, after the investigation, Wallace had stated that he had not directed that work. Jay had a meeting with Dunaway and Wallace, and Wallace asked Jay to tell Austin Morgan, the new chief operating officer of Wallace Construction, that Wallace had not approved the work on his home. Jay went to the office and told Morgan that Wallace had said he had not directed Jay to do that work and that he had not approved of that work. A week before his deposition, Jay signed a Promissory Note for $142,341, plus interest, to repay Wallace Construction for what Wallace said he did not authorize or approve. After signing the promissory note, Jay continued as president of the company.

         ¶28. Some of Mike's personal expenses also were charged to the company. He took his family on a vacation that was paid for by the company with Wallace's authorization. The company additionally paid for Mike's house slab and dirt work. Mike had knowledge that equipment and men went to work on Jay's, Harris's, and Dunaway's houses and testified that it was a common occurrence for workers who were not on jobs to be utilized in that fashion and that it had been going on for as long as he had been on the Board.

         ¶29. In addition to Jay's, Dunaway's, and Mike's houses, Wallace authorized management to divert roughly $50,000 to Randall Lambert, Wallace's nephew, to help him build his house. This was not accounted for through payroll to Lambert. Wallace Construction had diverted company funds to TLW, Inc., which was one hundred percent owned by Wallace's daughter, Tonya. Likewise, Wallace had the company pay a full salary with health insurance and 401k benefits to Jerron Carney, another of his nephews, even though Jerron did not work for the company and was a full-time preacher at Wallace's church. Jerron had a company truck with fuel and maintenance paid by the company as well.

         ¶30. Brother Carney testified that he had general knowledge that the Wallaces had run personal expenses through the company and that he had been aware of it since he had been a manger of the company in 1974. Brother Carney testified that Wallace had known of and had given approval for the construction of Jay's driveway and that all members of the Board had known about it. Brother Carney testified that Jay's house had been built on property conveyed to him by Wallace. Brother Carney believed that Jay would have had Wallace's permission to spend the $160,000 of company resources for personal benefit and did not think that Jay would steal from the company. Brother Carney testified that, in 2007 or 2008, if he had any reason to believe that Dunaway had been stealing from Wallace that he would have taken some action. When asked if he would have gone to Wallace and reported any rumors, he testified that, "Yeah well, it wasn't hid. I mean, it was open. It wasn't nothing under the covers, you know."

         ¶31. Wallace alleges that the date that damages began was April 1, 2008. This is the date that McArthur Thames provided the results of its 2007 audit. Wallace testified that, at that time, McArthur Thames should have informed the entire Board of the personal expenses that had been charged to the company. When asked what Wallace would have done had he known about the personal expenses at that time, Wallace testified:

I would have never dreamed of T.J. doing anything like this. And I would have been shocked beyond.
Now, then, if I'd have found out that – you know, I would have figured, if T.J. hadn't told me, if I had not found out, my auditor, he should have caught this and that he told me about it, I would have done something about it.
I can't sit here today and tell you exactly what I would have done. I can imagine what I would have done, but I would have never dreamed T.J. Dunaway doing what I know he's done now.
So I can't tell you exactly what I would have done at that point in time, but I can tell you that I would have done this: If my auditors – if it'd been Harry McArthur, Harry McArthur would have called me and – called me in and went over this with me. Then I would have been able to do something about it.
But I can't tell you what I would have done at that point in time, but I can tell you this: When I found out what was being done; I would have stepped back in the company, I would have demoted him or probably fired him. And that's no if and ands about that. . . . .
But if I'd have known – if my auditors would have told me what was going on in '08, '09, even '10, I could have stepped back in my office and run that company. I could have salvaged my company.

         Wallace stated that he had thought he had the money to spend. He testified that he had given a million dollars to foreign missions and that he would not have done that if he had known he was "broke." Wallace testified that McArthur Thames never sat down with him to go over a statement. He stated that he had not known how to read financial statements and had relied on McArthur Thames's representations. Wallace testified: "But I got the bottom line, and it looked good to me, and that's ...


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