Title: Ex Parte Alabama Farmers Coop., Inc.

State: alabama

Issuer: Alabama Supreme Court

Document:

911 So. 2d 696 (2005)
Ex parte ALABAMA FARMERS COOPERATIVE, INC.
(In re Alabama Farmers Cooperative, Inc.
v.
PricewaterhouseCoopers, LLP).
1031252.

Supreme Court of Alabama.
December 3, 2004.
As Modified on Denial of Rehearing February 25, 2005.
*697 Andrew P. Campbell and Brandy Murphy Lee of Campbell, Waller & Poer, LLC, Birmingham; Larry W. Morris and Randall S. Haynes of Morris, Haynes & Hornsby, Alexander City; and W. Percy Badham III of Maynard, Cooper & Gale, Birmingham, for petitioner.
Gilbert E. Johnston, Jr., and William D. Jones III of Johnston Barton Proctor & Powell, LLP, Birmingham; and Bingham D. Edwards of Edwards, Mitchell & Reeves, Decatur, for respondent.
HARWOOD, Justice.
Alabama Farmers Cooperative, Inc. ("AFC"), petitioned this Court for a writ of certiorari to review the judgment of the Court of Civil Appeals in Alabama Farmers Cooperative, Inc. v. PricewaterhouseCoopers, LLP, 911 So. 2d 689 (Ala.Civ.App.2004). In that opinion the Court of Civil Appeals affirmed the summary judgment for PricewaterhouseCoopers, LLP ("PwC"), entered by the trial court on the ground that the statute of limitations governing AFC's negligence and fraud claims against PwC had expired before AFC filed its action. On August 17, 2004, we granted the writ to address the issue whether AFC presented substantial evidence creating a genuine issue of material fact as to when it knew or should have known of the alleged misrepresentations or concealments in PwC's financial statements so as to begin the running of the statutory limitations period on its fraud claim. We reverse and remand.
The Court of Civil Appeals set out the following facts:
911 So. 2d  at 690-91. After discussing the applicable standard of review, the Court of Civil Appeals further stated:
911 So. 2d  at 692-93.
With respect to AFC's fraud claim, the Court of Civil Appeals rejected AFC's argument that it had reasonably relied upon PwC's representations and was not aware of PwC's fraud and therefore the limitations period had not expired before it filed its action, in the following rationale:
911 So. 2d  at 693.
In her special writing concurring in part and dissenting in part, Presiding Judge Yates, joined by Judge Crawley, disagreed with the analysis of the fraud issue in the main opinion:
911 So. 2d  at 695-96 (footnote omitted).
Our review of the record shows that AFC's June 2001 complaint alleged that AFC had specifically instructed PwC to audit AFC and specially to investigate Dixieland and Davis and that PwC had assured AFC that it had implemented controls that would prevent Davis from misappropriating any AFC funds. The complaint further alleges that after Davis was caught in his financial improprieties, PwC was specifically requested to investigate Davis and Dixieland's operations and its audit in that regard "came up clean." The business contracts between AFC and PwC indicate generally that PwC was to be AFC's principal business advisor and that PwC's audits were intended to allow it to accurately state AFC's financial position. PwC also indicated that it would update its accounting procedures and review AFC's internal bookkeeping to ensure the reliability of AFC's records. Among PwC's duties was the obligation to review lease agreements and to report on the financial effect of such agreements. William T. Bishop, a team leader and one of PwC's employees who performed its work for AFC, testified in his deposition that PwC would certainly disclose unauthorized or fraudulent practices in leases.
The record also contains evidence from the deposition testimony of Tommy Paulk, president of AFC, that AFC had authorized Davis, as the vice president of Dixieland, to acquire trucking equipment and to enter into equipment rentals under "short-term leases," i.e., leases with rental terms by the week or by the month. Davis was not authorized to enter into "long-term leases," i.e., leases with rental terms over a period of years. Paulk testified that he had discussed these limitations with Davis and had also discussed with Davis the fact that only Joe Lovvorn, chief operating officer of AFC, had the authority to enter into long-term leases. Davis was fired on June 19, 1998, for the specific reason that he had been using company checks to pay for personal purchases. Immediately after Davis's employment was terminated, Paulk discovered other irregularities indicating that Davis was falsely recording revenues and expenses. In addition to the accounting irregularities, on the day after Davis's employment was terminated Paulk discovered a number of unauthorized long-term leases that he recognized as creating "a problem." AFC then informed PwC about those leases and sought its investigation of AFC's financial position in light of the unauthorized leases. Paulk also testified that AFC began to contact the companies with whom AFC had executed the leases *702 in an attempt to "extricate ourselves from the leases." Paulk testified that AFC was able to terminate some of the unauthorized leases in this fashion, but he also stated that some of the parties to the leases were not cooperative. Paulk stated that he contacted Bishop and requested a "forensic" team to evaluate the problems arising from Davis's employment, including the unauthorized leases.
The record shows that the PwC audit delivered to AFC in September 1998, after AFC had disclosed to PwC the unauthorized leases executed by Davis and in response to AFC's request that PwC investigate the effect of those leases on AFC's financial position, did not alert AFC to any obligation resulting from those leases. PWC's working papers concerning its audit stated, in pertinent part:
Further, AFC's financial statement for 1998 as audited by PwC did not show any financial obligation on AFC's part under long-term leases. Bishop testified that PwC's investigation did not find any misstated accounts, but he also stated that he did not know whether the leases in question were examined and that "the audit process is based on our judgment."
Thus, the record shows that AFC discovered Davis's misconduct, that it informed PwC of that misconduct, and that it requested that PwC investigate the misconduct, specifically including the financial effects of the unauthorized long-term leases. PwC subsequently issued an audit report that indicated that AFC had no long-term obligations under the unauthorized leases even though PwC had apparently not reviewed those leases. The critical question is whether, under those circumstances, AFC acted reasonably in relying on PwC's audit report showing that it had no obligations under the leases or whether AFC should have known that PwC had not examined the unauthorized leases in conducting the audit. We conclude that the record does present a genuine issue of material fact as to whether AFC could have reasonably relied on PwC's September 1998 audit, which served to allay any suspicion that PwC might itself be suppressing information as to any failures in its service with respect to the effect of the *703 unauthorized leases. If AFC's reliance on PwC's audit was reasonable, then it would not have had notice that in preparing the financial statement PwC disregarded the effect of the leases until AFC was sued on its obligations under the leases in December 1998, and its fraud claim was filed within the limitations period. Judge Yates's citation to Barlow v. Liberty National Life Insurance Co., 708 So. 2d 168 (Ala.Civ.App.1997), in her legal analysis of when the limitations period for fraud is tolled under circumstances analogous to this case is also appropriate. That analysis in Barlow states:
708 So. 2d  at 173-74.
The statute of limitations is tolled as to a fraud claim if, after discovery of the fraudulent act and inquiry, the plaintiff is misinformed or falsely informed by the defendant and the plaintiff reasonably relies on the defendant's misrepresentation. Foremost Ins. Co. v. Parham, 693 So. 2d 409 (Ala.1997).
The application of this test to the facts in this case requires the conclusion that the summary judgment on AFC's fraud claim was incorrect. Accordingly, we reverse the judgment of the Court of Civil Appeals insofar as it affirmed the summary judgment on that claim, and we remand the cause to that court for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
NABERS, C.J., and HOUSTON, SEE, LYONS, BROWN, JOHNSTONE, WOODALL, and STUART, JJ., concur.