Court Opinion

ID: 4161123
Source: CourtListenerOpinion
Date Created: 2017-04-18 19:08:43.939693+00
Date Added: 2024-06-11T08:45:49.877023
License: Public Domain

IN THE COURT OF APPEALS OF THE STATE OF MISSISSIPPI

                               NO. 2015-CA-01570-COA

GREAT SOUTHERN EXCAVATORS, INC.,                                        APPELLANTS
GREAT SOUTHERN SHELL, INC.,
CHRISTOPHER E. LOVELACE AND EDWARD
C. LOVELACE, JR.

v.

TEC PARTNERS, LLP AND JEFFREY A.                                          APPELLEES
TURNIPSEED

DATE OF JUDGMENT:                        09/17/2015
TRIAL JUDGE:                             HON. WILLIAM E. CHAPMAN III
COURT FROM WHICH APPEALED:               RANKIN COUNTY CIRCUIT COURT
ATTORNEY FOR APPELLANTS:                 CLARENCE MCDONALD LELAND
ATTORNEY FOR APPELLEES:                  ALEXANDER FREDERICK GUIDRY
NATURE OF THE CASE:                      CIVIL - TORTS - OTHER THAN PERSONAL
                                         INJURY AND PROPERTY DAMAGE
TRIAL COURT DISPOSITION:                 GRANTED SUMMARY JUDGMENT IN
                                         FAVOR OF APPELLEES
DISPOSITION:                             REVERSED AND REMANDED: 04/18/2017
MOTION FOR REHEARING FILED:
MANDATE ISSUED:

      BEFORE LEE, C.J., BARNES AND FAIR, JJ.

      FAIR, J., FOR THE COURT:

¶1.   This is an accounting malpractice case. In 2001, Great Southern Excavators Inc. and

Great Southern Shell Inc. (collectively Great Southern) hired Jeffrey Turnipseed, a member

of accounting firm TEC Partners LLP (TEC), to provide accounting and tax services. Both

Great Southern corporations were majority owned and operated by two brothers –

Christopher Lovelace and Edward Lovelace Jr.1

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        Christopher and Edward each owned forty-nine percent of the company stocks, and
their mother owned the remaining two percent.
¶2.    The Lovelaces claimed Turnipseed was hired to oversee their office manager (and

aunt) Anita Musgrove in calculating and depositing payroll taxes. In 2004, the IRS alerted

Great Southern that it owed back federal payroll taxes. The matter was resolved, but another

filing deficiency happened two years later. Great Southern later discovered Musgrove had

been embezzling company funds. Great Southern sued TEC and Turnipseed for failure to

ensure the payroll tax deposits were made timely and for failure to report Musgrove’s

embezzlement of company funds.

¶3.     After years of litigation, TEC moved for summary judgment, which was granted by

the circuit court. Great Southern appeals, asserting the circuit judge erred in finding that: (1)

expert testimony was required to prove that TEC breached the applicable standard of care;

and (2) Great Southern’s expert failed to state how TEC breached that standard of care. The

case hinges on whether or not Turnipseed and TEC agreed to weekly review by TEC of

payroll taxes (Great Southern’s employees were paid weekly) – a responsibility not set out

in the original written contract. We find that there remain questions of material fact between

the parties, and therefore the circuit court erred in granting TEC’s motion for summary

judgment. We reverse and remand.

                                           FACTS

¶4.    Great Southern originally hired TEC to prepare monthly financial statements, prepare

tax returns, perform a review of financial statements, and prepare profit/loss reports on a per-

job basis. The 2001 engagement letter set out the nature and limitations of TEC’s services

in which these monthly services would be performed for a monthly fee of $775. Other

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services, including review of the payroll account by request, were performed and charged

for as required.

¶5.    In 2004, the IRS discovered that Great Southern had not paid its federal payroll taxes.

Funds owed to the IRS in Great Southern’s payroll account had not been electronically

transferred to the IRS account in the same bank. After a meeting with the IRS, funds

remaining in the account were immediately deposited with the IRS, and the issue was

attributed to an error related to the company computer and its operator, Musgrove.

¶6.    In the summer of 2006, Great Southern realized there was still a problem with the

federal payroll taxes. The corporation immediately alerted the IRS and paid the taxes a few

months later with proceeds from loans secured by corporate property. During its review, the

IRS notified Great Southern that there was an embezzlement problem. An investigation by

Great Southern ensued, and the embezzler was revealed – Musgrove. She had been getting

the refund checks and depositing them into her personal account. Musgrove was arrested,

pled guilty, and served a two year prison sentence.

¶7.    Great Southern sued Turnipseed and TEC, submitting that they violated their duty

based on an agreement between Christopher and Turnipseed – that Turnipseed would come

to the office weekly to ensure that the funds due to the IRS were actually transferred from

the payroll account to the IRS account. In support of Great Southern’s claim, Christopher

stated that, after the 2004 problem, Turnipseed came to Great Southern’s office weekly to

make sure the payroll taxes were paid. Musgrove testified to the same effect. TEC denied

that it “originally agreed” to monitor Great Southern’s federal payroll taxes, as the 2001

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engagement letter did not include those tasks. Turnipseed did not testify, but a TEC officer

testified that Turnipseed only went to the office once or twice a year before 2006.

¶8.    Great Southern designated Donna Ingram, a forensic accountant, as an expert. During

discovery, Ingram submitted a preliminary report pointing out what appeared to her to be an

accounting error, but she noted that the opinion was based on a preliminary review of various

records, since she had not yet reviewed TEC’s work product in detail. TEC and Turnipseed

filed a motion for summary judgment, claiming that Great Southern’s expert had failed to

provide testimony showing that TEC breached its duty to Great Southern. In response, Great

Southern submitted a supplemental affidavit from Ingram (based on her review of some of

TEC’s work product produced in discovery). The nine-page affidavit concluded that,“[i]n

their failure to comply with professional accounting standards, TEC caused [Great Southern]

to incur tax penalties and make business decisions based on unreliable financial data.”

¶9.    The circuit court granted TEC’s motion for summary judgment, from which Great

Southern appeals.

                                STANDARD OF REVIEW

¶10.   “In reviewing a trial court’s grant or denial of summary judgment, the well-established

standard of review is de novo.” Crist v. Loyacono, 65 So. 3d 837, 842 (¶12) (Miss. 2011).

Summary judgment is appropriate where “the pleadings, depositions, answers to

interrogatories and admissions on file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the moving party is entitled to a judgment

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as a matter of law.” M.R.C.P. 56(c). “The evidence must be viewed in the light most

favorable to the party against whom the motion has been made.” Crist, 65 So. 3d at 842

(¶12) (citation omitted).

                                       DISCUSSION

¶11.   “To distinguish between malpractice claims and ordinary negligence, a court should

consider: ‘(1) whether the claim pertains to an action that occurred within the course of a

professional relationship; and (2) whether the claim raises questions of professional judgment

beyond the realm of common knowledge and experience.’” Crosthwait v. S. Health Corp.

of Houston, 94 So. 3d 1126, 1130 (¶11) (Miss. Ct. App. 2011) (quoting 65 C.J.S. Negligence

§ 160 (2010)). According to Great Southern’s complaint and Ingram’s reports, Great

Southern’s claims against TEC arose out of alleged errors or omissions that occurred within

the course of TEC’s professional accounting relationship with Great Southern. So the nature

of this case qualifies Great Southern’s claim as malpractice.

¶12.   In an accounting malpractice case, “the existence of certain factors must be proven

by a preponderance of the evidence[:] . . . 1. Existence of [an accountant]-client

relationship[;] 2. Negligence on the part of the [accountant] in handling his client’s affairs

entrusted to him; and 3. Proximate cause of injury.” Wirtz v. Switzer, 586 So. 2d 775, 779

(Miss. 1991) (abrogated on other grounds by Upchurch Plumbing Inc. v. Greenwood Utils.

Comm’n, 964 So. 2d 1100, 1118 (¶45) (Miss. 2007)). Additionally, expert testimony is

required to prove that the professional failed to exercise his knowledge, skill, or ability. Id.

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at 781.

¶13.      During discovery, Ingram submitted a preliminary report pointing out what appeared

to her to be an accounting error, but she noted that the opinion was based on a preliminary

review of various records, since she had not yet reviewed TEC’s work product in detail. It

was her general opinion that:

          TEC and Turnipseed had access to data, which if reviewed, would have led to
          the discovery that the payroll taxes were not being paid. Had this discovery
          been made timely, and the payroll taxes paid weekly as required by the IRS,
          [the office manager] would have had less opportunity to embezzle money from
          [Great Southern]. Also, [Great Southern’s] management would have had
          accurate financial information to make informed decisions regarding the
          Company’s operations.

Ingram’s report did not explicitly state that TEC breached that standard of care. She did,

however, specifically refer to the general and specific agreements for TEC and Turnipseed,

as accountants, to review payroll tax records, and as noted above, discover payroll taxes were

not paid, resulting in damages.

¶14.      In opposing summary judgment, Great Southern provided Ingram’s supplemental

affidavit, which stated the following:

          The professional accounting standards for review engagements state the
          accountant should perform additional procedures if the accountant determines
          such procedures to be necessary to obtain limited assurance that the financial
          statements are not materially misstated. The workpapers provided by TEC in
          discovery reflect the numerous occurrences of inconsistent data, unexpected
          financial relationships and balances (which should remain constant) changing
          by material amounts from period-to-period. Had TEC properly investigated
          these occurrences they would have discovered the erroneous cash balances and
          the failure to timely and properly remit payroll taxes. In their failure to comply
          with professional accounting standards, TEC caused [Great Southern] to incur

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      tax penalties and make business decisions based on unreliable financial data.
      By not promptly detecting errors in case and other general ledger accounts
      TEC also provided Anita Musgrove an opportunity to embezzle money from
      [Great Southern].

Ingram detailed numerous TEC documents showing how, in her opinion, Turnipseed failed

to comply with professional accounting standards:

      TEC [document] 000638 shows that TEC proposed adjusting journal entry
      AJE # 1 for November 30, 2003, and adjusted three cash accounts, including
      the payroll checking account. A CPA will not generally adjust a cash account
      without first reviewing the reconciliation to make sure the entry is valid and
      accurate.

      ....

      The description on the AJE referred to . . . above is “to adjust to actual as of
      12/31/2002.” These were not amounts that were adjusted initially by TEC in
      their 2002 review engagement, but rather differences in the reports generated
      by QuickBooks. In theory, the December 31, 2002 balances generated at the
      conclusion of TEC’s 2002 review should be identical to the December 31,
      2002 balances produced by QuickBooks at any later date. Unfortunately, this
      was not what happened. When TEC produced the balance sheet in December
      2003, the December 31, 2002 balances for many accounts had changed,
      including the cash and equity accounts. For TEC to “roll” equity in their
      November 2003 compilation they had to process this correcting entry. It is
      doubtful that a minimally competent CPA would fail to investigate the cause
      for this change, especially since the impact to the two equity accounts was over
      $160,000; three cash accounts required adjustment; and another account
      balance had to be adjusted for almost $400,000.

      ....

      TEC [document] 001113 shows TEC proposing a December 31, 2002 entry to
      adjust account 111.020 which is the payroll checking account at Community
      Bank and TEC [document] 001114 shows TEC proposing corrections to five
      cash accounts as of November 30, 2003, three of which are payroll bank
      accounts. Again, a CPA will not generally adjust a cash account without first
      reviewing the reconciliation to make sure the entry is valid and accurate.

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       ....

       TEC in its response to [Great Southern’s] First Set of Interrogatories and
       Request For Production of Documents states on page 3 that Chris Lovelace
       approached Turnipseed and asked him to provide additional services to help
       Musgrove. Then on page 4, TEC responds “Turnipseed did not begin assisting
       Musgrove until late July or early August in 2006[.]”

       ....

       TEC’s June 16, 2006, invoice described the work performed as “Work
       performed through May 31, 2006 ” and was for $1,150, which is far different
       than the $775 per month set forth in the engagement letter.

       ....

       TEC’s July 17, 2006, invoice described the work performed as “Work
       performed through June 30, 2006 ” and was for $875, which is also different
       from the $775 per month set forth in the engagement letter.

       ....

       [B]ased on their workpapers, TEC did not investigate an increase in payroll
       liabilities from the prior year of approximately $150,000, or more than 300%,
       while conducting their analytical review procedures as part of the 2005 review
       engagement. A minimally competent accountant should have questioned why
       the balances increased from period to period, especially one that knew that
       payroll tax payments previously had not been remitted timely . . . .

¶15.   After review, we find Ingram’s affidavit presented material questions of fact that

preclude summary judgment. We also find that Ingram’s testimony properly stated TEC had

a duty to comply with professional accounting standards and breached that duty when it

failed to comply with those standards. If, in fact, Turnipseed appeared weekly and reviewed

the payroll records, then, according to Ingram, he should have recognized and investigated

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evidence of possible embezzlement. If he did not review the records weekly, and he had

agreed to do so, then that failure constitutes malpractice and breach of a contract by a

professional. The issue presented, therefore, is what, if anything, was Turnipseed’s duty to

review payroll payment activity weekly and to ensure deposit of funds due to the IRS. The

issue is one to be decided on the merits at a trial.

¶16.   As for further details of the factual dispute regarding Turnipseed’s duty to Great

Southern, Christopher, Edward, and Musgrove testified under oath and in depositions that,

beginning in 2004, Turnipseed came to the office weekly to make sure the payroll taxes were

remitted. Christopher stated that he requested Turnipseed to do so and Turnipseed agreed.

TEC, however, claimed that Turnipseed did not come on a weekly basis to help with the

payroll taxes until early fall of 2006. The record contains some evidence that the billing of

significant activity of TEC through Turnipseed was not covered by the 2001 engagement

agreement. As previously stated, Turnipseed did not testify. Christopher, Musgrove, and

Great Southern’s expert, Ingram, also testified that Turnipseed reviewed bank statements that

showed an error in the cash balances. TEC said that Turnipseed did not. “Issues of fact

sufficient to require denial of a motion for summary judgment obviously are present where

one party swears to one version of the matter in issue and another says the opposite.” K.R.

Borries v. Grand Casino of Miss. Inc. Biloxi, 187 So. 3d 1042, 1046 (¶8) (Miss. 2016). The

existence of an agreement by Turnipseed to monitor on a weekly basis, and charge Great

Southern for doing so, is a material issue of fact, appearing in deposition testimony and

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affidavits of six people. Determining the credibility of those persons is the province of the

fact-finder.

¶17.   TEC also argues for the first time on appeal that Ingram’s affidavit was submitted

after the discovery deadline and therefore in violation of Uniform Rule of Circuit and County

Court 4.04. TEC waived this argument when it failed to object at the summary-judgment

stage. See Moore v. M&M Logging Inc., 51 So. 3d 216, 220 (¶8) (Miss. Ct. App. 2010).

Even so, Mississippi Rule of Civil Procedure 56(c) states that “[t]he adverse party prior to

the day of the [summary judgment] hearing may serve opposing affidavits.” M.R.C.P. 56(c).

Great Southern complied in submitting Ingram’s affidavit the day before the hearing.

Further, “when an expert’s opinion is challenged, the party sponsoring the expert’s

challenged opinion [must] be given a fair opportunity to respond to the challenge.” Kilhullen

v. Kan. City S. Ry., 8 So. 3d 168, 174 (¶13) (Miss. 2009). Because TEC claimed that Ingram

failed to show that TEC breached its duty to Great Southern, Great Southern was entitled to

respond.

¶18.   Based on Ingram’s testimony and the disputed facts listed above, we find summary

judgment was improper.

¶19. THE JUDGMENT OF THE RANKIN COUNTY CIRCUIT COURT IS
REVERSED, AND THIS CASE IS REMANDED FOR FURTHER PROCEEDINGS
CONSISTENT WITH THIS OPINION. ALL COSTS OF THIS APPEAL ARE
ASSESSED TO THE APPELLEES.

    LEE, C.J., IRVING AND GRIFFIS, P.JJ., BARNES, ISHEE, CARLTON,
WILSON, GREENLEE AND WESTBROOKS, JJ., CONCUR.

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