Opinion

Court: Texas Court of Appeals, 3rd District (Austin)
Filed: Nov 22, 1995
Status: Published
Cited by: 0 cases
Authority: More cited than 35.7%

The opinion

Colonial Foods

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-95-00105-CV

The Bankruptcy Estate of Louis Rochester, Thos. D. Murphy, Jr., Ray Hawkins,

Trudi Hestand and Tracy Hawkins, individually and on behalf of Colonial Food

Stores, Inc.; and Hawkins-Rochester-Murphy, Inc., Appellants

Robert Campbell, Rory McLaughlin, Joe Fleckinger, Chuck Schmidt, Individually

and doing business as, and as agents for Deloitte & Touche, a partnership,

formerly known as Touche Ross & Co.; and Touche Ross & Co., Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT

NO. 91-8113, HONORABLE MARY PEARL WILLIAMS, JUDGE PRESIDING

Appellants ("the shareholders"), (1) the former owners of Colonial Food Stores, Inc.

("Colonial"), brought an action in district court for accounting malpractice and fraud based on tax

advice rendered by appellees ("Touche Ross") (2) in connection with the sale of Colonial. The

district court granted Touche Ross's motion for summary judgment, which was predicated on the affirmative defense of limitations, among other grounds. We will affirm the district court's

grant of summary judgment in part and reverse in part, remanding only the fraud claims to the

district court for further proceedings.

THE CONTROVERSY

This action for accounting malpractice and fraud arose from the sale of Colonial,

a corporation owned by the shareholders. In 1980, the shareholders engaged Touche Ross as tax

accountants and auditors; Touche Ross prepared Colonial's tax returns and performed audits for

Colonial through 1984, the year of Colonial's dissolution. In 1983, the shareholders decided that

they would sell Colonial's assets if each of them could realize $2,000,000 from the sale after

payment of the corporation's federal income taxes. When the shareholders began negotiations

with a buyer, they retained Touche Ross to advise them concerning the tax aspects of the proposed

sale. When the shareholders and the buyer reached an impasse on price, the buyer suggested a

tax treatment of the sale that would allow the shareholders to realize the amount they wanted at

a price the buyer was willing to pay.

At a meeting of Colonial's board of directors, Touche Ross made a presentation

in which it advised the shareholders that the tax treatment proposed by the buyer was acceptable

and would yield each shareholder over $2,000,000 after taxes. The shareholders further contend

that Touche Ross represented that the proposed tax treatment would withstand audit and that the

shareholders would not face additional tax liability on the transaction. Based on Touche Ross's

presentation, the shareholders accepted the buyer's proposal, sold Colonial's assets, distributed

the proceeds of the sale, and dissolved Colonial in April 1984. The Internal Revenue Service

("IRS"), after auditing Colonial in 1987, found the tax treatment of the sale to be improper and

assessed a sizeable deficiency against Colonial. The shareholders contested the deficiency,

eventually settled the dispute with the IRS, and subsequently brought this action.

The relevant dates in this appeal are as follows:

April 27, 1983 - Touche Ross gives tax advice to Colonial's board of

directors

April 24, 1984 - The shareholders dissolve Colonial and distribute its

assets

June 11, 1987 - IRS issues a notice of deficiency to Colonial due to the

tax treatment of the sale

November 16, 1989 - U.S. Tax Court renders judgment against Colonial for

the deficiency

June 11, 1991 - The shareholders file the present action in district court

The shareholders pled various causes of action in their original petition, including

negligence, breach of implied warranty, and violation of the Texas Deceptive Trade Practices Act

(DTPA). During discovery, the shareholders found out that Touche Ross also had provided tax

advice to Colonial's buyer during the time of the sale. Accordingly, the shareholders amended

their petition to include a fraud claim based on this alleged conflict of interest. Touche Ross

moved for summary judgment on the affirmative defense of limitations. All parties agreed that

the fraud cause of action was subject to a four-year limitations period (3) and that the remaining

causes of action were governed by a two-year limitations period. (4) The parties disputed the time

at which the causes of action had accrued; Touche Ross contended that the causes accrued at the

time the shareholders received the notice of deficiency from the IRS, while the shareholders

argued that the causes accrued, at the earliest, when the tax court rendered judgment on the

deficiency.

As an alternate ground for summary judgment, Touche Ross argued that the Texas

Business Corporation Act barred any claims by Colonial because the corporation had been

dissolved for more than three years before filing the petition. Touche Ross further argued that

the shareholders lacked the capacity to bring individual claims because the alleged causes of action

properly belonged to the corporation. Touche Ross urged that these two arguments, taken

together, warranted summary judgment in their favor as an alternative to the limitations defense.

The district court granted summary judgment in favor of Touche Ross by a general

order, without specifying the grounds relied upon for the judgment. The shareholders now

complain that the judgment was erroneous.

DISCUSSION

The shareholders complain that the trial court erred in granting summary judgment

on the basis of limitations. A defendant moving for summary judgment on the basis of an

affirmative defense must conclusively establish the facts pertaining to every element of the defense

and must also show that it is entitled to judgment as a matter of law. Tex. R. Civ. P 166a(c);

Munoz v. Gulf Oil Co. , 693 S.W.2d 372, 373 (Tex. 1985); Brown v. KPMG Peat Marwick , 856

S.W.2d 742, 746 (Tex. App.--El Paso 1993, writ denied). The facts pertaining to Touche Ross's

limitations defense in this cause are undisputed; therefore, we need only decide whether the trial

court properly applied the law to the undisputed facts.

The central issue in this appeal is the time at which the shareholders' alleged causes

of action accrued. A cause of action accrues when a party has suffered damage from a wrongful

act and can seek relief from a court of competent jurisdiction. Murray v. San Jacinto Agency,

Inc. , 800 S.W.2d 826, 828 (Tex. 1990); Robinson v. Weaver , 550 S.W.2d 18, 19 (Tex. 1977);

Cook Consultants v. Larson , 700 S.W.2d 231, 237 (Tex. App.--Dallas 1985, writ ref'd n.r.e).

In this case, the damage from alleged tax-accounting malpractice consists of additional tax

liability, as both parties agree. The key question is when Colonial suffered the damage of

increased taxes.

The shareholders urge that the discovery rule (5) applies to their claims and operates

to remove them from the limitations bar. We need not decide whether the discovery rule applies

because it is not relevant to this appeal. The parties assert two different events upon which the

causes of action accrued: the notice of deficiency or the tax-court judgment. However, both

events provided notice of the tax deficiency proceedings. The issue in this appeal is not discovery

of the cause of action, it is the timing of legal injury to the shareholders. Touche Ross argues that

the limitations period began running at the earlier of the two forms of notice that the shareholders

received. Thus, even if applicable, the discovery rule would not toll the statute of limitations in

this cause.

The shareholders argue that they only suffered damage once the tax court rendered

judgment against them for a deficiency; they contend that a notice of deficiency cannot constitute

damage for the purposes of limitations because a deficiency assessed by the IRS can be reversed

through administrative review or proceedings in the tax court. Touche Ross responds that the

shareholders misconstrue the type of damage required for a cause of action to accrue. Touche

Ross contends that the "legal injury rule" provides that a party has been damaged, for purposes

of limitations, when the party discovers a concrete and specific risk to an economic interest. See

Atkins v. Crosland , 417 S.W.2d 150, 153 (Tex. 1967). In this case, Touche Ross argues, the IRS

notice of deficiency apprised the shareholders of a substantial risk of increased tax liability for

Colonial, triggering the limitations period for malpractice based on the relevant tax advice. We

agree with Touche Ross.

Under the legal injury rule, harm from a wrongful act that is lawful in itself arises

when the claimant becomes aware of a concrete economic risk to a protected legal interest; this

risk is considered "legal injury" for the purposes of limitations even though harm is not certain.

See Atkins , 417 S.W.2d at 153 . This Court has previously applied the legal injury rule in the

context of a professional malpractice case. See Zidell v. Bird , 692 S.W.2d 550 (Tex. App.--Austin

1985, no writ). Though Zidell involved a legal malpractice claim, we discussed the supreme

court's application of the legal injury rule in the seminal Atkins decision, which was a tax-accounting malpractice case. Id. at 557; see Atkins , 417 S.W.2d at 153 . We noted that a cause

of action for tax-accounting malpractice accrues when the taxpayer receives a notice of deficiency

from the IRS. Zidell , 692 S.W.2d at 557 . Two other courts of appeals have reached the same

conclusion, with no decisions to the contrary. Ponder v. Brice & Mankoff , 889 S.W.2d 637, 642

(Tex. App.--Houston [14th Dist.] 1994, writ denied); Hoover v. Gregory , 835 S.W.2d 668, 672

(Tex. App.--Dallas 1992, writ denied).

In a tax-accounting malpractice case, the IRS notice of deficiency satisfies the

definition of damage under the legal injury rule because it clearly informs the taxpayer that the

IRS will seek additional taxes, creating a specific and substantial risk that the taxpayer will

actually face additional tax liability. Atkins , 417 S.W.2d at 153 ; Zidell , 692 S.W.2d at 557 . We

reject the shareholders' argument that harm occurs only upon a judgment of tax deficiency because

that approach requires certain harm in contravention of the legal injury rule's clear standard of

specific and concrete risk of harm. We reaffirm our prior determination in Zidell , approve the

reasoning of Ponder and Hoover , and hold that the shareholders' alleged causes of action accrued

when they received their notice of deficiency from the IRS.

The shareholders argue that, even if their causes of action accrued upon receipt of

the notice of deficiency, the statute of limitations was tolled during the audit contest proceedings

under the holding of Hughes v. Mahaney & Higgins , 821 S.W.2d 154, 157 (Tex. 1991). We

disagree. In Hughes , the supreme court held that the statute of limitations for legal malpractice

would be tolled until the exhaustion of all appeals on the underlying claim only if the malpractice

occurred "in the prosecution or defense of a claim that results in litigation . . . ." Id. The

supreme court carefully worded this tolling rule to apply only to a specific class of legal

malpractice claims. We hold that the Hughes tolling rule is inapplicable to this accounting

malpractice action. Accord Ponder , 889 S.W.2d at 643-44 ; Hoover , 835 S.W.2d at 675-76 .

Accordingly, we hold that all of the shareholders' causes of action except fraud are

barred by limitations. The causes accrued upon receipt of the IRS notice of deficiency on June

11, 1987. The two-year limitations period expired on June 11, 1989. Because the shareholders

did not file suit until June 11, 1991, their causes of action subject to the two-year limitations

period are barred. The shareholders' fraud claims, however, are subject to a four-year limitations

period. Because the shareholders filed suit exactly four years after receipt of the notice of

deficiency, their actions for fraud are not barred by limitations.

Touche Ross argues that the shareholders' fraud claims are nevertheless barred by

limitations because the shareholders received a preliminary copy of the IRS notice of deficiency

a short time before receiving the final, official notice. Touche Ross urges that the preliminary

notice sufficed to notify the shareholders of legal injury in the same manner as the official notice.

We disagree. As discussed above, we hold that the formal IRS notice of deficiency triggers the

requisite concrete risk of tax liability for purposes of the legal injury rule. Prior awareness of IRS

activity, such as a preliminary notice of deficiency, informs the taxpayer of some risk, but the risk

is not sufficiently definite or concrete until the IRS has issued its formal notice of deficiency. As

a matter of policy, it is important that a taxpayer clearly know the time at which potential causes

of action involving tax liability accrue; the issuance of a formal notice of deficiency provides such

a clear date on which the taxpayer faces a concrete and specific risk of tax liability. Because the

trial court improperly held that the fraud cause of action was barred by limitations, we sustain the

shareholders' third point of error.

Touche Ross argues that summary judgment on the fraud cause of action may also

be upheld on the ground that the shareholders' claims belong only to Colonial as a corporation,

and Colonial's claims are now barred because claims by a dissolved corporation must be brought

within three years after dissolution. See Tex. Bus. Corp. Act Ann. art. 7.12 (West Supp. 1995).

The district court impliedly held that the shareholders did not have the capacity to sue as

individuals and that Colonial's corporate claims against Touche Ross were barred by the Business

Corporation Act. (6) The shareholders do not challenge the district court's ruling that Colonial's

claims are barred, but they assert that the individual shareholders have personal causes of action

for fraud because Touche Ross rendered tax advice to the individuals as well as the corporation.

A shareholder may have a personal cause of action against a wrongdoer to a

corporation if the wrongdoer also violates a duty owed directly to the shareholder as an individual.

Wingate v. Hajdik , 795 S.W.2d 717, 719 (Tex. 1990). In this case, the individual shareholders

alleged that Touche Ross undertook to advise them personally in addition to advising the

corporation. Whether Touche Ross actually undertook this representation is a question of fact.

A movant for summary judgment has the burden of showing that no genuine issue of material fact

exists and that the movant is entitled to judgment as a matter of law. Nixon v. Mr. Property

Management Co. , 690 S.W.2d 546, 548-49 (Tex. 1985). In deciding whether there is a disputed

material fact issue precluding summary judgment, evidence favorable to the nonmovant will be

taken as true, every reasonable inference must be indulged in favor of the nonmovant, and any

doubts must be resolved in the nonmovant's favor. Id.

Our examination of the record in light of the standard of review set out above

discloses the existence of a factual dispute as to whether Touche Ross undertook to advise or

represent the shareholders as individuals. Given the existence of this material fact dispute, the

district court erred in granting summary judgment for Touche Ross on the individual shareholders'

fraud claims. We therefore sustain the shareholders' seventh point of error.

CONCLUSION

The district court properly granted summary judgment in favor of Touche Ross on

the basis of limitations except with respect to the shareholders' alleged cause of action for fraud.

The district court erred in granting summary judgment in favor of Touche Ross on the fraud cause

of action both on the basis of limitations and on the basis that the individual shareholders lacked

capacity to bring claims. The fraud claims are not time barred, and the record discloses a fact

dispute on the material question whether Touche Ross undertook to advise the individual

shareholders. We therefore affirm the district-court judgment in part and reverse in part and

remand the cause to the district court for further proceedings consistent with this opinion.

Mack Kidd, Justice

Before Justices Powers, Aboussie and Kidd

Affirmed in Part; Reversed and Remanded in Part

Filed: November 22, 1995

Publish

1. Louis Rochester and appellants Ray Hawkins and Thomas Murphy together owned

90% of Colonial's shares (30% each) and were the primary corporate decisionmakers

during the events relevant to this appeal. Rochester's interest in Colonial has now been

assumed by his bankruptcy estate, an appellant in this cause. Appellants Trudi Hestand

and Tracy Hawkins together owned the remaining portion of Colonial (10%). Hawkins-Rochester-Murphy, Inc. was formed upon the sale and dissolution of Colonial to receive

the sale proceeds and distribute them to the individual shareholders.

2. The individual appellees were employees of Touche Ross at the time of the events

relevant to this appeal.

3. Fraud claims are governed by the four-year limitations period in Tex. Civ. Prac. &

Rem. Code Ann. § 16.004 (West 1986). Williams v. Khalaf , 802 S.W.2d 651, 656-57 (Tex.

1990).

4. Professional malpractice, whether characterized as negligence or breach of an

implied warranty of good and workmanlike conduct, is governed by the two-year

limitations period in Tex. Civ. Prac. & Rem. Code Ann. § 16.003 (West 1986). Willis v.

Maverick , 760 S.W.2d 642, 644 (Tex. 1988); Black v. Wills , 758 S.W.2d 809, 814 (Tex.

App.--Dallas 1988, no writ). The DTPA contains a separate two-year limitations provision.

Tex. Bus. & Com. Code Ann. § 17.565 (West 1987).

5. Under the discovery rule, a statute of limitations does not begin to run until the

claimant discovers or, in the exercise of reasonable diligence, should have discovered the

facts establishing a cause of action. Burns v. Thomas , 786 S.W.2d 266, 267 (Tex. 1990).

6. Because the district court's order did not specify the grounds on which the court

granted summary judgment, we will uphold the summary judgment on appeal if any

theory advanced by the movant is meritorious. State Farm Fire & Casualty Co. v. S.S. ,

858 S.W.2d 374, 380 (Tex. 1993).

of fact.