932 F.2d 1563 (8th Cir. 1991), 90-1890, Garnac Grain Co., Inc. v. Blackley

Docket Nº:90-1890, 90-1930.
Citation:932 F.2d 1563
Party Name:GARNAC GRAIN CO., INC., Appellant/Cross-Appellee, v. F. Duane BLACKLEY, Donald A. Blackwell, Frederick M. Borchardt, Stephen G. Butler, Stephen P. Clark, Ralph W. Clermont, R. Bruce Earls, John O. Eichhorn, Leland R. Gerhart, Martin F. Gleason, Jr., Robert J. Graham, Jeffrey H. Green, J. Alan Harkness, Johnnie G. Henson, Merrill A. Joslin, Jr., Jam
Case Date:May 17, 1991
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 1563

932 F.2d 1563 (8th Cir. 1991)

GARNAC GRAIN CO., INC., Appellant/Cross-Appellee,

v.

F. Duane BLACKLEY, Donald A. Blackwell, Frederick M.

Borchardt, Stephen G. Butler, Stephen P. Clark, Ralph W.

Clermont, R. Bruce Earls, John O. Eichhorn, Leland R.

Gerhart, Martin F. Gleason, Jr., Robert J. Graham, Jeffrey

H. Green, J. Alan Harkness, Johnnie G. Henson, Merrill A.

Joslin, Jr., James B. Judd, Robert E. Lawson, Lawrence J.

Legrand, Richard D. Love, H. Max Lummis, IV, Edward W.

Mehrer, Cecil R. Miller, Jack A. Newman, Jr., Clifford L.

Olson, Charles W. Peffer, David C. Potter, Brooks R. Read,

Daniel S. Reilly, A. John Robertson, Jr., William M. Rowe,

Jr., Richard J. Sabolik, Joseph R. Sims, Robert W.L.

Spencer, Dennis M. Stevens, James M. Stolze, Richard A.

Toftness, Richard C. Vaughan, Buddy L. Vick, Michael J.

Walters, Appellees/Cross-Appellants,

Kathryn A. Millison, Third-Party Defendant.

Nos. 90-1890, 90-1930.

United States Court of Appeals, Eighth Circuit

May 17, 1991

Submitted Jan. 7, 1991.

As Modified on Denial of Rehearing

July 30, 1991.

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[Copyrighted Material Omitted]

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A. Bradley Bodamer, Overland Park, Kan., for appellant/cross-appellee.

Paul Scott Kelly, Jr., Kansas City, Mo., for appellees/cross-appellants.

Before ARNOLD, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and WOLLMAN, Circuit Judge.

ARNOLD, Circuit Judge.

Garnac Grain appeals several rulings of the District Court culminating in the dismissal of its accounting-malpractice and breach-of-contract claims against partners of the accounting firm Peat, Marwick, Mitchell & Company. 1 We affirm in part and reverse in part.

I.

The events leading to this litigation began in March 1976, when an employee in Garnac's Kansas City office, Kathryn Millison, began embezzling from her employer. Millison accomplished most of her embezzlement by intercepting outgoing Garnac checks payable to vendors, adding her husband's name to the check as a payee, endorsing the check in her husband's name, and depositing the money in their joint bank account. When the cancelled checks arrived in Garnac's bank statement, Millison intercepted the statement, erased her husband's name as payee and his endorsement, and then forged the endorsement of the original payee. Millison continued this scheme undetected until September 1982. Over the course of more than six years, she embezzled a total of approximately $3.4 million.

After discovering Millison's embezzlement, Garnac hired the accounting firm of Price Waterhouse to determine the extent of its losses. During its review of Garnac's books, Price Waterhouse began investigating whether Garnac's accountants since 1948, Peat, Marwick, had violated Generally Accepted Auditing Standards ("GAAS") for the fiscal years ending January 31, 1977 through January 31, 1982, by failing to discover Millison's embezzlement. Thinking that Price Waterhouse was merely determining the extent of the loss, Peat, Marwick cooperated with the investigation. It gave Price Waterhouse access to its audit work papers for the years in question. Only belatedly did Peat, Marwick realize that the investigation extended to its own auditing procedures, but it nevertheless continued to cooperate with Price Waterhouse. After writing several preliminary

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drafts with contradictory conclusions, on October 12, 1983, Price Waterhouse issued a final report containing its opinion that Peat, Marwick failed to comply with GAAS for the fiscal year ending January 31, 1982, but not for any of the previous years.

On June 29, 1984, Garnac sued Peat, Marwick for negligence and breach of contract for failing to comply with GAAS for the fiscal years ending January 31, 1977 through January 31, 1982. Garnac claimed that Peat, Marwick's errors precluded it from discovering and preventing Millison's embezzlement. Garnac sought recovery of the approximately $3.4 million plus prejudgment interest. Peat, Marwick brought a third-party complaint against Millison, her bank which had cashed the altered checks, and four other banks, seeking contribution for any loss attributed to it. 2 Peat, Marwick also counterclaimed against Garnac, asserting that Garnac's agent, Price Waterhouse, violated a contract implied in fact by failing to provide Peat, Marwick with preliminary drafts of its report.

II.

Although Price Waterhouse concluded that Peat, Marwick violated GAAS only for the fiscal year ending January 31, 1982, Garnac sued Peat, Marwick for the entire period of Millison's embezzlement. Garnac concedes that demonstrating violations of GAAS requires expert testimony, which Price Waterhouse's report does not provide for fiscal years prior to that ending January 31, 1982. It therefore sought additional experts to opine that Peat, Marwick violated GAAS for the remaining periods.

Garnac identified four individuals who would supply its expert testimony. Peat, Marwick moved both to exclude the testimony of these witnesses and for summary judgment on Garnac's pre-1982 claims. The District Court granted the motions, concluding Garnac had a prima facie case only for the fiscal year ending January 31, 1982.

Two of Garnac's proposed experts are Garnac employees: Peter Stettler, its current president and former executive vice-president, and Bill Bosilevac, its director of accounting. The District Court concluded that these two witnesses are not qualified under Federal Rule of Evidence 702 to provide expert testimony that Peat, Marwick failed to comply with GAAS. Finding no abuse of discretion, we affirm. Although Bosilevac is Garnac's director of accounting, he attended only one year of college, and has taken only a few noncredit night courses in auditing and accounting. He is not a certified public accountant. Peter Stettler similarly lacks formal training in accounting or auditing. While he has a business degree, he has never taken courses in auditing or internal controls, has had only a basic accounting course, and is not a certified public accountant.

We are mindful of Rule 702 and our own case law's recognition of practical knowledge and experience as providing an adequate basis for expert testimony. See, e.g., Circle J Dairy, Inc. v. A.O. Smith Harvestore Products, Inc., 790 F.2d 694, 700 (8th Cir.1986). The deposition testimony of these witnesses, however, indicates that their practical knowledge does not provide them with the requisite expertise in auditing or accounting. At Peter Stettler's deposition, for example, he stated that he does not know "exactly" what "generally accepted accounting principles" means. Joint Appendix at 519. He also indicated that he is uncertain how to determine whether a check is "suitably endorsed." Id. at 525. Although Bosilevac has worked in Garnac's accounting department for approximately twenty-two years and helped implement...

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