Arthur Andersen & Co. v. Perry Equipment Corp.
| Citation | 898 S.W.2d 914 |
| Decision Date | 16 February 1995 |
| Docket Number | No. 01-93-01104-CV,01-93-01104-CV |
| Parties | ARTHUR ANDERSEN & CO., Appellant and Cross-Appellee, v. PERRY EQUIPMENT CORPORATION, Appellee and Cross-Appellant. (1st Dist.) |
| Court | Court of Appeals of Texas |
This is an appeal from a judgment on a jury verdict in a malpractice, fraud, and deceptive trade practices case. The jury awarded the plaintiff, Perry Equipment Corporation (PECO), $9,297,601 against the defendant Arthur Andersen & Co. (Arthur Andersen). The parties perfected separate appeals, which are considered together. We affirm.
It is uncontested that on August 23, 1985, PECO purchased Maloney Pipeline Systems, Inc. (Maloney Pipeline) from Ramteck II, Inc. (Ramteck II), for $4,088,237. 1 The acquisition was accomplished through a stock purchase. As a condition of the sale, Maloney Pipeline paid for Arthur Andersen to audit Maloney Pipeline for the benefit of PECO.
In early 1985, Arthur Andersen had been performing a consolidated audit on Ramteck Systems, Ramteck II, and Maloney Pipeline, but had stopped in June because of a question relative to the development of a mud machine by Ramteck II. On July 2, 1985, Mr. Vera and Mr. Russett of Arthur Andersen attended a meeting with Mr. Hartmann and Mr. Miller from Ramteck II to discuss the status of the audit and the possibility of the sale of Maloney Pipeline to PECO. At the end of July, Mr. Miller called Arthur Andersen and requested that it do a separate audit of Maloney Pipeline. Mr. Vera, the top Arthur Andersen employee on the Maloney Pipeline audit, testified he knew it was a condition of the Maloney Pipeline purchase and sale agreement that Arthur Andersen's audit be provided to PECO, and that it would not surprise him that people who receive Arthur Andersen's audits rely on them.
On May 20, 1985, approximately three months before PECO purchased Maloney Pipeline, an employee of Arthur Andersen sent Ramteck II's chief executive officer a letter, along with an enclosed report discussing the tax aspects of the proposed sale of Maloney Pipeline to PECO. In the report, Arthur Andersen stated that Maloney Pipeline was currently operating at a loss, and estimated the amount of that loss to be $600,000. Mr. Perry, chief executive officer of PECO, testified that if he had seen the report prior to the date of the sale, PECO would not have purchased Maloney Pipeline.
Shortly before the purchase, PECO reviewed two financial statements prepared by Arthur Andersen. The March 31, 1985, statement was an audited one and covered the preceding 11-month period. The June 30, 1985, statement was not audited and covered the period subsequent to March 31, 1985. Both financial statements showed Maloney Pipeline to be a profitable company.
In November 1985, three months after the purchase, Maloney Pipeline, which PECO operated as a "stand-alone" company, ran out of money and required a cash infusion from PECO of $400,000. On March 23, 1986, PECO and Ramteck II entered into a settlement agreement whereby Ramteck II cancelled the purchase money promissory notes made by PECO totalling $2,000,000, and cancelled the letters of credit securing the notes. Maloney Pipeline continued to require cash infusions, and in October 1986, Maloney Pipeline filed Chapter 11 2 bankruptcy proceedings. The Chapter 11 reorganization was converted to a chapter seven 3 liquidation in 1989. Maloney Pipeline was still in chapter seven at the time of trial.
On February 12, 1987, PECO sued Arthur Andersen contending that the financial statements prepared by Arthur Andersen overstated the profits and net worth of Maloney Pipeline by millions of dollars. PECO alleged causes of action for negligence, negligent misrepresentation, gross negligence, fraud, breach of implied warranty, and violations of the Deceptive Trade Practices Act (DTPA). 4
Questions were submitted to the jury on all causes of action. The jury found Arthur Andersen 51 percent negligent and PECO 49 percent negligent. It also found that Arthur Andersen (1) committed fraud, (2) violated the DTPA, but not knowingly, and (3) breached a warranty. The jury responded negatively to the questions on gross negligence and negligent misrepresentation.
The jury found the following damages in connection with the DTPA cause of action:
5. This is the total of nine items of damages awarded by the jury
a. Purchase Price of Maloney Pipeline $4,088,237
b. Costs and expenses incurred by PECO as a result of its $1,361,231 5
purchase and ownership of Maloney Pipeline (totalled)
5 This is the total of nine items of damages awarded by the jury.
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Total $5,449,468
In its motion for judgment, PECO asked for judgment under the DTPA because it was the most favorable theory of recovery under the jury's verdict. The trial court awarded PECO damages under the DTPA as follows:
A. Actual Damages
DTPA Actual Damages $ 5,449,468
LESS Credit for Settlement with Ramteck II ($ 2,000,000)
TOTAL ACTUAL DAMAGES $ 3,449,468.
B. Prejudgment Interest on Net Actual Damages to 8/20/93 (10% $ 3,856,972
compounded daily commencing 180 days following occurrence
giving rise to cause of action [2,739 days] )
C. DTPA Additional Damages 1,000
SUB TOTAL $ 7,307,440
D. Attorney's Fees (27% of $7,307,440) $ 1,973,009
E. Costs of Court expended by PECO (including mediation fee $ 17,152
and special master fee)
--------------
TOTAL AWARD TO PLAINTIFF $ 9,297,601
In its fourth point of error, Arthur Andersen asserts the trial court erred in ruling that PECO was a "consumer" of Arthur Andersen's audit services under the DTPA.
Whether a party is a consumer is generally a question of law for the trial court. Holland Mortgage & Inv. Corp. v. Bone, 751 S.W.2d 515, 517 (Tex.App.--Houston [1st Dist.] 1987, writ ref'd n.r.e.). The DTPA defines a consumer as "an individual ... who seeks or acquires by purchase or lease, any goods or services." TEX.BUS. & COM.CODE ANN. § 17.45(4) (Vernon 1987). To have a valid complaint under the DTPA, the goods or services purchased or leased must form the basis of the complaint. Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349, 351-52 (Tex.1987); Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 539 (Tex.1981).
That PECO sought and acquired the auditing services of Arthur Andersen is shown by the following uncontroverted facts:
(1) As a condition of the purchase and sale of Maloney Pipeline, PECO was to receive Maloney Pipeline's audited financial statements prepared by Arthur Andersen.
(2) Arthur Andersen performed a separate audit of Maloney Pipeline for the specific purpose of supplying audited financial statements to PECO.
(3) Arthur Andersen knew and expected that PECO would be relying upon the audited financial statements in making decisions regarding the purchase of Maloney Pipeline.
Further, it is clear from the pleadings that Arthur Andersen's auditing services "form the basis of" PECO's complaint. Thus, the only question remaining regarding PECO's consumer status relates to the "purchase" element of the consumer definition.
The record shows that although PECO "sought and acquired" Arthur Andersen's auditing services, it did not, itself, "pay" Arthur Andersen directly for those services. However, it is uncontroverted that Maloney Pipeline paid for the auditing services of Arthur Andersen for the benefit of PECO. This is sufficient. See Kennedy v. Sale, 689 S.W.2d 890, 892 (Tex.1985) ()"; see also Rudolph v. ABC Pest Control, Inc., 763 S.W.2d 930, 933-34 (Tex.App.--San Antonio 1989, writ denied) ().
We hold that the trial court did not err in concluding, as a matter of law, that PECO was a "consumer" under the DTPA. Accordingly, we overrule Arthur Andersen's fourth point of error.
In its first point of error, Arthur Andersen asserts PECO failed to prove, and failed to obtain a jury finding of actual, recoverable damages under a correct legal measure. Arthur Andersen argues that PECO had to prove actual damages under the "out-of-pocket" or "benefit-of-the-bargain" measure, and because it failed to do so, the "purchase price" finding of $4,088,237 was immaterial and should have been disregarded.
The DTPA provides that a prevailing consumer may obtain "the amount of actual damages found by the trier of fact." TEX.BUS. & COM.CODE ANN. § 17.50(b)(1) (Vernon Supp.1994). The amount of actual damage recoverable under the DTPA is "the total loss sustained [by the consumer] as a result of the deceptive trade practice." Henry S. Miller Co. v. Bynum, 836 S.W.2d 160, 162 (Tex.1992); Kish v. Van Note, 692 S.W.2d 463, 466 (Tex.1985) (emphasis added). While the DTPA does not define "actual damages," the term has been construed to mean common-law damages. W.O. Bankston Nissan, Inc. v. Walters, 754 S.W.2d 127, 128 (Tex.1988); Kish, 692...
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