Askanase v. Fatjo

• Decision Date: 21 July 1993
• Docket Number: Civ. A. H-91-3140.
• Citation: 828 F. Supp. 465
• Parties: David ASKANASE, Trustee, and Fitness Corporation of America, Plaintiffs, v. Tom J. FATJO, Jr., et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

828 F. Supp. 465

David ASKANASE, Trustee, and Fitness Corporation of America, Plaintiffs, v. Tom J. FATJO, Jr., et al., Defendants.

Civ. A. H-91-3140.

United States District Court, S.D. Texas.

July 21, 1993.

COPYRIGHT MATERIAL OMITTED

Rhett G. Campbell, Morris & Campbell, Houston, TX, for David Askanase, Trustee, and Fitness Corporation of America.

Robert L. Ketchand, Short & Ketchand, Houston, TX, for Tom J. Fatjo, Jr., Parkgate, Inc.

Timothy R. McCormick, Thompson & Knight, Dallas, TX, for Jeffrey A. Bair.

Edmund Lee Haag, III, Fulbright & Jaworski, Houston, TX, for Bayou Park Club Partnership, Houstonian Holdings Partnership, Ahmed Mannai, Fitness Inv., N.V., Mannai Inv. Co., Inc., Xantor, Inc., Parkgate Associated, Ltd., Hfund, Inc.

John Wesley Wauson, Wauson & Associates, Houston, TX, for Ron Hemelgarn, Great Lakes Leasing Agency Intern., H. & C. Intern., Hemelgarn Racing, Inc.

John Wesley Wauson, Wauson & Associates, Susan J. Brandt, Thelan Marrin Johnson & Bridges, Houston, TX, for Beechmont Partnership, Coordinated Spa Services, Inc., Twenty-First Century, Kenneth O. Melby.

Susan J. Brandt, Thelan Marrin Johnson & Bridges, Houston, TX, for Newtowne Enterprises, Inc., John Snideman.

Richard W. McLaren, Jr., Ernst & Young, Associate Gen. Counsel, Cleveland, OH, Morton Lee Susman, Weil Gotshal & Manges, Houston, TX, for Ernst & Young.

Frank G. Jones, Fulbright & Jaworski, Houston, TX, for Housprops Inc., Peter M. Jackson, Houstonian Estates Inv. Co., N.V.

Jay J. Madrid, Winstead Sechrest & Minick, Dallas, TX, for Alexander M. Milley, Pacific Asset Holdings, L.P.

Ronald J. Restrepo, Houston, TX, for Roger A. Ramsey.

John Wesley Wauson, Wauson & Associates, Pauline Ng Lee, Thelen Marrin Johnson & Bridges, Houston, TX, for John Snideman, Financial Services Corp., Management Accounting, Inc.

Albert Solochek, Andrew N. Herbach, Howard Solochek & Weber, Milwaukee, WI, for Gerald M.H. Stein, Joseph J. Zilber, JZL, Ltd., ZL Co., Inc., Zilber, Inc., Zilber, Ltd.

Jerry P. Jones, Dallas, TX, for Thomas J. Tierney.

Jerry P. Jones, Timothy R. McCormick, Thompson & Knight, Dallas, TX, for Thomas J. Tierney, Criterion Marketing, Inc., Criterion Marketing, Ltd.

Lucy P. Seward, Golden & Associates, Houston, TX, for Philip A. Troskey.

Morton Lee Susman, Weil Gotshal & Manges, Houston, TX, for Weil Gotshal & Manges.

ORDER OF ADOPTION

HITTNER, District Judge.

The Court has reviewed the Memorandum and Recommendation of the United States Magistrate Judge signed on June 11, 1993 with respect to Ernst & Young's Motion to Dismiss Counts VIII and IX of the Amended Complaint (Docket Entry # 195). The Court finds the Memorandum and Recommendation should be, and the same is hereby, adopted as the Court's Memorandum and Order. Accordingly, it is

ORDERED that Ernst & Young's Motion to Dismiss Count VIII of the Amended Complaint is GRANTED. It is further ORDERED that Ernst & Young's Motion to Dismiss Count IX of the Amended Complaint is GRANTED as to Plaintiff Fitness Corporation of America and is DENIED as to Plaintiff David Askanase, Trustee.

MEMORANDUM AND RECOMMENDATION

CRONE, United States Magistrate Judge.

Pending before the court is Defendant Ernst & Young's Motion to Dismiss Counts VIII and IX of Amended Complaint for Failure to State a Claim upon Which Relief can be Granted (Docket Entry # 195), its brief in support of its motion (Docket Entry # 196), and Plaintiffs' Response and Opposition to the Motion (Docket Entry # 228). All pretrial matters were referred to the undersigned magistrate judge pursuant to 28 U.S.C. § 636(b)(1) (Docket Entry # 334). After careful review of the pending motion and response, the briefs in support, and the arguments of counsel, this Court recommends that Defendant's motion be granted in part and denied in part.

I. Background.

This action was brought by Plaintiffs David Askanase, bankruptcy trustee for LivingWell, Inc. ("Livingwell") (and its three bankrupt subsidiaries, LivingWell (North), LivingWell (South), and LivingWell (Midwest)), and Fitness Corporation of America ("FCA"), LivingWell's nonbankrupt subsidiary. The Original Complaint was filed on October 25, 1991. In the Amended Complaint, filed August 31, 1992, Plaintiff seeks to recover from insiders, officers, and directors monies received by them when the companies purportedly were insolvent and damages for injuries to the companies allegedly caused by them.

In counts VIII and IX of the Amended Complaint, Plaintiffs also seek recovery from Ernst & Young ("E & Y"), (formerly known as Ernst & Whinney ("E & W")), LivingWell's auditors, whom Plaintiffs claim performed an imprudent and improper audit. Plaintiffs allege that E & W learned facts from which it concluded or should have concluded that LivingWell and its subsidiaries were insolvent, had a severe liquidity crisis, had insufficient funds to meet its operating requirements, had inadequate controls, and had substantial irregularities in sales activities. On March 31, 1987, E & W issued its audit opinion for the year ending December 31, 1986, showing that the company had a positive net worth of over $47 million, and advised the board of directors that LivingWell had earned $1.7 million from continuing operations in 1986, which Plaintiffs contend were false and misleading statements. Plaintiffs assert that if E & W had performed a proper audit and given appropriate advice to the board of directors, management would have been forced to place LivingWell and its subsidiaries into insolvency or bankruptcy proceedings at an earlier date, which would have benefited the companies. Plaintiffs further allege that LivingWell, through its independent directors or a majority of its shareholders, did not know and could not have known in the exercise of reasonable diligence of the wrongful acts and omissions prior to October 27, 1987. Accordingly, Plaintiffs contend that limitations were tolled until at least October 27, 1987, two years prior to the date the bankruptcy petition was filed. Alternatively, Plaintiffs assert that limitations were tolled under the doctrine of adverse domination until October 27, 1989, the date of the bankruptcy filing. Plaintiffs use these facts as a basis for Count VIII, charging E & Y with breach of contract, and Count IX, charging E & Y with professional negligence.

Defendant E & Y moves to dismiss Counts VIII and IX under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. E & Y contends that Count VIII, the breach of contract claim, should be dismissed because a claim for breach of a professional's duty of care sounds strictly in tort, not in contract. E & Y further asserts that Count IX, the claim for professional negligence, should be dismissed as time-barred because the companies' officers and directors were fully apprised of the alleged deficiencies in E & Y's audit more than two years before this lawsuit was filed.

II. Analysis.

A. The Applicable Standards Under Rule 12(b)(6).

A motion to dismiss under Rule 12(b)(6) tests only the formal sufficiency of the statements of the claims for relief. It is not a procedure for resolving contests about the facts or merits of the case. In ruling on a motion to dismiss, the Court must take the plaintiffs' allegations as true, view them in a light most favorable to plaintiffs, and draw all inferences in favor of the plaintiffs. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Garrett v. Commonwealth Mortgage Corp. of Am., 938 F.2d 591, 593 (5th Cir.1991). The motion must be denied unless it appears to a certainty that plaintiffs can prove no set of facts that would entitle them to relief. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); McCartney v. First City Bank, 970 F.2d 45, 47 (5th Cir. 1992); Garrett, 938 F.2d at 594. Where the issue of limitations requires a determination of when a claim begins to accrue, the complaint should be dismissed only if the evidence is so clear that there is no genuine factual issue and the determination can be made as a matter of law. Sisseton-Wahpeton Sioux Tribe v. United States, 895 F.2d 588, 591 (9th Cir.1990), cert. denied, 498 U.S. 824, 111 S.Ct. 75, 112 L.Ed.2d 48 (1990).

B. Count VIII — Breach of Contract.

Although Plaintiffs characterize their claims as resting on both breach of contract and professional negligence, they use the same set of facts as the foundation for both claims. As the basis for their contract claim, Plaintiffs allege that E & W "contracted with LivingWell to perform an audit in conformance with generally accepted auditing standards, consistently applied," and "in a good, workmanlike manner, consistent with that of a prudent and proper certified public accounting firm." Then, Plaintiffs claim that E & W breached this contract by failing "to properly and prudently conduct an audit of LivingWell and its subsidiaries." Plaintiffs further contend that E & W rendered an audit opinion that was false and materially misleading and failed to disclose material negative information to LivingWell's board of directors. The thrust of Plaintiffs' allegations is that, in performing the 1986 audit of LivingWell, E & W failed to perform up to the standard expected of a reputable certified public accounting firm. In essence, therefore, Plaintiffs' claim is nothing more than a claim for breach of a professional's duty, thinly disguised as a contract claim.

Under Texas law, such a claim sounds only in tort.¹ See, e.g., FDIC v. Ernst & Young, 967 F.2d 166, 172 (5th Cir.1992); American Medical Elec., Inc. v. Korn, 819 S.W.2d 573, 576 (Tex.App. — Dallas 1991, writ denied); University Nat'l Bank v. Ernst & Whinney, 773 S.W.2d 707, 710 (Tex.App.— San Antonio 1989, no writ); Sledge v. Alsup, 759 S.W.2d 1, 2 (Tex.App. — El Paso 1988, no writ); Citizens State Bank v....