Delmar Vineyard v. Timmons

• Decision Date: 07 April 1972
• Docket Number: No. 166,166
• Citation: 486 S.W.2d 914
• Parties: DELMAR VINEYARD et al. v. B. A. TIMMONS, C.P.A., et al.
• Court: Tennessee Court of Appeals

Page 914

486 S.W.2d 914

DELMAR VINEYARD et al. v. B. A. TIMMONS, C.P.A., et al.

No. 166.

Court of Appeals of Tennessee, Eastern Section.

April 7, 1972 Certiorari Denied by Supreme Court Nov. 6, 1972.

Meares, Dungan & Jarvis, Maryville, O'Neil, Parker & Williamson, Key & Lee, Knoxville, for appellants.

Bird, Navratil & Ballard, Maryville, for appellees.

OPINION

PARROTT, Judge.

Timmons & Company has appealed from the chancellor's decree awarding Local 309 of United Steel Workers of America a judgment in the amount of $153,688.80 for losses allegedly suffered as a result of Timmons & Company's negligently performing audits of the Union Store operated by Local 309.

Although the original bill has the sound of a tort action, it is an action for breach of contract and, in essence, a malpractice action. Complainants do not charge defendants with fraud but predicate their recovery on the grounds defendants negligently conducted audits of the Union Store. It is averred complainants have been 'consistently misinformed for a number of years by the defendants as to the true and correct financial condition of the store operations in the following respects: (a) the accounts payable have been understated, and (b) the inventory has been overstated in cost value.'

It is asserted as a direct result of defendants' 'failures, negligence, and misconduct and Local 309's reliance thereon (understatement of accounts payable and overstated inventory), said association continued to carry on said mercantile operations under the same management and with the same policies in the mistaken belief that the operation had made and was making a reasonable profit, and was financially sound.'

Defendants deny the inventory was overstated or that the accounts payable were erroneously reported.

In its answer defendants aver the mark-down figure used in the inventory 'was arrived at and agreed to by the complainants themselves through their officers and managers elected by the Union . . ..'

As for the accounts payable, defendants say the 'audit reflected all of the accounts payable made available through the Union and its store personnel at the time the audit was made and the accuracy of these accounts payable was verified by the defendants through accepted auditing procedures . . ..'

Among other things, defendants assert as a defense:

'If the Union Store and Union itself lost any money as a result of the Store's operation, it was not due to any act or omission on the part of these defendants nor was it due to any breach of contract on the part of these defendants but same was due to the complainants own negligence in its election of management, its supervision of the business, its management of the Store's operation, its untimely and wasteful liquidation of the inventory and assets of the store, its participation in a fraud upon the defendants in failing to accurately advise them of all of the accounts payable and the true value of the inventory.'

After hearing all the proof, the chancellor found defendants had breached their contract by negligently conducting audits for the years 1965, 1966 and 1967. He further found that as a result of the defendants' erroneously reporting the accounts payable and using a different mark-down and mark-up percentage on the inventory for the years 1965, 1966 and 1967 from the preceding years without disclosing such, complainants suffered damages of $153,688.80 for which amount judgment was entered.

Local 309 organized and commenced operating the Union Store in 1957. The store was of the general department type engaged in the retailing of clothing, toys, shoes, etc. It was operated continuously from its organization until it closed in July 1967. In all of the years of its operation, except 1965, the store showed a book profit. Apparently in 1967 there was some concern among the membership of Local 309 about the operation of the store because immediately after the election of a new slate of union officers, the store was closed.

The constitution and by-laws adopted by Local 309 creating the store provided 'the objective of the organization is to make goods available to members at a substantial saving.' The constitution and by-laws place the responsibility of operating the store in a four-man committee which must be considered and deemed as owners so far as this case is concerned.

Since the organization of the store in 1957, defendant, Timmons & Company, has conducted annual audits of the Union Store. At all times the inventory was taken by the Union Store employees under the supervision of Timmons & Company. The merchandise was inventoried at its marked price of sale and was then extended or adjusted by using a mark-up--mark-down percentage in arriving at the true value of the inventory. For the years 1962, 1963 and 1964 a mark-up of 25% And mark-down of 20% Was applied to the inventory with a profit being shown for these years. In 1965 a mark-up of 11.1% And a mark-down of 10% Was used and the audit revealed the business had suffered a $3,189.21 loss. For the year 1966, a mark-up of 19.1% And a mark-down of 16% Was applied to the inventory and for the year 1967, a mark-up of 10% And a mark-down of 9% Was used. In these two years the store also showed a book profit.

It is the complainants' contention and apparently the chancellor agreed that the defendants changed the inventory valuation mark-up and mark-down percentages from preceding years without disclosing same to complaints. Our review of this record shows the proof does not support such but contrarily, the mark-up and mark-down percentages were agreed upon by management, store committee and the accountants. C. W. McSpadden, Timmons' employee who was in charge of the audit for the three years in question, testified that the manager and the members of the Union Committee who so far as this lawsuit is concerned must be considered as if they were the owners, were consulted as to the mark-up and mark-down percentages which were arrived at by agreement.

James R. Brown, chairman of the store committee during the entire period of time 1965, 1966, 1967 and for several years prior, denies the percentages were ever agreed upon. With all due deference to Mr. Brown's denial, we find his testimony to be uncertain about many material things making it impossible for us to accept his denial of the mark-up and mark-down percentages being discussed with the store committee and management. Apparently in earlier years the accountants required the store committee and manager to sign a statement that they 'unanimously agree that to the best of their knowledge __(%)__ mark-up is an accurate estimate to use in arriving at the inventory cost of the above date' but no such statements were procured for the years 1965, 1966 and 1967. Mr. Brown admits signing prior statements but says that such certificate 'was for government purposes as they explained it to me.' He does not remember signing any certificates as to the value of the inventory and said if he did, he did not know what he was signing. In the record for each of the years in question is a certificate signed by Mr. Brown certifying that the inventory furnished was correct to the best of his knowledge and belief.

The testimony of Vernon Scarbrough, manager of the store during the years in question, is contrary to Mr. Brown's denial and supports Mr. McSpadden's testimony that the mark-up--mark-down percentages were discussed with the store committee and agreed upon. It was his testimony that the accountants and store committee always had a meeting at the time the audit was made and that Mr. Brown as chairman of the committee was always in the meetings and other committee members also would attend. He testified that in these meetings 'we would discuss the operation that we had had for the year, the mark-downs that we had taken and what we felt was the correct figure that needed to be used on the cost of merchandise.'

Mrs. Ruth McClanahan, the bookkeeper for the past several years, including the years 1965, 1966 and 1967, testified that at the time of the taking of the inventory and during the period of time when the audit was being made Mr. Brown was always present and as a usual thing some of the other men on the store committee helped take the inventory.

We think the unimpeached testimony of the store's manager, bookkeeper and defendant's employee McSpadden pertaining to the inventory outweighs the store committee chairman Brown's denial that during the years in question there was no agreement or knowledge by the store committee of the mark-up and mark-down percentages applied to the inventory.

To support their contention the accountants overstated the inventory, complainants offer as proof as audit made by accountants, King & King, after the store closed in July. Naturally an inventory taken on a different date would not be the same as an inventory taken on another date. Further, both the bookkeeper, Mrs. McClanahan, and her assistant, Carolyn Jones, pointed out that King & King, in taking their inventory, did not use the marked price of each item as was used in the inventory made under the supervision of Timmons & Company. King & King would take the marked-down items on the shelves and if there were other items of identical nature, such as shirts, etc. not marked down, these items were also recorded at the marked down selling price.

We think the evidence clearly shows management and the store committee (which must assume the same position as owners) were not only aware of the method of which the inventory was taken but participated and agreed on the percentages of mark-up and mark-down. Since the store committee not only was informed but participated and agreed on the inventory, they cannot be permitted in law or equity to now claim losses on the grounds of misrepresentation on the part of defendants. Further, we do not find any credible evidence showing defendants overstated the inventory.

This brings...