Deloitte & Touche v. Weller

• Decision Date: 14 April 1998
• Docket Number: No. 07-96-0324-CV,07-96-0324-CV
• Citation: 976 S.W.2d 212
• Parties: DELOITTE & TOUCHE, Appellants, v. Harvill E. WELLER, Jr. and Frederick B. Wookey, Jr., Appellees.
• Court: Texas Court of Appeals

Page 212

976 S.W.2d 212

DELOITTE & TOUCHE, Appellants, v. Harvill E. WELLER, Jr. and Frederick B. Wookey, Jr., Appellees.

No. 07-96-0324-CV.

Court of Appeals of Texas,

Amarillo.

April 14, 1998.

Beck Redden & Secrest (David J. Beck) Woodard Hall & Prim (Robert M. Corn) Houston, Gibson Dunn & Crutcher (John T. Behrendt) Dallas, Gibson Dunn & Crutcher (Theodore B. Olson), Washington, DC, for appellant.

Susman Godfrey LLP (H. Lee Godfrey, Kenneth E. McNeil, Geoffrey L. Harrison), Franklin Cardwell & Jones (Gregory N. Jones and Ronald G. Franklin), Houston, for appellee.

Before BOYD, C.J., and QUINN and REAVIS, JJ.

ON MOTIONS FOR REHEARING

BOYD, Chief Justice.

In response to the motions for rehearing filed by both parties to this appeal, we withdraw our opinion of September 16, 1997, and substitute the following opinion in its place.

This appeal arises from a class action brought by limited partner investors in Granada 4, a Texas limited partnership formed to engage in agriculture and food production. Harvill E. Weller, Jr. and Frederick B. Wookey, Jr. are the representative members of the appellee class. The suit was brought against appellant Deloitte & Touche (Deloitte) for alleged negligence in preparing the partnership's tax return. In 15 points, Deloitte contends the trial court erred in rendering judgment against it for interest paid on back taxes to the Internal Revenue Service and for exemplary damages. For reasons we later express, we must reverse the judgment of the trial court and render judgment that appellees take nothing.

A proper consideration of Deloitte's challenges requires us to recount the factual and procedural history of this dispute. In 1986, the Granada 4 limited partnership consisted of 10,358 limited partners and one general partner, Granada Management Corporation (GMC). Granada 4 was designed and operated as a registered tax shelter for the limited partners. The partnership obtained tax benefits deferring and converting ordinary income into capital gains by investing in joint ventures involving agriculture. Several of these joint ventures were with other limited partnerships formed by GMC.

One of the joint ventures in which Granada 4 invested in 1986 involved the purchase of 800,000 cattle to graze on land leased by the partnership. The objective was to permit the partnership, and consequently the partners, to take a deduction for the cost of keeping the cattle at pasture. This deduction is referred to as the pasturage deduction. At the end of 1986, GMC hired Deloitte to prepare and sign the partnership's 1986 tax return. That return included a 95 million dollar pasturage deduction. It was signed by Deloitte partner Ben Anderson. ¹ Based on information provided to them in K-1 forms sent out by GMC, the limited partners took deductions on their individual returns in proportion to their investment in the partnership.

The Internal Revenue Service (IRS) subsequently audited the 1986 returns of Granada 4 and the joint ventures in which it had invested. As a result of the audits, the IRS disallowed numerous deductions taken by these entities. The disallowed deduction that is the primary focus of this litigation is the pasturage deduction. The IRS determined that there was no, or at least inadequate, evidence showing that the joint ventures owned cattle at pasture in 1986. On April 10, 1990, the IRS sent notices of deficiency, each entitled Final Partnership Administrative Adjustment (FPAA) to three of the joint ventures. A corresponding notice was sent to Granada 4 the following month. GMC informed the limited partners of the FPAA and GMC's challenge thereto on May 30, 1990.

On November 15, 1991, GMC entered into three settlement agreements with the IRS, one for each of the joint ventures whose deductions were disallowed. The disallowed deductions totaled 79 million dollars. The pasturage deductions accounted for only a portion of this amount but, appellees contend, the partnership's position was so weak on that issue that it was forced into a settlement. Because the settlements avoided the imposition of substantial penalties by the IRS, there is no dispute whether the settlements were appropriate.

The IRS assessed back taxes and interest against the limited partners. Appellees Harvell E. Weller, Jr. and Frederick B. Wookey, Jr., acting as representative members of a class consisting of all the limited partners in the Granada 4 limited partnership, filed suit against Deloitte on May 26, 1992. In the suit, appellees claimed Deloitte was negligent and grossly negligent in the preparation of the partnership's 1986 tax return by failing to investigate the basis for the deductions asserted by the partnership. They further alleged that Deloitte knew there were no records supporting the pasturage deduction before it signed the 1986 tax return and that it attempted to conceal this fact by generating false documentary evidence showing that the partnership had cattle at pasture when in fact it did not. In the suit, appellees sought actual damages of over 34 million dollars, exemplary damages and pre- and post-judgment interest.

Because the trial court believed that determining the amount of actual damages would not present a fact question, the parties went to trial on the issues of liability and exemplary damages beginning October 26, 1993. On November 1, 1993, the jury returned a verdict finding Deloitte and the "Granada Entities" ² negligent, that their negligence proximately caused "the occurrence in question," and assigning 60 percent responsibility to Deloitte and 40 percent to the Granada entities. The jury also found Deloitte's negligence to be gross negligence and found $77,685,000 in exemplary damages. The question of actual damages was resolved pursuant to a claims procedure advocated by appellees. Under the plan, appellees would bear the expense of notifying the class members, collect documentation of the amount of interest assessed by the IRS, total the results and present this information to the court. The trial court suggested that the question of actual damages be resolved by "something that looks like a summary judgment proceeding" so that an appellate court would know how to analyze it.

On September 26, 1994, appellees filed their motion for summary judgment on the issue of actual damages. On December 13, 1994, the trial court sent a letter to the parties setting out its intended disposition of the remaining issues. On January 27, 1995, the trial court granted appellees' motion for partial summary judgment on actual damages and also rendered a final judgment in the suit. That judgment awarded appellees $79,010,955.73 plus post-judgment interest of 10 percent per annum and costs.

In its first point, Deloitte argues appellees' cause of action was time barred because the suit was filed outside the two-year statute of limitations for causes of action based on negligence. See Tex. Civ. Prac. & Rem.Code Ann. § 16.003 (Vernon 1986 & Supp.1998). On April 10, 1990, the IRS issued FPAA notices of deficiency to each of the three joint ventures in which Granada 4 had invested. On May 7, 1990, the IRS mailed the notices to GMC, which was serving as the general partner and the "Tax Matters Partner" for the Granada 4 limited partnership. GMC received the FPAAs on May 12, 1990, and notified the limited partners on May 30, 1990 of the FPAAs and of a petition which had been filed in Tax Court challenging the IRS adjustments. On November 15, 1991, GMC entered into settlements with the IRS resulting in disallowances of $79 million worth of Granada 4 tax deductions. Assessments were subsequently sent to each of the limited partners for their 1986 tax liability and interest. As we have noted, this suit was filed on May 26, 1992.

Deloitte argues the statute of limitations began running on May 7, 1990, when the IRS mailed the FPAAs to Granada. Alternatively, Deloitte argues the statute of limitations began running on May 12, 1990, when GMC received the FPAAs. Of course, if we were to adopt either argument, the suit, having been filed on May 26, 1992, would be time barred.

The purpose of statutes of limitation is to bar the adjudication of suits filed at a time far removed from the injury causing event. This is to prevent the consideration of stale claims and other inefficiencies and imprecisions associated with delayed litigation. The statute of limitations begins to run when a cause of action accrues. Tex. Civ. Prac. & Rem.Code Ann. § 16.003(a) (Vernon Supp.1998). In Atkins v. Crosland, 417 S.W.2d 150, 153 (Tex.1967), the Supreme Court of Texas stated the general rule that:

[A] cause of action sounding in tort accrues, in the absence of a statute to the contrary or fraudulent concealment, when the tort is committed. This rule obtains notwithstanding the fact that the damages, or their extent, are not ascertainable until a later date.... A legal injury must be sustained, of course, before a cause of action arises.

Atkins, 417 S.W.2d at 153 (citations omitted) (emphasis added). It has long been the rule that a legal injury in tort occurs when the tort is committed and damage suffered. Black v. Wills, 758 S.W.2d 809, 816 (Tex.App.--Dallas 1988, no writ). It has also been the rule that a cause of action only accrues when facts come into existence supporting each element of the tort. Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 828 (Tex.1990); Stroud v. VBFSB Holding Corp., 917 S.W.2d 75, 80 (Tex.App.--San Antonio 1996, writ denied).

A claim for professional malpractice is based in negligence. See e.g., Cosgrove v. Grimes, 774 S.W.2d 662, 664 (Tex.1989). The elements of a cause of action for negligence are well established. They are: 1) a legal duty owed by one person to another; 2) a breach of that duty; 3) the breach was an actual cause of injury; and 4) actual injury. Alm v. Aluminum Co. of America, 717 S.W.2d 588, 595 (Tex.1986). See also Greater Houston Transp. Co. v....