Electronic Equipment Express, Inc. v. Donald H. Seiler & Co.

• Decision Date: 21 August 1981
• Citation: 122 Cal.App.3d 834,176 Cal.Rptr. 239
• Court: California Court of Appeals Court of Appeals
• Parties: ELECTRONIC EQUIPMENT EXPRESS, INC., et al., Plaintiffs, Cross-Defendants, Cross-Appellants and Respondents, v. DONALD H. SEILER & CO., et al., Defendants, Cross-Complainants, Cross- Respondents and Appellants. Civ. 46263.

Page 239

176 Cal.Rptr. 239

122 Cal.App.3d 834

ELECTRONIC EQUIPMENT EXPRESS, INC., et al., Plaintiffs, Cross-Defendants, Cross-Appellants and Respondents, v. DONALD H. SEILER & CO., et al., Defendants, Cross-Complainants, Cross- Respondents and Appellants.

Civ. 46263.

Court of Appeal, First District, Division 3, California.

Aug. 21, 1981.

Cooley, Godward, Castro, Huddleson & Tatum, Thomas A. H. Hartwell, John B. Bates, Jr., San Francisco, for plaintiffs, cross-defendants, cross-appellants and respondents.

William R. Dickerson & Associates, Los Angeles, Horvitz & Greines, Encino, for defendants, cross-complainants, cross-respondents and appellants.

WHITE, Presiding Justice.

Defendants and appellants Donald H. Seiler & Co. and Angelo Peter Maffei appeal from a judgment for Electronic Equipment Express, Inc., James Clements and John White (hereafter EEE or respondents) after a jury found appellants liable for accounting malpractice. Appellants contest only the trial court's rulings and the jury's findings on their statute of limitations defense. ¹ Specifically appellants contend that: (1) respondents' cause of action was barred by the statute of limitations and appellants' cross-complaint, filed September 19, 1975, did not toll the statute; (2) in any event, there was not substantial evidence to support the jury's finding that respondents did not discover, or with reasonable diligence could not have discovered, appellants' alleged negligence prior to September 19, 1973 or that actual damages occurred after September 19, 1973; (3) the jury's special verdict on the statute of limitations defense was tainted by prejudicially erroneous instructions; and (4) special verdict question Nos. 2 and 3 were so imprecise that the jury never determined the facts sufficient for the trial court to rule on the statute of limitations defense. We affirm the judgment.

Facts

In July 1972, respondents engaged appellant Donald H. Seiler & Co. as its certified public accountant to supervise the work of the in-house bookkeeper, Mr. Gosney, to provide monthly financial statements, and to prepare an audit for the fiscal year ending April 30, 1973. Appellant Donald H. Seiler & Co. assigned its employee Angelo Peter Maffei to handle the account.

At the initial meeting regarding the engagement, Maffei was advised by James W Clements, president and chief executive officer of EEE, that the company was expanding and needed the assistance of a certified public accountant to overcome the limitations of Mr. Gosney and to make sure that the books and records of the company were correctly maintained. Maffei further understood that if he found any deficiencies in the maintenance of the company's financial records, he should rectify them.

The two basic financial documents that came out monthly were the balance sheet and operating statement, which historically had been prepared by Gosney. Maffei began reviewing the records in August or September 1972 and the first statement in which he was involved was for September 1972; he continued reviewing the monthly statements through the month ending March 31, 1973.

Maffei prepared a 1973 income projection predicting increased revenues. He also helped prepare the audited year-end statement as of April 30, 1973, submitted to respondents on August 11, 1973, and the unaudited statement for the three-month period ending July 31, 1973, which Clements received in September 1973.

Shortly after appellants were engaged, respondents set up a subsidiary in New Jersey to handle their business on the East Coast and were considering expanding into the computer refurbishing business. Since the subsequent monthly statements showed escalating earnings, it appeared to the management of EEE and to Maffei that expansion was justified. As a result EEE entered the refurbishing business in January 1973.

After the March 31, 1973 statement came out, Maffei advised Clements to take measures to reduce the income tax liability. Accordingly, respondents declared bonuses, established profit sharing plans, and made various capital investments.

During this same period, appellants began the audit for the year ending April 30, 1973. The audit lasted over four months and was presented to Clements on August 11, 1973. During the period of the audit, appellants submitted no monthly financial statements to respondents and failed to advise respondents as to EEE's financial condition despite numerous requests by Clements for information and to expedite the audit.

The financial picture manifest in the year-end audit statement was considerably different than that reflected in the monthly reports. Contrary to the success shown in the March 31 statement exhibiting an excess of $78,000 in assets over liabilities and current assets of $20,000 over current liabilities, the audited report disclosed a reduction of net worth of approximately $171,248. Clements was aware of these discrepancies but he testified that he did not realize they were due to appellants' accounting errors at that point in time.

At no time did appellants express reservations as to EEE's viability, having issued an unqualified opinion in its audit for the year ending April 30, 1973, or any concerns that EEE's subsidiary operations might lead the company to insolvency.

By the time of the submission of the audit on August 11, 1973, EEE had overdrafts at the bank and was in arrears on its federal payroll withholding taxes, which by September had reached $113,000.

On September 13, 1973, Union Bank foreclosed on the approximately $41,200 remaining on its $50,000 loan to respondent by offsetting against funds received from United Van Lines, which had been assigned as collateral. After the offset, approximately $11,000 remained in EEE's account for its use, sufficient to cover a few days of operation expenses. Respondents immediately obtained alternate financing with Transport Clearings and discontinued further expansion of the business.

Respondents were first contacted by the Internal Revenue Service regarding the withholding taxes in August 1973 and a payment schedule was established in October 1973. During this same period, summer and fall 1973, EEE's sales were at an all time high.

Respondents replaced appellants in October 1973 with Thomas Meehan, a certified public accountant, who joined the company as an employee. He was hired to provide reliable and accurate accounting information, to render financial advice and to inform EEE of its true financial condition. At the time Meehan was hired Clements did not understand the reason for the financial difficulties EEE had been experiencing. He had continued to rely on appellants' expertise until Meehan was hired, particularly since he had little knowledge of financing and accounting.

Meehan began his review of the company's books and records, and appellants' statements and related materials immediately, and in November or December 1973 he was able to determine that the subsidiary operations should be terminated. In the course of his review, Meehan discovered numerous errors in appellants' work, including the monthly statements and the audit. Specifically Meehan found that appellants had understated EEE's loss by approximately $93,000 and had failed to include a reserve for taxes. Further, the financial statement for the three-month period ending July 31, 1973, overstated income by $67,000.

On November 29, 1973, the Internal Revenue Service filed a lien against EEE. This caused the demise of the business, according to Meehan, because within two to three weeks very few orders were placed. Customers discovered the lien and declined to place equipment with EEE. EEE was forced to close its doors on December 24, 1973.

Respondents filed their complaint for damages for accounting malpractice on November 12, 1974 some four months after EEE had been suspended as a corporation for nonpayment of its corporate franchise tax. (Rev. & Tax.Code, § 23301.) Appellants demurred to the complaint four times with the last attempt being overruled. Thereafter, on September 19, 1975, appellants filed a cross-complaint against respondents to recover the value of their services. On December 22, 1975, appellants filed its answer raising for the first time that respondents' cause of action was barred by the statute of limitations because EEE had its corporate powers suspended prior to the filing of the action. (Rev. & Tax.Code, § 23301.)

Appellants twice moved for summary judgment on the ground that respondents' action was barred by the statute of limitations. Both motions were denied. On April 26, 1976, EEE's corporate powers were reinstated. (Rev. & Tax.Code, § 23305a.) The special trial on the statute of limitations defense was subsequently held, and this appeal followed.

I

Revenue and Taxation Code section 23301 states: "Except for the purpose of amending the articles of incorporation to set forth a new name, the corporate powers, rights and privileges of a domestic taxpayer, may be suspended" upon nonpayment of taxes and assessments. A corporation which has been suspended pursuant to section 23301 is without capacity to prosecute or to defend a civil action while suspended. (Reed v. Norman (1957) 48 Cal.2d 338, 309 P.2d 809.) Section 23305a of the same code provides for a certificate of revivor upon payment of the delinquent taxes by the corporation, and "Upon the issuance of such certificate by the Franchise Tax Board the taxpayer therein named shall become reinstated but such reinstatement shall be without prejudice to any action, defense or right which has accrued by reason of the original suspension or forfeiture." (Emphasis added.) A statute of limitations defense which accrues while a corporation's powers are suspended is one such defense which cannot be prejudiced by revival of the corporation. (Welco Construction, Inc. v. Modulux (1975) 47 Cal.App.3d 69, 120 Cal.Rptr. 572, per Scott, J.)

Respondents conceded below and they...