Garnac Grain Co., Inc. v. Blackley, s. 90-1890
| Decision Date | 30 July 1991 |
| Docket Number | Nos. 90-1890,90-1930,s. 90-1890 |
| Citation | 932 F.2d 1563 |
| Parties | 33 Fed. R. Evid. Serv. 102 GARNAC GRAIN CO., INC., Appellant/Cross-Appellee, v. F. Duane BLACKLEY, Donald A. Blackwell, Frederick M. Borchardt, Stephen G. Butler, Stephen P. Clark, Ralph W. Clermont, R. Bruce Earls, John O. Eichhorn, Leland R. Gerhart, Martin F. Gleason, Jr., Robert J. Graham, Jeffrey H. Green, J. Alan Harkness, Johnnie G. Henson, Merrill A. Joslin, Jr., James B. Judd, Robert E. Lawson, Lawrence J. Legrand, Richard D. Love, H. Max Lummis, IV, Edward W. Mehrer, Cecil R. Miller, Jack A. Newman, Jr., Clifford L. Olson, Charles W. Peffer, David C. Potter, Brooks R. Read, Daniel S. Reilly, A. John Robertson, Jr., William M. Rowe, Jr., Richard J. Sabolik, Joseph R. Sims, Robert W.L. Spencer, Dennis M. Stevens, James M. Stolze, Richard A. Toftness, Richard C. Vaughan, Buddy L. Vick, Michael J. Walters, Appellees/Cross-Appellants, Kathryn A. Millison, Third-Party Defendant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
A. Bradley Bodamer, Overland Park, Kan., for appellant/cross-appellee.
Paul Scott Kelly, Jr., Kansas City, Mo., for appellees/cross-appellants.
Before ARNOLD, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and WOLLMAN, Circuit Judge.
Garnac Grain appeals several rulings of the District Court culminating in the dismissal of its accounting-malpractice and breach-of-contract claims against partners of the accounting firm Peat, Marwick, Mitchell & Company. 1 We affirm in part and reverse in part.
The events leading to this litigation began in March 1976, when an employee in Garnac's Kansas City office, Kathryn Millison, began embezzling from her employer. Millison accomplished most of her embezzlement by intercepting outgoing Garnac checks payable to vendors, adding her husband's name to the check as a payee, endorsing the check in her husband's name, and depositing the money in their joint bank account. When the cancelled checks arrived in Garnac's bank statement, Millison intercepted the statement, erased her husband's name as payee and his endorsement, and then forged the endorsement of the original payee. Millison continued this scheme undetected until September 1982. Over the course of more than six years, she embezzled a total of approximately $3.4 million.
After discovering Millison's embezzlement, Garnac hired the accounting firm of Price Waterhouse to determine the extent of its losses. During its review of Garnac's books, Price Waterhouse began investigating whether Garnac's accountants since 1948, Peat, Marwick, had violated Generally Accepted Auditing Standards ("GAAS") for the fiscal years ending January 31, 1977 through January 31, 1982, by failing to discover Millison's embezzlement. Thinking that Price Waterhouse was merely determining the extent of the loss, Peat, Marwick cooperated with the investigation. It gave Price Waterhouse access to its audit work papers for the years in question. Only belatedly did Peat, Marwick realize that the investigation extended to its own auditing procedures, but it nevertheless continued to cooperate with Price Waterhouse. After writing several preliminary drafts with contradictory conclusions, on October 12, 1983, Price Waterhouse issued a final report containing its opinion that Peat, Marwick failed to comply with GAAS for the fiscal year ending January 31, 1982, but not for any of the previous years.
On June 29, 1984, Garnac sued Peat, Marwick for negligence and breach of contract for failing to comply with GAAS for the fiscal years ending January 31, 1977 through January 31, 1982. Garnac claimed that Peat, Marwick's errors precluded it from discovering and preventing Millison's embezzlement. Garnac sought recovery of the approximately $3.4 million plus prejudgment interest. Peat, Marwick brought a third-party complaint against Millison, her bank which had cashed the altered checks, and four other banks, seeking contribution for any loss attributed to it. 2 Peat, Marwick also counterclaimed against Garnac, asserting that Garnac's agent, Price Waterhouse, violated a contract implied in fact by failing to provide Peat, Marwick with preliminary drafts of its report.
Although Price Waterhouse concluded that Peat, Marwick violated GAAS only for the fiscal year ending January 31, 1982, Garnac sued Peat, Marwick for the entire period of Millison's embezzlement. Garnac concedes that demonstrating violations of GAAS requires expert testimony, which Price Waterhouse's report does not provide for fiscal years prior to that ending January 31, 1982. It therefore sought additional experts to opine that Peat, Marwick violated GAAS for the remaining periods.
Garnac identified four individuals who would supply its expert testimony. Peat, Marwick moved both to exclude the testimony of these witnesses and for summary judgment on Garnac's pre-1982 claims. The District Court granted the motions, concluding Garnac had a prima facie case only for the fiscal year ending January 31, 1982.
Two of Garnac's proposed experts are Garnac employees: Peter Stettler, its current president and former executive vice-president, and Bill Bosilevac, its director of accounting. The District Court concluded that these two witnesses are not qualified under Federal Rule of Evidence 702 to provide expert testimony that Peat, Marwick failed to comply with GAAS. Finding no abuse of discretion, we affirm. Although Bosilevac is Garnac's director of accounting, he attended only one year of college, and has taken only a few noncredit night courses in auditing and accounting. He is not a certified public accountant. Peter Stettler similarly lacks formal training in accounting or auditing. While he has a business degree, he has never taken courses in auditing or internal controls, has had only a basic accounting course, and is not a certified public accountant.
We are mindful of Rule 702 and our own case law's recognition of practical knowledge and experience as providing an adequate basis for expert testimony. See, e.g., Circle J Dairy, Inc. v. A.O. Smith Harvestore Products, Inc., 790 F.2d 694, 700 (8th Cir.1986). The deposition testimony of these witnesses, however, indicates that their practical knowledge does not provide them with the requisite expertise in auditing or accounting. At Peter Stettler's deposition, for example, he stated that he does not know "exactly" what "generally accepted accounting principles" means. Joint Appendix at 519. He also indicated that he is uncertain how to determine whether a check is "suitably endorsed." Id. at 525. Although Bosilevac has worked in Garnac's accounting department for approximately twenty-two years and helped implement some of its internal controls, his testimony reveals that he has specialized knowledge of Garnac and its operations, not auditing or GAAS.
Our decision to affirm the District Court's exclusion of the expert testimony of Bosilevac and Peter Stettler does not extend, however, to the exclusion of the testimony of another proposed Garnac expert witness: Howard Stettler. 3 Stettler is a professor who has retired from teaching at the School of Business at the University of Kansas. Garnac hired Stettler to oppose Peat, Marwick's motion for summary judgment by providing expert testimony that Peat, Marwick violated GAAS for all the audit years in dispute. On August 30, 1988, the District Court granted Peat, Marwick's motion in limine to exclude Professor Stettler's expert testimony.
In its decision to exclude Stettler's testimony, the District Court relied on Federal Rules of Evidence 702, 703, and 403. The Court found that Professor Stettler lacked the qualifications to testify as an expert under Rule 702. Although Professor Stettler taught auditing courses for almost forty years at the University of Kansas, he worked only as a staff assistant at an auditing firm for four years in the 1940's. He has no experience in auditing grain operations like Garnac's, has never reviewed another auditor's work, and his license as a certified public accountant expired in 1981.
As additional support for its decision, the District Court concluded that the basis of Stettler's opinion was unreliable under Rule 703. Professor Stettler concluded in a report dated July 12, 1985, that Peat, Marwick violated GAAS after reading only Price Waterhouse's report. Not only did Price Waterhouse reach conclusions contrary to Stettler's for five of the six audit years, but it expended considerably more effort in reaching its conclusions. Price Waterhouse spent approximately 600 hours preparing its report, while Professor Stettler spent approximately twenty hours preparing his. As a sort of catchall reason for excluding Stettler's testimony, the District Court relied also on Rule 403. The Court reasoned that Stettler's testimony would confuse the jury because it contradicted other expert testimony offered by Garnac, namely that of Price Waterhouse.
While Professor Stettler's use of the Price Waterhouse report alone as the basis of his July 12, 1985 opinion may be the weakest aspect of his proposed expert testimony, it crosses the threshold of admissibility. 4 Moreover, Stettler reaffirmed his opinion in a report dated July 15, 1986, after reviewing Peat, Marwick's work papers. Rule 703 allows experts to express their opinions on "facts or data ... perceived by or made known to [them] at or before the hearing." Certainly, Professor Stettler's later review of the work papers and reaffirmation of his previous opinion is permissible under this broad language. The District Court did not mention this second opinion (attached as an exhibit to Peat, Marwick's motion in limine) in its August 30, 1988 decision to exclude Stettler's testimony.
Perhaps the combined weaknesses of Howard Stettler's methodology and qualifications would lead us to discount his opinion if we...
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