Greenstein, Logan & Co. v. Burgess Marketing, Inc.

• Decision Date: 05 November 1987
• Docket Number: No. 10-87-005-CV,10-87-005-CV
• Citation: 744 S.W.2d 170
• Court: Texas Court of Appeals
• Parties: RICO Bus.Disp.Guide 6917 GREENSTEIN, LOGAN & COMPANY, et al., Appellants, v. BURGESS MARKETING, INC., et al., Appellees.

Page 170

744 S.W.2d 170

RICO Bus.Disp.Guide 6917

GREENSTEIN, LOGAN & COMPANY, et al., Appellants, v. BURGESS MARKETING, INC., et al., Appellees.

No. 10-87-005-CV.

Court of Appeals of Texas Waco.

Nov. 5, 1987.

Rehearing Denied Dec. 3, 1987.

F. Glenn Smith, III and Guy M. Hohmann, Brill & Brooks, Scott Douglas Cunningham, Brown & Fowler, P.C., Houston, for appellant.

Jim Meyer, Dunnam, Dunnam, Horner & Meyer, Waco, for appellee.

OPINION

THOMAS, Justice.

This suit is for accounting malpractice. Burgess Marketing, Inc., the plaintiff, obtained a $3,605,000 judgment against the accounting firm of Greenstein, Logan & Company and six of its partners, the defendants, based on jury findings of negligence and proximate cause. The accountants contend the judgment should be reversed because the court abused its discretion when it made various discovery rulings, refused to grant them a continuance, dismissed their RICO ¹ claims for lack of jurisdiction, excluded material evidence, and refused to submit their requested issues. They also argue the court erred when it overruled their objections to the proximate-cause issues in the charge, allowed Burgess Marketing to file a last-minute trial amendment, and refused to enter a judgment in their favor notwithstanding the verdict. Finally, they complain that the damages are excessive. The judgment will be affirmed because none of these contentions can be sustained.

Burgess Marketing, whose principal owner is Jack Burgess, sells gasoline and other fuels in Central Texas through convenience stores it owns or leases. Greenstein Logan had performed Burgess Marketing's annual audit since the company's inception in 1970. Burgess Marketing hired Norman Dunham, one of Greenstein Logan's certified public accountants, as its comptroller in August 1982. From September 1982 until he was fired as comptroller in July 1985, Dunham underaccrued and underpaid Burgess Marketing's federal excise tax. Greenstein Logan failed to discover Dunham's error during the 1984 and 1985 audits.

When Dunham's successor at Burgess Marketing discovered the underpayment in September 1985, Burgess fired Greenstein Logan and employed Patillo, Brown & Hill to determine the amount of the tax delinquency. Patillo Brown's investigation revealed that the audited financial statements prepared by Greenstein Logan for 1984 and 1985 had grossly understated Burgess Marketing's excise-tax liability and expense and overstated its net profit and net worth. Patillo Brown found that the company owed approximately $1,177,000 in delinquent excise taxes on March 31, 1985, and not $137,473 as shown on the 1985 audited financial statements prepared by Greenstein Logan. Furthermore, Patillo Brown estimated that the tax delinquency, excluding penalties and interest, had increased to approximately $1,650,000 by September 30, 1985. Instead of a net profit and a positive net worth, as shown on the audited financial statements prepared by Greenstein Logan, Burgess Marketing actually had been operating at a substantial monthly deficit, was bankrupt, and had a negative net worth of - $1,700,000. The Internal Revenue Service levied a $2,700,000 tax lien against Burgess individually and Burgess Marketing's assets in May 1986 for the delinquent tax, penalties and interest.

Burgess, his wife and Burgess Marketing sued Greenstein Logan and six of its partners, Curtis Logan, James Brockway, Robert Lindover, Russell Chupik, Gary Bonds, and Barbara McKittnick, for accounting malpractice. They asserted, among other theories of recovery, that Burgess Marketing's damages had been proximately caused by Greenstein Logan's negligent conduct. However, Greenstein Logan contended that Burgess and Dunham had intentionally underpaid the excise tax and then used the tax money to finance Burgess Marketing's expansion into the convenience stores and to cover Burgess' personal losses in other business ventures. The defense argued that Burgess and Burgess Marketing had merely "borrowed" the excise taxes from the federal government when conventional lenders refused to lend them the money they needed. To cover up their scheme, Greenstein Logan alleged, Burgess and Dunham intentionally and fraudulently concealed the underpayment of the excise tax during the 1984 and 1985 audits. Greenstein Logan also alleged that Burgess was negligent when he failed to properly supervise Dunham and failed to detect the underpayment when he reviewed the monthly financial statements that Dunham had prepared.

The jury found that Greenstein Logan had negligently misrepresented Dunham's competence as an accountant before he was hired as Burgess Marketing's comptroller, that it had negligently failed to perform the 1984 and 1985 audits in accordance with generally accepted auditing standards, and that its negligence had proximately caused Burgess Marketing to suffer $3,500,000 in damages. The jury also awarded the company $120,000 in reasonable attorney's fees at the trial and appellate levels.

The trial began on September 29, 1986. Greenstein Logan's first complaint is that the court abused its discretion when it entered an order on September 12, allowing Burgess Marketing until September 17 to produce reports of its experts and postponing the deposition of one of Burgess Marketing's experts until September 22. It argues that the September 12 order violated its right under Rule 166b(5) to have Burgess Marketing designate its experts and disclose the substance of their opinions more than thirty days prior to the trial. See Tex.R.Civ.P. 166b(5). A statement of facts of the September 12 hearing is not included in the appellate record. Abuse of discretion is an issue that cannot be determined without a record of the discovery hearing. See Vestal v. Jackson, 598 S.W.2d 724, 726 (Tex.Civ.App.--Waco 1980, no writ).

Greenstein Logan apparently contends under point one that the court, acting on its own and without any objection, should not have allowed three of Burgess Marketing's experts to testify because either their indentity or their opinions had not been timely disclosed under Rule 166b(5). It bases this contention on the rule that the testimony of a late-designated expert is "automatically" excluded by Rule 215(5). See Tex.R.Civ.P. 215(5); Morrow v. H.E.B., Inc., 714 S.W.2d 297 (Tex.1986). Such an interpretation of the automatic-exclusion rule in Morrow, if adopted, would encourage a party to keep silent, await a favorable verdict, and then appeal an adverse judgment on the ground that the court had failed, on its own, to prevent a late-designated expert from testifying. A more prudent and logical interpretation of the rule in Morrow is that the court must, upon a timely and proper objection, "automatically" exclude the testimony of a late- designated expert, if the party offering it does not prove that a good cause exists for its inclusion. See Morrow, 714 S.W.2d at 298. Greenstein Logan, which did not object to any of Burgess Marketing's experts testifying when called as witnesses, has waived any complaint that their testimony should have been excluded under Rule 215(5). See Southwestern Bell Tel. Co. v. Davis, 582 S.W.2d 191, 194 (Tex.Civ.App.--Waco 1979, no writ). Point one is overruled.

On March 31, 1986, Greenstein Logan originally answered a written interrogatory inquiring about its expert witnesses by stating that "no expert has been retained to date." It supplemented this answer on August 29 by designating twelve expert witnesses, and concluded the supplementation with the following statement: "After we take the depositions of the Plaintiff's experts ... we may have rebuttal experts." On September 24, five days before trial, Greenstein Logan designated Bill Carden, Ray Perryman and Carey Maness as "rebuttal expert witnesses." However, the court granted Burgess Marketing's motion in limine to suppress their testimony because they had not been timely identified under Rule 166b(5).

A party must identify any expert whose identity or opinion has not been previously disclosed in response to an appropriate inquiry. Tex.R.Civ.P. 166b(5)(b). Supplementation of the prior answer must occur at least thirty days before the trial, unless the court finds that a "good cause" exists for a later supplementation. Id. What constitutes "good cause" is within the court's discretion, and its decision on the issue will not be set aside except for an abuse of discretion. Morrow, 714 S.W.2d at 298.

Greenstein Logan bases the second point on the purported exclusion of the testimony of its three so-called "rebuttal" experts. It contends the evidence conclusively proved that a good cause existed for their late designation because the September 12 order did not allow access to the reports, calculations, and names of Burgess Marketing's damage experts until just a few days before the trial. Greenstein Logan also insists that rebuttal experts do not have to be designated more than thirty days prior to trial under Rule 166b(5).

An appellate court never reaches the question of whether evidence was erroneously excluded unless the complaint has first been properly preserved for review. See McInnes v. Yamaha Motor Corp., U.S.A., 673 S.W.2d 185, 187 (Tex.1984). Thus, the initial question is whether Greenstein Logan properly preserved any complaint about the exclusion of the three experts' testimony. Rule 52 of the Rules of Appellate Procedure prescribes two methods for preserving error arising from the exclusion of testimony when, as here, an offer of proof is necessary. See Tex.R.App.P. 52(b), (c). The first is by an informal bill of exception made before the court reporter. Id. at 52(b). The second method is by a formal bill of exception. Id. at 52(c). Furthermore, a party complaining about the exclusion of evidence must, either by an informal or formal bill, show the substance of what was excluded. Gulf Paving Co. v. Lofstedt, 144 Tex. 17, 188 S.W.2d 155, 159 (1945). Likewise, he must show by a...