Investors REIT One v. Jacobs

• Decision Date: 08 November 1989
• Docket Number: No. 88-982,88-982
• Citation: 546 N.E.2d 206,46 Ohio St.3d 176
• Parties: , 58 USLW 2341 INVESTORS REIT ONE, Appellant, v. JACOBS et al., Appellees. INVESTORS REIT TWO, Appellant, v. FORTMAN et al., Appellees.
• Court: Ohio Supreme Court

Page 176

46 Ohio St.3d 176

546 N.E.2d 206, 58 USLW 2341

INVESTORS REIT ONE, Appellant, v. JACOBS et al., Appellees.

INVESTORS REIT TWO, Appellant, v. FORTMAN et al., Appellees.

No. 88-982.

Supreme Court of Ohio.

Submitted April 27, 1989.

Decided Nov. 8, 1989.

Syllabus by the Court.

1. Claims of accountant negligence are governed by the four-year statute of limitations for general negligence claims found in R.C. 2305.09(D), not by the two-year period for bodily injury or injury to personal property set forth in R.C. 2305.10, or by the one-year limitations period for professional malpractice claims in R.C. 2305.11(A).

2a. The discovery rule is not available to claims of professional negligence brought against accountants.

2b. However, by the express terms of R.C. 2305.09(D), the four-year limitations period does not commence to run on claims presented in fraud or conversion until the complainants have discovered, or should have discovered, the claimed matters.

The matter now before us derives from the litigation arising out of the demise of two real-estate investment trusts, Investors REIT One ("IRO") and Investors REIT Two ("IRT").

On April 23, 1980, IRO and IRT filed separate complaints against Larry Fortman, former trustee, and others, including attorneys and accountants, who had participated in transactions involving the trusts. The transactions at issue were allegedly marked by a scheme to defraud that involved conflicts of interest and breaches of trust and fiduciary duty on the parts of Fortman and the other named defendants.

The accountant defendants included Coopers & Lybrand, an international firm of certified public accountants with an office located in Columbus, Ohio; H. Martin Westfall, partner in charge of the Columbus office of Coopers & Lybrand; and partners Jerry D. Sullivan and David A. Gaston. Hereafter the accountant defendants will be collectively referred to as "C & L." C & L, it is alleged, served as accountants for IRO and IRT from, respectively, 1969 and 1972 through at least part of 1975. Moreover, it is alleged, C & L served as accountants for many of the trusts' related entities, including subsidiaries, limited partnerships and joint ventures.

In its complaint, IRT alleged that Fortman had acted detrimentally to the best interests of the trust, and that such actions "were committed intentionally, knowingly, willfully, and with scienter with a purpose to defraud and deceive IRT, IRT was thereby defrauded and deceived, as a result of which IRT has been damaged." IRT further alleged that the named defendants, including C & L, had "knowingly, intentionally and with scienter, and with a purpose to defraud and deceive IRT, participated, aided and abetted Fortman in defrauding IRT, as a result of which IRT has been damaged." The alleged fraud perpetrated on IRT resulted in the loss of the entire investment of $10,000,000 by the beneficiaries of IRT.

The complaint further alleged that since no "authority existed for transactions in assets of IRT reflected on the financial statements of IRT for the years 1972 through 1974, Coopers & Lybrand (including Westfall, Sullivan and Gaston) was either grossly negligent, reckless or else knowingly participated in a fraud upon IRT perpetrated by Fortman." Alleging that C & L had knowledge of the conflict-of-interest transactions engaged in by Fortman, IRT claimed that C & L "profited from such conflicts through the receipt of fees, estimated to be in the hundreds of thousands of dollars, from IRO, IRT and the C & L Audit Entities."

The IRT complaint further alleged:

"Coopers & Lybrand intentionally prepared notes to the financial statements of IRT for the years 1972 through 1974 in a fashion designed to obscure the entities with whom IRT had dealings, the properties involved in the transactions, the profits or other monies received by C & L Audit Entities and by Fortman and his affiliates, and that such transactions violated the IRT Declaration of Trust and constituted breaches of fiduciary duty. Coopers & Lybrand (and Westfall, Sullivan, and Gaston) knew all of such facts but intentionally disguised such facts to conceal such facts from the beneficiaries of IRT, the Securities and Exchange Commission and other users of the financial information, with the purpose of the continued realization of fees by Coopers & Lybrand from the C & L Audit Entities and to conceal the falsity of prior Coopers & Lybrand certifications of IRT financial statements."

IRT summarized its allegations against C & L:

"Such intentional omissions constitute breaches of its assumed duties to IRT and its beneficiaries and constitute a further act of fraud by Coopers & Lybrand." (Emphasis added.)

In its prayer for relief on its claims against C & L, IRT sought damages incurred for breach of contract ($10,000,000); the repayment to IRT of all fees received by C & L; and a finding that C & L is jointly and severally liable, along with the other defendants, for other damages. IRT also prayed for $100,000,000 in punitive damages from the named defendants.

IRO filed its complaint against the named defendants the same day as did IRT--April 23, 1980. With leave of court, the complaint was subsequently amended in what the court of appeals has aptly described as "excruciating length."

The complaint asserted claims against Fortman and certain other trustees and attorneys and against the C & L accountants. In substance, the complaint alleged that the named defendants had knowingly participated in a "scheme and conspiracy to deceive and defraud IRO" and thereby deplete the trust's assets.

As to the C & L defendants, the complaint contained specific allegations:

"C & L defendants entered the scheme and conspiracy to deceive and defraud IRO in 1969. * * * Each [accountantdefendantS individually participated in the scheme and conspiracy by performing acts hereinafter referred to as the acts of C & L.

" * * *

"In addition, C & L and Westfall received title to a property of IRO * * * to pay the fees purportedly owed to C & L * * *. That transfer took place in March, 1975 and subsequently C & L concealed the transaction * * *. The transaction was entered into pursuant to the scheme and conspiracy of which C & L defendants were participants * * *."

Attacking the accountants' professional efforts, IRO also claimed:

"Further, as to financial statements for 1974 and prior periods, purported to be audited by C & L, those financial statements were not audited in accordance with generally accepted auditing standards and were simply another part of the scheme and conspiracy. * * * Such financial statements and C & L's purported audits violated * * * [the terms of the trust]." (Emphasis added.)

IRO further alleged that C & L had breached its contract to audit the financial statements of IRO in accordance with generally accepted standards for the years 1969, 1970, 1971, 1972, 1973 and 1974, with the breach not discovered until after June 13, 1979.

Arising out of the broad allegations of conspiracy and fraud are charges that C & L had failed to comply with generally accepted auditing standards and procedures. IRO summed up its claims alleging:

"The acts of C & L defendants mentioned herein were taken intentionally with a purpose to deceive and defraud IRO, and as a result thereof IRO was deceived and defrauded and has suffered the damage herein set forth." (Emphasis added.)

As damages, IRO sought "[a]gainst each defendant, jointly and severally, for fraud and deceit, judgment in the collective amount of the gross capital contributed to IRO by its beneficiaries * * * and an award of punitive and exemplary damages * * *." Against the C & L defendants IRO sought, for breach of contract, an amount equal to the collective gross capital contribution by the IRO beneficiaries, and for the alleged wrongful taking of the IRO property to cover fees, the return of the property.

The trial court granted the defendant's various motions for dismissal or for summary judgment, finding that the trusts had failed to timely commence their actions under the pertinent statutes of limitations. On appeal, IRO and IRT contended, among their various assignments of error, that the trial court erred in finding their claims of accountant malpractice, fraud, conversion and breach of trust time-barred by either R.C. 2305.09 or 2305.11.

The court of appeals affirmed the trial court's dismissal of the trusts' claims purportedly alleging accountant negligence as time-barred under the four-year limitations period set forth in R.C. 2305.09(D). However, the appeals court reversed and remanded the trial court's dismissal of the claims founded in fraud, conversion and breach of trust, finding that under the express terms of R.C. 2305.09(D), the statute's four-year limitations period did not commence to run on these latter claims until the complainants discovered or should have discovered the claimed matters.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Crabbe, Brown, Jones, Potts & Schmidt, Charles E. Brown, Steven B Ayers, Jill T. Fleishman, Strip, Fargo, Schulman & Hoppers, A.C. Strip, John Z. Fargo and Michael P. Vasko, Columbus, for appellants.

Vorys, Sater, Seymour & Pease, David S. Cupps, F. James Foley and Charles P. Hurley, Columbus, for appellees.

Squire, Sanders & Dempsey, David J. Young, Kevin R. McDermott, Michael W. Pettit and Kim L. Swanson, Columbus, urging affirmance for amicus curiae, Ohio Soc. of Certified Public Accountants.

JOHN V. CORRIGAN, Judge, Court of Appeals.

The issue presented for our consideration by the appellant-trusts, IRO and IRT, queries whether the discovery rule is available to extend the governing statute of limitations on the claims of IRO and IRT against the accountant-defendants for negligence. The "discovery rule" generally provides that a cause of action accrues for purposes of the governing statute of...