Nerman v. Alexander Grant & Co.
| Decision Date | 21 February 1991 |
| Docket Number | 90-1931,Nos. 90-1893,s. 90-1893 |
| Citation | 926 F.2d 717 |
| Parties | Lewis NERMAN, Jerome Nerman, Larry Spitcaufsky, Arrow Truck Sales, Inc., Emmett R. Davis, Robert and Jean Gentle, Allan E. Hall, Mrs. Louis Kaplan, Barney Karbank, Gerald Rabin, Mrs. Melvin Spitcaufsky, Cleo L. Shaw, Richard Lee Shaw, Marty Dubowy and Mark Dubowy, individually and d/b/a M & M Investments, Sam Price and Steve Price, individually and d/b/a Sam and Steve Price Joint Venture, and Lewis Nerman, Jerome Nerman, Larry Spitcaufsky, and Mrs. Melvin Spitcaufsky, as shareholders for Arrow Fleet Sales, Inc., Appellants, v. ALEXANDER GRANT & COMPANY, now known as Grant Thornton, Joseph J. Haith, John C. Burke, individually and as representative of the defendant class of Grant Thornton Partners, Appellees. Michael L. ALBERT, Gerald R. Livingston, Nels D. Eliason, Bernard Magid, Robert Holmes, James Nesci, Myron "Mike" Milder, Jerome Milder, Appellees, v. GRANT THORNTON (formerly Alexander Grant), a general partnership, John C. Burke, Joseph J. Haith, Appellants. |
| Court | U.S. Court of Appeals — Eighth Circuit |
James P. Keller, St. Louis, Mo., for appellants.
Alan S. Rutkoff, Chicago, Ill., for appellees.
Before BEAM, BRIGHT, Senior Circuit Judge, and WOODS, * District Judge.
The district court 1 granted the defendants' motion for summary judgment on the plaintiffs' state claims for fraud and negligence in two virtually identical cases, consolidated for trial. 2 The plaintiffs in Lewis Nerman, et al. v. Alexander Grant & Company, et al. have appealed the district court's order that their suit was not filed within the applicable five year statute of limitations. 3 The defendants, Alexander Grant & Company n/k/a Grant Thornton ("Grant") and individual Grant partners, have appealed the district court's order in Michael Albert, et al. v. Grant Thornton, because the district court declined to impose Rule 11 sanctions.
We affirm both the district court's order granting the defendants' motion for summary judgment against the Nerman plaintiffs 735 F.Supp. 1443 and the district court's order denying the defendants' motion for sanctions against the Albert plaintiffs.
It is undisputed that in December 1976, the plaintiffs invested as limited partners in a Kentucky coal mining venture, known as "Polls Creek." In their amended complaint, the plaintiffs alleged that Grant, a national accounting firm, fraudulently induced them to invest in Polls Creek by making material and false representations.
The plaintiffs specifically alleged that Grant represented to them in November and December of 1976: (1) that the Polls Creek venture would be a wise investment, (2) that the investment would provide a profit of at least 20% within a reasonable period of time, (3) that it would present no risk of loss, (4) that it would enable them to take a substantial tax write-off worth several times their investments, and (5) that there was no risk that the tax shelter deductions would be disallowed by the Internal Revenue Service. App. at 53.
The plaintiffs took the Polls Creek tax deductions on their 1976 tax returns, filed in April of 1977. As it turned out, not only was the Polls Creek investment virtually worthless, but the Internal Revenue Service disallowed the tax write-offs and assessed the plaintiffs interest and penalties on the unpaid taxes.
It is undisputed that the plaintiffs received a one-hundred page memorandum in February, 1977, two months after the investment was made, setting out numerous risks of the Polls Creek investment, including "substantial tax risks." This memorandum, in effect, disclaimed most, if not all, of the alleged misrepresentations made by Grant in December, 1976.
For example, the memorandum warned the plaintiffs that the Polls Creek investment involved a "high degree of risk," and that it was "suitable only for those persons who have, and will continue to have, a high amount of annual income and a substantial net worth and who can afford to bear such risks and have no need for liquidity from such investment." App. at 536. The memorandum further warned that there was "no assurance that such coal reserves in fact exist, are in such quantities, consistently, or on the average or have the specifications shown in the report or that such reserves are physically or economically recoverable." App. at 536.
The Polls Creek investors were told in the February memorandum of App. at 536-37. The plaintiffs were warned that there was:
no assurance that the Partnership will be able to market its coal at a price which will permit it to recover costs incurred under the Contract Mining Agreement and still earn a profit. In the event that it is unable to cover such costs, the Partnership and the Limited Partners may suffer substantial adverse financial consequences, including the loss of their entire investment.
Additionally, the plaintiffs were told in the memorandum that each of them should assume, "that the Internal Revenue Service would claim that some if not all of the deductions this Partnership will claim are not allowable; this means every partner of this Partnership should assume he will be audited." App. at 545 (emphasis original).
One part of the memorandum dealt specifically with the tax ramifications: "There is a substantial risk that upon challenge, the deductions, particularly with respect to the portion to be paid by issuance by the Nonrecourse Note, could not be sustained by litigation." App. at 559.
In spite of this comprehensive warning, which effectively disclaimed all of the representations allegedly made to induce the plaintiffs to invest, the plaintiffs contend that their damages did not accrue until 1981 when the IRS notified them that their tax deductions would be disallowed. According to the plaintiffs' theory, their cause of action did not accrue until the last element of their damages could be ascertained, that is, when the tax deductions were actually disallowed.
The parties argue that the resolution of this case lies in the interpretation of Section 516.100 Mo.Rev.Stat. (1986), which states in pertinent part:
[T]he cause of action shall not be deemed to accrue when the wrong is done or the technical breach of contract or duty occurs, but when the damage resulting therefrom is sustained and is capable of ascertainment, and, if more than one item of damage, then the last item, so that all resulting damage may be recovered, and full and complete relief obtained.
Under the plaintiffs' theory, the last item of damage, that is, the disallowance of the deductions taken on their 1976 tax returns, did not occur until 1981, well within five years of filing suit in 1984. 4 According to the plaintiffs, had they sued prior to the disallowance, they could not have recovered for this element of damage. They argue that a claim for the loss of the tax deduction filed prior to 1981 would have been deemed too speculative.
Both plaintiffs and defendants contend that the issue for this Court to determine is whether, under Missouri law, a cause of action accrues, and thus the limitation period begins to run, at the time of ascertainment of some damage or at the time the last item of damage can be ascertained. Plaintiffs do not argue that the statute requires waiting until the exact amount of the last item of damage can be ascertained, but they do contend that the limitations period begins to run only when the fact that damage will be sustained can be ascertained. Thus, plaintiffs argue, until the IRS actually disallowed the 1976 deductions, sometime in 1981, they could not ascertain that they would suffer that element of damage. Both plaintiffs and defendants cite Missouri cases interpreting Section 516.100, quoted above, in support of their positions.
The resolution of this case, however, lies not in determining whether the limitations period commences when the first or the last element of damage is ascertained, but rather in determining what damages are available in Missouri for fraud and misrepresentation. On this point, the Missouri case law is clear and unambiguous. In a recent case the Missouri Supreme Court, sitting en banc, held:
The courts of this state are committed to the benefit of the bargain rule as a method of arriving at damages in a case of fraud and deceit. It allows a defrauded party to be awarded the difference between the actual value of the property and what its value would have been if it had been as represented. Smith v. Tracy, 372 S.W.2d 925, 938 (Mo.1963), as quoted in Auffenberg v. Hafley, 457 S.W.2d 929, 937 (Mo.App.1970). The damages are measured at the time of the transaction. Id. at 937.
Heberer v. Shell Oil Co., 744 S.W.2d 441 (Mo.banc 1988) (emphasis added). Furthermore, the Missouri Court of Appeals has recently held:
An action for relief on the ground of fraud, however, accrues--not when the resulting damage is capable of ascertainment--but when the facts constituting the fraud are discovered. It is governed not by the limitations provisions of Sec. 516.100, but by the limitations provisions of Sec. 516.120(5)....
Schwartz v. Lawson, 797 S.W.2d 828 (Mo.App.1990) (emphasis supplied).
All of the plaintiffs' damages can and must be measured as of the time of the transaction. That is to say, all of their damages are...
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