234 So. 3d 312
Miss.2017Background
- T.L. Wallace was sole owner of T.L. Wallace Construction until selling it in June 2012 after bond capacity and cash-flow collapse; McArthur Thames audited the company and prepared tax returns from 2007–2011 and issued unqualified opinions each year.
- After Wallace retired in 2006, management (including CFO T.J. Dunaway and President Jay Carney) ran day-to-day operations; later investigations showed millions in personal and nonshareholder expenses were charged to company job costs and “shop” accounts.
- Prospective buyers in 2012 uncovered materially overstated net worth; McArthur Thames rescinded the 2011 audit and amended statements were prepared reflecting large reclassifications of personal expenses.
- Wallace sued (Jan. 2013) for auditor negligence, negligent tax return preparation, breach of fiduciary duty/contract, fraud, and conspiracy, seeking ≈$14.7M in lost profits and lost business value.
- At summary-judgment/Daubert proceedings the trial court excluded plaintiff’s causation expert (R. Summerford) as unreliable and granted summary judgment for McArthur Thames for lack of expert proof of causation; plaintiff appealed and defendant cross-appealed discovery and statute-of-limitations rulings.
- Mississippi Supreme Court: expert testimony is not always required to prove causation in auditing malpractice; Wallace’s lay testimony created a triable issue as to causation, so summary judgment was reversed in part; exclusion of Summerford’s expert was affirmed; trial-court discovery limits (post-sale company records and Wallaces’ personal accounts) were reversed and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether expert proof of causation is required in auditing-malpractice cases | Wallace: no categorical requirement; his lay testimony about what he would have done creates a causal issue | McArthur Thames: complexity of accounting and valuation requires expert causation proof here | Court: no per se rule — expert not required here; lay testimony created genuine fact issue, so summary judgment reversed on causation |
| Admissibility of plaintiff's causation expert (R. Summerford) | Summerford: applied valuation and causal analysis tying negligent audits to lost profits/value | McArthur Thames: methodology unreliable under Rule 702/Daubert | Court: trial judge did not abuse discretion excluding Summerford; exclusion affirmed |
| Statute of limitations (accrual/discovery rule) | Wallace: injury was latent; he did not discover negligent audits until 2012 so suit timely | McArthur Thames: Wallace should have discovered problems earlier by inquiry | Court: genuine factual dispute about discovery accrual; denial of summary judgment affirmed |
| Discovery of post-sale company records and Wallaces’ personal bank accounts | Wallace: limited discovery to pre-sale records; post-sale/personal records unduly burdensome and beyond scope | McArthur Thames: post-sale and personal finances relevant to damages and to rebut plaintiffs’ claims of total loss | Court: trial court abused discretion by limiting post-sale company records and by denying discovery of Wallaces’ personal accounts; those rulings reversed and remanded |
Key Cases Cited
- Burnham v. Tabb, 508 So. 2d 1072 (Miss. 1987) (proximate cause requires reasonable connection between defendant’s act and plaintiff’s damage)
- Wal-Mart Stores, Inc. v. Johnson, 807 So. 2d 382 (Miss. 2001) (expert testimony not required where facts are within common understanding of jury)
- Travelers Cas. & Sur. Co. of Am. v. Ernst & Young LLP, 542 F.3d 475 (5th Cir. 2008) (lay testimony that decision-maker would not have acted absent auditor’s assurances supports causation)
- Wirtz v. Switzer, 586 So. 2d 775 (Miss. 1991) (distinguishing need for expert proof of standard of care from jury’s ability to find causation)