Cohen & Co. v. Breen , 2014 Ohio 3915 ( 2014 )

[Cite as Cohen & Co. v. Breen, 2014-Ohio-3915.]
Court of Appeals of Ohio
EIGHTH APPELLATE DISTRICT
COUNTY OF CUYAHOGA
JOURNAL ENTRY AND OPINION
No. 100775
COHEN & COMPANY
PLAINTIFF-APPELLEE
vs.
JAMES P. BREEN
DEFENDANT-APPELLANT
JUDGMENT:
AFFIRMED
Civil Appeal from the
Cuyahoga County Court of Common Pleas
Case No. CV-12-789388
BEFORE: McCormack, J., Blackmon, P.J., and Stewart, J.
RELEASED AND JOURNALIZED: September 11, 2014
ATTORNEYS FOR APPELLANTS
Philip S. Kushner
Christian J. Grostic
Kushner & Hamed Co., L.P.A.
1375 East 9th St.
Suite 1930
Cleveland, OH 44114
ATTORNEYS FOR APPELLEE
Andrew A. Kabat
Daniel M. Connell
Haber, Polk, & Kabat, L.L.P.
737 Bolivar Road
Suite 4400
Cleveland, OH 44115
TIM McCORMACK, J.:
{¶1} After a jury trial, the trial court awarded accounting firm Cohen &
Company (“Cohen”) $166,015.06 in fees James P. Breen (“Breen”) owed Cohen for
accounting services Cohen rendered in Breen’s divorce case. On appeal, Breen contends
that the trial court erred in excluding evidence relating to the accounting firm’s failure to
perform its duties according to the accounting standards set forth in the parties’
agreement. After a careful review of the record and applicable law, we affirm the
judgment of the trial court.
The Underlying Divorce Case and the Accounting Services
{¶2} The Breens were married in 2000. Kerri Breen (“Mrs. Breen”) filed for
divorce in 2009. Before he was married, Breen owned significant real estate through
five business entities. The real estate included the IMG Building and the Lincoln
Building in downtown Cleveland, and several commercial office buildings in the suburbs.
The values of these buildings decreased significantly during the Breens’ marriage.
Under the law, any appreciation in value of premarital properties during the marriage is
subject to division; however, if Breen could show the properties decreased in value
during the marriage, there would be no appreciation subject to division. In addition,
although the real estate had an approximate combined value of $14 million, in Breen’s
estimate they were all “under water” due to the large amount of mortgage obligations.
The valuation of the real estate was the focus of the four-year divorce proceeding.
{¶3} Breen initially hired Ciuni & Panichi to perform accounting services for his
divorce case. The matter went to trial in February 2011. In the second day of trial,
however, his divorce counsel was suspended from practice. The trial was continued to a
later date, and Breen retained new counsel, who recommended the accounting firm Cohen
& Company.
{¶4} Breen and Cohen entered into a letter of engagement in April 2011. The
agreement provided that the partner hourly rates range from $295 to $395, the
professional staff rates range from $135 to $295, and support staff range from $115 to
$155.
{¶5} Cohen provided various accounting services for Breen in the divorce
matter, from April 2011 to May 2012. The total bill came to $163,300.
{¶6} Andrew Finger was the partner for this engagement. According to his
testimony in the subsequent trial, his staff reviewed more than 25 boxes of documents,
which contained Breen’s personal and business financial information. The review
covered a period of over 12 years. At the request of Breen’s divorce counsel, Finger
prepared three reports for the purposes of determining property division and calculating
Breen’s support obligations.
{¶7} The first report prepared by Cohen was a valuation report. It valuated
Breen’s ownership interests in five business entities that owned or operated the real estate
at issue. The report was to determine the fair market value of Breen’s interests in these
business entities at the date of his marriage and determine whether they had increased or
decreased in value over the 12-year period of his marriage. Finger’s report showed that
the business entities all decreased in value over the period of his marriage. In fact, the
report showed that for four of the five business entities, the value of Breen’s ownership
interest was zero at the time of the divorce.
{¶8} The second report prepared by Cohen for the divorce proceeding was an
income- and-cash-flow report for the purpose of determining Breen’s spousal and child
support obligations.
{¶9} The third report prepared by Cohen was a “tracing” report to allow Breen to
prove the premarital portion of Breen’s assets. It traced every dollar coming into or
going out of each of his business entities during the 12-year period of the marriage. To
prepare this report, Cohen’s work included creating a statement of shareholders’ equity
for each property every year of the 12-year period and it involved sorting out all the loan
transactions among the entities over the period of time.
{¶10} According to Finger, at some point during the engagement, he realized most
of the properties would be “under water” and he raised the question of the necessity of the
costly valuation and tracing work with Breen’s divorce counsel, who assured him that
both the valuation and the tracing were critical to the ability of Breen to retain the
ownership of all his assets in the divorce proceeding.
{¶11} At the divorce trial, Mrs. Breen’s counsel challenged Finger’s testimony
about his valuation of the real estate at issue. After Finger testified at great length about
his valuation methodology, Mrs. Breen’s counsel filed a motion to exclude the valuation
report and Finger’s testimony. However, before the trial court ruled on the motion, the
Breens decided to settle. Under the settlement agreement, Breen retained all five
business entities.
{¶12} The bill of Cohen’s accounting services, including the three reports and
court testimony, came to $163,300. According to Finger’s testimony at trial, in order to
support the value opinions presented in the reports, Cohen had to conduct a thorough
review of a vast number of documents spanning over a 12-years period, making the
engagement very time-consuming and costly.
{¶13} Breen paid an initial retainer of $10,000 and later paid another $12,000.
After trying to work out a payment plan with Breen, without success, Cohen filed the
instant breach of contract action to collect unpaid fees of $141,300, plus interest.1
{¶14} In response to Cohen’s collection action, Breen filed a counterclaim,
alleging accounting malpractice and professional negligence by Cohen. Among other
contentions, Breen alleged Finger’s valuation report improperly adopted an appraisal
Regarding the payment history, Finger testified that Cohen sent Breen the bills monthly,
1
beginning in July 2011. Breen did not pay, but he did not question the amount of the bills either,
and Cohen continued its work. The valuation and income-and-cash-flow reports were completed in
August 2011, and the tracing report was completed in November 2011. By September 2011, there
was a balance of $86,000 and a payment plan was worked out to allow Breen to pay $2,000 per
month towards his outstanding balance. In a letter agreement signed by Breen on September 6,
2011, Breen acknowledged he owed $86,000 for Cohen’s services. In the letter, he also
acknowledged that additional time will be incurred for its services, including time for deposition and
court testimony. Breen stated in that letter that he was unable to pay due to his divorce proceeding,
but agreed to pay $2,000 per month toward the balance. Breen, however, made few payments under
this agreement. At the end, he paid a total of $22,000, including the $10,000 retainer up front. He
owed $166,015.06, including finance charges, at the time Cohen’s complaint was filed.
report prepared by James Huber, an appraiser hired by Mrs. Breen. Breen also alleged
Finger offered testimony at the divorce trial that was inconsistent with his written report.
{¶15} Breen requested several extensions of time to obtain an expert for his
counterclaim, which the trial court granted. However, apparently unable to secure an
expert, Breen voluntarily dismissed the counterclaim before trial.
{¶16} After Breen dismissed his counterclaim, Cohen filed a motion in limine to
preclude Breen from introducing evidence concerning alleged accounting malpractice or
failure to satisfy the applicable accounting standard of care. The trial court granted
Cohen’s motion in limine, on the ground that Breen had no expert to support his claim
that Cohen failed to adhere to the standards of care. The court, however, allowed Breen
to cross-examine Finger regarding the services provided by Cohen and its compliance
with the engagement letter, to the extent the testimony did not involve applicable
accounting standards. The court’s ruling on the motion in limine and exclusion of
evidence regarding Cohen’s failure to comply with accounting standards is the subject of
this appeal.
{¶17} After a three-day trial, the jury awarded Cohen $200,015, including accrued
interests. Breen filed a motion for a new trial or, in the alternative, for remittitur. The
trial court denied a new trial, but remitted the judgment to $166,015. Breen now appeals.
He raises a single assignment of error, which states:
Where an element of plaintiff’s claim was that it performed its duties under
the contract, the trial court erred by barring defendant from introducing
evidence of, cross-examining witnesses regarding, or even making
reference to, plaintiff’s failure to perform its duties according to the
standards underlying and set forth in the contract.
{¶18} We review motions in limine on an abuse of discretion standard. Mayfield v.
Cuccarese, 8th Dist. Cuyahoga No. 89594, 2008-Ohio-1812, ¶ 29. In general, the
decision whether to admit or exclude relevant evidence lies within the discretion of the
trial court. Rigby v. Lake Cty., 58 Ohio St. 3d 269, 271, 569 N.E.2d 1056 (1991). An
appellate court will not reverse that decision absent an abuse of discretion and a showing
of prejudice. Id.
{¶19} In this appeal, Breen’s claim focuses on his allegation of a failure to adhere
to applicable standards in Finger’s valuation report and Finger’s testimony at the divorce
trial. He argues Finger’s performance fell below the standard of care referenced in the
parties’ letter of engagement, and, in this manner, Cohen failed to fulfill its contractual
obligations, relieving Breen’s duty to pay.
{¶20} Breen points to the portion of the engagement letter that stated that Cohen
would provide services in connection with the performance of a valuation engagement, as
defined by Statement on Standards for Valuation Services #1 issued by the American
Institute of Certified Public Accountants (“SSVS #1”), “in order to determine or to
evaluate and reply to an opposing expert’s opinion” of the fair market value of James
Breen’s ownership interests.
{¶21} Breen alleges that the valuation report prepared by Finger to value Breen’s
ownership interests in the five business entities relied on the appraisal report by James
Huber, an opposing expert; furthermore, because Huber’s report was not produced as an
exhibit by either party, Finger’s opinion and testimony was called into question by Mrs.
Breen’s counsel.
Finger’s and Breen’s Testimony at Trial
{¶22} The valuation report prepared by Finger, which was admitted as an exhibit
at trial, stated that Cohen performed a valuation of Breen’s ownership interests in various
entities as the term is defined in “SSVS #1” of the American Institute of Certified Public
Accountants. It also stated that the valuation “was conducted in accordance with the
“SSVS #1.” At trial, Finger, a member of the American Institute of Certified Public
Accountants, who was also certified in financial forensics, testified that in valuing the
various business entities, he utilized the “Adjusted Book Value Method.” Under this
method, a balance sheet for each business entity was generated, which consisted of a
listing of all the assets and liabilities of the business entity.
{¶23} To determine the fair market value of the property owned by the businesses,
in turn, Finger used the “Capitalization of Earnings Method.” Finger explained that,
under the “Capitalization of Earnings Method,” one would identify the earnings expected
to be generated from the property annually and then determine the appropriate
capitalization rate (“multiple”). The property’s value would then be arrived at by
applying the capitalization rate/multiple to the earnings.
{¶24} Finger explained that the capitalization rate for each property is based on
various risk factors. He testified that in determining the appropriate “capitalization rate”
for the subject properties, he considered Huber’s appraisal report, among other data. He
stated that in his testimony in the divorce trial, he made it very clear that he independently
determined “the net operating income” and he considered a range of items in determining
the “capitalization rate,” including Huber’s appraisal report, a report prepared by
appraiser Richard Racek, the county tax valuation, the statistics in the capitalization rates
proposed by Price Waterhouse Coopers, and capitalization rates proposed by “CB Richard
Ellis.”
{¶25} Finger admitted that his use of the Huber appraisal in his valuation report
was challenged by Mrs. Breen’s counsel at trial. He testified, however, that whether his
reports were admissible in the divorce proceeding had nothing do with his responsibilities
as an accounting professional regarding the reports.
{¶26} Finger acknowledged that the Huber report carried a “restrictive use”
provision, but testified that Mrs. Breen’s counsel did not challenge his use of Huber’s
report based on that designation. Finger also stated that, generally, when a valuation
report was prepared, it was customary to allow the opposing party to use it.
{¶27} Breen did not have an expert for his claim that Cohen’s performance fell
below the applicable standard of care for an accounting professional. Although he
acknowledged that, because he dismissed the counterclaim, the issue of accounting
malpractice was not before the trial court, he nonetheless attempted to offer his own
testimony to show that the service provided by Cohen failed to adhere to the accounting
standards.
{¶28} Breen testified Finger’s performance was deficient in failing to challenge
Huber’s report. He pointed out that the letter of engagement stated that Cohen was to
perform a valuation engagement “in order to determine or to evaluate and reply to an
opposing expert’s opinion” of the value of his ownership interests in various entities, yet
Finger failed to rebut Huber’s report. In particular, a tenant in one of the properties had
been six months late for rental payments. Huber valuated the property based on what
Breen considered an extraordinary assumption that the tenant would become current soon.
Breen testified that he expected Finger to challenge and investigate the issue in his own
valuation report but Finger failed to do so. When questioned by Breen’s counsel on this
issue, Finger explained that he did not use the “rent roll” and income information from
the Huber report regarding the property. Instead, he determined the “net operating
income” of the property on his own, based on the financial statements of the company
involved, to arrive at his opinion of the property’s value.
{¶29} Breen also testified that Finger’s testimony in the divorce trial was
inconsistent with the valuation method utilized in his report. However, the trial court
here did not permit him to further testify or elaborate, on the ground that he was not
qualified as an expert. Throughout the trial, the trial court disallowed testimony from
Breen regarding his criticism of Finger’s valuation methodology because Breen was not
an expert.
Law and Analysis
{¶30} Although Breen withdrew his counterclaim of accounting malpractice and
professional negligence due to a lack of expert, it appears he attempted to offer his own
testimony on this issue by couching his claim as one for breach of contract, contending
that Cohen did not comply with the contractual terms by failing to adhere to the
accounting standards referenced in the letter of engagement.
{¶31} “The term ‘malpractice’ refers to professional misconduct, i.e. the failure of
one rendering services in the practice of a profession to exercise that degree of skill and
learning normally applied by members of that profession in similar circumstances.”
Strock v. Pressnell, 38 Ohio St. 3d 207, 211, 527 N.E.2d 1235 (1988), citing 2
Restatement of the Law 2d, Torts, Section 299(A) (1965). In the context of legal and
medical malpractice, the courts have held that “malpractice by any other name still
constitutes malpractice,” whether predicated on contract or tort. Pierson v. Rion, 2d
Dist. Montgomery No. CA23498, 2010-Ohio-1793, ¶ 14, citing Muir v. Hadler Real
Estate Mgmt. Co., 4 Ohio App. 3d 89, 89-90, 446 N.E.2d 820 (10th Dist.1982). The
Tenth District in Muir explained that “professional misconduct may consist either of
negligence or of breach of the contract of employment. It makes no difference whether
the professional misconduct is founded in tort or contract, it still constitutes malpractice.”
Muir at 90. See also Omlin v. Kaufmann & Cumberland Co., L.P.A., 8th Dist. Cuyahoga
No. 82248, 2003-Ohio-4069, ¶ 15; Dottore v. Vorys, Sater, Seymour & Pease, L.L.P.,
8th Dist. Cuyahoga No. 98861, 2014-Ohio-25, ¶ 33.
{¶32} “[B]ecause claims of professional negligence involve knowledge that is
beyond the ken of laypersons, expert testimony is required to assist the trier of fact in
determining these issues.” Vosgerichian v. Mancini Shah & Assocs., 8th Dist. Cuyahoga
Nos. 68931 and 68943, 1996 Ohio App. LEXIS 788, *8-9, (Feb. 29, 1996), citing
Ramage v. Cent. Ohio Emergency Serv., Inc., 64 Ohio St. 3d 97, 592 N.E.2d 828 (1992)
(expert testimony was necessary to establish the prevailing standard of care where the
professional skills and judgment of a nurse were alleged to be deficient).
{¶33} At the trial, the valuation report was submitted as an exhibit and it stated
that Cohen performed a valuation of Breen’s ownership interests in various entities as the
term is defined in “SSVS #1” of the American Institute of Certified Public Accountants.
It also stated that the valuation “was conducted in accordance with the “SSVS #1.”
Finger, a certified public accountant, testified that he performed the services in
conformity with the letter of engagement.
{¶34} Despite framing his claim as one for breach of contract, the claim that
Cohen failed to adhere to applicable accounting standards is in essence a claim of
malpractice. Breen lacked expert testimony to prove his allegations that Cohen’s
services fell below applicable standard of care for accounting professionals, a subject
matter beyond the knowledge of a lay person and requiring and the assistance of an
expert. Therefore, the trial court did not abuse its discretion in granting plaintiff’s
motion in limine and excluding evidence on this issue.
{¶35} Judgment of the Cuyahoga County Court of Common Pleas is affirmed.
It is ordered that appellee recover of appellant costs herein taxed.
The court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate issue out of this court directing the common
pleas court to carry this judgment into execution.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of
the Rules of Appellate Procedure.
______________________________________________
TIM McCORMACK, JUDGE
PATRICIA ANN BLACKMON, P.J., and
MELODY J. STEWART, J., CONCUR