Cohen & Co. v. Breen

2014 Ohio 3915

• Court: Ohio Court of Appeals
• Decided: September 11, 2014
• Docket: 100775
• Status: Published

Opinion

[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