COURT OF APPEALS OF OHIO, EIGHTH DISTRICT COUNTY OF CUYAHOGA NO. 68006 : GOMERSALL & CHESTER CPA'S : : JOURNAL ENTRY Plaintiff-Appellee : : and -vs- : : OPINION : SHORE METAL TREATING, INC. : : Defendant-Appellant : : DATE OF ANNOUNCEMENT APRIL 3, 1997 OF DECISION: CHARACTER OF PROCEEDING: Civil appeal from Common Pleas Court Case No. 262266 JUDGMENT: Affirmed. DATE OF JOURNALIZATION: __________________________ APPEARANCES: For Plaintiff-Appellee: For Defendant-Appellant: JOHN D. SAYRE, ESQ. JAMES F. KOEHLER, ESQ. THOMAS A. GATTOZZI, ESQ. TIMOTHY J. FITZGERALD, ESQ. JAMES H. GROVE, ESQ. 7th Floor Bulkley Building Nicola Gudbranson & Cooper 1501 Euclid Avenue 2750 Terminal Tower Cleveland, Ohio 44115 Cleveland, Ohio 44113-2287 -2- PATRICIA ANN BLACKMON, P.J.: Defendant-appellant Shore Metal Treating, Inc. (Shore Metal) appeals a decision from the trial court in favor of plaintiff- appellee Gomersall & Chester CPA's (Gomersall & Chester) on its complaint for fees for accounting services rendered and denying Shore Metal's counterclaim for accountant malpractice. Shore Metal 1 assigns six errors for our review. We affirm the trial court's judgment as it pertains to assign- ments of error I, II, IV and V. However, in a separate entry we dismissed Shore Metal's assigned error III and VI under the doctrine of res judicata. In Motion No. 77081 Gomersall & Chester claimed Shore Metal's assigned errors III and VI pertained to claims allowed and paid in Shore Metal's Chapter 7 Bankruptcy and are barred under the doctrine of res judicata. We agreed and granted that motion. The apposite facts follow. Gomersall & Chester, an accounting firm, provided accounting services for Shore Metal, Inc. Shore Metal was a partnership between Wayne Samuelson and Glen Ratliff. Samuelson and Ratliff were also partners in S&R Realty, a real estate company through which they owned the building in which Shore Metal was housed. Shore Metal leased the building from S&R Realty. Around 1987, Ratliff decided to move out of state and wanted to divest himself of his interests in Shore Metal and S&R Realty. On Gomersall's advice, Shore Metal redeemed Ratliff's 60% interest 1 See Appendix. -3- in Shore Metal Treating and gave him a promissory note for $356,000. Twenty percent of S&R Realty was later sold to Shore Metal, which became a partner in S&R Realty. The transaction left Ratliff with 48% ownership and Samuelson with 32% ownership. S&R Realty borrowed $750,000 from Ameritrust. Part of the money was paid on the mortgage on the building and the rest was used by Samuelson to buy out Ratliff's interest in S&R Realty in January 1989. Samuelson received a salary from Shore Metal as well as additional compensation in form of loans from Shore Metal's profit sharing plan. For 1988, Samuelson received a salary of $70,000 and loans of $85,805. In 1989, Samuelson received a salary of $49,207 and loans of $146,717. In 1990, Samuelson received a salary of $50,000 and loans of $146,587. In 1991, Samuelson received a salary of $38,850 and loans of $170,552. In 1990, Samuelson withdrew approximately $33,000 from Shore Metal's profit sharing plan in the form of loans. IRS regulations limited the amount of such loans to the lesser of $50,000 or one- half of the participant's vested interest in the plan. On January 1, 1991 and again on December 31, 1991, Gomersall & Chester sent Samuelson a letter advising him that the loans from the profit sharing plan were in violation of IRS limits and requirements. In the letter, Gomersall & Chester advised Samuelson to begin repayment of the loans immediately. Gomersall & Chester also warned of the possibility of tax penalties and IRS disqualification of the plan. Despite these warnings, Samuelson did not repay the -4- loans. In 1992, Gomersall & Chester contacted Samuelson to discuss termination of the profit sharing plan. Under IRS rules, if a profit sharing plan showed no contributions for a period of five years, it was subject to disqualification. After an IRS disqualification, the amounts invested in the plan would be taxable to plan participants. Concerned about possible disqualification, Gomersall & Chester decided to file a Form 5310 with the IRS to enable Shore Metal to voluntarily terminate its plan. Gomersall & Chester became concerned that the unpaid loans taken by Samuelson from the profit sharing plan would result in an IRS audit. He prepared a promissory note for $34,440.73 to reflect the amount of the outstanding loans. Though prepared in 1992, the note was dated August 31, 1991. After consulting with another accountant, James Jenkins, Samuelson refused to sign the note and fired Gomersall. On July 24, 1992, after receiving the Form 5310, the IRS sent Shore Metal a request for additional information about the profit sharing plan including a request for a copy of the note showing the principal and interest rate for the $34,440 loan to Samuelson. Gomersall & Chester advised Samuelson that he would not respond to the information request and advised Samuelson to discuss the matter with his new accountant. Jenkins failed to file the requested documents. The IRS found the loans taken by Samuelson from the profit sharing plan violated the Internal Revenue Code. The loans were treated as distributions -5- and additional taxes, interest, and penalties were imposed. On December 3, 1993, Gomersall & Chester filed a complaint against Shore Metal Treating, Inc. for $64,465.40 in outstanding fees for accounting services. On February 9, 1994, Shore Metal filed its answer to the complaint, along with a counterclaim for breach of contract, negligence, and breach of fiduciary duty. Wayne Samuelson, his wife Rosemary Samuelson, and S&R Realty intervened as defendant-counterclaimants. In the counterclaim, Shore Metal alleged that Gomersall & Chester provided erroneous advice on several matters including (1) the company profit sharing plan; (2) the loans made by Shore Metal to Samuelson and others in lieu of compensation and secured by "promissory notes" without due dates or repayment schedules; (3) Samuelson's purchase of an additional interest in S&R Realty; (4) structure of a $54,000 corporate loan from a third party; (5) structure of transactions involving loans made by Samuelson to Shore Metal Treating using funds borrowed from the profit sharing plan; (6) an attempt by Shore Metal Treating to terminate the profit sharing plan without repaying the money borrowed from the plan and (7) the sale by Samuelson of part of his partnership interests in Shore Metal Treating and S&R Realty. In the counterclaim, Shore Metal Treating, Inc., Samuelson, and S&R claimed that Gomersall's erroneous accounting and tax advice subjected them to substantial taxes and penalties. After a trial, the jury found in favor of Gomersall & Chester on the complaint in the sum of $64,065.50. The jury also found in -6- favor on Gomersall & Chester on the counterclaim. On August 24, 1994, Shore Metal moved for judgment notwithstanding the verdict or, in the alternative, for a new trial. The court denied the motion on September 12, 1994. This appeal followed. In its first assignment of error, Shore Metal asserts the trial court erred by not instructing the jury that violations of the American Institute of Certified Public Accountant's Code of Professional Conduct was evidence of accounting malpractice. Shore Metal sought the following instruction: There has been testimony and evidence presented to you regarding the American Institute of Certified Public Accountants, the "AICPA," and its Code of Professional Conduct. This Code of Conduct has been adopted by the AICPA to set forth the minimum standard of care for persons who practice in the accounting profession. The violation by Gomersall & Chester of the Code of Professional Conduct is a circumstance which you may consider, along with the other facts and circumstances of this case, in determining whether the Gomersall firm has acted with the degree of care required. When reviewing a claim of error in the trial court's jury instructions, we must determine whether the appellant's substantial rights have been directly and prejudicially affected. Wagenheim v. Alexander Grant & Co. (1983), 19 Ohio App.3d 7, 16. In this case, Shore Metal Treating has failed to demonstrate that it was prejudiced by the trial court's failure to give the requested instruction. The trial court permitted Shore Metal's expert to testify as to the provisions of the AICPA Code of Professional Conduct and to give his opinion that Gomersall & Chester violated that code. The court instructed the jury that it was to decide -7- "whether the method or procedure by the plaintiff was reasonable or cautious and in accordance with the standard of care required of an accountant in his field of practice." (Tr. 612) The trial court is not required to give requested jury instructions verbatim. It is only required to clearly and fairly inform the jury about the applicable law so they can understand it and apply it to the facts of the case. Wagenheim at 16. Because we conclude the trial court's instructions accurately and completely explained what evidence the jury could consider in determining whether Gomersall & Chester breached its duty of care, we overrule Shore Metal's first assignment of error. In its second assignment of error, Shore Metal asserts the trial court erred in denying its motion for judgment notwithstand- ing the verdict or, in the alternative, for a new trial on its claim for accounting negligence. A motion for judgment notwith- standing the verdict should be granted when "the trial court, after construing the evidence most strongly in favor of the party against whom the motion is directed, finds that upon any determinative issue reasonable minds could come to but one conclusion upon the evidence submitted and that conclusion is adverse to such party." Civ.R. 50(A)(4). Shore Metal alleged that Gomersall & Chester breached his duty of care by improperly structuring the 1988 buyout of Glen Ratliff's interests in Shore Metal and S&R Realty. Shore Metal's expert, Gary Bleiweiss, testified the loans taken out by S&R Realty and given to Samuelson to facilitate the Ratliff buyout should have -8- been directly to Samuelson and could have avoided a capital gain in 1992 which resulted in an additional $74,066 in additional tax liability. Gomersall & Chester testified that, if Samuelson had purchased Ratliff's interest outright, the partnership would have immediately terminated and Shore Metal would have lost the tax and income benefits of being a partnership. In addition, the transaction would have been taxable to Samuelson. Bleiweiss also testified that Gomersall & Chester breached the standard of care by filing the Form 5310 in connection with the termination of the profit sharing plan. According to Gary Bleiweiss, the filing of the Form 5310 alerted IRS to the existence of outstanding loans by Samuelson and resulted in an IRS audit. However, Bleiweiss admitted that he had never terminated a profit sharing plan. Gomersall & Chester testified that Samuelson ignored his repeated warnings that Samuelson was improperly borrowing money from the profit sharing plan and his recommendations that Samuelson should begin to repay the loans immediately. After five years during which no contributions were made to the profit sharing plan, Gomersall & Chester recommended termination of the plan in order to avoid possible IRS disqualification to the plan which would make the amounts invested in the plan taxable to all participants. Gomersall & Chester testified he filed the 5310 in order to ensure IRS cooperation with the plan's termination. When the IRS requested additional documentation to support the $34,449 in -9- outstanding loans from the plan, Gomersall & Chester recommended that Samuelson execute a promissory note to memorialize the loan transaction in order to avoid an audit. However, Samuelson refused to do so and fired Gomersall. In a letter dated August 13, 1992, Gomersall & Chester notified Samuelson he would not respond to the IRS request for information and advised him to discuss the information request with his new accountant. Bleiweiss testified that the signing of the promissory notes in 1992 to reflect a transaction taking place in 1991 would be illegal. However, Gomersall's expert, Jeffrey Neuman, testified that the notes were not improper because they reflected trans- actions which actually occurred and there was no requirement that the notes be prepared within a certain time frame of the trans- actions. Bleiweiss conceded that, had the notes been signed, they might have constituted sufficient documentation to comply with the IRS request for information and could have avoided an audit. Construing the evidence most strongly in favor of Gomersall, we conclude that reasonable minds could reach different conclusions about whether Gomersall's advice fell below the standard of care within the accounting profession. Consequently, the trial court correctly denied the motion for directed verdict. Our review of the trial court's denial of the motion for new trial is limited to a determination of whether the trial court abused its discretion. See Malone v. Courtyard by Marriott (1996), 74 Ohio St.3d 440, 447. Though Shore Metal argues the jury verdict was against the manifest weight of the evidence, the testimony -10- discussed above demonstrates there was competent, credible evidence upon which the jury could conclude Gomersall's advice was proper. See First Federal Sav. Bank v. WSB Investments (1990), 67 Ohio App.3d 277, 282. We conclude the trial court correctly denied Shore Metal's motion for a new trial of its accounting malpractice claim. Shore Metal's second assignment of error is overruled. Shore Metal's third assignment of error was dismissed by this Court in Journal Entry No. 81248, dated April 3, 1997. Shore Metal's fourth assignment of error claims the trial court erred when it refused to instruct the jury on the issue of punitive damages where there was uncontroverted evidence that Gomersall & Chester had counseled his client to commit a federal criminal offense by backdating documents before an IRS audit. Punitive damages are intended to punish and deter certain conduct. Moskovitz v. Mt. Sinai Med. Ctr. (1994), 69 Ohio St.3d 638, 651. A plaintiff is not entitled to punitive damages unless he can show that the tortfeasor acted with actual malice which is defined as a "state of mind under which a person's conduct is characterized by hatred, ill will or a spirit of revenge or a conscious disregard for the rights and safety of other persons that has a great probability of causing substantial harm." See R.C. 2315.21(C)(3); Preston v. Murty (1987), 32 Ohio St.3d 334 at syllabus; Atkinson v. Internatl. Technegroup, Inc. (1995), 106 Ohio App.3d 349, 362; Cabe v. Lunich (1995), 70 Ohio St.3d 598, 604. Shore Metal argues an instruction on punitive damages was warranted because Gomersall & Chester counseled Samuelson to commit -11- a criminal offense by backdating documents and because Gomersall & Chester committed a criminal offense by disclosing his client's tax information without his consent. Shore Metal erroneously cites Cabe v. Lunich (1995), 70 Ohio St.3d 598 for the proposition that punitive damages should be submitted to the jury for its consideration when the defendant's conduct is a criminal offense. Cabe held evidence that a driver involved in a vehicular accident was legally intoxicated requires the trial court, upon plaintiff's request, to instruct the jury that punitive damages may be found to be appropriate if the jury finds the driver acted with actual malice by driving after consumed alcohol. Id. at 602-603 (emphasis added). Cabe did not relieve the plaintiff's burden of proving actual malice. Contrary to Shore Metal's argument, the mere fact that Gomersall & Chester committed a criminal offense does not entitle Shore Metal to an instruction on punitive damages. Shore Metal presented no evidence that Gomersall & Chester acted out of hatred, ill will, revenge, or a conscious disregard for Shore Metal's rights and safety of others. Accordingly, the trial court acted properly in refusing to instruct the jury on punitive damages. Moreover, in McCullough v. Spitzer Motor Center, Inc. (1996), 108 Ohio App.3d 530, 536 the court held the trial court's failure to charge on punitive damages, even if erroneous, was not prejudicial where the jury returned a verdict in favor of the defendant. Because proof of actual damages on the underlying action is required before punitive damages can be awarded, the -12- jury's finding of no liability on the counterclaim was held to eliminate any basis for punitive damages, thereby rendering harmless any error in the court's failure to give the requested instruction. Id. Shore Metal's fourth assignment of error is overruled. In its fifth assignment of error, Shore Metal argues the trial court erred in allowing Gomersall's expert, Jeffrey Neuman, to testify at trial when the evidence revealed that Gomersall & Chester violated federal criminal law by furnishing Shore Metal's tax information to Neuman without Shore Metal's consent. In Wagenheim v. Alexander Grant & Co. (1983), 19 Ohio App.3d 7, 11, the court held that the client's right against the unauthorized disclosure of his financial information is subject to an exception when disclosure is necessary and relevant to resolving a litigated issue. In this case, Gomersall's handling of Shore Metal's financial affairs was at issue in the accountant malpractice counterclaim raised by Shore Metal. Consequently, a review of Shore Metal's financial information and of Gomersall's advice by a qualified expert was relevant and necessary to the determination of the issues raised by the counterclaim. Under the circumstances, the trial court did not err in permitting Neuman to testify at trial. Shore Metal's fifth assignment of error is overruled. Finally, Shore Metal's assignment of error VI was dismissed in Journal Entry No. 81248, dated April 3, 1997, for the reasons contained therein. Judgment affirmed. -13- It is ordered that Appellee recover of Appellant its 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. Exceptions. PORTER, J., and PATTON, J., CONCUR. PATRICIA ANN BLACKMON JUDGE N.B. This entry is an announcement of the court's decision. See App.R. 22(B), 22(D) and 26(A); Loc.App.R. 27. This decision will be journalized and will become the judgment and order of the court pursuant to App.R. 22(E) unless a motion for reconsideration with supporting brief, per App.R. 26(A), is filed within ten (10) days of the announcement of the court's decision. The time period for review by the Supreme Court of Ohio shall begin to run upon the journalization of this court's announcement of decision by the clerk per App.R. 22(E). See, also S.Ct.Prac.R. II, Section 2(A)(1). -14- APPENDIX ASSIGNMENTS OF ERROR I. THE TRIAL COURT ERRED WHEN IT REFUSED TO INSTRUCT THE JURY THAT PLAINTIFF-APPELLEE'S VIOLATIONS OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT'S CODE OF PROFESSIONAL CONDUCT WAS EVIDENCE OF ACCOUNTING MALPRACTICE. II. THE TRIAL COURT ERRED WHEN IT DENIED THE MOTION FOR JUDGMENT NOTWITHSTANDING THE JURY'S VERDICT OR IN THE ALTERNATIVE FOR A NEW TRIAL ON THE CLAIM FOR ACCOUNTING MALPRACTICE. III. THE TRIAL COURT ERRED WHEN IT DENIED THE DEFENDANT-APPELLANT'S MOTIONS FOR A DIRECTED VERDICT AND FOR JUDGMENT NOTWITHSTANDING THE JURY'S VERDICT ON THE CLAIM FOR FEES. IV. THE TRIAL COURT ERRED WHEN IT REFUSED TO INSTRUCT THE JURY ON THE ISSUE OF PUNITIVE DAMAGES WHERE THERE WAS UNCONTROVERTED EVIDENCE THAT PLAINTIFF-APPELLEE HAD COUNSELED HIS CLIENT TO COMMIT A FEDERAL CRIMINAL OFFENSE BY BACKDATING DOCUMENT BEFORE AN IRS AUDIT. V. THE TRIAL COURT ABUSED ITS DISCRETION IN PERMITTING PLAINTIFF-APPELLEE'S EXPERT WITNESS TO TESTIFY WHERE THE PLAINTIFF-APPELLEE COMMITTED A FEDERAL CRIMINAL OFFENSE WHEN HE TURNED OVER THE TAX RETURNS AND RELATED INFORMATION OF DEFENDANT-APPELLANT AND INTERVENOR-APPELLANTS TO THE EXPERT WITHOUT THE TAXPAYERS' CONSENT OR A VALID COURT ORDER. VI. THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT PERMITTED THE PLAINTIFF TO REOPEN ITS CASE TO .