H. Lefoldt, Jr. v. Donald Rentfro

Case: 18-60581 Document: 00515107730 Page: 1 Date Filed: 09/06/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 6, 2019
No. 18-60581
Lyle W. Cayce
Clerk
H. KENNETH LEFOLDT, JR., in his capacity as Trustee for the Natchez
Regional Medical Center Liquidation Trust,
Plaintiff - Appellant
v.
HORNE, L.L.P.,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Mississippi
Before HAYNES, GRAVES, and HO, Circuit Judges.
JAMES C. HO, Circuit Judge:
For over a century, Mississippi has required that a public board speak
and act only through its minutes. See Bridges v. Clay Cty. Sup’rs, 58 Miss.
817, 820 (Miss. 1881). Mississippi courts will not give legal effect to a contract
with a public board unless the board’s approval of the contract is reflected in
its minutes. “Otherwise, an individual member of the board or agent thereof
would be capable of binding the board and expending the public taxpayers’
money without the benefit of the consent of the board as a whole.” Butler v.
Bd. of Sup’rs for Hinds Cty., 659 So. 2d 578, 579 (Miss. 1995). The public
interest protected by the minutes rule is “paramount to other individual rights
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which may also be involved,” id., and Mississippi courts “strict[ly] adhere[]” to
the rule even when “the rule may work an apparent injustice.” Id. at 581–82
(quoting Colle Towing Co., Inc. v. Harrison Cty., 57 So. 2d 171, 172 (Miss.
1952)).
In this case, a private accounting firm, Horne, L.L.P., asks us to enforce
the minutes rule against the Natchez Regional Medical Center, a community
hospital owned by the Adams County Board of Supervisors. The Medical
Center (through its bankruptcy trustee, H. Kenneth Lefoldt) brought this suit
against Horne alleging accounting malpractice. Horne claims the suit must
fail because there can be no accounting malpractice claim without proof of a
professional relationship, and there is no record evidence on the minutes here
that the Medical Center ever entered into a professional relationship with
Horne.
We agree with Horne, as did the district court. Accordingly, we affirm.
I.
From 2009 to 2014, Horne served as the Medical Center’s auditor.
Horne’s services were provided pursuant to a series of engagement letters with
the Medical Center. Each of those engagement letters contained an arbitration
clause. The letters were executed by Charles Mock, the Medical Center’s chief
financial officer. But none of them were ever incorporated into the Medical
Center’s board minutes.
In 2014, the Medical Center filed for bankruptcy. The United States
Bankruptcy Court for the Southern District of Mississippi established a
liquidation trust and appointed H. Kenneth Lefoldt as its trustee. Acting in
this capacity, Lefoldt filed the underlying action against Horne, contending
that Horne was guilty of professional malpractice when it failed to detect
significant flaws in the Medical Center’s financial controls. According to the
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complaint, Horne’s supposed lapse resulted in the loss of millions of dollars in
unbilled revenue that contributed to the Medical Center’s descent into
bankruptcy.
After the complaint was filed, Horne moved to stay the proceeding so
that the parties could start the arbitration process as stipulated in the
engagement letters. The district court denied the motion. The Medical Center
successfully argued that, as a public body, it could speak and act only through
the minutes of its board of trustees, and that the arbitration agreement was
never approved in the board’s minutes.
On appeal, we affirmed on this point. We noted that, out of all the
minutes entered into the record, the board only referenced its contractual
relationship with Horne three times. Lefoldt v. Horne, L.L.P., 853 F.3d 804,
808–09 (5th Cir. 2017). And each of those occasions referred only to a one-year
contract signed in 2009. No mention was made of two subsequent agreements
executed in 2010 and 2012. Accordingly, we held that the 2010 and 2012
engagement letters failed as a matter of law. Id. at 813–14.
On remand, Horne moved for summary judgment on all claims stemming
from the 2010–2013 audits, using the same argument that the Medical Center
successfully invoked to void the arbitration agreement—that the agreement
failed under the minutes rule. As Horne explained, the Medical Center must
prove the existence of a professional relationship in order to prevail on its
malpractice claim. Horne argued that, by voiding the 2010 and 2012
engagement letters under the minutes rule, the Medical Center invalidated the
basis for that relationship. The district court granted summary judgment to
Horne.
In response, the Medical Center attempted to submit additional evidence
into the record to prove the existence of a professional relationship with
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Horne—namely, minutes from the board’s regular session meetings on
January 19, 2011 and March 16, 2011, as well as minutes from the board’s
executive session meetings. Based on this new evidence, the Medical Center
asked the district court to reconsider its grant of summary judgment.
The Medical Center admitted, however, that this evidence was in fact
not new at all—the Center had access to its own minutes throughout the
proceedings. It nevertheless sought to excuse its tardiness on the ground that
the minutes became relevant only when the district court granted summary
judgment to Horne. The district court rejected this explanation and denied the
motion. This appeal followed.
II.
Mississippi law requires that a plaintiff in an accounting malpractice
case prove by a preponderance of the evidence the existence of a professional
relationship. Great S. Excavators, Inc. v. TEC Partners, LLP, 231 So. 3d 1011,
1014 (Miss. Ct. App. 2017). A plaintiff may satisfy this burden in one of two
ways. It may demonstrate that the parties entered into a contract. Or it may
show that the parties were in privity with one another, such that the
accountant assumed a duty to handle the plaintiff’s delineated interests with
professional competency and care. Wirtz v. Switzer, 586 So. 2d 775, 779 (Miss.
1991) (quoting 1 AM. JUR. 2D Accountants § 15 (1962)), abrogated on other
grounds by Upchurch Plumbing, Inc. v. Greenwood Utils. Comm’n, 964 So. 2d
1100 (Miss. 2007).
This court has already determined that, by virtue of the minutes rule,
the Medical Center never formed a contract with Horne to perform the four
audits conducted from 2010 to 2013. Lefoldt, 853 F.3d at 813–14. So for the
Medical Center to survive summary judgment, it must show that it was in
privity with Horne. See, e.g., Edmonds v. Williamson, 13 So. 3d 1283, 1290
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(Miss. 2009) (recognizing a professional relationship even though client never
signed an agreement); Singleton v. Stegall, 580 So. 2d 1242, 1244 (Miss. 1991)
(recognizing a professional relationship after the client paid the lawyer’s fee).
The Medical Center must prove that it manifested its intent to engage Horne’s
services and that Horne either consented to provide those services or failed to
manifest its lack of consent, while reasonably knowing that the Medical Center
would rely on Horne to perform. Gibson v. Williams, Williams & Montgomery,
P.A., 186 So. 3d 836, 848 (Miss. 2016).
With that goal in mind, the Medical Center draws this court’s attention
to the four annual audits Horne conducted from 2010 to 2013. It notes that, in
previous cases, Mississippi courts have been willing to infer the continuation
of a professional relationship after an initial exchange of services. See Baker
Donelson Bearman Cladwell & Berkowitz, P.C. v. Seay, 42 So. 3d 474, 485
(Miss. 2010). We have previously recognized as valid the 2009 engagement
letter between Horne and the Medical Center. Lefoldt, 853 F.3d at 814. There
is no doubt that a professional relationship formed as a result of that
engagement letter. The Medical Center therefore argues that the four
subsequent audits are evidence that Horne and the Medical Center intended
to continue the professional relationship created by the 2009 engagement
letter beyond the initial one-year contract period.
This evidence would have been sufficient to overcome summary
judgment, but for the fact that the Medical Center is a community hospital run
by a public board and therefore subject to Mississippi’s minutes rule. KPMG,
LLP v. Singing River Health Sys., 2018 WL 5291088, at *5 (Miss. 2018); see
also MISS. CODE § 41-13-35(3). But as such, the Medical Center is limited in
the type of evidence that it can use to prove its intent to maintain a professional
relationship with Horne. Under Mississippi’s minutes rule, a public board
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“speaks and acts only through its minutes.” Wellness, Inc. v. Pearl River Cty.
Hosp., 178 So. 3d 1287, 1290 (Miss. 2015). The minutes are the “sole and
exclusive evidence of what the board did” in its official capacity. Smith v. Bd.
of Sup’rs of Tallahatchie Cty, 86 So. 707, 709 (Miss. 1921).
As we have previously held, the minutes initially submitted by the
Medical Center made no mention of doing any business with Horne beyond the
2009 engagement letter. Lefoldt, 853 F.3d at 809. So based on the record
before it, the district court was right to conclude that the Medical Center failed
to offer any competent evidence that it was in privity with Horne.
Accordingly, we affirm. 1
1The district court did not abuse its discretion when it denied the Medical Center’s
motion to reconsider based on its belated submission of additional board minutes. See, e.g.,
Templet v. HydroChem Inc., 367 F.3d 473, 477 (5th Cir. 2004) (abuse of discretion review
applies when district court refuses to consider new materials). As we have explained, the
content of the board minutes has played a central role in the case ever since the Medical
Center challenged the engagement letters under the minutes rule. The Medical Center has
presented no legitimate excuse for its delay.
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