Walter Morgan v. Ann Fennimore

N ON PRECEDEN TIAL DISPOSITION
To be cited only in accordance with
Fed. R. App. P. 32.1
U nited States C ourt of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued May 5, 2011
D ecided July 18, 2011
Before
H on. D aniel A. Manion, C ircuit Judge
H on. D iane P. Wood, C ircuit Judge
H on. Ann C laire Williams, C ircuit Judge
N o. 10-3863 Appeal from the U nited States D istrict
C ourt for the Southern D istrict of
Walter L. Morgan, Indiana, Indianapolis D ivision.
Plaintiff-A ppellant, N o. 09 C V 00399
v. Sarah Evans Barker, Judge.
Ann J. Fennimore and Fennimore and
Associates, P.C .,
D efendants-A ppellees.
O RD ER
Walter Morgan had the good fortune of winning the Ohio lottery; unfortunately, for
the next twenty years his accountant failed to file an Ohio tax return on the annual distribution
from his winnings. Morgan learned of this fact years later when the state sent him a bill for
almost two million dollars. Not surprisingly, he sued his accountant for malpractice. The
No. 10-3863 Page 2
district court found that Morgan’s claims were barred by the statute of limitations and granted
summary judgment for the accountant. Morgan appeals, and we affirm.
I.
In 1986, Walter Morgan won twenty-five million dollars in the Ohio lottery. At the time,
a lump sum payment was not available, so Morgan’s winnings were spread out over twenty
years, with Morgan receiving a little over 1.2 million dollars a year. Shortly after winning the
lottery, Morgan’s wife asked that the winnings be put in both their names. He obliged. And
a year or so later, she divorced him, cutting his annual payment down to a little over $600,000.
Among other things, he invested some of that amount in a local furniture business that he ran
with a cousin.
At the time that Morgan won the lottery, he lived and worked in Indiana and had a
local accountant. Even with his new fortune, he remained in Indiana and kept the same
accountant for taxes and other matters. The original accounting firm that Morgan used was
later purchased by Ann Fennimore, a CPA. And in 1990, she took over Morgan’s account,
which included his winnings and the furniture business. In at least one instance Fennimore
proved astute: she discovered that Morgan’s cousin was stealing from the company and she
let Morgan know about it.
But while Fennimore performed well ferreting out the cousin’s fraud, her performance
on tax returns left much to be desired. Since Morgan’s winnings were paid annually, each year
the Ohio lottery sent him a substantial check after first withholding taxes for the IRS and Ohio.
Ohio also sent Morgan a W–2G form that documented the lottery winnings for tax purposes.
And each year Morgan gave Fennimore the W– 2G form. Yet, in spite of the fact that
Fennimore received a W–2G every year and Ohio withheld taxes on Morgan’s winnings,
Fennimore failed to prepare and file Ohio taxes for Morgan. At her deposition, she could not
offer any explanation for this. For what it’s worth, though, Morgan’s initial accountant didn’t
file Ohio taxes on his lottery winnings either. Whatever the reason, for almost twenty years
neither Fennimore nor the state of Ohio caught on to the error.1
In 2003, Morgan’s life changed. He divorced his second wife, moved from Indiana
to Washington state, and transferred his remaining lottery winnings to an investment firm.
In exchange for the rights to his remaining winnings, he received an annuity and was no
1
And we don’t know whether Morgan’s ex-wife paid O hio income taxes on her
share of the winnings.
No. 10-3863 Page 3
longer responsible for paying taxes on the lottery income. From then on, the investment
firm was responsible for paying Ohio taxes on the lottery winnings. Although he moved
to Washington, Morgan continued to use Fennimore (in Indiana) for his annual tax
return—income that at this point did not include lottery winnings.
D uring the summer of 2008 Morgan received a letter from the state of O hio notifying
him that he had overpaid his taxes the previous year by three thousand dollars and asking
whether he wanted a check for that amount or to have it credited to his taxes the following
year. Morgan opted for the check. But apparently what appeared to be a favorable audit caused
the state to further scrutinize his account. So instead of receiving a check, Morgan received a
notice that the three thousand dollars had been credited to his outstanding tax bill of almost
two million dollars. The notice also asked for prompt payment of the remaining sum. Morgan
actually owed less than a half-million dollars in back taxes; the bulk of the total consisted of
interest and penalties.
After reading the notice, Morgan immediately called Fennimore to determine what had
happened. Fennimore promised to handle the matter and Morgan granted her power of
attorney to deal directly with the state of O hio. After many unexplained delays on
Fennimore’s part and with a looming deadline for challenging the tax assessment, Morgan
hired an attorney, who was able to negotiate the tax bill down to $250,000. Morgan paid the
tab, and in 2009 sued Fennimore in Indiana for malpractice.
Before the district court, Fennimore denied any liability; in addition, she argued that
under Indiana law Morgan’s claims were barred by its statute of limitations. Morgan, for his
part, argued that O hio law and its statute of limitations should apply. The distinction is critical
to Morgan’s claim. In O hio, the statute of limitations for accounting malpractice claims is four
years from the time the party learns of the malpractice, while in Indiana it is three years from
the date the accounting service is provided. Ind. C ode § 25–2.1–15–2; O hio. Rev. C ode
§ 2305.09. Fennimore’s last allegedly negligent act was in April 2004 when she failed to prepare
and file Morgan’s 2003 O hio state taxes with the rest of the taxes she prepared for him that
year. Yet it wasn’t until over four years later, in July 2008, that Morgan learned of her
negligence, and he didn’t file a lawsuit until April 2009. So, under O hio law Morgan’s claims
could go forward, but under Indiana law his claims were barred unless the statute of
limitations was tolled by some equitable doctrine. In a very thorough order, the district court
found that under Indiana’s choice-of-law rules, Indiana law applied to Morgan’s claims and
that his claims were time-barred and not otherwise equitably tolled—namely by the
continuous-representation doctrine.
II.
No. 10-3863 Page 4
On appeal, Morgan challenges the district court’s finding both that Indiana law applies
to his claims and that his claims are not tolled by the continuous-representation doctrine.2 We
review the granting of summary judgment de novo. Carlisle v. Deere & Co., 576 F.3d 649, 653
(7th Cir. 2009).
When a federal court hears a diversity case it applies the forum state’s choice-of-law
rules. Carlisle, 576 F.3d at 653. Here, the forum state is Indiana, which employs a modified lex
loci delicti analysis. In re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1016 (7th Cir. 2002). Under
it, the substantive law of the place of the wrong will usually govern, “unless the state where
the tort occurred is an insignificant contact.” Simon v. United States, 805 N.E.2d 798, 804 (Ind.
2004). Then Indiana looks to the state with the most significant contacts. Id. at 805.
While there is room for debate about whether Indiana courts would consider Indiana
or Ohio the place of the wrong, the answer to that question is not the deciding factor in this
case. Rather, this is overwhelmingly an Indiana case: Fennimore’s office is in Indiana, during
much of the relevant time period Morgan lived in Indiana, Morgan and Fennimore’s
relationship was centered in Indiana, and Fennimore’s failure to properly prepare and file
Morgan’s taxes occurred in Indiana. Thus, Indiana has the most significant contacts with this
case. And under Indiana’s choice-of-law rules, we apply Indiana law.
Under Indiana law, Morgan had to file his claims the earlier of (1) one year from the
date the alleged act or omission is discovered or should have been discovered, or (2) three
years after the service for which the suit is brought was performed. Ind. Code § 25–2.1–15–2.
The “three-year limitation period contains no discovery rule.” Crowe, Chizek, & Co., v. Oil Tech.,
Inc., 771 N.E.2d 1203, 1207 (Ind. Ct. App. 2002). Fennimore’s last negligent act was completed
in April 2004 when she failed to prepare and file Morgan’s 2003 Ohio tax return with the other
tax returns she prepared for him that year—presumably his federal and Indiana taxes. But
Morgan did not file his lawsuit until April 2009—five years later. So, his claims are barred
unless the statute of limitations is somehow tolled.
Morgan argues that the statute of limitations should be tolled under the continuous-
representation doctrine. Biomet, Inc. v. Barnes & Thornhurg, 791 N.E.2d 760, 765–68 (Ind. Ct.
App. 2003). Under it, the statute of limitations is tolled when there is a negligent act and an
2
At oral argument, Morgan also argued that the statute of limitations had not run
because he was also claiming accounting malpractice during the years 2006–2008. That
argument was not clearly presented to the district court nor was it raised in his briefs, and it
is thus waived. See Aw e v . A shcroft, 324 F.3d 509, 512–13 (7th C ir. 2003).
No. 10-3863 Page 5
ongoing professional service attached to the specific negligent act that is in dispute—the mere
continuation of a general, professional relationship is not enough. Bambi’s Roofing, Inc. v.
Moriarty, 859 N.E.2d 347, 357 (Ind. Ct. App. 2006). To determine whether the doctrine applies,
Indiana courts focus on “the matter which formed the basis of the alleged professional
malpractice.” Id. at 356. They then look to see if there was an ongoing, professional relationship
tied to that precise matter. Id. For example, if an accountant makes a mistake setting up a
client’s tax shelter that the IRS later deems invalid and the accountant then attempts to defend
the client before the IRS concerning that alleged error, the statute of limitations is tolled during
the course of the representation tied to the faulty tax shelter. E.g., Ackerman v. Price Waterhouse,
252 A.D. 2d 179 (N.Y. 1998). The doctrine does not, however, toll the statute of limitations
when there is an alleged act of malpractice, and subsequently there remains some general,
ongoing professional relationship between the client and the accountant. Bambi’s Roofing, Inc.,
859 N.E.2d at 358. So, if after the tax shelter is deemed invalid the accountants still prepare
some tax forms or perform a general audit every year, that wouldn’t be a enough to hold that
the doctrine applies. Id.Morgan argues that the doctrine should apply for two reasons. First, he argues that the
doctrine applies because Fennimore continued to do his taxes until 2008. Second, he argues
that the doctrine applies because when he called Fennimore about the Ohio tax bill in the
summer of 2008 she looked into the matter, but did not really do anything to fix her repeated
errors. He claims that her services at that time constitute a continuous representation that was
directly tied to the malpractice—namely, her failure to file Ohio taxes. Concerning Morgan’s
first argument, the fact that Fennimore continued to do his taxes until 2008 simply means that
they had a general, ongoing professional relationship. Each year he had income—unrelated
to the lottery—and each year she prepared his taxes for him. These services were not tied in
any way to her failure to file Ohio taxes over the years before 2004, and the doctrine is
“necessarily limited to the accountant’s representation in the same, specific matter” as the
alleged malpractice. Bambi’s Roofing, 859 N.E.2d at 358 (emphasis added)). Thus, the tax returns
she prepared and filed for him after 2004 do not toll the statute of limitations.
Morgan’s second argument is that his call to Fennimore in the summer of 2008 about
his Ohio tax bill for the years 1986–2003 constituted a continuous representation. He’s correct
that this phone call and Fennimore’s “efforts” to clear up the problem were tied to the specific
act of malpractice: her failure to prepare and file the Ohio tax returns. The problem is that by
the time Morgan learned of Fennimore’s negligence and contacted her, the statute of
limitations had expired. And a single act of representation on a related issue four years after
Fennimore failed to properly prepare and file Morgan’s taxes, and at least one year after the
statute of limitations had already expired, is insufficient to find that the continuous
No. 10-3863 Page 6
representation doctrine applies. See Maurice W. Pomfrey & Associates, Ltd. v. Hackock &
EstaBrook, LLP, 50 A.D.3d 1531 (N.Y. App. Div. 2008) (“[Plaintiff] did not seek or obtain
defendant’s services in connection with the employment agreement until March 2000, more
than three years after the statute of limitations . . . expired [and therefore the continuous
representation doctrine did not apply.]”); cf In re Paternity of S.J.J., 877 N.E.2d 826, 829 (Ind. Ct.
App. 2007) (holding “a new statute of limitations cannot revive a claim which was foregone
under the prior statute of limitations before passage of the new one”(quotation omitted));
Hughes Aircraft Co. v. ex rel. Schumer, 520 U.S. 939, 950 (1997) (noting that “extending a statute
of limitations after the pre-existing period of limitations has expired impermissibly revives a
moribund cause of action”). Indeed, Morgan is not really asking us to apply the continuous
representation doctrine; he is asking us to re-write it, something we are not inclined to
do—“Federal courts are loathe to fiddle around with state law.” Insolia v. Philip Morris Inc., 216
F.3d 596, 607 (7th Cir. 2000).
III.
In sum, the district court correctly determined that under Indiana’s choice-of-law rules
Indiana law governs Morgan’s claims. In addition, the district court correctly determined that
Morgan’s claims were barred by the Indiana statute of limitations. Accordingly, the judgment
of the district court is affirmed.