HUCKESTEIN MECHANICAL SYSTEMS, INC. v. IC STAFFING SOLUTIONS, LLC et al
Filing
44
MEMORANDUM OPINION & ORDER denying 33 Motion for Partial Summary Judgment filed by PHILIP M. SAUVAGEOT, IC STAFFING SOLUTIONS, LLC. Signed by Magistrate Judge Robert C. Mitchell on 7/23/2014. (spc)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
HUCKESTEIN MECHANICAL SERVICES, INC., )
Plaintiff,
)
)
vs.
)
)
IC STAFFING SOLUTIONS, LLC and PHILIP M. )
SAUVAGEOT,
)
Defendants.
)
Civil Action No. 13-479
MEMORANDUM OPINION
Plaintiff, Huckestein Mechanical Services, Inc. (“Huckestein”), brings this action against
Defendants, IC Staffing Solutions, LLC (“IC Staffing”) and its owner, Philip M. Sauvageot,
alleging claims of professional malpractice, breach of contract and conversion, arising out of
accounting services that were provided to it by IC Staffing, Sauvageot and IC Staffing’s former
employee, Douglas Michael Foster. Plaintiff alleges that Defendants provided grossly and
significantly inaccurate financial services, misrepresented that Foster was a certified public
accountant and failed to uncover numerous acts of theft committed by Foster until after his death.
Presently pending before the Court for resolution is Defendants’ motion for partial
summary judgment with respect to Plaintiff’s claims for conversion and breach of contract and
Plaintiff’s requests for punitive damages and select damages allegedly incurred to uncover and
remedy theft and negligence. For the reasons that follow, the motion will be denied.
Facts
In January 2010, Wendy Staso purchased Huckestein and became its President and Chief
Executive Officer (“CEO”). (Staso Dep. at 9:13-16.)1 Staso purchased Huckestein from her
husband, Keith Staso, and his business partner, John Bouloubasis. (Staso Dep. at 9:20-25.)
1
Defs.’ App. (ECF No. 36) Ex. A.
Mssrs. Staso and Bouloubasis owned Huckestein from approximately 2003 until January
2010. (Staso Dep. at 10:1-7.) When asked what led to her purchasing Huckestein, Wendy Staso
testified as follows:
The company started to not have enough money to pay its bills and so our
family started to have to put money in the company to pay the bills. In order to
have control over that investment, we could no longer live or deal with John
[Bouloubasis] running the company.
(Staso Dep. at 10:18-25.)
Accounting Services from ICS, Inc.
From approximately January 2011 to August 2011, Huckestein received accounting
services from Independent Controller Services, Inc. (“ICS, Inc.”) (Am. Compl. ¶ 4.)2 A portion
of ICS, Inc.’s services were provided by Sauvageot, who was an employee of ICS, Inc. (or a
company affiliated with ICS, Inc.) (Sauvageot Dep. at 23, 25, 40.)3 Defendants indicate that the
agreement provided that ICS, Inc. would act as a controller approximately one day per week to
oversee the monthly transactional postings and closing procedures, to answer general accounting
questions that might arise, and to review financial reports with Huckestein management on a
monthly basis. (Sauvageot Dep. at 74.) They have attached the agreement between ICS, Inc. and
Huckestein, which contains these terms. The proposal is dated September 22, 2010 and it was
signed by Wendy Staso on January 5, 2011. (Defs.’ Supp. App. Ex. G.)4
Sauvageot Creates IC Staffing
In approximately July, 2011, Sauvageot left ICS, Inc. and became the sole owner of IC
Staffing, a company that provides general temporary staffing support, headhunter services,
elderly in-home care and business and personal accounting services. (Sauvageot Dep. at 31, 33.)
2
ECF No. 25.
Pl.’s App. (ECF No. 39) Ex. E.
4
ECF No. 42.
3
2
Huckestein learned that Sauvageot was leaving ICS, Inc., and Staso asked Sauvageot if
IC Staffing wanted to keep the Huckestein account and if he could promise that there would be
no gaps in service. (Staso Dep. at 21:17-22:11.) Sauvageot indicated that IC Staffing could
provide the same accounting services to Huckestein that had been provided by ICS, Inc.
(Sauvageot Dep. at 74.) These services included: negotiating payment arrangements with
Huckestein’s vendors, performing expense analyses, preparing budgets, doing payroll work,
preparing cashflow reports, preparing financial information for company meetings, participating
in meetings with company consultants, preparing information for company audits, doing
accounts receivable and accounts payable reconciliations, preparing work-in-progress
reconciliations, performing prepaid account analysis and reviewing financial statements.
(Sauvageot Dep. at 44-47, 50, 53, 87-88, 90-92.)
Huckestein states that it accepted IC Staffing’s offer to perform accounting services and
retained IC Staffing, through a verbal agreement, to perform the functions of a controller at
Huckestein, to handle Huckestein’s financials and to staff accordingly. (Staso Dep. at 27.)
Defendants respond that the agreement provided that IC Staffing would act as a controller
approximately one day per week to oversee the monthly transactional postings and closing
procedures, to answer general accounting questions that might arise, and to review financial
reports with Huckestein management on a monthly basis. (Sauvageot Dep. at 74.) They cite the
prior agreement between ICS, Inc. and Huckestein, which contains these terms. (Defs.’ Supp.
App. Ex. G.)
Huckestein contends that because IC Staffing was functioning as Huckestein’s controller,
it was the most senior entity maintaining Huckestein’s finances, with the responsibility of
3
generating accurate financial information. (Lally Dep. at 31-37.)5 Moreover, Sauvageot was the
single point of accountability for anything financial at Huckestein. (Staso Dep. at 44.)
Defendants note that the agreement between ICS, Inc. and Huckestein explicitly stated
that ICS, Inc. “will not audit or review the financial statements, and our engagement cannot be
relied upon to disclose errors, fraud, or illegal acts that may exist.” (ECF No. 42 Ex. G at 2.)
They argue that this same provision applied to the agreement between Huckestein and IC
Staffing. They further contend that: Staso was the most senior person responsible for several
aspects of Huckestein’s financial functions during the relevant time period, including, for
example: (1) she approved all payments of invoices and most credit card purchases; (2) on a
weekly basis, without Sauvageot, she reviewed billing and collection issues; (3) she held a
monthly financial review between management and Sauvageot; (4) she reviewed and signed
every check that was issued, unless an emergency arose when she was out of the office; and (5)
she drafted and revised the annual budget with the assistance of Mecal McDade (not Sauvageot).
(Staso Dep. at 36, 55, 63, 76-7, 80, 111.)
After beginning to work at Huckestein, IC Staffing’s accounting role increased, with IC
Staffing assuming additional financial responsibilities, including managing cash and handling
accounts payable, accounts receivable and data entry accounting functions at Huckestein.
(Sauvageot Dep. at 83; Staso Dep. at 96, 106-07.)
Foster Begins Work at Huckestein
To handle these additional tasks, Sauvageot hired Douglas Michael Foster as an
employee of IC Staffing, who reported to Sauvageot. (Sauvageot Dep. at 129-30.) Foster was
5
ECF No. 39 Ex. A. Defendants object to this averment, for which Plaintiff relies upon the
testimony of its expert, John Lally. Nevertheless, Lally testified that he based his information on
an interview with Huckestein CEO Wendy Staso. (Lally Dep. at 31.)
4
placed on-site at Huckestein to work on a daily basis. (Lally Dep. at 31-37; Sauvageot Dep. at
129-30.) Defendants state that Foster also received on-site direction from Wendy Staso. (Staso
Dep. at 55, 63, 76-77, 80.)
Sauvageot represented to Huckestein management that Foster was a certified
public accountant (“CPA”) who would be more “accounting savvy” than the prior Huckestein
employees that did the work. (Sauvageot Dep. at 131; Staso Dep. at 29-30.)6 Sauvageot also
represented that he was a CPA. (Staso Dep. at 30.)
Huckestein has a board of directors with three members: Wendy Staso, Keith Staso, and
Mecal McDade. (Staso Dep. at 36.) Huckestein holds monthly board meetings to review the
company’s financials. (Staso Dep. at 36.) At its monthly board meetings, the Huckestein board is
presented with a balance sheet and a profit and loss statement. (Staso Dep. at 36.)
During IC Staffing’s engagement, Sauvageot attended Huckestein’s monthly board
meetings to present financial information. (Staso Dep. at 39.) In 2011 and 2012, Huckestein held
weekly staff meetings with its office personnel. (Staso Dep. at 72-74.) Wendy Staso testified
that the purpose of these staff weekly meetings was as follows:
To review our financial situation, AR to AP, billing issues, collection
issues, those kinds of things. So we had a financial review. We had an operations
review, which is getting the work done. We had a sales review, what our people
owe and who they are calling on, those kinds of things. We talked about any
issues and then we have open discussion to talk about any issues that were
impacting -- that people were having that would impact other people in the
company, so that we could resolve those issues collectively.
(Staso Dep. at 73.)
After IC Staffing hired Foster, Sauvageot continued performing accounting services at
Huckestein and purported to review and supervise Foster’s work. (Staso Dep. 27-30, 44, 55, 58;
6
Defendants deny this statement, but Wendy Staso testified to it.
5
Lally Rpt. at 2, 4.)7 Defendants deny that they reviewed Foster’s work in an audit fashion.
Foster’s Alleged Theft
During the time that Foster was providing services to Huckestein, Wendy Staso had two
company signature stamps for writing checks. (Staso Dep. at 53:16-17.) She gave Foster access
to the signature stamps, one of which he kept in his desk. (Staso Dep. at 54:20-23.) She did so
because Foster was working as an accountant and because IC Staffing managed the cash at
Huckestein. (Staso Dep. at 96, 106-07.) Defendants deny that IC Staffing manage the cash;
rather, it only provided a cash position report.
When asked whether she advised Sauvageot that Foster had a signature stamp, Mrs. Staso
testified, “I don’t believe I did.” (Staso Dep. at 55:7-9.) However, she stated that, as the
controller, IC Staffing had responsibility to make sure its employees exercised proper controls.
(Staso Dep. at 55:4-6.)
Defendants contend that Foster should not have had access to signature stamps or
company credit cards. (Sauvageot Dep. at 98:11-23.) Their expert states that, as part of proper
internal controls, only Staso should have had access to the stamps or she should have reviewed
all checks written with the stamp. (King Dep. at 110-16; King Rpt. at 11-12.)8
Huckestein’s current accountant, Wendy Burton, testified she did not think that it would
be acceptable internal control for her to have the signature stamp at her desk. (Burton Dep. at
38:1-4.)9 Burton also testified that Foster should not have had the signature stamp at his desk.
(Burton Dep. at 38:5-7.)
Huckestein has identified five checks that Foster issued to himself using Staso’s signature
7
ECF No. 39 Ex. B.
ECF No. 42 Exs. H, I.
9
ECF No. 36 Ex. C.
8
6
stamp. (Burton Dep. at 32.) These five checks issued to/by Foster were written on the following
dates and in the following amounts -- for a total sum of $3,664.07:
February 29, 2012: $67.38
March 28, 2012: $1,742.24
April 9, 2012: $155.17
April 25, 2012: $1,199.28
May 2, 2012: $500.00
(Pl.’s Expert Rpt. Ex. III.)10
Huckestein has identified 11 payments made from Huckestein’s bank account to an
HSBC credit card allegedly belonging to Foster. (Pl.’s Expert Rpt. Ex. IV.)11 These 11 payments
to the HSBC credit card occurred between March 8, 2012, and June 20, 2012, for a total amount
of $5,084.02. (Id.) When asked what steps Huckestein took to confirm the owner of this HSBC
card, Burton testified that she contacted the credit card company, and the individual with whom
she spoke stated that the name on the account was Douglas Foster. Huckestein did not receive
any written confirmation that Foster was the owner of the card. (Burton Dep. at 39.)
Huckestein has identified six payments that Foster allegedly electronically issued from
the Huckestein bank account to pay his personal Verizon Wireless account, for a total amount of
$2,085.07. (Pl.’s Expert Rpt. Ex. IV.) At the time of these payments, Huckestein also had
multiple Verizon Wireless accounts. (Staso Dep. at 68.) Huckestein’s application systems
manager (and former IT administrator), Edward Tworek, investigated the Verizon account
allegedly improperly paid from Huckestein’s bank account. (Tworek Dep. at 9-10.)12
10
ECF No. 36 Ex. B at 1.
ECF No. 36 Ex. B at 2.
12
ECF No. 36 Ex. D.
11
7
Tworek testified that his investigation consisted of the following:
I was asked about Verizon Wireless. I called Verizon Wireless and
discussed with them, “We have an account with you. There is charges coming out
of our checking account going to you that I don't have any record of on our
accounts, on our account side.”
They transferred me over to their treasury department. I spoke to their
treasury department. They were unwilling to give up information for their own
security reasons, but the representative I spoke to on the phone stated -- well, I
asked the representative on the phone, “If I provide you with a phone number, can
you at least tell me if this is the account that this money is going to?”
The representative hesitated and said, “I could at least do that for you.”
At that time I gave them Mike Foster’s personal cell phone number, and
they confirmed that that was the account.
(Tworek Dep. at 25.)
Huckestein has identified one electronic payment of $457.80 issued from its bank
account on June 18, 2012, to pay a DirectTV account allegedly in Foster’s name. (Pl.’s Expert
Rpt. Ex. IV.) On behalf of Huckestein, Burton investigated this payment to DirectTV. (Burton
Dep. at 29-30.) She testified that she “contacted DirectTV, and the individual that I spoke with
on the telephone at DirectTV told me that it was for Douglas M. Foster” and that ended her
investigation. (Burton Dep. at 30:20-31:1.)
Huckestein has identified two orders from Staples, which include purchases that Foster
allegedly made without permission: (1) a purchase on March 22, 2012, in the amount of $481.48;
and (2) a purchase on June 13, 2012, in the amount of $267.46, for a total of $748.94. (Pl.’s
Expert Rpt. Ex. V;13 see also Staples invoices, ECF No. 36 Ex. E.) Defendants state that both of
the at-issue purchases from Staples include office supplies and/or equipment, and both were
delivered to Huckestein’s offices. Plaintiff responds that the items were delivered to
13
ECF No. 36 Ex. B at 3.
8
Huckestein’s offices but were removed by Foster. (Lally Rpt. at 4.)
Staso testified that, “Nobody has the authority to order from Staples without making a list
of what they want and getting my approval to buy that stuff.” (Staso Dep. at 80:20-22.) When
asked whether Foster had requested approval for ordering supplies from Staples, Staso testified,
“I don’t remember.” (Staso Dep. at 81:4-6.) Defendants cite Burton’s testimony that she did not
personally search to determine whether the scanner Foster ordered was at the Huckestein facility.
(Burton Dep. at 44-46.) However, Plaintiff has submitted evidence that the items purchased in
the two unauthorized on-line purchases from Staples, including a personal music player and
digital camera, could not be located anywhere at Huckestein. (Lally Rpt. at 4.)
Plaintiff contends that, as Huckestein’s controller, it was IC Staffing’s responsibility to
establish and implement any necessary internal controls. (Lally Dep. at 44-45.) Sauvageot never
recommended to Huckestein management that they should implement internal accounting
policies to prevent theft. (Staso Dep. at 58.)
After working at Huckestein (as an employee of IC Staffing) for a number of months,
Foster died on June 19, 2012. (Staso Dep. at 66.) After Foster’s death, Huckestein learned that
Foster had stolen money from Huckestein over a period of several months as outlined above.
(Lally Rpt. at 2-4.)
Plaintiff’s expert states that, if Sauvageot had been properly overseeing and reviewing
Foster’s work at Huckestein, IC Staffing should have detected and prevented the theft. (Lally
Rpt. at 4.) Defendants respond that:
IC Staffing and Sauvageot were properly overseeing Foster, but, given the
following factors, there would be no reason for IC Staffing to detect the alleged
theft during its routine work for Huckestein: (1) there was a short time period at
issue because, with the exception of four payments to Verizon Wireless (at a time
when Huckestein had multiple Verizon Wireless accounts), the instances of
alleged theft identified by Huckestein occurred during the three and a half months
9
prior to Foster’s death; (2) over the course of these months, Foster’s alleged theft
amounted to less than $12,000 at a company with annual revenues exceeding $7
million; and (3) according to Plaintiff’s former outside accountant and current
expert, Foster made efforts to conceal his alleged theft, which made it that much
more difficult to uncover.
(ECF No. 41 ¶ 67.)
Foster did not record several of the theft transactions in Huckestein’s general ledger and,
in other instances, he grouped the theft with other business transactions and used vague
descriptions to describe the group transactions in Huckestein’s general ledger. (Lally Rpt. at 4.)
Plaintiff’s expert states that, during the investigation after Foster’s death, Huckestein also
learned that, in addition to the theft, IC Staffing provided grossly and significantly inaccurate
financial services to Huckestein. (Lally Dep. at 110-13; Lally Rpt. at 4-10.) IC Staffing failed to
set up and administer escrow accounts, failed to use proper banking accounts to execute
payments, failed to properly track and pay overhead expenses, processed unauthorized vendor
payments, failed to properly manage credit card accounts, failed to properly account for accounts
receivable, failed to properly handle payroll and sales tax liabilities, provided inaccurate
financial reports to management and failed to maintain an accurate general ledger. (Lally Rpt. at
4-10.)
Not surprisingly, Defendants’ expert disagrees. He places the blame on Huckestein for
failing to implement proper internal controls. (King Rpt. at 12-25, 36; King Dep. at 79, 92, 17374.)
Damages Allegedly Incurred to Uncover and Remedy Theft and Negligence
Plaintiff is seeking to recover the costs incurred to identify and correct Foster’s alleged
theft and the Defendants’ alleged accounting errors in the following amounts for the following
individuals:
10
Huckestein Employees
Wendy Staso (CEO)
Edward Tworek (Appl.
Systems Manager)
Amanda Staso (Clerk)
Outside Services
WLR Services (Wendy
Burton)
Klammarec Business
Solutions (Mecal McDade)
Lally & Co., LLC
Hours
116
243
Damages Claimed
$9,512.00
$8,019.00
114
$1,140.00
932.07
$41,943.15
241
$20,641.65
Unknown
$10,393.80
Total: $91,649.60
Defendants state that Tworek does not do any accounting work. (Staso Dep. at 46:14-16.)
Plaintiff responds that Tworek supports Huckestein’s accounting department with information
technology by managing and supporting Huckestein’s enterprise resource planning software and
by submitting work-in-progress reports to the accounting department. (Tworek Dep. at 10-11.)
Defendants state that Mecal McDade is an executive management consultant rather than
an accountant. (Staso Dep. at 37, 48.) Plaintiff responds that McDade is a consultant for
Huckestein that devoted a significant amount of time to the investigation and correction of IC
Staffing’s theft and accounting errors, as documented in her affidavit. (ECF No. 39 Ex. F.)
Defendants note that Staso testified that she and Tworek performed “ballpark
calculations” when determining how many hours they spent on identifying and correcting the
alleged accounting errors. (Staso Dep. at 115.) Plaintiff responds that she testified that she
worked with Tworek “to come up with what we thought was a fair assessment of how much time
of his was spent to do the cleanup work.” (Staso Dep. at 115.)
Wendy Burton kept specific track of her hours spent on identifying and correcting the
alleged accounting errors. (Staso Dep. at 115.) Tworek was not paid any overtime for his work.
(Staso Dep. at 115.) Tworek receives an annual salary rather than an hourly income. (Staso Dep.
at 116.) Huckestein did not hire anyone to assist with Burton’s job while identifying and
11
correcting the alleged accounting errors. (Staso Dep. at 116.) Huckestein did not lose any
customers due to the time spent identifying and correcting the alleged accounting errors. (Staso
Dep. at 117.)
Plaintiff asserts that these errors caused significant damage to Huckestein’s business and
the effect of IC Staffing’s grossly inaccurate financial services and substandard work was so
significant that it overshadows whatever services may have been done correctly. (Lally Dep. at
111; Lally Rpt. at 4-10.) Plaintiff asserts that IC Staffing’s services, including its failure to
uncover Foster’s theft and its accounting errors, fell below the standard of care expected of a
reasonably prudent accounting professional. (Lally Dep. at 153-54.)
As Huckestein was uncovering IC Staffing’s theft and errors, it was learned that Foster
and Sauvageot misrepresented their accounting credentials to Huckestein, falsely claiming to be
CPAs. (Staso Dep. at 29-30.) Sauvageot obtained an online degree in accounting from American
Intercontinental University in 2007. (Sauvageot Dep. at 6, 13.) He is not, and never has been, a
CPA. (Sauvageot Dep. at 6.) Foster was not a CPA. (Sauvageot Dep. at 127-28.) Questions
remain about Foster’s accounting credentials, as Sauvageot has no employment file on Foster.
He did contact Foster’s prior employer, Glessner & Associates, a CPA firm in West Virginia.
Gary Glessner “spoke highly of Mike [Foster] and his skills.” (Sauvageot Dep. at 111, 117-18,
127.)
Investigating IC Staffing’s theft and correcting its accounting mistakes was a main
priority of Huckestein because accurate and updated financials are especially important for a
business in the construction industry (like Huckestein) because this information is used for
bidding and obtaining jobs and loans. (Lally Dep. at 115-17.)
Several Huckestein employees and independent contractors spent time investigating and
12
working to correct these issues, including Wendy Staso (Huckestein’s President and CEO),
Edward Tworek (Huckestein’s IT administrator / application business systems analyst), Amanda
Staso (a temporary accounting clerk at Huckestein), Wendy Burton (WLR Services), Mecal
McDade (Klammarec Business Solutions) and David Buttignol (Lally & Co., LLC). (Lally Rpt.
at 9 & Ex. VI.) In general, Wendy Staso oversaw the investigation and correction efforts,
conducted weekly meetings on these efforts, addressed short-term cash needs, interacted with
bank personnel and vendors and organized financial information. (ECF No. 39 Ex. G.) She also
hired Amanda Staso, who reviewed, analyzed and organized documents found in Foster's home
and office. (ECF No. 39 Ex. G.)
In general, Edward Tworek retrieved and compiled electronic financial information and
e-mails, checked the accuracy of reports generated by IC Staffing, investigated theft transactions
and provided IT assistance in correction efforts. (ECF No. 39 Ex. H.)
In general, Wendy Burton reviewed, analyzed and corrected bank statements, credit card
statements, tax payments, accounts receivable information and accounts payable information,
contacted and negotiated with hundreds of vendors and clients, and prepared and input corrected
financial information. (ECF No. 39 Ex. I.)
In general, Mecal McDade reviewed, analyzed and corrected vendor payments and
accounts receivable information, reviewed Foster’s correspondence, adjusted payment cycles
and assisted within inputting corrected financial information. (ECF No. 39 Ex. F). In general,
David Buttignol addressed general ledger accounting mistakes, bank reconciliation mistakes and
mistakes in recording information in Huckestein’s ERP system. His efforts are described in the
Lally & Co. invoice. (ECF No. 39 Ex. J.) Huckestein employees and consultants generated
invoices and/or estimates of the daily amount of time spent on these efforts between June of
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2012 and January of 2013. (Staso Dep. at 115; Lally Rpt. at 9 & Ex. VI; ECF No. 39 Exs. F, G,
H, I, and J.)
Based on a review of the time estimates, interviews with these individuals and a detailed
review of IC Staffing’s theft and accounting errors, John Lally (Huckestein’s testifying expert
accountant) opines that the amount of time spent investigating and correcting IC Staffing's theft
and errors was very reasonable given the magnitude of the situation. (Lally Dep. at 98-100.)
Plaintiff contends that Mr. Lally’s opinion is also supported by the monthly distribution of hours,
which shows that (as he would expect) 75% of the hours spend investigating and correcting IC
Staffing’s theft and errors was performed in the first four months after Foster’s death, with less
time spent the later months tying down remaining issues. (Lally Dep. at 98-100.) Defendants’
expert disagrees. (King Dep. at 164-74.)
Procedural History
On March 14, 2013, Plaintiff filed a complaint against Defendants in the Court of
Common Pleas of Allegheny County, Pennsylvania. Count I alleged a claim of professional
malpractice against IC Staffing and Count II alleged it against Sauvageot. The remainder of the
complaint consisted of three claims against IC Staffing: Count III alleged a claim of breach of
contract, Count IV alleged a claim of conversion and Count V alleged a claim of negligent
hiring/supervising.
On March 28, 2013, Defendants filed a notice of removal, removing the action to this
Court on the basis of diversity jurisdiction. On April 8, 2013, Defendants filed an amended
notice of removal, to clarify that: Plaintiff is a Pennsylvania corporation with a principal place of
business in Duquesne, Pennsylvania; IC Staffing is a limited liability company whose sole
member is Sauvageot, a citizen of Ohio; and the amount in controversy, exclusive of interest and
14
costs, exceeds the sum of $75,000.00. (ECF No. 3 ¶¶ 3-6, 10-16 & Ex. A.)
On April 8, 2013, Defendants filed a motion to dismiss Count V of the complaint, the
claim for negligent hiring/supervision asserted against IC Staffing (ECF No. 5). On April 25,
2013, a Memorandum Opinion and Order was entered (ECF No. 17), granting this motion and
dismissing Count V of the complaint. On August 7, 2013, Plaintiff filed an Amended Complaint
(ECF No. 25) and on August 14, 2013, Defendants filed an answer thereto (ECF No. 26).
On April 30, 2014, Defendants filed a motion for partial summary judgment (ECF No.
33). On June 6, 2014, Plaintiff filed its opposition (ECF No. 38) and on June 17, 2014,
Defendants filed a reply brief (ECF No. 43).
Standard of Review
As amended effective December 1, 2010, the Federal Rules of Civil Procedure provide
that: “The court shall grant summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Fed.R.Civ.P. 56(a). Summary judgment may be granted against a party who fails to adduce facts
sufficient to establish the existence of any element essential to that party’s case, and for which
that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986). The moving party bears the initial burden of identifying evidence which demonstrates
the absence of a genuine issue of material fact. Once that burden has been met, the non moving
party must set forth “specific facts showing that there is a genuine issue for trial” or the factual
record will be taken as presented by the moving party and judgment will be entered as a matter
of law. Matsushita Elec. Indus. Corp. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). An
issue is genuine only if the evidence is such that a reasonable jury could return a verdict for the
nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
15
In following this directive, a court must take the facts in the light most favorable to the
non-moving party, and must draw all reasonable inferences and resolve all doubts in that party’s
favor. Hugh v. Butler County Family YMCA, 418 F.3d 265, 266 (3d Cir. 2005); Doe v. County
of Centre, Pa., 242 F.3d 437, 446 (3d Cir. 2001).
Defendants contend that: 1) Plaintiff cannot maintain a claim for conversion because theft
was not within Foster’s scope of his employment and IC Staffing gained no benefit from it; 2)
the breach of contract claim merely restates the accounting malpractice tort claim and the
gravamen of the claim is not the breach of a particular contractual provision, but alleges that a
professional failed to render services with the ordinary skill and knowledge of the profession;
and 3) Plaintiff has no evidence to support either punitive damages or select damages for
investigation and correction of accounting errors.
Plaintiff responds that: 1) under the Restatement (Second) of Agency § 261, a principal
who puts a servant in a position where he commits fraud while apparently acting within his
authority is liable to third parties for the servant’s fraud even if the principal is innocent and the
agent acted for his own purposes, so here IC Staffing is liable for having enabled Foster’s fraud,
which it would have uncovered with proper oversight and internal controls; 2) through a verbal
agreement, Huckestein hired IC Staffing to perform the functions of a controller and
Pennsylvania law recognizes that failure to perform accounting services in accordance with
professional standards supports a breach of contract claim; and 3) whether Foster’s conduct
support a request for punitive damages is a jury question and a tortfeasor is responsible for
reasonably foreseeable damages, including time spent investigating and repairing financial harm,
and damages are not determined at the summary judgment stage, only whether there is a
reasonable basis for calculating them.
16
In their reply brief, Defendants contend that: 1) the Restatement section does not apply
unless Foster made express misrepresentations to Huckestein and he did not; 2) the breach of
contract claim still requires an express contractual provision that was breached, not simply a tort
claim that IC Staffing did not act “professionally”; and 3) there is no evidence that IC Staffing
acted recklessly—rather, it appears that Foster stole a relatively small amount of money over a
short period of time and made efforts to conceal it, and Plaintiff’s investigative time is too high
(one-third of economic damages and seven-and-a-half times the alleged theft amount), although
Defendants admit this may be an issue of fact.
Determining State Law
The Court of Appeals has stated that:
In adjudicating a case under state law, we are not free to impose our own
view of what state law should be; rather, we are to apply state law as interpreted
by the state’s highest court in an effort to predict how that court would decide the
precise legal issues before us. Kowalsky v. Long Beach Twp., 72 F.3d 385, 388
(3d Cir. 1995); McKenna v. Pacific Rail Serv., 32 F.3d 820, 825 (3d Cir. 1994).
In the absence of guidance from the state’s highest court, we are to consider
decisions of the state’s intermediate appellate courts for assistance in predicting
how the state’s highest court would rule. McKenna, 32 F.3d at 825; Rolick v.
Collins Pine Co., 925 F.2d 661, 664 (3d Cir. 1991) (in predicting state law, we
cannot disregard the decision of an intermediate appellate court unless we are
convinced that the state’s highest court would decide otherwise).
Gares v. Willingboro Township, 90 F.3d 720, 725 (3d Cir. 1996). Because this is a diversity
action, the Court must predict how the Pennsylvania Supreme Court would rule if presented with
this situation. This is an issue of law to be resolved by the court. Bohler-Uddehom America,
Inc. v. Ellwood Group, Inc., 247 F.3d 79, 103 (3d Cir. 2001).
Scope of Agent’s Employment and Fraud
The Restatement of Agency indicates that:
A principal who puts a servant or other agent in a position which enables the
agent, while apparently acting within his authority, to commit a fraud upon third
17
persons is subject to liability to such third persons for the fraud.
Restatement (Second) of Agency § 261. Comment (a) to the above section states that:
The principal is subject to liability … although he is entirely innocent, has
received no benefit from the transaction, and, as stated in Section 262, although
the agent acted solely for his own purposes. Liability is based upon the fact that
the agent’s position facilitates the consummation of the fraud, in that from the
point of view of the third person the transaction seems regular on its face and the
agent appears to be acting in the ordinary course of the business confided to him.
Id. cmt. a. See also Restatement (Second) of Agency §§ 262, 219(2)(d) (liability may be
imposed when “the servant purported to act or to speak on behalf of the principal and there was
reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of
the agency relation.”).
The Pennsylvania Supreme Court adopted § 261 as the law in Pennsylvania in First
National Bank v. Turchetta, 181 A.2d 285 (Pa. 1962). In that case, the court found that a car
dealership could be held liable for a partner’s theft through presenting forged documents to a
bank, despite the partnership’s innocence in the theft, lack of benefit therefrom and the claim that
the partner had no authority to take the money. See also Bowman v. Home Life Ins. Co., 243
F.2d 331 (3d Cir. 1957) (district court erred in failing to instruct jury that, under § 261, insurance
company could be held liable when its field employee posed as a doctor and committed
unwanted touching of two female applicants for insurance, even though the company obviously
received no benefit from his tortious conduct); Summit Airlines, Inc. v. Ganz, 160 B.R. 911,
918-19 (E.D. Pa. 1993) (law firm could be held liable for placing attorney in position of having
access to client funds, which he converted by writing checks to himself); Rubin Quinn Moss
Heaney & Patterson, P.C. v. Kennel, 832 F. Supp. 922, 932 (E.D. Pa. 1993) (same).
Defendants contend that these cases are distinguishable either because the tortfeasor was
a partner (whose acts were deemed to be those of his fellow partners under the law) or because
18
the tortfeasor had made express misrepresentations to the third party. However, the cases do not
make this distinction and Defendants have not explained why their liability (for placing Foster in
a position which enabled him to commit acts of theft and fraud) depends upon whether Foster
made express misrepresentations to Huckestein or simply quietly committed his acts. In either
event, Huckestein was the innocent party and “where one of two innocent persons must suffer
loss for the fraud of a third, the loss should fall on the one whose act facilitated it.” Bowman,
243 F.2d at 334.
Defendants’ citations are to cases that discuss the Restatement (Second) of Agency § 228,
which states that conduct of a servant is within the scope of employment if but only if: a) it is of
the kind he is employed to perform; b) it occurs substantially within the authorized time and
space limits; and c) it is actuated, at least in part, by a purpose to serve the master. Fitzgerald v.
McCutcheon, 410 A.2d 1270, 1271 (Pa. Super. 1979) (off-duty policeman who shot his neighbor
during an argument following a night of drinking was not acting within the scope of his
employment); Sanchez by Rivera v. Montanez, 645 A.2d 383, 388 (Pa. Commw. 1994)
(community action program not vicariously liable for case worker’s molestation of minor
plaintiff since it was undertaken for purely personal reasons); Matsko v. United States, 372 F.3d
556, 559 (3d Cir. 2004) (United States not vicariously liable for federal employee’s act of
assaulting plaintiff who took his chair during a business visit since the “act” was not the retrieval
of the chair but the assault, which was not within the scope of his employment); Harris v. KFC
U.S. Properties, Inc., 2012 WL 2327748 (E.D. Pa. June 18, 2012) (KFC not vicariously liable for
employee’s act of pistol whipping of customer with whom he was arguing because it was not the
kind of act KFC expected him to perform and was not actuated with a purpose to serve the
employer); Amberg-Blyskal v. Transportation Security Admin., 832 F. Supp. 2d 445, 448 (E.D.
19
Pa. 2011 (TSA not liable for agent allegedly stealing plaintiff’s jewelry while examining her
luggage at airport); Schloss v. Sears Roebuck & Co., 2005 WL 433316, at *2 (E.D. Pa. Feb. 24,
2005) (no vicarious liability for Sears based on allegation that technician who entered home to
fix plaintiff’s washing machine stole her earrings, since that was not within the scope of his
employment).
As these case descriptions demonstrate, the question presented therein was primarily
whether an agent was acting within the scope of employment when he assaulted a third party. 14
Here by contrast, the facts concern a fraud committed by an employee who was placed in a third
party’s business by a principal. As observed by the Court of Appeals for the Fifth Circuit:
The proper inquiry for determining vicarious liability of a principal whose agent
defrauds the principal’s customer is the relationship between the principal and the
customer…. The courts reasoned that a principal who provides his agent with the
tools or position necessary to perpetrate a fraud on the principal’s customers,
should be held responsible to the innocent customers who relied on the agent….
The premise underlying § 219(2)(d) and § 261 liability [is] a relationship between
the principal and an innocent third party….
Entente Mineral Co. v. Parker, 956 F.2d 524, 529 (5th Cir. 1992). See also Akins v. Golden
Triangle Planning & Dev. Dist., Inc., 34 So.3d 575, 582 (Miss. 2010) (Randolph, J., dissenting)
(genuine issues of fact should have precluded nonprofit economic development corporation
whose employee allegedly defrauded builder from obtaining summary judgment because “[i]n
employee theft/dishonesty/fraud cases … the standards outlined in Sections 219(2)(d) and 261 of
the Restatement (Second) of Agency apply.”)15
This is an employee theft/dishonesty/fraud case and Plaintiff has raised liability pursuant
14
In addition, Matsko and Amberg-Blyskal were cases under the Federal Torts Claims Act,
which explicitly waives governmental liability only when the governmental employee is “acting
within the scope of his … employment.” 28 U.S.C. § 1346(b)(1).
15
The majority opinion in Akins did not discuss § 261 because the plaintiff failed to plead or
argue it and thus it contained only a narrow ruling that vicarious liability under respondeat
superior did not apply. Here by contrast, Plaintiff has raised the issue.
20
to § 261, not § 228. The principal (IC Staffing) had a relationship with the customer
(Huckestein), and the customer has alleged that it was defrauded by the principal’s agent
(Foster). Whether or not Plaintiff could maintain a claim under § 228 is irrelevant. Therefore,
Defendants’ argument is rejected and the motion for summary judgment with respect to the
conversion claim will be denied.
Breach of Contract Claim for Professional Services
Defendants argue that Plaintiff cannot maintain a breach of contract claim for accounting
services because it is merely alleging that they failed to comply with professional standards,
rather than that they breached a specific contractual provision. Plaintiff responds that both
claims may be maintained and that it has pointed to specific contractual provisions that were
breached.
Under Pennsylvania law, breach of professional services, such as legal malpractice, can
be advanced either as a tort claim or as a breach of contract claim. Bailey v. Tucker, 621 A.2d
108 (Pa. 1993). Some federal courts have predicted that Pennsylvania law would not allow for a
breach of contract claim unless the plaintiff demonstrates that specific contractual provisions
have been violated. See Stacey v. City of Hermitage, 2008 WL 941642, *4 (W.D. Pa. Apr. 7,
2008); Edwards v. Thorpe, 876 F. Supp. 693, 694 (E.D. Pa. 1995).
However, Pennsylvania state courts have not imposed this requirement. See Gorski v.
Smith, 812 A.2d 683, 693 (Pa. Super. 2002). In Steiner v. Markel, 968 A.2d 1253 (Pa. 2009), a
legal malpractice case involving property erroneously described in a deed, the Pennsylvania
Supreme Court was faced with a statute of limitations issue, which it resolved by determining
that the plaintiff had waived the issue of whether their professional malpractice claim was for
breach of contract. However, in his dissent, Justice Saylor asserted that the court should have
21
taken the opportunity to clarify the “disordered area of the law” in which legal malpractice
claims may be stated under either contract or tort theories:
[A] substantial, underlying conceptual problem in this case is that this Court has
not detailed the elements of a contract-based cause of action for legal malpractice
in a fashion which would meaningfully distinguish them from those necessary to
support a tort-based cause. Indeed, the discussion of a contract-based cause in
Bailey v. Tucker, 533 Pa. 237, 621 A.2d 108 (1993), suggests the elements of
tort- and contract-based causes of action in this setting overlap substantially, if not
completely. See id. at 251-52, 621 A.2d at 115. See generally 3 West’s PA.
PRAC., TORTS: LAW AND ADVOCACY § 6:29 (2008) (suggesting that, if
Bailey is adhered to on its terms, “any distinction between contract and tort claims
is practically meaningless” and plaintiffs, by mere skillful pleading may avail
themselves of the longer limitations period). A counter-position has developed in
the federal courts, which have effectively predicted this Court would require
averment of a breach of some particular provision of the agreement of
representation, or a failure to follow specific client instructions, to support a
contract-based claim.
Id. at 1260, 1262 (Saylor, J., dissenting) (some citations omitted).
In Koken v. Steinberg, 825 A.2d 723 (Pa. Commw. 2003), an auditor argued that:
accountants may not be sued in contract for failing to properly provide
professional services and that an action against them may only be brought in
malpractice. The Court disagrees. Nothing in our law insulates accountants or
other professionals from being sued in contract for a failure to properly perform
professional services. Neither party can demonstrate anything in our law that says
that an accountant may or may not be sued in contract based on allegations of
malpractice, and the Court’s research discloses nothing.
Id. at 730. The court held that it did accept that accountants should be held to the same
standards applied to attorneys in Bailey and held that the auditor was employed to
provide professional services; it promised to provide those services according to
“generally accepted accounting practices” which the court found to be “consistent with
those expected of the profession at large” and it was specifically alleged that its failure to
perform its duties as promised was the proximate cause of the damages. The court held
that these allegations were sufficient to state a claim for breach of contract.
22
Plaintiff argues that, through a verbal agreement, Huckestein retained IC Staffing
to perform the functions of a controller at Huckestein with the responsibility of
generating accurate financial information. (Staso Dep. at 27, 44; Lally Dep. at 31-37.)
Through Sauvageot, IC Staffing agreed to (and purported to) perform accounting services
that included negotiating payment arrangements with Huckestein's vendors, doing payroll
work, preparing cashflow reports, preparing financial information for company meetings,
preparing company audits, doing AR and AP reconciliations, reviewing financial
statements, doing data entry and managing cash. (Sauvageot Dep. at 44-47, 50, 53, 83,
87, 88, 90; Staso Dep. at 96, 106-107.) Plaintiff contends that IC Staffing breached its
contract with Huckestein because these tasks, which were an explicit part of the
engagement agreement between Huckestein and IC Staffing, were not performed (or if
performed, were not properly performed), and Huckestein did not receive the services
that it bargained and paid for. (Lally Dep. at 110-13; Lally Rpt. at 4-10.)
Pennsylvania law on the question of whether a plaintiff must point to a specific
contractual provision in order to maintain a breach of contract action arising out of
professional services, such as accounting, is uncertain. In addition, Plaintiff has pointed
to specific contractual provisions that it alleges Defendants breached. Although the
contract between ICS, Inc. and Huckestein was written, the contract between IC Staffing
and Huckestein was oral. Construing the facts in the light most favorable to Huckestein
as the nonmoving party, it has supported a claim that Defendants breached specific
contractual provisions that it agreed to perform. Therefore, it can maintain its breach of
contract claim and Defendants’ motion for partial summary judgment as to this claim will
be denied.
23
Punitive Damages
Under Pennsylvania law:
punitive damages are an “extreme remedy” available in only the most exceptional
matters. See Martin v. Johns-Manville Corp., 508 Pa. 154, 494 A.2d 1088, 1098
n. 14. (Pa.1985), rev’d on other grounds sub nom., Kirkbride v. Lisbon
Contractors, Inc., 521 Pa. 97, 555 A.2d 800 (1989). Punitive damages may be
appropriately awarded only when the plaintiff has established that the defendant
has acted in an outrageous fashion due to either “the defendant’s evil motive or
his reckless indifference to the rights of others.” Martin, 494 A.2d at 1096; see
also Hutchison v. Luddy, 870 A.2d 766, 770 (Pa. 2005) (finding that punitive
damages may be appropriately awarded only when the plaintiff has established
that the defendant has acted in a fashion “so outrageous as to demonstrate willful,
wanton or reckless conduct”). A defendant acts recklessly when “his conduct
creates an unreasonable risk of physical harm to another [and] such risk is
substantially greater than that which is necessary to make his conduct negligent.”
Id. at 771 (citation omitted). Thus, a showing of mere negligence, or even gross
negligence, will not suffice to establish that punitive damages should be imposed.
SHV Coal, Inc. v. Continental Grain Co., 526 Pa. 489, 587 A.2d 702, 705 (1991).
Rather, the plaintiff must adduce evidence which goes beyond a showing of
negligence, evidence sufficient to establish that the defendant’s acts amounted to
“intentional, willful, wanton or reckless conduct....” Id. at 704 (citation omitted).
Phillips v. Cricket Lighters, 883 A.2d 439, 445-46 (Pa. 2005) (footnote omitted).
Plaintiff contends that Foster’s repeated theft and cover-up efforts create at least a jury
issue as to whether his acts permit recovery of punitive damages and that IC Staffing is
vicariously liable for Foster’s tortious or criminal acts. It cites Rizzo v. Haines, 555 A.2d 58 (Pa.
1989) (attorney who fraudulently induced clients to transfer money to his account and withheld
information, committing acts of breach of fiduciary duty and fraudulent misrepresentation, could
be held liable for punitive damages); Shiner v. Moriarty, 706 A.2d 1228, 1240 (Pa. Super. 1998)
(punitive damages could be assessed against attorney and his law firm for wrongful use of civil
proceedings, abuse of process and intentional interference with contractual relations) ; and Dean
Witter Reynolds, Inc. v. Genteel, 499 A.2d 637, 643 (Pa. Super. 1985) (punitive damages
properly assessed against brokerage firm).
24
“It is well settled that the decision of whether to award punitive damages and the amount
to be awarded are within the discretion of the fact finder.” Dean Witter, 499 A.2d at 642. In
addition, punitive damages may be awarded solely on the basis of vicarious liability of an agent.
Id. “In Pennsylvania, there is no requirement that an agent commit a tortious act at the direction
of his principal, nor must the principal ratify the act, in order for punitive damages to be imposed
on him.” Shiner, 706 A.2d at 1240. See also In re Phar-Mor, Inc. Sec. Litig., 892 F. Supp. 676,
695 (W.D. Pa. 1995) (reckless performance of audits could support a claim for punitive
damages).
Defendants contend that Plaintiff has no evidence that they engaged in outrageous
conduct with either an evil motive or a reckless indifference to Plaintiff’s rights to support
punitive damages for “reckless accounting practices” and that the alleged theft was performed by
Foster, a non-party who used the money for personal expenses and Defendants did not ratify his
behavior or accept or use money he stole. However, because there is no requirement that an
agent commit an act at the direction of his principal or that the principal must ratify the act, to
support a claim of punitive damages, the argument regarding Foster’s conduct is irrelevant. With
respect to Defendants’ accounting practices, Plaintiff’s expert opines that they were reckless and
Defendants’ expert contends that they were not. The trier of fact will have to make this
determination upon hearing all the evidence. Therefore, with respect to the request for punitive
damages, the motion for partial summary judgment will be denied.
Investigative Damages
Defendants argue that Plaintiff cannot recover the cost of investigating and repairing
Foster’s fraud. Plaintiff responds that such costs are recoverable and have been documented.
“A tortfeasor is liable for damages that are the reasonably foreseeable consequence of his
25
actions. The expenses incurred by Plaintiff as a result of Defendant’s malfeasance, as well as the
costs associated with the discovery of and payment to the victims of Defendant’s wrongdoing,
were clearly foreseeable results of Defendant’s conduct.” Rubin Quinn, 832 F. Supp. at 934.
Plaintiff has documented the amount of time that various individuals spent investigating
and remedying Foster’s acts. Defendants’ initial brief relied upon a lack of support, which has
now been presented. In their reply brief, they comment only that the damages appear to be
excessive based upon the facts of this case. This issue cannot be resolved on a motion for
summary judgment, but must be determined at trial. Therefore, the motion for summary
judgment with respect to Plaintiff’s request for investigative damages will be denied.
An appropriate order follows.
26
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
HUCKESTEIN MECHANICAL SERVICES, INC., )
Plaintiff,
)
)
vs.
)
)
IC STAFFING SOLUTIONS, LLC and PHILIP M. )
SAUVAGEOT,
)
Defendants.
)
Civil Action No. 13-479
ORDER
AND NOW, this 23rd day of July, 2014,
IT IS HEREBY ORDERED that Defendants’ motion for partial summary judgment (ECF
No. 33) is denied.
s/Robert C. Mitchell____________
ROBERT C. MITCHELL
United States Magistrate Judge
27
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