Case Title: STROUD v. ARTHUR ANDERSEN & CO.

Citation: 

Docket Number: 92033

State: oklahoma

Court: Oklahoma Supreme Court

Date: 2001-09-18T00:00:00Z

Document:
STROUD v. ARTHUR ANDERSEN & CO.  STROUD v. ARTHUR ANDERSEN & CO. 2001 OK 76 37 P.3d 783 72 OBJ 2725 Case Number: 92033 Decided: 09/18/2001 Modified: 12/03/2001 Mandate Issued: 01/11/2002 As Corrected: October 25, 2001 Rehearing Denied: December 3, 2001 THE SUPREME COURT OF THE STATE OF OKLAHOMA STEVE STROUD, an individual, and STROUD CROP, INC., an Oklahoma corporation, Appellees/Counter-appellants v. ARTHUR ANDERSEN & CO., a partnership, Appellant/Counter-appellee CERTIORARI TO THE COURT OF CIVIL APPEALS, DIVISION 2 APPEAL FROM THE DISTRICT COURT OF OKLAHOMA COUNTY HONORABLE NILES JACKSON, JUDGE ¶0 Steve Stroud and Stroud Crop, Inc. [appellees] sued Arthur Andersen & Co. [Andersen] alleging the negligent performance of financial audits of Stroud Crop, Inc. over a several-year period. Appellees were awarded both compensatory and punitive damages on a jury verdict. Andersen appealed assigning error to the trial court's jury instructions and also contesting the sufficiency of the evidence to support the judgment. On appeal the Court of Civil Appeals reversed and remanded the case holding that it was fundamental error for the trial court to have instructed the jury on the "audit interference rule" instead of using the standard comparative-negligence jury instruction. Upon certiorari previously granted, THE COURT OF CIVIL APPEALS' OPINION IS VACATED AND THE DISTRICT COURT JUDGMENT IS AFFIRMED. Kenneth W. Klingenberg and George H. Brown of Klingenberg & Associates, Oklahoma City, Oklahoma; David B. Coffin, Dallas, Texas; Barry K. Roberts, Norman, Oklahoma; and Stanley M. Ward, Norman, Oklahoma, for the appellees/counter-appellants. Kenneth N. McKinney, Robert D. Tomlinson and A. Michele Campney of McKinney & Stringer, Oklahoma City, Oklahoma; and Philip Allen Lacovara and Joanne E. Benisch of Mayer, Brown & Platt, New York, New York, for the appellants/counter-appellees. Edwin F. Garrison of Looney, Nichols & Johnson, Oklahoma City, Oklahoma; Louis A. Craco and Richard L. Klein of Wilkie Farr & Gallagher, New York, New York; and Richard I. Miller, General Counsel of the American Institute of CPA's, New York, New York, for amicus curiae American Institute of Certified Public Accountants. J. Angela Ables, James W. Rhodes and Kevin R. Wisner of Kerr, Irvine, Rhodes & Ables, Oklahoma City, Oklahoma, for amicus curiae Oklahoma Society of Certified Accountants. Lavender, J. ¶1 Resolution of today's cause requires the Court (1) to ascertain for comparative-negligence purposes the relevance of a plaintiff's negligence when a professional's I. FACTS AND PROCEDURAL HISTORY ¶2 Steve Stroud, individually, [Stroud] and Stroud Crop, Inc. [SCI] brought an action against Arthur Andersen & Co. [Andersen or defendant], a professional accounting firm, seeking damages for economic injuries allegedly emanating from flawed audits of SCI and Insurance Company of the Prairie States' [ICOPS] financial statements. ¶3 In the latter part of 1987 SCI at one of its lenders' insistence sought to have its December 31, 1987 balance sheet audited. It hired the defendant to perform the required accounting in accordance with generally accepted auditing standards [GAAS]. ¶4 Next, plaintiffs assert that it relied upon the flawed audited statements of SCI's financial condition to make certain business decisions which ultimately rendered SCI/ICOPS unable to sustain economic viability during the 1990's. Lastly, Stroud/SCI allege that Andersen after becoming aware of the understatement of SCI's liabilities failed to extend to its clients (SCI/ICOPS) the duty of care required by the Code of Professional Conduct for accountants. ¶5 Andersen defends by asserting (1) that plaintiffs failed to prove by sufficient evidence that its audits of SCI and ICOPS were flawed and (2) that the economic losses suffered by SCI resulted solely from (a) bad management decisions made by Stroud/SCI and (b) SCI's flawed internal accounting procedures. ¶6 Before beginning its deliberations the jury was instructed by the trial judge on negligence, wanton and reckless conduct, and punitive damages among other issues. Jury Instruction No. 16 ¶7 At the conclusion of an eleven-day jury trial judgment was awarded to the plaintiffs on a jury verdict. Both compensatory and punitive damages were awarded. Andersen appealed. The Court of Civil Appeals [COCA] held that Jury Instruction No.16 which adopted the audit interference rule represented a fundamental-law error requiring the judgment's reversal. The case was remanded for a new trial. ¶8 Appellees sought certiorari which was granted. II STANDARD OF REVIEW ¶9 When the Court is called upon to review a jury's verdict in an action at law, that verdict is conclusive as to all disputed facts and conflicting statements. ¶11 Lastly, the trial court's denial of prejudgment interest to Stroud/SCI essentially presents a question of law which is reviewed de novo. COMPARE THE PLAINTIFF'S NEGLIGENCE TO ANDERSEN'S ONLY INSOFAR AS IT INTERFERED WITH THE LATTER'S PROFESSIONAL UNDERTAKING (i.e., AUDIT) ¶12 In today's forensic contest it is necessary to understand the context in which the determinative issues arose before their resolution is addressed. It is only when one realizes that the asserted errors relate to separate components [i.e., liability and damages] of the plaintiff's negligence-action that the Court's pronouncement can be fully appreciated. ¶13 To establish a prima facie case of negligence Stroud/SCI must prove: (1) that Andersen owed a duty of care arising from its rendition of professional accounting services to the plaintiffs, (2) that the duty was breached, and (3) that injury and the resultant damages were directly the result of Andersen's failure to perform its duty.17 The plaintiffs are required to clear two evidentiary hurdles to be awarded compensatory damages. First, they must prove that Andersen breached that degree of duty which was owed to them and which resulted in their injury. Then they must adduce evidence establishing the amount of compensatory damages which is their due. ¶14 Initially, today's pronouncement enunciates the criteria to be used for identifying the scope of a plaintiff's conduct which is relevant when a jury decides whether a defendant's conduct is negligent and caused injury. Then we assess whether the plaintiffs met their burden of proof as to damages. When a jury finds the plaintiff has proved a prima facie case of negligence, the plaintiff is entitled to recover those damages which are foreseeable and naturally flow from the defendant's negligent acts.18 In the latter regard it is axiomatic that a defendant is not liable for damages attributable solely to the plaintiff's conduct but instead is only liable for those damages which are proved by the plaintiff to extend from the defendant's established breach-of-duty, i.e., negligence. Simply stated, the latter issue is a question of proving one's damages. Assessment of the compensatory damages resulting or flowing from the defendant's negligent conduct presents a factual question which lies squarely within the jury's province. A ¶15 When a certified public accounting firm is engaged for audit purposes, it is employed to discover "inadvertent errors" in its client's bookkeeping systems and further to protect the client from its own employees' failure to find errors in the company's books and accounting system. Stated in general terms, the auditor is retained to give an opinion whether in conformity with GAAP [Generally Accepted Accounting Principles] the client's financial statements fairly represent its financial position.19 ¶16 A certified public accountant [CPA] owes a different duty of care to his/her client when rendering professional services than the duty of ordinary care which members of society owe to each other. It is Andersen's alleged breach of its professional duty as an auditor which lies at the heart of Stroud/SCI's negligence claim. Hence, the provision of professional services provides the initial context in which the Court considers SCI's [the plaintiff's] conduct that stands interposed as a defense to Andersen's fault. ¶17 The scope of Andersen's duty of care owed as a provider of professional accounting services is established not only by the formalized standards adopted by the American Institute of Certified Public Accounts i.e., GAAS and GAAP but also by the Oklahoma statutory and regulatory provisions which govern the field.20 A CPA's duty to his/her client, while not coterminous with those of lawyers and doctors, is certainly comparable in that violation of the recognized rules governing the profession can be used to evidence a breach of duty in a civil action and can also result in professional discipline.21 The Court is mindful of the enhanced obligations and responsibilities owed to the public by a person who dons the mantle of a professional. ¶18 At trial Andersen sought to assert a comparative-negligence defense22 to the allegation that it had committed professional malpractice. In essence Andersen requested the trial judge to instruct the jury that the plaintiffs' negligent conduct [if causing more than 50% of its damages] could be used to excuse its own negligent performance of professional duties. The trial judge rejected the defendant's position. Rather the trial judge instructed the jury that as it considered whether Andersen breached a duty of care owed to plaintiffs, it could only consider that negligence of the plaintiff which interfered with the defendant's provision of professional services. ¶19 Andersen did adduce at trial evidence from which the jury could have inferred that Stroud/SCI independent of the audited financial statements made several negligent business decisions subsequent to Andersen's first audit [e.g., purchase of building and moving corporate headquarters to Ruidoso, New Mexico from Weatherford, OK] which contributed to SCI and ICOPS' financial woes. In response the plaintiffs adduced evidence see Stroud testimony upon which the jury could have concluded that Stroud/SCI's allegedly negligent business decisions were made in reliance upon the flawed financial statements which had been audited by the defendant. ¶20 Despite the evidentiary conflict over whose conduct caused Stroud/SCI's injury, the jury concluded that plaintiffs did not interfere with Andersen's performance of the respective audits. Andersen offered no instance where it requested something of the plaintiffs regarding the SCI/ICOPS financial statements which was not provided to the audit staff. Even the auditors who participated in the engagement and testified at trial stated that the plaintiff was very cooperative with all of Andersen's requests. ¶21 The trial judge correctly understood that circumscribing the use of the adduced evidence of plaintiff's own negligence in regard to the first two evidentiary elements [duty and breach] of a prima facie case of negligence did not foreclose Andersen from arguing that the plaintiff's conduct broke the chain of causation as to the injuries/damages which emanated from the defendant's proven negligence.23 Nor did it preclude Andersen from arguing, as it did at trial, that its acts as an auditor did not directly cause the damages for which Stroud/SCI sought compensation. ¶22 In our quest to determine the relevance of the plaintiff's conduct to a professional-negligence claim, we find the legal analysis of National Surety24 and the Tenth Circuit of the U.S. Circuit Court of Appeals' decisions in Fullmer v. Wohlfeiler & Beck25 and Steiner Corp. et al. v. Johnson & Higgins of California26 to be persuasive. There the courts held that an accountant could assert as a defense the plaintiff's own negligent acts when such conduct contributed to the accountant's failure to perform his/her work. As noted by the Tenth Circuit, to hold otherwise would render illusory the notion that an accounting firm is negligent when its performance breaches the duty of care it owes as a professional to the public and causes injury. An accountant cannot defend his/her deficient professional conduct by asserting that its client was also negligent unless the client's conduct can be proven to have interfered with the accountant's provision of professional services. Today's clarification of the proof necessary to establish a prima facie case of professional negligence does not prevent Andersen from asserting as it did that the damages for which Stroud/SCI seek compensation did not flow or result from its [the auditors'] conduct. It does prevent the defendant from excusing its liability for professional negligence by interjecting facts into the trial which are unrelated to the issue of its responsibility for negligently-provided professional services.27 B ¶24 Andersen asserts the adduced evidence was insufficient to establish that it caused plaintiff's injury. Defendant also alleges that the evidence which the plaintiffs used to establish the quantum of its damages was speculative. Resolution of the asserted errors requires we review (1) whether the jury was properly instructed on the issue of the required causal nexus between the defendant's conduct and the plaintiffs' injuries/damages necessary to sustain the jury's verdict and (2) whether reasonable inferences can be drawn from the adduced evidence which support the judgment. ¶25 An essential element of actionable negligence is that the complained-of conduct be the direct cause of the injury for which compensation is sought. Direct cause means a cause which, in a natural and continuous sequence, produces injury and without which the injury would not have happened. For negligence to be a direct cause it is necessary that some injury to a person or to the property of a person in Plaintiff's situation must have been a reasonably foreseeable result of negligence. ¶26 In a negligence action a plaintiff is required to adduce evidence which (in the trial judge's opinion) is sufficient (1) to induce a reasonable person to believe that a causal link exists between the defendant's conduct and the resulting injury and (2) to establish the presence of a controverted factual question which should be submitted to the jury. "The prohibition of recovery of damages because of uncertainty and too speculative in nature applies to the fact of damage and not to the amount of damage." The parties do not question that Stroud/SCI were in fact injured. The defendant's issue with the jury's verdict and damage-award more particularly addresses who and/or what caused the economic losses which the plaintiffs experienced and how value was ascribed to the injury. It is against these standards that the Court reviews whether the jury's verdict and damage-award are supported by competent evidence. ¶27 In the present case the jury was required to assess the degree of care utilized by Andersen in meeting its professional obligations to the plaintiffs over approximately a five-year period. ¶29 How the jury chose to weigh the various witnesses' testimony is completely within their bailiwick and the Court will not engage in re-weighing the evidence. ¶30 At trial it was acknowledged that valuing damages such as those the result of defendant's breach was not an exact science. Nonetheless, the plaintiff's expert ¶31 The Court is also cognizant that the jury found the defendant engaged in wanton and/or reckless misconduct IV STROUD WAS A FORESEEABLE AND KNOWN RELIER UPON THE AUDITS PREPARED BY ANDERSEN AND, HENCE, IS A PROPER PARTY-PLAINTIFF ¶33 Defendant objects to the award which the jury made to Steve Stroud individually. Anderson acknowledges that while Stroud is a real party in interest insofar as he is asserting a claim for damages on his own behalf, it owed him no duty since he was never its client. Defendant further asserts that a shareholder cannot assert personal causes for damages occasioned a corporation by breach of a duty owed solely to the company. Andersen's analysis is not persuasive. ¶34 The common law remains in full force in Oklahoma unless a statute explicitly provides to the contrary. One who, in the course of his . . . profession . . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. . . . V STROUD/SCI ARE NOT ENTITLED TO PREJUDGMENT INTEREST UNDER THE PROVISIONS OF ¶35 Plaintiffs' claim that Andersen's negligent conduct injured their "personal rights" thereby entitling them to receive prejudgment interest under the terms of 12 O.S. Supp. 1997 § 727(E).53 The trial court denied their motion for the same.54 The Court does not find § 727(E)'s ambit to be as sweeping as the plaintiffs suggest. Were we to extend the reach of § 727's provisions as requested, our decision would have the practical effect of extending the prejudgment-interest allowance to almost every prevailing party in a tort action. Such a result would eviscerate the legislatively-imposed limitations embodied in § 727's provisions. ¶36 At common law judgments do not bear interest. Hence, recovery of interest on a judgment must be authorized by statute.55 The injuries of which both SCI and Stroud complain are injuries to business assets, i.e., property. When in 1984 the Court first considered whether a negligence claim involving an injury to property was a "personal injury" under the provisions of § 727 then in effect, it held it was not and that prejudgment interest was unavailable.56 The statutory amendments to § 727 enacted since then do not persuade the Court that the Legislature intended to extend the Court's earlier definition of "personal" to include injury to property.57 An economic loss emanating from a business venture does not qualify as a personal injury under § 727(E)'s provisions and, hence, does not meet the statutory requirement for an award of prejudgment interest.58 The trial court's denial of prejudgment interest is sustained. VI SUMMARY ¶37 Today's cause calls upon the Court to review the evidentiary process by which a case alleging accountant-malfeasance is presented to a jury. Appellant would have the Court allow it to present evidence of a plaintiff's conduct occurring before the defendant's engagement as a certified auditor as a defense to its negligence. Today's pronouncement holds that an accountant may not defend the beach of a duty of care owed to its client by introducing evidence of the client's conduct unless the latter interfered with the defendant's provision of professional services. The above rule is peculiarly relevant to that trial stage where the plaintiff is establishing a prima facie case of actionable negligence. ¶38 The above rule does not preclude the defendant from adducing evidence that the plaintiff's injury did not flow from or was not directly caused by the defendant's conduct. Nor does the announced rule prevent the defendant from asserting supervening or intervening causes, if any there be, which break the chain of causation as to the injury for which the plaintiff is seeking compensation. At trial Andersen did adduce evidence which, if believed by the jury, would have exonerated it of liability for the damages sought by Stroud/SCI. Nonetheless, the jury chose to believe the plaintiffs' evidence and find otherwise. ¶39 The Court will not re-weigh the evidence in the case before it. A review of the trial transcript discloses that the adduced evidence along with the reasonable inferences which could be drawn from it sufficiently proves not only the fact of the plaintiffs' injury but also the amount of compensatory and punitive damages which were awarded. ¶40 Upon certiorari previously granted, THE COURT OF CIVIL APPEALS' OPINION IS VACATED AND THE DISTRICT COURT JUDGMENT IS AFFIRMED. ¶41 HARGRAVE, C. J., WATT, V.C.J., HODGES, LAVENDER, OPALA, KAUGER, SUMMERS and BOUDREAU, JJ., concur. ¶42 WINCHESTER, J., dissents. FOOT