Title: Scioto Mem. Hosp. Assn., Inc. v. Price Waterhouse

State: ohio

Issuer: Ohio Supreme Court

Document:

Scioto Memorial Hospital Association, Inc., Appellee and Cross-
Appellant, v. Price Waterhouse, Appellant and Cross-Appellee. 
[Cite as Scioto Mem. Hosp. Assn., Inc. v. Price Waterhouse (1996), ___ Ohio 
St.3d ___.] 
Torts -- Negligence -- Ohio’s comparative negligence law applicable to 
client’s claim against accountant for professional negligence. 
Ohio’s comparative negligence law is applicable to a client’s claim against its 
 
accountant for professional negligence. 
 
(No. 94-409 -- Submitted September 12, 1995 -- Decided February 7, 
1996.) 
 
Appeal and Cross-Appeal from the Court of Appeals for Franklin 
County, No. 90AP-1124. 
 
Appellee and cross-appellant, Scioto Memorial Hospital Association, 
Inc. (“Scioto”), began planning the construction of Richmond Place, a 
residential retirement center in Lexington, Kentucky.  Appellant and cross-
appellee, Price Waterhouse (“PW”), was hired by Scioto in 1981 to advise it on 
the financial feasibility of Richmond Place.  PW was hired to review the work 
of the architect, the underwriter, Hereth, Orr & Jones, Inc. (“HOJ”), and the 
 
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marketing consultant, American Retirement Corporation (“ARC”), and to 
recommend to Scioto whether to proceed with the Richmond Place investment. 
 
PW wrote and mailed to Scioto an engagement letter regarding PW’s 
role as a financial-feasibility consultant for Scioto’s investment.  Pursuant to 
the letter, PW was to issue a preliminary feasibility study.  Following 
satisfactory results in that study and a decision to proceed, PW was to “review 
a detailed financial forecast.”  However, rather than reviewing a “forecast,” PW 
reviewed a “financial projection” compiled by HOJ.  PW explained to Scioto in 
a cover letter attached to HOJ’s report that a “projection” “represents 
management’s estimate of its possible, but not necessarily most probable, 
future course of action.  Financial forecasts, on the other hand, represent 
management’s judgment, based on present circumstances, of the most likely set 
of conditions and their most likely course of action.”  The final report issued to 
Scioto assumed a projected occupancy rate of ninety-eight percent. 
 
The marketing consultant, ARC, marketed “pre-sales” of Richmond 
Place units in February 1982.  Consultants, including PW, also reviewed the 
proposed terms of an agreement to be signed by future residents.  The 
 
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agreement contained an unusual and somewhat controversial term allowing for 
the refundability of the occupancy fees.  The occupancy fees were significantly 
high, ranging from $40,000 to approximately $84,000, and the refundability 
was to be conditioned upon (1) the development being ninety-five percent 
occupied, and (2) the same apartment being sold to a new resident. 
 
Lowell Thompson, the hospital’s president, testified that in the spring of 
1982, “pre-sales” (defined as the receipt of $1,000 fully refundable deposits) 
were lagging and he voiced his concerns with PW, through John West.  
Thompson testified that John West reassured him that Richmond Place was a 
good project.   
 
On June 1, 1983, the project was seventy-percent complete when a fire 
swept through and destroyed virtually all but one wing of the retirement 
center’s construction.  Scioto decided to rebuild with $3.4 million it received 
from its insurance company.  As of June 1984, however, only fifteen residents 
occupied Richmond Place, which had one hundred seventy units. 
 
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Unable to make Richmond Place profitable, Scioto sold the center to 
ARC in June 1985 for $10 million.  ARC was released from liability to Scioto 
when it bought Richmond Place. 
 
On August 9, 1985, Scioto brought suit against PW based upon alleged 
negligence and breach of contract.  Scioto claimed that PW was negligent in 
failing adequately to assess and disclose to Scioto the risks associated with the 
project. Scioto asserted at trial that had PW’s report accurately reflected the 
financial “forecast,” the Richmond Place project would not have been 
undertaken.  PW asserted at trial that the failure of Richmond Place was a result 
of residents’ backing out after the fire due to delays in construction.  PW also 
presented at trial evidence that Scioto’s damages resulted from Scioto’s lack of 
business-interruption insurance to cover the six-month delay in construction 
due to the fire, during which time monthly interest payments of $230,000 to 
service bonds continued to be payable. 
 
The trial court granted Scioto’s motion in limine with respect to PW’s 
defense of comparative negligence and excluded evidence relevant to that 
asserted defense based on the “audit interference” rule, first articulated in Natl. 
 
5 
Sur. Corp. v. Lybrand (1939), 256 A.D. 226, 9 N.Y.S.2d 552.  After a fifteen-
week trial, the jury returned a general verdict for Scioto in the amount of 
$15,845,607.62.   No instruction on the comparative negligence defense was 
given to the jury.  PW’s motion for a new trial to allow in evidence of Scioto’s 
negligence was overruled.  
 
The court of appeals affirmed the trial court’s judgment on liability but 
found that the damages were excessive.  The court ordered a remand for retrial 
on the damages issue unless Scioto accepted a remittitur reducing the award to 
$8,771,000, plus interest.  Scioto accepted the remittitur.  On the issue of the 
comparative negligence defense, the court of appeals found no error, citing the 
audit interference rule, but stated that even if there was error in not allowing 
the comparative negligence defense, “any exclusion of evidence was 
nonprejudicial, Price Waterhouse referring extensively only to the exclusion of 
evidence as to the availability of loss-interruption insurance.”  The court found 
that Scioto’s failure to obtain this insurance did not affect the losses caused by 
PW, but only those caused by the fire. 
 
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This matter is now before this court upon the allowance of a motion and 
cross-motion to certify the record. 
___________ 
 
James A. Readey; Thompson, Hine & Flory and Gerald L. Draper, for 
appellee and cross-appellant. 
 
Vorys, Sater, Seymour & Pease, John C. Elam, Davis S. Cupps and Carl 
D. Smallwood, for appellant and cross-appellee. 
 
Emens, Kegler, Brown, Hill & Ritter, L.P.A., S. Martijn Steger and 
Michael J. Galeano, urging reversal for amicus curiae, Ohio Society of 
Certified Public Accountants. 
 
Clark, Perdue, Roberts & Scott and Edward L. Clark, urging affirmance 
for amicus curiae, Ohio Academy of Trial Lawyers. 
___________ 
 
Francis E. Sweeney, Sr., J.   The main issue before this court is whether 
the comparative negligence defense is applicable to a professional negligence 
claim of a client against its accountant.  For the following reasons, we find that 
the comparative negligence defense is applicable in accounting negligence 
 
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cases.  Accordingly, the trial court erred in granting the motion in limine and in 
not giving an instruction on the comparative negligence defense.  Nevertheless, 
we affirm the court of appeals’ upholding of the jury’s verdict because the error 
was not prejudicial in this case. 
 
The “audit interference” rule was set forth in Natl. Sur. Corp. v. Lybrand 
(1939), 256 A.D. 226, 9 N.Y.S.2d 552.  At that time, New York recognized 
contributory negligence as a complete bar to recovery.  In National Surety, the 
New York Supreme Court, Appellate Division, held that contributory 
negligence constituted an affirmative defense for accountants only if the 
client’s negligence contributed to the accountant’s failure to perform his 
contract and to report the truth.  While this rule was adopted by a number of 
jurisdictions, a review of these cases shows that none discusses its applicability 
in a state recognizing comparative negligence, with the exception of Fullmer v. 
Wohlfeiler & Beck (C.A. 10, 1990), 905 F.2d 1394 (applying Utah law).  See 
Lincoln Grain v. Coopers & Lybrand (1984), 216 Neb. 433, 345 N.W.2d 300; 
Jewelcor Jewelers & Distrib., Inc. v. Corr (Pa.Super.1988), 542 A.2d 72; 
Cereal Byproducts Co. v. Hall (1956), 8 Ill.App.2d 331, 132 N.E.2d 27; 
 
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Greenstein, Logan & Co. v. Burgess Marketing, Inc. (Tex. App.1987), 744 
S.W.2d 170.  The audit interference rule was made to soften what was then the 
“harsh rule” of negligence law which barred recovery of damages if there was 
any contributory negligence on the part of the plaintiff.  Note, The Peculiar 
Treatment of Contributory Negligence in Accountants’ Liability Cases (1990), 
65 N.Y.U.L. Rev. 329, 354. 
 
However, in light of Ohio’s comparative negligence statute enacted in 
1980, R.C. 2315.19(A), there is no need for a special rule and, thus, we reject 
the application of the audit interference rule in Ohio.  Hence, any negligence by 
a client, whether or not it directly interferes with the accountant’s performance 
of its duties, can reduce the client’s recovery.  In so holding, we note that 
virtually all courts that have expressly considered the applicability of the audit 
interference rule to their comparative negligence states have agreed and 
rejected the rule.  See Halla Nursery, Inc. v. Baumann-Furrie & Co. 
(Minn.1990), 454 N.W.2d 905, 909 (“Because we have broadly construed the 
comparative fault act and applied it to other professional malpractice actions, 
we *** hold that the trial court did not err in applying the principles of 
 
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comparative fault in this action by a client against an accountant for negligent 
failure to discover embezzlements in the client’s business.”); Fed. Deposit Ins. 
Corp. v. Deloitte & Touche (E.D.Ark.1992), 834 F.Supp. 1129, 1144-1147 
(applying Arkansas law); Devco Premium Fin. Co. v. N. River Ins. Co. 
(Fla.App.1984), 450 So.2d 1216 (declined to adopt the audit interference rule 
because it was based on principles of contributory negligence, which had been 
repudiated in Florida); Capital Mtge. Corp. v. Coopers & Lybrand (1985), 142 
Mich.App. 531, 537, 369 N.W.2d 922, 925; Natl. Credit Union Adm. Bd. v. 
Aho, Henshue & Hall (Aug. 30, 1991), E.D.La. No. 90-4443, unreported, 1991 
WL 174671 (applying Louisiana law). 
 
Ohio has adopted comparative negligence for all negligence actions not 
covered by statute.  R.C. 2315.19; Wilfong v. Batdorf (1983), 6 Ohio St.3d 
100, 6 OBR 162, 451 N.E.2d 1185, overruled in part and modified in part on 
other grounds, Van Fossen v. Babcock & Wilcox Co. (1988), 36 Ohio St.3d 
100, 522 N.E.2d 489.  Thus, comparative negligence is the law of Ohio in 
negligence cases, including professional negligence cases, where appropriate.  
See Cincinnati Riverfront Coliseum, Inc. v. McNulty (1986), 28 Ohio St.3d 
 
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333, 28 OBR 400, 504 N.E.2d 415.  As to the application of the comparative 
negligence defense in the present case, we note that while accountants should 
exercise ordinary care in conducting their accounting activities, the persons 
who hire accountants, usually businesspersons, should also be required to 
conduct their business activities in a reasonable and prudent manner.  Halla 
Nursery, Inc. v. Baumann-Furrie, supra, 454 N.W.2d at 909. 
 
Based on the foregoing, we conclude that Ohio’s comparative negligence 
law is applicable to a client’s claim against its accountant for professional 
negligence.  Accordingly, the trial court erred in granting the motion in limine 
as to PW’s comparative negligence defense and in failing to give an instruction 
on comparative negligence to the jury. 
 
However, despite the trial court’s initial ruling granting the motion in 
limine, the record demonstrates that PW was not precluded from presenting 
extensive evidence tending to show that Scioto’s own conduct was a cause of 
its losses, in addition to the negligence of PW.  As the trial court noted in its 
decision denying PW’s motion for judgment notwithstanding the verdict, 
“Defendant properly developed an appreciable body of evidence on the alleged 
 
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acts of Plaintiff which would comprise all such affirmative defenses.  These 
were before the jury *** to use in establishing proximate cause as defined for 
the jury.” 
 
PW primarily argues about the trial court’s exclusion of evidence 
regarding Scioto’s failure to obtain business-interruption insurance. However, 
as the trial court noted, “the $4,000,000.00 hole in Plantiff’s [sic] protective 
coverage was clearly and repeatedly presented to the jury.”  Moreover, failure 
to obtain such insurance constitutes comparative negligence only with regard to 
the damages attributable to the delays caused by the fire and not the other 
damages which the jury found Scioto to have sustained as a result of PW’s 
negligence and breach of contract.  The court of appeals recognized that the 
jury award improperly included damages that resulted from the fire, and 
ordered a remittitur to cure the error. 
 
Accordingly, we find that while the trial court should have allowed the 
comparative negligence defense, in this case the error was cured by the court of 
appeals’ remittitur and, therefore, did not constitute prejudicial error.  
 
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Likewise, the trial court’s failure to give an instruction on comparative 
negligence was not prejudicial error in this case as Scioto’s alleged negligence 
pertained mainly to the damages caused by the fire which, as we stated above, 
does not constitute comparative negligence.  The court of appeals’ remittitur 
properly reduced the jury award by the amount of damages attributable to the 
fire.  Furthermore, evidence pertaining to the negligent acts of Scioto was 
presented to the jury during the trial.  The jury was instructed that it should not 
award any damages to Scioto which were not caused by PW.  The jury was 
instructed that if Scioto failed to act reasonably to avoid or reduce its losses, it 
could not recover any such damages.  Despite these instructions, the jury still 
awarded Scioto all of its damages, indicating that the jury found PW the sole 
cause of  the failure of Richmond Place.   Thus, we find that even if the jury 
had been required to apportion the fault between the parties in this case, the 
outcome would have been the same.  The jury found that PW was solely liable 
for Scioto’s loss.  Accordingly, since there was no prejudicial error, a new trial 
is not warranted. 
 
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As to Scioto’s Cross-Proposition of Law I, in which Scioto attacks the 
trial court’s denial of prejudgment interest, we find that the trial court’s order 
was within its discretion and will not be reversed absent an abuse of discretion.  
Kalain v. Smith (1986), 25 Ohio St.3d 157, 159, 25 OBR 201, 203, 495 N.E.2d 
572, 574.  The trial court did not abuse its discretion by denying prejudgment 
interest in the present case as the court found that PW had an objectively 
reasonable belief that it had no liability.  In Cross-Proposition of Law II, Scioto 
urges that the remittitur ordered by the appellate court be modified.  However, 
where a party voluntarily chooses to accept a remittitur, rather than a new trial, 
it cannot challenge that remittitur on appeal.  Iron RR. Co. v. Mowery (1881), 
36 Ohio St. 418, paragraph three of the syllabus.  This rule is fundamentally 
fair, as it simply binds a party to its election.  Id. 
 
Finally, we do find merit in Scioto’s third Cross-Proposition of Law, 
which contends that the court of appeals erred when it ordered post-judgment 
interest on Scioto’s verdict to run from September 1, 1988.  This was the date 
the nunc pro tunc entry was filed, which corrected a typographical error in the 
case number of the original judgment entry filed on August 4, 1988.  Since 
 
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post-judgment interest should run from the date of the original August 4, 1988 
judgment entry, we reverse the court of appeals’ finding on this issue and order 
post-judgment interest to run beginning August 4, 1988.  See R.C. 1343.03(B); 
In re Petition for Inquiry into Certain Practices (1948), 150 Ohio St. 393, 38 
O.O. 237, 82 N.E.2d 853, paragraph two of the syllabus. 
 
Judgment affirmed in part 
 
and reversed in part. 
 
RESNICK and PFEIFER, JJ., concur. 
 
COOK, J., concurs separately. 
 
MOYER, C.J., DOUGLAS and WRIGHT, JJ., concur in part and dissent in 
part. 
Cook, J., concurring. I concur with the judgment of the majority but dissent from the 
syllabus.  Primarily, my disagreement is with the concept that any negligence of a client, 
whether or not it directly interferes with the accountant’s performance, can reduce the client’s 
recovery.  I would hold, instead, that comparative negligence may be applied only to 
negligent acts of a client that contribute to the accountant’s failure to perform according to 
the standards of the accounting profession.  Other negligence by the client, such as the 
claimed negligence of Scioto here, is to be considered in the context of whether Scioto’s 
 
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damages proximately resulted from its own conduct as opposed to the professional 
negligence of Price Waterhouse.   I would adopt the reasoning of the court of appeals 
affirming the trial court’s decision not to instruct on comparative negligence in this case.    
 
I also note that although the majority finds that the trial court erred in granting the 
motion in limine, error may not be predicated on a preliminary ruling.  The resulting 
exclusion of evidence offered at trial may be raised as error on appeal and Price Waterhouse 
claims such error.  
 
 
DOUGLAS, J., concurring in part and dissenting in part.     I concur with 
the syllabus of the majority and the discussion in the opinion supporting the 
syllabus.  I respectfully dissent from the judgment of the majority and the 
remainder of the opinion. 
 
This case involves a plethora of issues including (1) comparative 
negligence, (2) intervening or superseding cause, (3) judicial estoppel, (4) 
measure of damages, (5) prejudgment interest, (6) post-judgment interest, (7) 
the “two issue” rule, and (8) remittitur.  Herein, I deal only with comparative 
negligence and judicial estoppel. 
I 
Comparative Negligence 
 
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The majority properly says that “any negligence by a client, whether or 
not it directly interferes with the accountant’s performance of its duties, can 
reduce the client’s recovery.  * * *   
 
“* * *  Thus, comparative negligence is the law of Ohio in negligence 
cases, including professional negligence cases, where appropriate.  * * * 
 
“* * *  Accordingly, the trial court erred in granting the motion in limine 
as to PW’s comparative negligence defense and in failing to give an instruction 
on comparative negligence to the jury.”  (Emphasis added.) 
 
Notwithstanding all the foregoing, the majority then finds that because 
PW was permitted to present “extensive evidence tending to show that Scioto’s 
own conduct was a cause of its losses,” the error of the trial court in granting 
the motion in limine was “cured by the court of appeals’ remittitur and, 
therefore, did not constitute prejudicial error.”  (Emphasis added.) 
 
This is the first place that I respectfully part company from the majority.  
In Marshall v. Gibson (1985), 19 Ohio St.3d 10, 12, 19 OBR 8, 10, 482 N.E.2d 
583, 585, we said that the judgment in that case “must be reversed on the 
grounds that the trial judge committed prejudicial error in refusing to instruct 
 
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the jury on comparative negligence * * *.”  I recognize that it can be argued 
that the rule emanating from Marshall (that it is error not to instruct the jury on 
comparative negligence when the evidence dictates such a charge) was based 
on the particular facts of Marshall.  However, given the unequivocal statement 
of the majority herein that it was error for the trial court not to give an 
instruction on comparative negligence, it is difficult to ignore the teachings of 
Marshall in this regard.  My reason for so concluding is simple -- we will never 
know what the jury might have decided had the jury had all the evidence before 
it that the granting of the motion in limine precluded. 
II 
Judicial Estoppel 
 
The doctrine of judicial estoppel prevents a party from staking out a 
position in a subsequent action that is inconsistent with a position taken in a 
prior action.  In the case at bar, I believe that Scioto took a position that was 
inconsistent with a prior position taken by it in a Kentucky court. 
 
As set forth by the majority, the Richmond Place project was largely 
destroyed by fire on June 1, 1983.  The fire, caused by a welder’s torch, placed 
 
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the project in serious jeopardy as to sales, revenues and competition for the 
existing market.  At the time of the commencement of the Richmond Place 
project, Lexington, Kentucky, had no comparable facility. 
 
On August 13, 1984, Scioto sued its general contractor, Foster & 
Creighton Company (“F&C”), in a Kentucky court.  In that suit, Scioto 
presented evidence that the negligence of F&C had caused Scioto $11.8 million 
in damages.  The depositions of at least two of Scioto’s corporate officers were 
taken.  Each swore that the Richmond Place project was on sound financial 
footing prior to the fire and that the subsequent failure of the venture was 
attributable to the fire.  Because of a liquidated damages clause in the contract 
between Scioto and F&C, the maximum Scioto could obtain from F&C was 
$1.2 million.  Before trial, the parties settled for something less than the full 
amount. 
 
In the case at bar (the “Ohio” case), Scioto claims that the failure of the 
project was due to the negligence of PW and that the fire caused Scioto no 
more real harm in the long run.  One of the same corporate officers whose 
deposition was taken in the Kentucky suit now says, in the Ohio case, that the 
 
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value of the project was not destroyed by the fire but the project was, instead, a 
failure before the fire. 
 
On this point, Scioto’s position in the Ohio case cannot be reconciled 
with its position in the Kentucky case.  However, the court of appeals decided 
that Ohio does not recognize the doctrine of “judicial estoppel” in cases like the 
one now before us.  I disagree. 
 
In Fish v. Lake Cty. Bd. of Commrs. (1968), 13 Ohio St.2d 99, 102, 42 
O.O.2d 290, 292, 234 N.E.2d 590, 592, this court took the position that a party 
who had previously, in a judicial proceeding, successfully asserted one of two 
inconsistent substantive rights may not, in a later judicial proceeding, assert the 
other inconsistent right.  While the term “judicial estoppel” is not used in the 
case, it is fair to say, I believe, that the term is descriptive of the case holding. 
 
If the position taken by Scioto in the Kentucky suit is to be given 
credence (as it was), then Scioto should not now be heard, in the Ohio case, to 
say something entirely different from and contradictory to the position it took 
in the Kentucky case.  This is not just the old “two bites of the apple” theory.  
 
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This is total consumption of the same apple twice -- a seemingly impossible 
feat. 
III 
Conclusion 
 
For the foregoing as well as some additional reasons, I respectfully 
dissent. 
 
MOYER, C.J., AND WRIGHT, J., concur in the foregoing opinion.