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Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 

---

MARK 

LEE 

v. 

P U B L I S H 

·. IN THE UNITED STATES COURT OF 

FOR THE TENTH CIRCUIT 

A. FULLMER and LYMAN MOODY, ) 

) 

Plaintiffs-Appellees/ ) 

Counter-defendants, ) 

) 

KENNARD, ) 

) 

Plaintiff-Appellee, ) 

) 

) 

) 

WOHLFEILER & BECK, a corporation, ) 

and GEORGE BECK, an individual, ) 

) 

Defendants-Appellants/ ) 

Counterclaimants. ) 

FILED 

United States Court of Appeals 

Tenth circuit 

APPEALS 

No. 

JUN 1 2 1990 

ROBERT L. HOECKER 

Clerk 

86-1167 

ON APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF UTAH 

(D.C. NO. 83-C-1108W) 

Stanley J. Preston of Snow, Christensen & Martineau, Salt Lake 

City, Utah (Max D. Wheeler of Snow, Christensen & Martineau, Salt 

Lake City, Utah, with him on the brief), for Plaintiffs-Appellees. 

Robert H. Rees of Kipp and Christian, P.C., Salt Lake City, Utah 

(Carman E. Kipp of Kipp and Christian, P.C., Salt Lake City, Utah, 

with him on the brief), for Defendants-Appellants. 

Before HOLLOWAY, Chief Judge, SETH and MCWILLIAMS, Circuit Judges 

HOLLOWAY, Chief Judge 

Appellate Case: 86-1167 Document: 01019865233 Date Filed: 06/12/1990 Page: 1 
This is a diversity action asserting claims of negligent 

misrepresentation, negligence and fraud brought by investors in 

Intermountain Giftmakers, a.failed business, ~gainst Giftmakers' 

auditors. After a bench trial, the district judge entered 

detailed findings, conclusions and a judgment for the investorsplaintiffs, Fullmer, Moody and Kennard, on the negligence and 

negligent misrepresentation claims for a portion of the damages 

sought. He found no basis for any claim of fraud by plaintiffs 

against the defendants. The auditors-defendants, Wohlfeiler & 

Beck, and defendant George Beck, appeal. 

I 

Following is a summary of the trial judge's detailed findings 

of fact and conclusions of law. The findings and conclusions will 

be developed further as required in treating the issues raised. 

During the mid-1970s the business that eventually became 

Giftmakers began manufacturing and wholesaling gifts. Giftmakers 

was a cottage industry which manufactured components and sold them 

to customers who then assembled them in their homes and sold the 

finished gifts to retailers. After sales dramatically increased 

during the period from 1976 to 1978, Giftmakers' business declined 

and it eventually dissolved in 1983. Fullmer, Moody and Kennard, 

as shareholders and creditors, sued the auditors, Wohlfeiler & 

Beck, for large losses resulting from transactions between the 

plaintiffs and Giftmakers. 

The transactions in question occurred from 1976 through 1983 

when Fullmer, Moody and Kennard invested money in Giftmakers and 

made substantial loans to the company. Fullmer and Moody also 

became directors of Giftmakers. In making his findings on 

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I 

liability, the trial judge divided these transactions into four 

time periods: (1) transactions entered into prior to August 8, 

.1979, when the first unaudited financial statements for December 

1978 were furnished by defendants; (2) transactions that took 

place after the furnishing of the first unaudited information on 

August 8, 1979, and up until June 6, 1980; (3) the transactions 

after June 6, 1980, and up until March 1, 1983, when defendants 

sent audited financial statements of Giftmakers; and (4) 

transactions after March 1, 1983, when the last audit information 

defendants furnished related to a time period some 14 months 

earlier, and at which point the court found that reliance on the 

old accounting information was unreasonable. 

The trial judge found no basis for any claim of fraud by the 

plaintiffs against the defendants. The judge also rejected any 

claims of knowing or reckless misrepresentation, or even gross 

negligence; thus no punitive damages were allowed. With respect 

to the claims based on negligent misrepresentation and negligence, 

the court did find the defendants liable for losses during the 

third period suffered on investments, loans and guaranties which 

the plaintiffs made after defendants issued the audited financial 

statements. The defendants issued qualified audit opinions on 

Giftmakers' financial statements for the years ending December 31, 

1979, 1980 and 1981. The trial judge found that these financial 

statements did not conform to generally accepted accounting 

principles and that the defendants did not perform their audits in 

accordance with generally accepted auditing standards. 

The trial judge rejected the defense that the plaintiffs h~d 

been guilty of negligence which caused or contributed to the 

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plaintiffs' losses. 

conclusions stated 

The 

that 

letter transmitting 

the judge had not 

his findings and 

found any of the 

plaintiffs guilty of cont~ibutory or comparative· negligence that 

would reduce their recovery. This was based on his opinion that 

the plaintiffs' negligence in an accounting malpractice case is 

only a defense, or the basis for an offset, where the plaintiffs' 

conduct has contributed to the accountant's failure to perform his 

work or his failure to furnish accurate accounting information. 

He said the plaintiffs were imprudent and negligent in the manner 

in which they handled a number of these transactions (~.g., 

obtaining no security and on occasion not even obtaining notes, 

etc.), but that none of that conduct had any relevance to the 

defendants' responsibility to furnish accurate accounting 

information. 

On appeal, the defendants argue that the judgment should be 

reversed or in any event the case should be remanded for 

consideration of the defendants' comparative negligence defense. 

The defendants-appellants do not challenge the trial judge's 

finding of negligence in making the audits. 

II 

The Comparative Negligence Defense 

Defendants Wohlfeiler & Beck contend that the trial judge 

erred in failing to apply comparative fault principles to reduce 

the plaintiffs' damages by the proportion of fault attributable to 

them. They point to assertions of the defense in their pleadings, 

and their proposed findings and conclusions presented to the trial 

judge. 

4 

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The gist of their argument is that comparative fault is a 

firmly established principle in Utah common law, and -refer to the 

enactment of Utah's compar.ati~ negligence statute, UTAH CODE ANN. 

§ 78-27-37 (repealed effective April 28, 1986). They maintain 

that the Utah Supreme Court has applied comparative fault 

principles that now appear in the codification of the Liability 

Reform Act of 1986, UTAH CODE ANN. § 78-27-37, et~-

April 28, 1986), 

(effective 

As noted earlier, the trial judge rejected the comparative 

negligence defense. In his conclusions of law the judge stated 

(pp. 37-38): 

7. Defendants are not entitled to assert a defense 

of contributory or comparative negligence against 

plaintiffs. The evidence establishes that plaintiffs 

passively relied on defendants' audited financial 

reports and there is no evidence that plaintiffs' 

negligence contributed to defendants' failure to 

properly prepare the audited financial reports or in any 

way prevented them from reporting the true financial 

condition of IGM in those audited reports. 

Defendants say the court apparently based its ruling on 

National Surety Corporation v. Lybrand, 9 N.Y.Supp.2d 554 (App. 

Div., 1st Dept. 1939), which stated that the defense of negligence 

of the employer only applies when the plaintiff's negligence 

contributed to the accountant's failure to perform his contract. 

This was a case decided in a contributory negligence context, 

which is not the doctrine now in Utah. Therefore, plaintiffs say 

that Devco Premium Finance Co. v. North River Insurance Co., 450 

So.2d 1216 (Fla. Ct. App. 1984), applies; that the Devco opinion 

correctly declined to adopt the holding in the National Surety 

case because it had been decided in a contributory negligen9e 

context; and that the plaintiffs should not be allowed to recover 

5 

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for losses which they could have avoided by the exercise of 

reasonable care, according to the Devco opinion. 

As the factual ·prsmise for .their argument on comparative 

negligence, the defendants argue that had Fullmer and Moody given 

the business such attention as an ordinarily discreet businessman 

would have given to his own concerns, they would have discovered 

the precarious financial situation of Giftmakers and would have 

avoided or reduced many of their losses. Further they say that 

Fullmer, Moody and Kennard each handled their transactions with 

Giftmakers in a negligent and careless manner, obtaining no 

security for loans, paying far more than book value for shares of 

stock, etc. Brief of Defendants-Appellants at 21. 

In the letter transmitting his findings and conclusions to 

counsel, the judge further explained his holding which rejected 

the comparative negligence defense: 

I have not found any of the plaintiffs guilty of 

contributory or comparative negligence that would reduce 

their recovery as to any of the claims on which they are 

entitled to recover. This is so inasmuch as my opinion 

is that plaintiffs' negligence in an accounting 

malpractice case is only a defense, or the basis for an 

offset, where the plaintiffs' conduct has contributed to 

the accountant's failure to perform his work or to his 

failure to furnish accurate accounting information. The 

plaintiffs were imprudent and negligent in the manner in 

which they handled a number of these transactions (e.g. 

obtaining no security and on occasion not even obtaining 

notes, etc.) but none of that conduct had any relevance 

to defendants' responsibility to furnish accurate 

accounting information. 

We are persuaded that the ruling of the trial judge on the 

comparative negligence theory of the defendants should be upheld. 

The parties have found no Utah decisions which are dispositive of 

the precise issue before us, and we have found none. We feel the 

trial judge has convincingly stated his holding, quoted above, by 

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ruling that the plaintiffs' negligence in an accounting 

malpractice case is only a defense, or the basis for an offset, 

\ 

wh-ere the plaintiffs' conduct has contributed to the accountant's 

failure to perform his work or to furnish accurate accounting 

information. This holding is not in conflict with the Utah· cases 

and is supported by reason and other authorities. 

It is true that in the context of a negligent 

misrepresentation action, the Utah court has held that the 

plaintiff has a duty to act reasonably to protect its own 

interests. Christenson v. Commonwealth Land Title Insurance Co., 

666 P.2d 302, 306 (Utah 1983); Mikkelson v. Quail Valley Realty, 

641 P.2d 124, 126 (Utah 1982). Thus we agree that in some 

circumstances, as defined by the trial judge, comparative 

negligence can be a defense. Moreover, it was stated in Jardine 

v. Brunswick Corporation, 423 P.2d 659, 662-63 (Utah 1967), -that: 

[T]here is recognized a defense somewhat analogous to 

contributory negligence in other tort actions. The one 

who complains of being injured by such a false 

representation cannot heedlessly accept as true whatever 

is told him, but has the duty of exercising such degree 

of care to protect his own interests as would be 

exercised by an ordinary, reasonable and prudent person 

under the circumstances; and if he fails to do so, is 

precluded from holding someone else to account for the 

consequences of his own neglect. 

Here, however, it was found that each plaintiff "as a result 

of their reasonable reliance on the negligent misrepresentations 

contained in defendant's audited financial reports" suffered the 

losses for which damages were allowed. Findings of Fact and 

Conclusions of Law at 30. These findings related to the audited 

reports, which the defendants had undertaken a duty to prepare, 

distinguish our case from one like Jardine where a heedless 

acceptance of a false representation was involved. 

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The conclusions 

persuasive authority. 

of the trial judge are supported by 

In Lincoln Grain, Inc. v ,_ Coopers & 

Lybrand, 345 N.W.2d 300 (Neb. 1984), a judgmerit for the defendant 

public accountants was reversed and the cause remanded for trial 

on a claim that an audit had not been conducted in accordance with 

generally accepted auditing standards. In affording guidance for 

the retrial, the Nebraska court agreed with the views expressed in 

National Surety Corporation v. Lybrand, 9 N.Y.Supp.2d 554 (App. 

Div. 1939), and Shapiro v. Glekel, 380 F.Supp. 1053 (S,D.N.Y. 

1974), and in Hawkins, Professional Negligence Liability of Public 

Accountants, 12 Vand. L. Rev. 797 (1959), and Menzel, The Defense 

of Contributory Negligence in Accountants' Malpractice Actions, 12 

Seton Hall 292 (1983). The court stated: 

We agree with the view of the National Surety and 

Shapiro courts that accountants are not to be rendered 

immune from the consequences of their own negligence 

merely because those who employ them may have conducted 

their own business negligently. Allowing such a defense 

would render illusory the notion that an accountant is 

liable for the negligent performance of his duties. We 

hereby adopt the rule enunciated by the National Surety 

and Shapiro courts, and articulated by Hawkins and 

Menzel, that the contributory negligence of the client 

is a defense only where it has contributed to the 

accountant's failure to perform the contract and to 

report the truth. 

345 N.W.2d at 307, 

Defendants argue that the court's statements demonstrate that 

the Lincoln Grain case was decided under contributory negligence 

principles, and that the harsh rule of the absolute bar of 

contributory negligence is not the rule now in Utah, Rigtrup v. 

Strawberry Water Users Association, 563 P.2d 1247, 1249 (Utah 

1977), overruled on other grounds, Moore v. Burton Lumber & 

Hardware Co., 631 P.2d 865 (Utah 1981); hence the Lincoln Grain 

8 

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opinion and others decided in contributory negligence regimes are 

inapplicable. 

We disagree with. this analysis of the Lincoln Grain case. 

While it is true that in the portion of the opinion quoted above, 

and in statements cited by the defendants, the court referred to 

contributory negligence, in actuality the case was decided in the 

context of comparative negligence principles. Earlier in the 

Nebraska court's opinion there is discussion of the trial court's 

instruction which did refer to contributory negligence. However, 

the instruction stated: 

If so, and if such negligence on the part of Lincoln 

Grain was the proximate or a proximately contributing 

cause of Lincoln Grain's damage, then the jury should 

compare the negligence of both Lincoln Grain and Coopers 

& Lybrand and otherwise proceed in accordance with the 

comparative negligence instructions. (Emphasis added.) 

345 N.W.2d at 306. 

Of course, there is a fundamental difference between the 

contributory negligence and comparative negligence doctrines, with 

the latter avoiding harshness of the absolute bar of contributory 

negligence. However, we are not convinced that the reasoning in 

the cases decided in contributory negligence contexts is 

necessarily inapposite here. Allowing either a comparative 

negligence or contributory negligence defense would tend to 

"render illusory the notion that an accountant is liable for the 

negligent performance of his duties," which is a result rejected 

by Lincoln Grain, 345 N.W.2d at 307. There is force to the 

reasoning in Lincoln Grain and other authorities with respect to 

both contributory and comparative negligence regimes. The basic 

reasoning was stated in National Surety Cor:eoration v. Lybrand, '• 

9 

N.Y.Supp.2d at 563: II [ W] e see no reason to hold that the 

accountant is not liable to his employer in such cases. 

9 

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Negligence of the employer is a defense only when it has 

contributed to the accountant's failure to perform his contract 

and to report the truth." 

The persuasive analysis in Menzel, The Defense of 

Contributory Negligence in Accountant's Malpractice Actions, 12 

Seton Hall 292 (1983), makes no distinction between contributory 

negligence and comparative negligence regimes. The introduction 

to the article states that "[t]he most interesting issue presented 

by accountant's malpractice cases is the availability of the 

defense of contributory, or, depending upon the jurisdiction, 

comparative negligence." The analysis then proceeds using the 

term contributory negligence as including comparative negligence 

as adopted in New Jersey. Id. at 292 n.l. The general conclusion 

of the author is stated as follows, id. at 310: 

It is submitted that the better reasoned view, and 

the view supported by the·weight of authorities which 

have considered the question, is that the negligence of 

a client in managing his business should not generally 

be a defense in accountant's malpractice actions. When, 

however, the conduct of the client is unreasonable under 

the circumstances and interferes with the accountant's 

ability to perform his duty, that conduct should be a 

bar, or partial bar (depending on applicability of 

comparative negligence concepts) to the cause of action. 

In other words, the better rule is that set forth in 

National Surety. (Emphasis added.) 

We have considered Devco Premium Finance Co. v. North River 

Insurance Co., 450 So.2d 1216 (Dist.Ct.App. Fla. 1984), and are 

not persuaded to adopt its reasoning. The Devco opinion rejected 

the holding of National Surety Corporation v. Lybrand, on the 

basis of the distinction between contributory negligence and 

comparative negligence. The National Surety Corporation principle 

that the negligence of the employer is a defense only where it 

contributed to the accountant's failure to perform his duty was 

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rejected on the basis of that distinction. We disagree. In 

accord with the analysis by Mr. Menzel, we are persuaded that the 

- .more .-fundamental. principle. is .that the .accountant-should not be 

absolved of the duty undertaken by him to one reasonably relying 

on his audit unless the plaintiff's negligence contributed to the 

auditor's misstatement in his reports. 

In sum, we are not persuaded that the trial judge erred in 

his ruling that the comparative negligence defense was 

inapplicable here. His views have substantial support in 

authorities we have cited. Moreover, in view of the unsettled 

state of the law in Utah on the precise issue before us, we treat 

the views of the resident district judge with some deference, 

although the legal ruling is ultimately reviewed de novo. Wilson 

v. Al McCord, Inc., 858 F.2d 1469, 1473 (10th Cir. 1988). The 

Supreme Court has noted that it is ''hesitant to overrule decisions 

by federal courts skilled in the law of particular states unless 

their conclusions are shown to be unreasonable." Chardon v. 

Fumero Suto, 462 U.S. 650, 654 n.5 (1982) (~uoting Propper v. 

Clark, 337 U.S. 472, 486-87 (1949)); see also Bishop v. Wood, 426 

U.S. 341, 346 n.10 (1976), For the reasons given, we are 

satisfied that the trial judge's ruling on the comparative 

negligence issue was not unreasonable and should be accepted. 

Propper, 337 U.S. at 489. 

III 

Defendants' Assertion That Clements' Knowledge Should 

Be Imputed to Plaintiffs Fullmer and Moody, 

Defeating Their Right to Recover 

Defendants maintain the trial court erred in failing to 

impute to plaintiffs Fullmer and Moody the knowledge of Clements, 

an officer of Giftmakers; 

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that having such knowledge, Fuller and Moody could not establish 

all the elements of their negligent misrepresentation and 

. negligence causes. of action; .. and thus reversal of judgment for 

them should follow. Brief of Defendants-Appellants at 22-27. 

The background facts were found by the trial court with 

respect to the relationships of Fullmer, Moody and Clements. 

Plaintiff Fullmer became chairman of the board of directors of 

Giftmakers on or about February 13, 1979, and never resigned and 

was never removed from that position. Plaintiff Moody became a 

member of the board of directors of Giftmakers on or about 

November 23, 1977, and never resigned and was never removed. On 

March 1, 1976, Clements became executive vice-president and chief 

financial officer of Giftmakers. Findings of Fact and Conclusions 

of Law at 2, 4. 

The defendant's argument runs along this line: the 

uncontroverted evidence at trial indicates that Clements was an 

agent of Fullmer and Moody, who were directors of Giftmakers. 

Fullmer and Moody had a duty under Utah law to give the business 

the attention an ordinarily discreet businessman would give to his 

own concern; instead, "they delegated and relied on Clements, a 

fellow member of the board, vice-president, and chief financial 

officer, to supervise and direct the operations of the company on 

their behalf. Under those circumstances Clements was Fullmer and 

Moody's agent." Brief of Defendants-Appellants at 23. Because 

Clements was an agent of Fullmer and Moody, his knowledge became 

their knowledge. With Clements' knowledge imputed to them, 

Fullmer and Moody were unable as a matter of law to establi~h 

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reasonable reliance or misstatements in the financial reports. 

Id. at 24, 26. 

_ The difficulty is that these are assertions of the creation 

by Fullmer and Moody of an agency relationship by Clements without 

any record support being shown. Clements was an officer of the 

corporation, but the creation of an individual agency relationship 

with respect to Fullmer and Moody is another matter. This theory 

was submitted to the trial judge in proposed findings, but he 

rejected the theory and instead found as follows: 

9. Plaintiffs are not bound by the alleged 

knowledge of Clements regarding either the financial 

condition of IGM, or the accounting treatment given to 

certain items in IGM's financial statements by 

defendants. Defendants represented to Clements that 

such accounting treatment was proper under generally 

accepted accounting principles and he reported this 

information to plaintiffs. Based on these 

representations, plaintiffs had no reason to believe 

otherwise and plaintiffs believed that the audited 

financial reports were accurate. 

Findings of Fact and Conclusions of Law at 38-39. 

The defendants argue that the ruling was in error, saying 

th~t ''the uncontroverted evidence at trial indicates that Clements 

was Fullmer and Moody's agent." Brief of Defendants-Appellants at 

23. This broad assertion about the creation of an agency 

relationship with respect to Clements is not supported by any 

reference to the record. Defendants have not shown that the 

findings and conclusions of the trial judge rejecting their theory 

were clearly erroneous. Accordingly, we conclude that the 

defendants have demonstrated no error in the ruling of the 

district court on the issue. 

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IV 

Defendants' Claim of Error in the Award of Damages 

With Respect to Plaintiffs' Investment in the 

."Hangouts" Royalty Interest 

Defendants challenge the award of damages to Fullmer and 

Moody in connection with their loans to Giftmakers on "Hangouts," 

a specific product line of goods which Giftmakers anticipated 

producing. They say that the only reasonable inference to be 

drawn from the evidence is that these investments by Fullmer and 

Moody were not loans to Giftmakers but were merely purchases of 

royalty interests in a separate and specific line of goods; that 

the agreements (Exhibits 28 and 34) do not evidence loans, but 

show nothing more than purchases by Fullmer and Moody of a royalty 

interest in the "Hangouts" line of goods; that the considerations 

going into a decision to purchase a royalty interest are different 

from those underlying a loan; that the considerations for the 

royalty interest purchase center around anticipated success of the 

product line, while the considerations for making a loan concern 

the over-all viability of the debtor. Brief of 

Defendants-Appellants at 28-29. 

Defendants .say that Fullmer and Moody were provided 

information on the anticipated sales and success of the "Hangouts" 

line, which was separate and apart from the reports prepared by 

the accounting firm, and it was the separate information on the 

line of goods on which Fullmer and Moody relied in entering into 

these transactions, not the financial reports prepared by the 

accounting firm. Accordingly, since Fullmer and Moody did not 

rely on the financial reports prepared by the defendants jn 

entering into the transactions, they should not recover. And if, 

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in fact, Fullmer and Moody did rely on the reports prepared by the 

defendants, such reliance was unreasonable. 

The t~ial judge addrEssed this issue in his findings and 

conclusions. It was found that Fullmer made ~ $25,000 loan to 

Giftmakers on November 30, 1981, in return for a royalty interest 

in the ''Hangouts" new product line, paying this sum to Giftmakers 

by means of a $15,000 check dated January 7, 1982, and. a $10,000 

check about the same date. It was found that Moody loaned 

Giftmakers $25,000 on June 24, 1981, obtained by a loan from Far 

West Bank; that on November 30, 1981, Moody converted the loan to 

a royalty interest in the "Hangouts" line of Giftmakers. The 

judge found that in entering into each of these financial 

commitments, a substantial factor on which each of the plaintiffs 

reasonably relied was the audited financial reports prepared by 

the defendants. Findings of Fact and Conclusions of Law at 22-24. 

In his_conclusions of law, the trial judge held that plaintiffs 

were entitled to recover against defendants on their claim of 

negligent misrepresentation with respect to the "Hangouts" loan of 

$25,000 by Moody and $25,000 by Fullmer. Id. at 30-31. 

We are not persuaded by the arguments of the defendants. 

First, the contention that the agreements do not evidence loans is 

not convincing because the agreements, although entitled 

"Assignment of Royalty Interest," do show financing and recite in 

fact that they are in return for "financing a portion of the costs 

associated with producing and marketing the line." Plaintiffs' 

Exhibits 28 and 34. Commitments of repayments related to the 

amount of the payments made by Moody and Fullmer are made in the 

agreements, with interest obligations. It is true that in 

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Defendants' Exhibit 12, projections were furnished which provided 

information regarding the anticipated sales and success of the 

"Hangouts" line. It is true. that- plaintiff Moody testified that 

the agreement by providing twice the amount of the loan in respect 

of some recovery was "generous" and there was particular interest 

by him in the potential of getting more than that through the 

royalty arrangement. Tr. 324-25. Dr. Fullmer conceded that if 

one got a royalty interest in this line, he might get a good 

return out of that royalty interest by sales of the line. Tr. at 

508. Nevertheless, there was testimony by Dr. Moody that he did 

rely on the financial reports in making the June 24, 1981, loan 

and subsequently converting it into an interest in the "Hangouts" 

line. Tr. 276. Furthermore, Dr. Moody. testified that the 

arrangement did have a connection with the financial condition of 

the company and he was "relying upon the financial condition of 

the company to save me if this did not work out." Tr. 322-23. 

Dr. Fullmer testified that in entering into the loan in connection 

with the "Hangouts" arrangement, he did rely on the financial 

condition of Giftmakers as set forth in their reports. Tr. 440. 

On consideration of the record evidence, we are not persuaded 

that the findings and conclusions respecting the "Hangouts" 

transaction were clearly erroneous. We are instead persuaded that 

the evidence affords ample support for the findings that the 

plaintiffs are entitled to recover against the defendants on their 

claim of negligent misrepresentation with respect to the 

transactions by both Dr. Fullmer and Dr. Moody related to the 

"Hangouts" matter. 

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V 

Defendants' Claim of Error in the Trial Court's 

Refusal to Reduce Damages by the Amount of - - -Alleged Tax Benefits to Plaintiffs 

Defendants further contend that the plaintiffs expected to 

receive tax benefits as a result of their losses from the 

transactions with Giftmakers. They say the district court erred 

in failing to reduce the plaintiffs' damages award by the amount 

of those tax benefits received or expected to be received in 

connection with their investments. Brief of Defendants-Appellants 

at 31-33. We disagree. 

The trial court ruled against the defendants on the issue, 

stating: 

The damages to be recovered by plaintiffs shall not 

be reduced by the amount of tax benefit, if any, which 

plaintiffs have received or expect to receive as a 

result of their losses from IGM. Under the tax benefit 

rule, plaintiffs will be required to report any damages 

recovered in this action as taxable income, resulting in 

a recapture of their tax benefits, and any prior tax 

benefits will thereby be disallowed. 

Findings of Fact and Conclusions of Law at 39. 

We are persuaded that the result reached by the district 

court judge was correct. Cereal Byproducts Co. v. Hall, 147 

N.E.2d 383 .(Ill. App.), aff'd, 155 N.E.2d 14 (Ill. 1958) (refusing 

to reduce damages for accountants' negligence in not discovering 

embezzlement of plaintiff by amount of tax benefits plaintiff 

received by virtue of theft) (on appeal to Illinois Supreme Court, 

tax benefit issue not raised); see also Randall v. Loftsgaarden, 

478 U.S. 647, 660, 667 (1986) (refusing tax benefit offset in 

securities fraud case); cf. MERTEN'S LAW OF FEDERAL INCOME 

TAXATION§ 7.74, et~.; Commissioner v. Anders, 414 F.2d 1283, 

1287-88 (10th Cir. 1969), 

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VI 

The Claim of Error in the Damage Award 

to Plaintiff Kennard 

Defendants lastly argue that the trial judge erred in 

awarding plaintiff Kennard recovery of $20,000 for his investment 

in Giftmakers' stock in November 1982. They say that an 

accountant's liability does not extend to such a future purchaser 

who could not reasonably be foreseen as a. third party who could be 

expected to rely on a financial statement prepared by an 

accountant for the corporation, citing Milliner v. Elmer Fox and 

Co., 529 P.2d 806, 808 (Utah 1974). 

The Utah Supreme Court later referred to the ruling in the 

Milliner case in Bushnell v. Sillitoe, 550 P.2d 1284, 1286 n.5 

(Utah 1976). The court there stated that the Milliner opinion 

confines the liability in such circumstances to those who "could 

reasonably be foreseen as a third party who would be expected to 

rely on the financial statement prepared by the accountant." 

We are satisfied that plaintiff Kennard was properly found to 

be entitled to recover. The trial judge found that: 

(d) Defendants knew that the audited financial 

reports would be presented to IGM's board of directors, 

its shareholders, and potential lenders and investors, 

for the purpose of obtaining financing and stock 

investments. Defendants also knew that shareholders 

would rely on these reports in assuming IGM's corporate 

debts. Defendants should reasonably have expected that 

plaintiffs, among others, would rely and act on their 

audited reports for these purposes. 

With respect to plaintiff Kennard, the judge covered him in 

the findings that included Moody, Fullmer and Kennard as having 

incurred damages "as a result of their reasonable reliance on the 

negligent misrepresentations contained in defendants' audited 

financial reports .... " He found that Kennard had incurred 

18 

Appellate Case: 86-1167 Document: 01019865233 Date Filed: 06/12/1990 Page: 18 
damages of $20,000. Kennard was included in the conclusions of 

law that he was entitled to recover on the claim for negligent 

misrepresentation with respect 

for $20,000 on November 19, 

Conclusions of Law at 30-31. 

to his Giftm~kers stock purchase 

1982. Findings of Fact and 

Plaintiff Kennard was properly held within those who could 

reasonably be foreseen to rely on the audited reports. See 

Bushnell, 550 P.2d at 1286 n.5; Restatement (Second) of Torts 

§ 552. 

AFFIRMED. 

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Appellate Case: 86-1167 Document: 01019865233 Date Filed: 06/12/1990 Page: 19