No. 88-426 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1990 

EUGENE B. THAYER and MONTANA 

MERCHANDISING, INC., 

Plaintiff and Respondent, 

ROBERT G. HICKS, JR. and SEMAN, 

KOONTZ, JACOBSEN & BLOOMGREN, a 

Partnership, 

Defendants and Appellants. 

APPEAL FROM: District Court of the Eighth Judicial District, 

In and for the County of Cascade, 

The Honorable Thomas McKittrick, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Robert J. Emmons, Great Falls, Montana 

For Respondent: 

Joe R. Bottomly, Great Falls, Montana 

Filed: 

For Amicus Curiae: 

Ward Shanahan, Helena, Nontan (h. I CPA' s) su%mltte8st. November 2, 1989 

Clerk 
Justice William E. Hunt, Sr., delivered the Opinion of the Court. 

Montana Merchandising, Inc. brought this action against the 

accounting firm of Seman, Koontz, Jacobsen & Bloomgren (Bloomgren) 

in the District Court of the Eighth Judicial District, Cascade 

County, claiming damages arising from Bloomgren's negligent 

performance of an audit of Intermountain Merchandising, Inc., and 

its negligent misrepresentation of financial information in that 

audit. By a vote of 9 to 3, a jury returned a verdict in favor of 

Montana Merchandising in the amount of $339,308. Bloomgren 

appeals. We affirm in part and reverse in part. 

The following issues are raised on appeal: 

1. To what extent does an accountant owe a duty of care to 

third parties with whom he is not in privity? 

2. Did the District Court err in instructing the jury that 

an accountant's failure to comply with generally accepted auditing 

standards (GAAS) or generally accepted accounting principles (GAAP) 

constitutes negligence as a matter of law? 

3. Did the District Court err in instructing the jury that, 

in a negligent misrepresentation action, reliance on 

representations is presumed? 

4. Did the District Court err in submitting the issue of 

causation to the jury? 

5. Did the District Court err in failing to reduce the jury 

verdict? 

6. Did the District Court err in granting pre-judgment 

interest to Montana Merchandising? 

7. Did the District Court err in its award of costs to 

Montana Merchandising? 

Montana Merchandising, Inc. is a Great Falls grain-trading 

company established in 1973 by Eugene Thayer, its president and 

majority shareholder. In 1974, Thayer and Robert Hicks, Jr. formed 

another corporation called Intermountain Merchandising, Inc. Hicks 
was the president and active manager of Intermountain. Thayer, 

only a passive investor in the corporation, was vice-president. 

Gary Black was secretary-treasurer. Black, a certified public 

accountant, was also secretary-treasurer and controller of Montana 

Merchandising. 

Thayer and Hicks each contributed $5,000 to Intermountain's 

formation. Intermountain then borrowed $25,000 from First National 

Bank. With this money, Intermountain purchased a bookstore, 

Reader's World. In 1975, Intermountain founded a Hallmark shop, 

known as Tiffany's ~ttic. In 1976, it acquired two other separate 

corporations, Yellowstone Merchandising and Security Equipment. 

Yellowstone sold retail art supplies and office equipment. 

Security Equipment sold handguns and law enforcement supplies. 

In January, 1977, Intermountain purchased Skyline 

Distributing, a wholesale art, craft and hobby supplier. With this 

purchase, Intermountain intended to greatly expand its operations. 

The Skyline inventory cost $300,000. 

In early 1977, Intermountain's debt to the bank, which was 

personally guaranteed by both Thayer and Hicks, totalled 

approximately $400,000. The corporation was highly leveraged and 

needed an infusion of capital to service the debt. Because Hicks 

was unwilling or unable to supply any additional capital, he 

proposed that Thayer purchase his interest in the corporation in 

exchange for cash and Reader's World, one of the more successful 

of Intermountain's assets. The parties contemplated that, after 

Thayer acquired Hicks's stock, Montana Merchandising would supply 

capital through loans to or investments in Intermountain. 

In order to determine the value of Hicks's stock and the 

financial condition of the corporation, Allen Bloomgren, a partner 

in the defendant accounting firm, was hired to perform an audit of 

Intermountain. The parties dispute whether Bloomgren was told that 

Montana Merchandising would become financially involved with 

Intermountain after Thayer bought Hicks out. 

In June, 1977, prior to the formal completion of the audit, 

Montana Merchandising advanced $140,000 to Intermountain to help 
fund its operations. In July, 1977, Bloomgren communicated his 

preliminary audit figures to Thayer, Black and Hicks. The 

preliminary figures showed that Intermountain was a going concern. 

Based on these figures, Montana Merchandising loaned Intermountain 

an additional $47,000. 

Bloomgren completed the audit on August 15, 1977, giving a 

llcleanll opinion on Intermountain's balance sheet. This "cleanv 

opinion endorsed the figures contained in the balance sheet without 

disclaimers or reservations. 

The audit showed that Intermountain had a positive shareholder 

equity of $112,608 and working capital of $393,141. The equity 

figures were higher than the Intermountain's previous equity 

balance of $89,654, which had been claimed in Intermountain's 

March, 1977, unaudited financial statements. The figures thus 

indicated that Intermountain was not only solvent, but profitable. 

The audit figures were relied upon in going forward with the 

planned buy out of Intermountain. In exchange for his interest in 

the company, Hicks received both Reader's World and a note from 

Thayer in the amount of $52,445. In January, 1978, Thayer 

transferred the stock to Montana Merchandising. Montana 

Merchandising assumed the $52,445 debt to Hicks. 

The expansion plans proceeded and Montana Merchandising 

advanced additional funds to Intermountain. It also signed 

guarantees for loans Intermountain received from a local bank. 

These guarantees, which included money borrowed by Intermountain 

in previous years, totalled $765,000. Montana Merchandising's 

total risk exposure on Intermountain's behalf increased to 

$1,300,000. 

In 1978, Montana Merchandising engaged Junkermier, Clark, 

Campanella, Stevens, P.C. to conduct a second audit of 

Intermountain. Gary Hill, the accountant who performed this second 

audit, found several material errors on the audit completed by 

Bloomgren. Among the errors discovered by Hill was an 

overstatement of the value and quantity of Intermountainls 

inventory by an estimated $153,000, a failure to identify almost 
$14,000 in unrecorded liabilities, the improper identification of 

long-term and short-term debt and the failure to offset a $40,000 

loss to subsidiaries. Hill testified that, once he corrected the 

errors, he found that Intermountain's value was a negative amount. 

In other words, at the time of the Bloomgren audit, Intermountain 

was an insolvent corporation. 

Upon receiving Hill's audit report, Montana Merchandising 

acted to mitigate its damages. It ceased buying inventory and 

attempted to sell the remaining warehouse goods. Ultimately, it 

hired a professional to conduct a liquidation sale. 

Through these efforts, Montana Merchandising reduced 

lntermountainls bank debt from $765,000 to $338,000. At that 

point, the bank called the remainder of the loans due. Montana 

Merchandising honored its guarantees on the notes. 

In 1979, Thayer and Montana Merchandising brought suit against 

Hicks and Bloomgren, alleging that the accountant was negligent in 

its audit of Intermountain. Montana Merchandising claimed that, 

had Bloomgren properly performed the audit, it would never have 

purchased the corporation's stock, nor would it have advanced money 

directly to or guaranteed loans on behalf of Intermountain. Prior 

to trial, Hicks, Thayer and Montana Merchandising settled their 

claims between one another. 

Trial proceeded between Montana Merchandising and Bloomgren. 

Following three weeks of testimony, the jury returned a verdict in 

favor of Montana Merchandising in the amount of $339,308. 

Bloomgren appealed to this Court. 

I. 

To what extent does an accountant owe a duty of care to third 

parties with whom he is not in privity? 

While some jurisdictions adhere to the rule that an accountant 

may not be held liable in negligence to parties with whom he is not 

in privity of contract, e. g., Citizen's Nat '1 Bank of Wisner v. 

Kennedy and Coe, 441 N.W.2d 180 (Neb. 1989) ; Robertson v. White, 

633 F.Supp. 954 (W.D. Ark. 1986) (applying Arkansas law) , the modern 

trend allows recovery to non-clients in certain instances. The 
question most courts grapple with today is not whether an 

accountant owes a duty of care to third parties but, rather, just 

how far the duty extends. In dealing with this issue, courts have 

employed three different approaches. The first approach limits the 

duty of care to those third parties who are actually known to the 

accountant, the second limits the duty to those who are actually 

foreseen and the third expands the duty to all those who are 

reasonably foreseeable. 

Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931), authored 

by Justice Cardozo, is the seminal case on accountant liability. 

Fearing that disastrous consequences would result if accountants 

were exposed to I1liability in an indeterminate amount for an 

indeterminate time to an indeterminate class,11 Ultramares, 174 N.E. 

at 444, Cardozo limited an accountantls duty of care to those in 

privity of contract with the accountant or to those whose "bond was 

so close as to approach that of privity. . . .I1 Ultramares, 174 

N.E. at 446. 

The Court of Appeals of New York recently reaffirmed and 

clarified the concept of "near privity1I enunciated in Ultramares. 

In Credit Alliance Corp. v. Arthur Andersen & Co., 483 N.E.2d 110, 

115 (N.Y. 1985), the Court held that "a relationship 'so close as 

to approach that of privityl [Ultramares] remains valid as the 

predicate for imposing liability upon accountants" for the 

negligent preparation of financial reports relied upon by 

noncontractual third parties. The Court delineated three factors 

to guide courts in determining whether a "near privityM bond 

exists. 

(1) [Tlhe accountants must have been aware 

that the financial reports were to be used for 

a particular purpose or purposes; 

(2) in the furtherance of which a known party 

or parties was intended to rely; and 

(3) there must have been some conduct on the 

part of the accountants linking them to that 

party or parties, which evinces the 
accountants1 understanding of that party or 

parties1 reliance. 

Credit Alliance, 483 N.E.2d at 118. Before an accountant may be 

held liable to a non-client third party, all three factors must 

exist. 

Some jurisdictions have adopted the near privity rule of 

Credit Alliance. E.g., Idaho Bank & Trust Co. v. First Bancorp of 

Idaho, 772 P.2d 720 (Idaho 1989); Toro Co. v. Krouse, Kern & Co., 

Inc., 827 F.2d 155 (7th Cir. 1987) (applying Indiana law). Others, 

however, have applied broader rules in determining the extent an 

accountantls duty of care to non-clients. The majority follow the 

approach set out in the Restatement (Second) of Torts 552 

1 (1977). E.g., First Florida Bank, N.A. v. Max Mitchell & Co., 558 

So.2d 9 (Fla. 1990) ; First Natll Bank of Bluefield v. Crawford, 

386 S .E. 2d 310 (W.Va. 1989) ; Raritan River Steel v. Cherry, Bekaert 

& Holland, 367 S.E.2d 609 (N.C. 1988); Pahre v. Auditor of State, 

422 N.W.2d 178 (Iowa 1988) ; Badische Corp. v. Caylor, 356 S.E.2d 

198 (Ga. 1987) ; Spherex, Inc. v. Alexander Grant & Co., 451 A.2d 

1308 (N.H. 1982); Haddon View Investment Co. v. Coopers & Lybrand, 

 his Court has recognized the tort of negligent 

misrepresentation as defined in the Restatement 5 552. Kitchen 

Krafters, Inc. v. Eastside Bank of Montana, P. 2d I I 47 

St. Rep. 602, 609 (Mont. 1990) ; Bottrell v. American Bank, 773 P. 2d 

694, 705-06, 46 St.Rep. 561, 574-75 (Mont. 1989); Brown v. Merrill 

Lynch, Pierce, Fenner & Smith, Inc., 197 Mont. 1, 12, 640 P.2d 453, 

458-59 (1982). In State Bank of Townsend v. Maryannls, Inc., 204 

Mont. 21, 32-33, 664 P.2d 295, 301-02 (1983), we approved of 

Restatement 5 552 comment a, which briefly speaks of the duty of 

a supplier of information to users of that information. Our 

approval of that comment was purely dicta and has no binding effect 

on the case at hand. 
436 N.E.2d 212 (Ohio 1982); Bonhiver v. Graff, 248 N.W.2d 291 

(Minn. 1976) . 

The Restatement expands the "known third partyv rule of Credit 

Alliance. It provides in pertinent part: 

(1) One who, in the course of his business, 

profession or employment, or in any other 

transaction in which he has a pecuniary 

interest, 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. 

(2) Except as stated in Subsection (3), the 

liability stated in Subsection (1) is limited 

to loss suffered 

(a) by the person or one of a limited sroup 

of persons for whose benefit and suidance he 

intends to supplv the information or knows 

that the recipient intends to supply it; and 

(b) throuqh reliance upon it in a transaction 

that he intends the information to influence 

or knows that the recipient so intends or in 

a substantially similar transaction. 

(Emphasis added.) 

Restatement (Second) of Torts 5 552 (1977) . 

Unlike the Credit Alliance approach, the Restatement does not 

require the accountant to actually know the identity of the 

specific third party and the particular transaction before 

liability will lie. The Restatement requires only that the 

accountant foresee and intend that members of a limited class will 

rely on his representations in determining whether to enter into 
a transaction with the audited entity. The transaction the parties 

enter into must be of a type actually foreseen by the accountant. 

At least four jurisdictions have expanded an accountant ' s duty 

to third parties beyond the "actually foreseenw class of the 

Restatement. These jurisdictions apply ordinary negligence rules 

when dealing with the question of the scope of liability, holding 

that an accountant owes a duty to all who might reasonably and 

foreseeably obtain and rely upon the accountant's work product. 

Touche Ross & Co. v. Commercial Union Ins. Co., 514 So.2d 315 

(Miss. 1987); International Mortgage Co. v. John P. Butler 

Accountancy Corp., 223 Cal.Rptr. 218 (Cal. Ct. App. 1986); 

Rosenblum v. Adler, 461 A.2d 138 (N.J. 1983); Citizens State Bank 

v. Timm, Schmidt & Co., S.C., 335 N.W.2d 361 (Wis. 1983). 

Because the facts of the present case meet the strictest of 

the three formulations of an accountant's duty of care to nonclients, we see no need to adopt a more liberal standard at this 

time. We therefore adopt a modified version of the Credit Alliance 

rule. 

In Credit Alliance, the defendant accounting firm knew that 

the plaintiff was the audited entity's principal lender and was 

fully aware that the plaintiff was relying on the financial 

statements and inventory valuations certified by the accounting 

firm to determine the amounts of money the plaintiff was willing 

to lend the audited entity. Furthermore, representatives of the 

plaintiffs and the accounting firm were in direct oral and written 

communication during the entire course of the lending relationship 
between the plaintiff and the audited entity. The Court determined 

that these facts added up to a near privity relationship, 

constituting a sufficient basis for the plaintiff's cause of action 

against the accounting firm. 

In the present case, as in Credit Alliance, the accountant 

actually knew that a specific third party would obtain and rely 

upon the audit in question. On May 17, 1977, the accountant, Allen 

Bloomgren, met with Eugene Thayer, major stockholder and president 

of Montana Merchandising and 50-percent shareholder and vicepresident of Intermountain; Robert Hicks, the other 50-percent 

shareholder and president of Intermountain; Gary Black, secretarytreasurer and controller of Montana Merchandising and secretarytreasurer of Intermountain; and L. D. Nybo, attorney for Thayer, 

Montana Merchandising and Intermountain. The meeting took place 

at the office of Montana Merchandising. With the exception of 

Bloomgren, all parties testified that Montana Merchandising was 

discussed at the meeting. Bloomgren's own work papers, which noted 

that Intermountain's fiscal year was to be aligned with Montana 

Merchandising's, corroborated the testimony of the other 

individuals. Substantial credible evidence indicates that 

Bloomgren knew that Montana Merchandising would rely upon the 

audit. 

In addition, Bloomgren knew that the audit was to be used for 

a particular purpose. Bloomgren testified that he knew that the 

end and aim of the audit was to aid in the buy out of Intermountain 

and that the reason for the buy out was that Intermountain needed 
more capital. From this testimony, the jury could reasonably have 

concluded that Bloomgren knew that the audit would be used in 

connection with all facets of the buy out, including direct loans 

to ~ntermountain and loan guarantees on behalf of Intermountain. 

Finally, Bloomgren's conduct links him to Montana 

~erchandising. In credit Alliance, the defendant accounting firm 

communicated orally and in writing with the plaintiff for the 

purpose of discussing the audited entity's financial condition. 

The Court held that these communications provided a sufficient 

nexus between the accountant and the noncontractual third party. 

Credit Alliance, 483 N.E.2d at 120. 

In this case, Bloomgren met with Montana Merchandising's 

principle shareholder, controller and attorney prior to the audit 

to discuss the financial condition of Intermountain. The meeting 

took place in Montana Merchandising's office. The accountant 

referred to Montana Merchandising in his notes. The other four 

parties present at the meeting testified that Montana Merchandising 

was discussed. In addition, during the audit, Bloomgren again met 

at Montana Merchandising's office with the corporation's principle 

shareholder and controller to discuss the preliminary audit 

figures . Substantial evidence links Bloomgren to Montana 

Merchandising. 

While the facts of the case fit succinctly under the Credit 

Alliance formulation, a question arises regarding whether the jury 

instruction given on an accountant's duty of care also falls under 
the Credit Alliance rule. The instruction at issue provided as 

follows: 

It is not necessary for Montana Merchandising 

to be a party to the contract of auditing 

services in order for it to recover against 

Mr. Bloomgren or his partnership. If you find 

Mr. Bloomgren had reason to know that Montana 

Merchandisins would rely upon the audit or Mr. 

Bloomsren could reasonably foresee damase to 

Montana Merchandisinq if the audit was 

performed negligently, then Mr. Bloomgren and 

the partnership of Seman, Koontz, Jacobsen & 

Bloomgren are liable for any damages caused by 

their negligence in the performance of the 

audit. 

The instruction is less than perfect. However, its defects 

are not so severe as to cause reversible error. 

The instruction is not really any broader than the actually 

known third party rule. It requires the jury to determine whether 

the accountant knew that his work product would be relied upon by 

or that his negligence could cause damage to a specific party-- 

Montana ~erchandising--not a class of parties or any party that 

might foreseeably rely upon the audit. By restricting the language 

to Montana Merchandising, the instruction negated the potentially 

harmful effect of the phrase I1reasonably foresee.I1 

Similarly, the instruction's failure to require the jury to 

make findings regarding the type of transactions Montana 

Merchandising would enter into in reliance upon the audit is not 

grounds for reversal. Other instructions provided that damages may 

include loans and guarantees. Furthermore, Bloomgren admitted that 

he knew the audit was undertaken specifically for the buy out and 

that the buy out was undertaken because Intermountain needed an 

infusion of capital. Viewing this instruction in light of the 
evidence presented at trial and the other instructions given to the 

jury, Bushnell v. Cook, 221 Mont. 296, 302, 718 P.2d 665, 669 

(1986), we cannot say that the failure to list the particular 

transaction upon which the audit would be relied constitutes a 

fatal defect in the jury instruction. 

Nor does the instruction's failure to require a specific 

finding of conduct linking the accountant to Montana Merchandising 

render it fatal. While such conduct may be useful evidence for 

proving that the accountant actually knew of the reliance of a 

particular third party and the specific transaction for which the 

audit was to be used, we will not require the jury to be instructed 

that they must find such conduct before imposing liability. 

In sum, an accountant may owe a duty of care to third parties 

with whom he is not in privity of contract. However, this duty 

exists only if the accountant actually knows that a specific third 

party intends to rely upon his work product and only if the 

reliance is in connection with a particular transaction or 

transactions of which the accountant is aware when he prepares the 

work product. 

11. 

Did the District Court err in instructing the jury that an 

accountant's failure to comply with generally accepted auditing 

standards (GAAS) or generally accepted accounting principles (GAAP) 

constitutes negligence as a matter of law? 

The District Court instructed the jury as follows: 

If you find that Mr. Bloomgren failed to 

comply with generally accepted auditing 
standards (GAAS) or generally accepted 

accounting principles (GAAP) in his audit of 

Intermountain Merchandising, Inc., the 

plaintiff has proved negligence on the part of 

Seman, Koontz, Jacobsen & Bloomgren as a 

matter of law. You should then determine 

whether that negligence was a legal cause of 

the Plaintiff Is injury. 

Bloomgren first argues that the jury should not have been 

instructed on GAAS and GAAP because the Board of Public Accountants 

(Board), which was created by the Montana Legislature in 1969 and 

empowered and obligated to set the standards for accountants 

practicing in this state, did not adopt GAAS and GAAP until 1980, 

three years after Bloomgren completed the audit. Bloomgren 

maintains that the District Court's instruction on GAAS and GAAP 

resulted in a retroactive application of the rules of the Board. 

Under the particular facts of this case, whether the Board had 

yet adopted GAAS and GAAP at the time of the audit is irrelevant. 

The expert witnesses called on behalf of Montana Merchandising as 

well as the expert called by Bloomgren testified that GAAS and GAAP 

were national standards promulgated by the American Institute of 

Certified Public Accountants that were followed by members of the 

profession. More importantly, Bloomgren certified in the 

engagement letter that the audit would be llconducted in accordance 

with generally accepted auditing standards . . . .I' Again, in the 

letter accompanying the audited financial statements, he certified 

that the audit was completed "in accordance with generally accepted 

auditing standards . . . . He also warranted that Intermountain s 

balance sheet fairly represented the financial condition of the 
company ''in conformity with generally accepted accounting 

principles . . . . II 

The District Court did not retroactively apply rules of the 

Board when it instructed on GAAS and GAAP. Once Bloomgren 

certified that his work was completed in accordance with GAAS and 

GAAP he was required to follow those standards. We will not allow 

an accountant who represents that his work conforms to national 

standards to escape the consequences of that representation simply 

because an administrative body in Montana has not yet adopted those 

same standards. 

Bloomgren next argues that, even if GAAS and GAAP were 

applicable in this case, the trial court erred by instructing the 

jury that an accountant's failure to comply with those standards 

constituted negligence as a matter of law. Bloomgren maintains 

that the court should have instead instructed the jury that any 

failure to adhere to GAAS and GAAP was merely evidence of 

negligence. We agree. 

A violation of a statute may constitute negligence as a matter 

of law, or, as it is often called, negligence per se. This Court 

has hesitated to extend the doctrine of negligence per se beyond 

the statutory framework. Thus, we have held that violations of 

administrative regulations that are not specifically incorporated 

by statute do not constitute negligence per se. Cash v. Otis 

Elevator Co., 210 Mont. 319, 326-27, 684 P.2d 1041, 1045, 

(1984)(violation of Montana safety code for elevators is evidence 

of negligence rather than negligence per se). See also Stepanek 
v. Kober Constr., 191 Mont. 430, 438, 625 P.2d 51, 56, 

(1981) (violation of OSHA regulations is evidence of negligence). 

We have also held that violations of rules contained in a 

maintenance manual for the Montana Department of Highways 

constitute only evidence of negligence. Townsend v. State, 227 

Mont. 206, 209, 738 P.2d 1274, 1276 (1987). Most precisely on 

point, we have held that violations of the standards of practice 

for architects as described in a handbook published by the American 

Institute of Architects constitute only evidence of negligence, not 

negligence as a matter of law. Taylor, Thon, Thompson & Peterson 

v. Cannaday, 230 Mont. 151, 155, 749 P.2d 63, 65-66 (1988). 

Accountants and auditors have a duty to exercise the same 

degree of care, skill and competence as that exercised by other 

reasonably competent members of the profession in the same or 

similar circumstances. Greenstein, Logan & Co. v. Burgess 

Marketing, Inc., 744 S.W.2d 170, 185 (Tex. Ct. App. 1987); In re 

Hawaii Corp., 567 F.Supp. 609, 617, (D. Haw. 1983). While it may 

be a matter of law for the trial court to determine the standard 

of care applicable to the case and to so instruct the jury, Aasheim 

v. Humberger, 215 Mont. 127, 129, 695 P.2d 824, 826 (1985), the 

jury must retain the ability to determine whether the professional 

exercised the proper degree of care, skill and diligence warranted 

under the circumstances. Evidence of national rules and codes 

followed by members of the profession may aid the jury in 

determining whether the proper degree of care was exercised, 
however, any deviation from the national guidelines, no matter how 

slight, does not automatically constitute negligence. 

Even though the District Court erred in instructing the jury 

that the failure to comply with GAAS and GAAP was negligence as a 

matter of law, the error was harmless. 

The testimony of both Montana ~erchandising's and Bloomgren's 

experts established that Bloomgren failed to exercise due care in 

several ways. He failed to identify almost $14,000 in unrecorded 

liabilities. He erroneously labelled $12,000 of prepaid 

commissions as accounts receivable. He misclassified $291,000 of 

short-term debt as long-term debt. He improperly recorded income 

tax liability, showing no taxes due. He failed to consolidate 

Intermountain's financial statements with those of its 

subsidiaries. Then, having failed to consolidate, he improperly 

used the equity method rather than the cost method of accounting, 

resulting in a $40,000 overstatement of Intermountain's income. 

In addition, Montana Merchandising's experts testified that 

Bloomgren failed to maintain the degree of independence and 

skepticism required of an auditor. He failed to gather sufficient 

competent evidence to properly test the pricing of the inventory 

and to determine whether the inventory was obsolete or slow moving. 

He failed to adapt the accounting program to the type of 

corporation he was auditing. 

An erroneous instruction is not prejudicial where it appears 

that, even without the instruction, the same verdict would have 

been reached. Britton v. Farmers Ins. Group, 221 Mont. 67, 88, 
721 P.2d 303, 316 (1986) ; Wolfe v. Schulz Refrigeration, 188 Mont. 

511, 519, 614 P.2d 1015, 1019 (1979). In view of the overwhelming 

evidence of Bloomgren's failure to exercise due care, the jury 

would have reached the same verdict without the instruction in 

question. The instruction was, at most, harmless. 

Did the District Court err in instructing the jury that, in 

a negligent misrepresentation action, reliance on representations 

is presumed? 

The District Court instructed the jury on the reliance element 

of negligent misrepresentation as follows: 

Where representations have been made in regard to 

a material matter and action has been taken, in the 

absence of evidence showing the contrary, it will 

be presumed that representations were relied upon. 

Bloomgren argues that this instruction impermissibly shifts 

the burden of proving reliance from the plaintiff to the defendant. 

We do not agree. 

The instruction imposed the initial burden on Montana 

~erchandising to prove that representations were made, that they 

were material and that it had taken action upon them. Once Montana 

~erchandising introduced evidence of reliance, the burden shifted 

to Bloomgren to prove that Montana Merchandising did not act upon 

its representations. Only if Bloomgren failed to rebut Montana 

~erchandising's evidence could the instruction's presumption of 

reliance come into play. Thus, the instruction did not improperly 

shift the burden of proof. 
Bloomgren also contends that it was prejudiced by the trial 

court's refusal to let it delve into certain aspects of Montana 

~erchandising's reliance. A review of the record, however, shows 

that the court gave Bloomgren wide latitude to question witnesses 

on the question of reliance. Only when Bloomgren inquired into the 

existence of corporate resolutions and minutes did the court limit 

its examination. 

The District Court retains broad discretion to determine the 

admissibility of evidence. Massman v. City of Helena, 773 P.2d 

1206, 1210, 46 St.Rep. 764, 768 (Mont. 1989). As the District 

Court limited Bloomgrenls inquiry into the question of reliance 

only in the area of corporate resolutions and minutes, we cannot 

say that the court abused its discretion. 

IV. 

Did the District Court err in submitting the issue of 

causation to the jury? 

At the close of Montana Merchandising's case in chief, 

Bloomgren moved the trial court for a directed verdict on the 

ground that Montana Merchandising had failed to prove that 

Bloomgren had caused its damages. Bloomgren contends that the 

court erred in denying its motion. 

When examining a denial of a motion for directed verdict, this 

Court utilizes the same standard of review as that used to review 

the propriety of a jury verdict. We will sustain the trial court's 

refusal to enter a directed verdict if substantial evidence exists 

to support the jury verdict. In determining whether substantial 
evidence supports the verdict, we will review the evidence in the 

light most favorable to the prevailing party. We will not reweigh 

conflicting evidence, for the weight and credibility to be given 

each piece of proof lies within the province of the jury. Stewart 

v. Fisher, 767 P.2d 1321, 1323, 46 St.Rep. 116, 119 (Mont. 1989). 

Bloomgren first argues that Montana Merchandising failed to 

prove that Intermountain was insolvent at the time of the audit. 

According to Bloomgren, Intermountain's insolvency arose after the 

audit was completed, therefore, the errors committed in the 

Bloomgren audit were not a cause in fact of Montana Merchandising's 

damages. 

Bloomgren maintains that Montana Merchandising failed to prove 

Intermountain's insolvency because Gary Hill, the accountant who 

performed the audit subsequent to Bloomgren's and who discovered 

Bloomgrenls auditing errors, only estimated the amount by which the 

Bloomgren audit had overstated the value of Intermountain's 

inventory. Bloomgren contends that this estimate was only a guess, 

therefore it was not substantial evidence upon which the jury could 

reasonably have determined that Intermountain was insolvent at the 

time of the audit. 

Relevant evidence is "evidence having any tendency to make the 

existence of any fact that is of consequence to the determination 

of the action more probable or less probable than it would be 

without the evidence." Rule 401, M.R.Evid. An expert's opinion, 

even if based on an estimate, is relevant evidence if it has a 

tendency to make a fact in issue more probable. Vandalia Ranch, 
Inc. v. Farmer's Union Oil & Supply Co. of insd dale, 221 Mont. 253, 

258, 718 P. 2d 647, 650 (1986). The imprecision of an expert 

opinion goes to the weight, not the sufficiency of the evidence. 

State v. Smith, 220 Mont. 364, 377, 715 P.2d 1301, 1308 (1986). 

In the present case, Hill testified that Bloomgren had 

erroneously priced the ~ntermountain inventory and had failed to 

consider the amount of obsolete inventory on hand, resulting in an 

estimated $153,000 overstatement of the inventory's value. Hill 

arrived at this figure through a statistical sampling of the 

inventory. He thoroughly explained, on both direct and crossexamination, the method used to conduct the sampling. 

Montana ~erchandising's two other expert witnesses supported 

Hill's testimony regarding the overvaluation of Intermountain's 

inventory. Two warehousemen at Intermountain also supported the 

evidence by testifying that 30 to 40 percent of the inventory was 

obsolete. 

Furthermore, the overstatement of inventory was only one error 

found on the Bloomgren audit. Testimony given by Hill, which was 

supported by expert witnesses for both sides, revealed that 

Bloomgren had committed other errors when auditing Intermountain. 

He neglected to identify almost $14,000 in unrecorded liabilities, 

he improperly credited Intermountain with $12,000 in prepaid 

commissions and he failed to offset a $40,000 loss to subsidiaries. 

Montana Merchandising was not required to prove the exact 

amount of Bloomgrenls errors. It was only required to introduce 

substantial evidence tending to show that it was more probable than 
not that Intermountain was insolvent at the time of the audit. 

Indeed, part of the evidence relied upon by Montana Merchandising 

consisted of an estimated overstatement of inventory. However, it 

was within the province of the jury to determine the weight and 

credibility of this evidence. viewed in the light most favorable 

to the prevailing party, substantial evidence supported a finding 

that Intermountain was insolvent at the time of the audit. 

Bloomgren next contends that Montana Merchandising failed to 

prove that Bloomgrenls negligence proximately caused Montana 

~erchandisingls damages. Bloomgren argues that other factors may 

have contributed to the damages, such as the loss of two key 

employees after the audit was completed, unbridled competition from 

another business, the lack of a market and the leveraged condition 

of Intermountain. 

Bloomgren relies on our opinion in Young v. Flathead County, 

232 Mont. 274, 757 P.2d 772 (1988), for the proposition that 

Montana ~erchandising was required to prove that the negligently 

performed audit was the sole cause of its damages. In Younq, we 

stated: 

Where more than one possible cause of damage 

appears, the plaintiff must eliminate causes other 

than those for which the defendant is responsible. 

Younq, 232 Mont. at 283, 757 P.2d at 777. This statement is a 

departure from Younqls otherwise excellent analysis of tort 

causation. Contrary to the above statement, a plaintiff is not 

required to eliminate all possible causes of damage in order to 

prove causation. Indeed, if such were the case, a defendant would 
rarely be held liable in a negligence action, for, as one authority 

has noted, '#The event without millions of causes is simply 

inconceivable; and the mere fact of causation, as distinguished 

from the nature and degree of the causal connection can provide no 

clue of any kind to singling out those which are held to be legally 

responsible." Prosser and Keeton on Torts 5 41 at 266 (5th ed. 

1984). 

Proximate cause is and should be discussed in terms of 

foreseeability. A defendant is liable for his wrongful conduct if 

it is reasonably foreseeable that plaintiff's injury may be the 

natural and probable consequence of that conduct. Kitchen 

Krafters, Inc. v. Eastside Bank of Montana, - P.2d. I I 47 

St.Rep. 602, 611 (1990). 

In Younq, 232 Mont. at 282, 757 P.2d at 777, we stated, 

"[P]roximate cause is one which in a natural and continuous 

sequence, unbroken by any new, independent cause, produces injury 

. . . .I1 This does not mean that any intervening event will cut 

off a defendant's liability. Only if the intervening cause is 

reasonably unforeseeable will it be considered a supervening event 

that breaks the chain of causation. Kitchen Krafters, - P.2d at 

, 47 St.Rep. at 612-13. A defendant's liability for his 

wrongful act will not be severed by an intervening cause if the 

intervening cause is one that the defendant might reasonably 

foresee as probable or one that the defendant might reasonably 

anticipate under the circumstances. Nehring v. LaCounte, 219 Mont. 

462, 470, 712 P.2d 1329, 1334 (1986). Accord Heckaman v. Northern 
Pac. Ry. Co., 93 Mont. 363, 386, 20 P.2d 258, 265 (1933); Reino v. 

Montana Mineral Land Development Co., 38 Mont. 291, 295-96, 99 P. 

853, 854-55 (1909). The question of foreseeability is an issue 

of fact to be decided by the jury. Prosser and Keeton on Torts, 

5 45, at 321. Whether the factors cited by Bloomgren were so 

unforeseeable as to break the chain of causation was properly left 

for the jury to determine. Substantial credible evidence 

supports the jury verdict in favor of Montana Merchandising. 

Montana Merchandising invested in Intermountain believing the 

corporation was profitable when in fact it was insolvent. The 

subsequent events cited by Bloomgren as reasons for the 

corporation's demise--the loss of employees, the competition from 

another business, the lack of a market and the leveraged condition 

of Intermountain--were of little consequence. They certainly 

cannot be considered unforeseeable, supervening events that broke 

the chain of causation. 

v. 

Did the District Court err in failing to reduce the jury 

verdict? 

Following the Bloomgren audit, Thayer gave Hicks a note in the 

amount of $52,445 and Hicks transferred his stock in Intermountain 

to Thayer. Later, Thayer transferred the stock to Montana 

Merchandising and Montana Merchandising assumed the debt to Hicks. 

When Hicks was named as a co-defendant in this lawsuit, he 

counterclaimed for the $52,445, the amount still due and owing on 

the note. Hicks, Thayer and Montana Merchandising reached a 
settlement prior to trial. As part of the settlement, the note was 

cancelled. 

Bloomgren contends that the judgment should be reduced by 

$52,445, the amount forgiven by the cancellation of the note. It 

argues that if the judgment is not reduced, Montana Merchandising 

will have recovered more than once on a single claim, resulting in 

an impermissible double recovery. 

This Court will not disturb a jury verdict as long as the 

verdict, when viewed in the light most favorable to the prevailing 

party, is supported by substantial credible evidence. Weinberg v. 

Farmers State Bank of Worden, 231 Mont. 10, 14-15, 752 P.2d 719, 

721-22 (1988). In the present case, Montana Merchandising itemized 

every item of damage it sought from Bloomgren and presented those 

damages to the jury. Nowhere on that itemized list is a reference 

to the cancelled note. Nor can we find any point in the transcript 

where Montana Merchandising referred to the $52,445 cancelled note 

as an element of damages. 

Montana Merchandising's itemized damages totalled 

approximately $494,000. They included funds directly loaned to 

Intermountain, monies paid on bank loans guaranteed on behalf of 

Intermountain, sums expended to liquidate Intermountain and 

expenses incurred by Intermountain and paid by Montana 

Merchandising. The jury returned a verdict of $339,308. The 

verdict is supported by substantial credible evidence and will not 

be reduced by this Court. 

VI . 
Did the District Court err in granting prejudgment interest 

to Montana Merchandising? 

The District Court awarded Montana Merchandising prejudgment 

interest at the rate of 10 percent accruing from 30 days after 

March 6, 1986, the date Montana Merchandising presented a written 

statement of claim to Bloomgren. Bloomgren argues that this award 

was in error. We agree. 

Two statutes govern prejudgment interest awards. Section 27- 

1-211, MCA, provides for an award of prejudgment interest if 1) a 

party's damages are capable of being made certain by calculation; 

and 2) the right to recover damages vests on a particular day. 

Crystal Springs Trout Co. v. First State Bank of Froid, 225 Mont. 

139, 140, 736 P.2d 95, 96 (1987). Montana Merchandising concedes 

that this section is not an appropriate statute for an award of 

prejudgment interest on the present case because its right to 

recover from Bloomgren did not vest on a particular day. 

The other statute governing prejudgment interest is 5 27-1- 

210, MCA, which allows an award of interest in certain tort 

actions. Because the legislature enacted 5 27-1-210, MCA, in 1985, 

approximately eight years after Montana Merchandising's claims 

against Bloomgren arose, an award of prejudgment interest under 

this statute in the present case would impermissibly give the 

statute retroactive effect. 

A statute is retroactive if it "takes away or impairs vested 

rights acquired under existing laws or creates a new obligation, 

imposes a new duty or attaches a new disability in respect to 
transactions already past." City of Harlem v. State Highway 

Commission, 149 Mont. 281, 284, 425 P.2d 718, 720 (1967). Section 

27-1-210, MCA, creates a new obligation, the payment of prejudgment 

interest on certain tort claims when, prior to 1985, no such 

obligation existed. Therefore, an award of prejudgment interest 

for claims that arose prior to 1985 results in a retroactive 

application of the statute. 

Unless expressly so declared by the legislature, a statute 

may not be applied retroactively. Section 1-2-109, MCA. We find 

no such declaration in either 5 27-1-210, MCA, or in Chapter 523, 

5 1, 1985 Mont. Laws 1050. Consequently, the statute does not 

apply to any claim arising prior to the date of enactment, 

including the claim in the present case. 

VII. 

Did the District Court err in its award of costs to Montana 

Merchandising? 

Following entry of judgment, Montana Merchandising submitted 

a bill of costs in the amount of $6,561. The bill was accompanied 

by an affidavit of Montana Merchandising's attorney certifying 

that, to the best of his knowledge, the costs were correct and 

necessary disbursements allowable by law. Bloomgren objected and 

moved the court to tax costs. After a hearing, the District Court 

entered an order denying the motion to reduce costs. 

Not all litigation expenses that may properly be billed to a 

client may necessarily be recovered from the opposing party. Only 

those costs delineated in 5 25-10-201, MCA, may be charged to the 
opposing party unless the item of expense is taken out of 5 25- 

10-201, MCA, by a more specialized statute, by stipulation of the 

parties or by rule of court. Luppold v. Lewis, 172 Mont. 280, 292, 

In the present case, neither party argues that the disputed 

costs are governed by either a special statute, stipulation of the 

parties or rule of court. Therefore, 5 25-10-201, MCA, governs the 

issue. It reads as follows: 

A party to whom costs are awarded in an action is 

entitled to include in his bill of costs his 

necessary disbursements, as follows: 

(1) the legal fees paid of witnesses, including 

mileage, or referees and other officers; 

(2) the expenses of taking depositions; 

(3) the legal fees paid for publication when 

publication is directed; 

(4) the legal fees for filing and recording papers 

and certified copies thereof necessarily used in 

the action or on the trial; 

(5) the legal fees paid stenographers for per diem 

or for copies; 

(6) the reasonable expenses of printing papers for 

a hearing when required by a rule of court; 

(7) the reasonable expenses of making transcript 

for the supreme court; 

(8) the reasonable expenses for making a map or 

maps if required and necessary to be used on trial 

or hearing; and 

(9) such other reasonable and necessary expenses 

as are taxable according to the course and practice 

of the court or by express provision of law. 

Section 25-10-201, MCA. 
''A verified memorandum of costs and disbursements is prima 

facie evidence that the items were necessarily expended and are 

properly taxable, unless, as a matter of law, they appear otherwise 

on the face." Swenson v. Buffalo Bldg. Co., 635 P.2d 978, 985, 38 

St. Rep. 1588, 1596 (Mont. 1981) . Conversely, a verified memorandum 

is not prima facie evidence of costs that, on their face, do not 

fall within the itemized list of 5 25-10-201, MCA. The prevailing 

party has the burden of proving that each disbursement that does 

not fall within the statutory list is within the purview of the 

statute. 

Montana Merchandising initially concedes that, in accordance 

with Powers Mfg. Corp. v. Leon Jacobs Enters., 216 Mont. 407, 701 

P.2d 1377 (1985) and Chilcott v. Rea, 52 Mont. 134, 155 P. 1114 

(1916), airfares and hotel bills incurred by its expert witnesses 

are not allowable costs. Along this line we additionally note that 

a $54 charge for rental of a car for one of Montana Merchandising's 

experts is also an inappropriate cost. Section 24-10-201(1), MCA, 

allows only mileage fees to be taxed as costs. See also 5 26-2- 

501(1)(b), MCA. It does not allow car rental expenses. 

Bloomgren contests the propriety of expenses incurred by 

Montana Merchandising in obtaining depositions of R. Hicks, E. 

Thayer, R. Butcher and R. Henry. While 5 25-10-201(2), MCA, allows 

costs incurred in taking depositions, this subsection has been 

modified by case law. Only the costs of depositions used at trial 

are recoverable. Cash v. Otis Elevator Co., 210 Mont. 319, 333, 

684 P.2d 1041, 1048. We must remand this question to the District 
Court for it to determine whether the depositions of Hicks, Thayer, 

Butcher and Henry were used at trial. Only the expenses incurred 

by Montana Merchandising in recording, transcribing and editing any 

deposition used at trial shall be charged to Bloomgren. The 

incidental expenses incurred in obtaining a deposition, including 

airfare, rental car costs and hotel charges, shall not be charged 

to Bloomgren. 

At trial, Montana Merchandising presented the testimony of one 

of its witnesses, Tom Jenkins, by means of a video-taped 

deposition. While the jury viewed the tape, the court and the 

parties followed along with written transcripts of the video-taped 

deposition. On several occasions, the written transcripts were 

used by both parties, Bloomgren as well as Montana Merchandising, 

to object to upcoming portions of the video tape that were 

inadmissible under the Rules of Evidence. To determine how to 

rule, the court reviewed the portion of the written transcript to 

which the objection referred. If the court sustained the 

objection, it used the transcript to determine how much of the 

video-taped testimony should be kept from the jury. 

In its bill of costs, Montana Merchandising sought to charge 

the expense of both videotaping and transcribing Jenkinst 

deposition. Bloomgren claims that both charges are improper. We 

do not agree. 

As we noted earlier, the costs of a deposition used at trial 

are properly taxable. Cash, 210 Mont. at 333, 684 P.2d at 1048. 

Furthermore, Rule 30(h)(5), M.R.Civ.P., provides, "The reasonable 
expense of recording, editing, and using an audio-visual or tape 

recorded deposition may be taxed as costs as provided by 1aw.I' 

This rule, however, remains subject to the limitation that the 

audio visual or tape recording must be used at trial before the 

expenses incurred in obtaining such a deposition may be charged to 

the opposing party. In this case, both the video tape and the 

written transcript of Jenkins1 deposition were used at trial, 

therefore, the expenses of both may be charged to Bloomgren. 

Bloomgren also disputes costs claimed by Montana Merchandising 

for charges incurred for an expert's review of work papers and a 

consultation with another law firm regarding jury instructions. 

We agree that such charges are not taxable costs within the meaning 

of the statute but are more in the nature of expert and attorney 

fees, the costs of which must be born by the party who incurred 

them. 

Finally, Bloomgren challenges several miscellaneous costs 

charged by Montana Merchandising, including expenses for telephone 

calls, photocopies, supplies for exhibits and enlargements of 

exhibits. We have previously given the District Court broad 

discretion under § 25-10-201 (9) , MCA, to determine whether similar 

costs are I1reasonable and necessary expenses as are taxable 

according to the course and practice of the court . . . l1 See 

Cash, 210 Mont. at 333, 1041 P.2d at 1048 (allowing the taxing of 

costs for photographs used at trial); Swenson, 635 P.2d at 985, 38 

St.Rep. at 1596, (allowing the taxing of costs for telephone calls, 

photographs, exhibits, supplies, photocopies and other 
miscellaneous charges). However, we believe that the discretion 

of the District Court should be limited to allowing only those 

costs incurred in constructing exhibits admitted at trial. On 

remand, the District Court shall determine whether the remaining 

expenses claimed by Montana Merchandising were incurred in such 

manner. Any expenses for photocopies, supplies and enlargements 

that were expended on exhibits admitted at trial may be charged to 

Bloomgren. Telephone charges, however, may not be taxed as costs 

under any circumstances. 

To summarize the foregoing discussion, the following expenses 

are not taxable costs: telephone calls; airfares, hotel bills and 

rental car expenses incurred by Montana Merchandising's expert 

witnesses; airfares, hotel bills, rental car expenses and other 

incidental costs incurred in obtaining depositions; charges for an 

expert's review of workpapers; and expenses of consultation with 

another law firm. Both the video tape and the written transcript 

of Jenkins' deposition are taxable. On remand, the District Court 

shall determine whether the depositions of Hicks, Thayer, Butcher 

and Henry were used at trial. If so, the expenses incurred in 

recording, transcribing and editing these depositions are taxable 

costs. The District Court on remand shall also determine whether 

photocopies, supplies and enlargements were used in exhibits 

admitted at trial. If so, these costs are taxable and may be 

charged to Bloomgren. 

The judgment entered by the District Court on February 19, 

1988 awarding Montana Merchandising $339,307.61 is affirmed. 
The District Court's award of prejudgment interest is 

reversed. Montana Merchandising is entitled to interest at the 

rate of 10 percent per annum on the judgment of $339,307.61 from 

date of entry of judgment on February 19, 1988. 

The issue of costs is remanded for further proceedings in 

accordance with this Opinion. Interest on costs will commence on 

the date of entry of the District Court order on costs after the 

hearing on remand. 

'/ 

We Concur: -4 

Jief Justice