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Franklin Supply Company v. Tolman, 454 F.2d 1059 | Casetext Search + Citator
Franklin Supply Company v. Tolman
455 F.Supp. at 359-60. In Franklin Supply Company v. Tolman, 454 F.2d 1059 (9th Cir.1972),…
In general, "an accountant hired to audit the financial statements of a client is not a fiduciary of the…
Full title:FRANKLIN SUPPLY COMPANY, ETC., APPELLANT, v. ALBERT W. TOLMAN, JR. AND…
Date published: Jan 7, 1972
454 F.2d 1059 (9th Cir. 1972)
holding accounting firm not in fiduciary relationship with client
Summary of this case from Wright v. Sutton
December 16, 1971. As Amended on Denial of Rehearing January 7, 1972.
Irwin F. Woodland (argued), Julian O. von Kalinowski, Carl D. Lawson, Robert E. Cooper, of Gibson, Dunn Crutcher, Los Angeles, Cal., Helmick, Conover Burkhardt, Denver, Colo., Victor M. Earle III, New York City (of counsel), for appellant.
Ira C. Rothgerber, Jr. (argued), Robert S. Slosky, of Rothgerber, Appel Powers, Denver, Colo., Melvin M. Belli, of Belli, Ashe, Ellison, Choulos Lieff, San Francisco, Cal., Anthony F. Zarlengo, Denver, Colo., for appellee.
This appeal is from a judgment awarding damages to plaintiff below, Franklin Supply Company, from Peat, Marwick, Mitchell Co., an international certified public accounting firm and defendant below, based upon multiple claims of negligence and misrepresentation; fraud; breach of contract; and fraudulent conspiracy in performing an audit. Also named as a defendant was Albert W. Tolman, a citizen of Texas, representing a class of persons known as Peat, Marwick, Mitchell Co.
The action was filed in the United States District Court for the Central District of California with jurisdiction founded upon 28 U.S.C. § 1332 (Diversity of citizenship).
The parties then decided to employ Jesse Guy Benson, an American who practiced law in Venezuela, to draft a contract and they also agreed to employ Peat, Marwick, Mitchell Co. (P.M.M), Servicios' auditors, to perform an audit as of April 30, with each party to share legal and accounting fees equally.
Benson did prepare a draft according to the instructions given to him. Harper received it in March of 1959 and asked Alexander Grant Co., Franklin's regular auditors, and Franklin's regular Chicago lawyers to review it. Harper later instructed Kerin to sign the document and Kerin, on behalf of Franklin, and Laffan, on behalf of Servicios, did so in Caracas on May 15, 1959. During the week prior to Franklin's take over on May 1, 1959, the inventory of Peticon was taken by Norris Culp, Controller of Peticon, and his staff. Inventory items were attempted to be priced at lower first-in-first-out landed costs, or the replacement cost from Peticon's regular suppliers on April 30, 1959. This had been the pricing method in prior financial statements and no substantial errors were made. (Finding of Facts 12, 13, 14. C.T. 1622, 1623).
On May 14, 1959, Kerin wrote to Laffan, president of Servicios, and complained of undesirable items of physical inventory, classifying some as slow moving and some as "obsolete or junk." These were itemized and totalled Bs 75,286.97 (Bolivars). Kerin concluded his letter as follows:
The rate of exchange of Venezuelan bolivars for United States dollars on April 30, 1959, was 3.35 to the dollar.
In April 1963, Franklin filed its present action in the United States District Court for the Central District of California against PMM. The second amended complaint upon which the case was tried charged that PMM did not perform an independent audit because the audit was in the charge of one Fred W. Southerland who was an employee of PMM, but was also an alternate director of Servicios and had been a director of Peticon. Because of this and the failure of PMM to formally disclose these facts, PMM was charged with having acted in violation of a fiduciary relationship and in violation of an implied duty of independence. It was also charged that the audit of PMM did not comply with the agreement of the parties. It was further alleged that there was substantial concealment of the condition of the inventory, in that much of it was obsolete or unsaleable and that certain diamond bit credits constituting a liability of Peticon were not properly shown. Franklin also charged fraudulent conspiracy between PMM and Servicios to misrepresent the financial condition of Peticon and, finally, a breach of an implied warranty to perform the audit in compliance with generally accepted accounting methods. Compensatory and punitive damages were sought.
Initially, jurisdiction must depend upon diversity of citizenship under Article III, Section 2 of the Constitution and 28 U.S.C. § 1332. The plaintiff is alleged to be a Nevada corporation with its principal place of business in Colorado. The defendant, Tolman, is a citizen of Texas. The defendant Peat, Marwick, Mitchell Co. is an organization composed of numerous unincorporated associations in which Tolman is a partner or owner of an interest. In addition, there is at least one, and perhaps more corporations of the same name, none of which is domiciled or has its principal place of business in Colorado or Nevada, but all connected with the unincorporated associations of the same name. The court found, pursuant to stipulation, that the executive offices of Peat, Marwick, Mitchell Co. (U.S.) and Peat, Marwick, Mitchell (general) are at 70 Pine Street, New York, New York. The Venezuelan Civil Society of Peat, Marwick, Mitchell Co. was found to be a separate entity from the Peat, Marwick, Mitchell Co. with which Franklin had dealt, but was connected with Peat, Marwick, Mitchell Co. (U.S.) and the same firm (general).
We can agree that this would have been better accounting practice. We cannot agree that under the circumstances of this case the failure to do so constitutes legal fraud. We have not had referred to us any cases so holding, nor have we found any. This is not a case such as Trussell v. United Underwriters, Ltd., 228 F. Supp. 757 (D.Colo. 1964), cited by appellee, where numerous purchasers of securities sought relief under the provisions of the Securities Exchange Act of 1934. The court there held that under particular provisions of the Act it was necessary to find that misstatements or half-truths were knowingly or intentionally made, while under other sections a violation could be found for constructive fraud from a totality of circumstances. No question of interpretation of the Securities Act is involved here.
The trial court here held that PMM was in a fiduciary relationship with the plaintiff when it accepted its engagement. From that point it appeared to hold defendant to the degree of integrity and fidelity of a trustee. Appellee frankly admits that there is no Colorado case squarely holding that an accountant as such is a fiduciary. A "fiduciary relation" is an elusive status to define. More often a fiduciary is a person who holds property or things of value for another — a trustee, executor, receiver, conservator or someone who acts in a representative capacity for another in dealing with the property of the other. Here, PMM was acting more in the capacity of arbitrator or fact finder not for one but for two persons. The duty of PMM was not to act as a fiduciary for Franklin; it was, rather, to act independently, objectively and impartially, and with the skills which it represented to its clients that it possessed, to make accurate determinations of fact. It would be liable for acting negligently or fraudulently.
The trial court determined that the law of Colorado controlled because it was the place of performance.
We do not say that a certified public accountant may never be a fiduciary. We do say it was not here. The case most closely in point is Gammel v. Ernst Ernst, 245 Minn. 249, 72 N.W.2d 364 (1955) where a national accounting firm engaged to perform an audit was "required to work with the same skill and care exercised by an average person engaged in the trade or profession involved." 72 N.W.2d at 368.
An audit prepared by Arthur Andersen Co., which was introduced in evidence, had re-examined the inventory pricing and made a computation showing that had the price of surplus materials been used for fixing replacement value, the PMM figures for inventory value could be reduced approximately $465,000. However, because some of the surplus lists used by Andersen were questionable, and because some of the surplus items might not have been available, the trial court "discounted" the overvaluation figure of Arthur Andersen Co. It found that:
Much evidence was introduced by expert witnesses on both sides as to the meaning of "current replacement value" and of the duty of PMM to detail its understanding of the meaning of the term in its report. The trial court found that such a duty did exist and that PMM failed to properly define its terms. We do not disturb those fact findings. The trial court also found that had the formula been properly applied it would have required the use of prices of surplus materials where available, instead of the price from Peticon's regular source of supply. We have had some difficulty with this finding of the court and its findings based upon the testimony of witnesses used by Andersen in its "reexamination" of the PMM figure by the use of price lists for surplus materials. We believe, however, that there is sufficient evidence to support those findings and we do not disturb them.
Mr. Eric Kohler, a well-known Certified Public Accountant, and the author of Kohler's Dictionary for Accountants, defined replacement cost or value. He was an expert witness on behalf of the plaintiff. There were also expert witnesses on behalf of the defendant. See note 5 infra.
"7. Mr. Southerland interpreted the clause as he thought it should be interpreted, which was exactly as Mr. Laffan, the president of Servicios, thought it should be. The objective result was that the seller fixed its own price for sale according to its own formula." C.T. 1613.
This was substantially the same as Finding Number Twenty-four by the court at the conclusion of the partial trial.
Although the contract in this form was submitted to Franklin's Chicago attorneys and to its accountants, no one suggested a further definition of the formula, although there was discussion that if Peticon's current suppliers could supply an item for less than cost, this price should be used. This is what was done. The expert testimony on this subject was conflicting but the practice actually followed by PMM in interpreting replacement value as the current costs from usual and regular sources of supply received substantial support.
Paton, Accountants Handbook § 10 at 561 (3d ed. 1947) Current replacement cost (value) is defined to mean:
This does not measure the conduct of Mr. Southerland. As the court found at the request of the plaintiff: "The evidence indicates no intentional attitude or desire of Mr. Southerland to defraud anybody. . . ."
Here there was non-disclosure but no "concealment," intentional or otherwise. Nor was there any evidence to prove that Southerland or PMM had knowledge that they were concealing facts concerning the method of pricing inventory items.
"Constructive fraud," as defined by the Colorado courts, is distinguished from actual common law fraud in that it lacks the element of intentional wrong-doing which was also absent here. In United States Nat. Bank v. Bartges, 122 Colo. 546, 224 P.2d 658, 664 (1950), the court adopts with approval a definition of constructive fraud by the Kansas Supreme Court:
"`Constructive fraud consists in any act of omission or commission contrary to legal or equitable duty, trust or confidence justly reposed, which is contrary to good conscience, and operates to the injury of another. The former [fraud] implies moral guilt; the latter may be consistent with innocence.'" Clay Center v. Myers, 52 Kan. 363, 35 P. 25, 26 (1893).
One particular item for which substantial damages were allowed involved diamond bits used in drilling oil wells. Peticon obtained the core barrels and diamond bits from their manufacturer, Drilling Services, Inc. (D S) in Dallas, Texas. It then sold the bits to the oil companies with the understanding that the companies could return used bits and would receive credit for any re-usable diamonds which were salvaged. Whenever a diamond bit was returned to Peticon by an oil company purchaser, it would be shipped to D S. That concern would extract the re-usable diamonds, store them for Peticon's account and send Peticon a memo of the salvage by carats and quality. Peticon would then issue a credit memorandum to the oil company based upon the price the oil company had paid for the diamonds when the bit had been sold. As a result, two entries would be made upon the Peticon books. One would reflect as an asset the value of the diamonds being held by D S for Peticon's account; the other would be a liability represented by the credit memorandum given to the customer for the diamonds he had purchased and returned.
A question was raised as to diamond valuation by Franklin employees when they took over management and control of Peticon on May 1, 1959. As a result, Kerin, a vice president of Franklin, went to Dallas to see D S in July. Thereafter, Kerin wrote to Southerland and gave him specific instructions on how to value the diamond inventory on the PMM audit of July 30, 1959. Southerland recomputed the diamond valuation accordingly and showed it in the July 30, 1959 audit as instructed. The court found that Kerin saw the audit and knew when he saw it that the diamonds had been valued as he had ordered. The damage claim arises in part because Franklin went back two years preceding its assumption of control and determined that a total of 36 bits had been sold. This, argued Franklin, meant an undisclosed liability for diamond credits when the bits were turned in for salvage. Servicios responded that when the credit was given for salvaged diamonds, the company would at the same time receive the diamonds of equal value which would off-set the liability.
The damage award for improper handling of the diamond inventory totaled $71,648.47. It was based on the loss which was sustained on sale of diamonds in inventory on April 30, 1959; loss on those acquired from customers after April 30, 1959 to September 30, 1960; and credits issued or due for the period October 1, 1960 to August 31, 1961.
Exhibit 73 is a compilation of this aggregate figure made by Mr. Fox, whose testimony was accepted by the trial court.Sales Cost Date Amount Gain or Loss
The findings of the court upon which liability as to diamonds is based are not entirely helpful to a solution of the problem. Some of them are combined with valuation of the other inventory items although the facts are different as to each. The evidence of the plaintiff as to inventory other than diamonds, was to the effect that PMM applied its own understanding of "lower of cost or current replacement value." The evidence as to valuation of the diamond inventory is quite different. Before the July 30, 1959 audit report of PMM was ever issued, Kerin, on behalf of Franklin, instructed Southerland how to value the diamond inventory and those instructions were followed. The court's findings of fact uniting the method of general inventory valuation with the diamond inventory valuation is, therefore, contrary to the evidence that the pricing of the diamond inventory was upon Franklin's express orders.
Finding of Fact Number 4.
"4. Issue: Did officers or employees of the plaintiff or of Peticon Division-Franklin Supply C.A.:
Answer: No, at least not to the extent that it would change the situation here concerned.
"5. Issue: Would the plaintiff be barred from asserting that the diamond and/or other inventory of Peticon was not properly valued if officers or employees of the plaintiff or Peticon Division-Franklin Supply C.A. did or knew any of the above?
Nonetheless the court appears to say clearly (1) that Franklin employees did participate in the valuation of the diamond inventory "but not to such an extent" as would remove the responsibility of Mr. Southerland; (2) that the plaintiff would not be barred from asserting that the diamond "and/or" other inventory of the plaintiff or Peticon had not been properly valued, unless the "major United States' officers of the plaintiff had full knowledge, which they did not." Finding of Fact Number Seventeen as requested by the defendant found that Kerin stopped at Dallas on July 19 or 20. After he reached Denver he wrote a letter to Southerland, dated July 21, saying that D S was to cable him instructing him how to value the diamonds. Finding of Fact Number Eighteen tells us that the salvaged diamonds were valued in accordance with the Kerin instructions. The letter giving the instructions is on the Franklin letterhead, dated July 29, 1959 addressed to Southerland and signed "Peticon Division, Franklin Supply C. A. by W. H. Kerin, Jr., Vice President." It is exhibit W in evidence.
"17. Kerin stopped at D S in Dallas on July 19 or 20 on his return trip from Venezuela to Denver. After he reached Denver he wrote a letter dated July 21, 1959 (Exhibit W) to Southerland in which he advised Southerland that D S, `is to cable you today verifying this fact and instructing you to use the original invoice value of the diamonds, which is the list at that time less our ten percent.'" (Emphasis supplied).
The only explanation for the court's ruling in view of the evidence is the finding that the plaintiff would not be barred from objecting to diamond inventory unless the "major United States' officers of Franklin had full knowledge, which they did not." On this view of the law, it is to be noted first that Kerin was the man sent to Venezuela by Harper at the beginning of negotiations to investigate Peticon. He visited all Peticon stores and reported on inventory. He was with Harper when Harper went to visit Peticon. He, with Harper, met with Servicios directors when the "handshake agreement" was made on February 28, 1959. He was one of two who signed the formal agreement on behalf of Franklin upon the express authorization and instruction of Harper. Kerin was one of Franklin's principal United States officers. Moreover, the law is clear that the knowledge of an agent is imputed to his principal particularly when he is in the executive echelon as Mr. Kerin was. Schoenbaum v. Firstbrook, 405 F.2d 200, 211 (2d Cir. 1968), cert. denied, Manley v. Schoenbaum, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Sanders v. Magill, 9 Cal.2d 145, 70 P.2d 159, 163-164 (1937); Mayer Oil Co. v. Schnepf, 100 Colo. 578, 69 P.2d 775, 777 (1937); Kingdom of Gilpin Mines v. McNeill, 88 Colo. 44, 291 P. 1036, 1037 (1930).
Thus, if the diamonds were overvalued, it was by Franklin and not by PMM. As to the valuation of diamonds acquired after April 30, 1959, the agreed valuation date, PMM would have no responsibility since those valuations were not relied upon to establish book value. Finally, there was no witness who testified that PMM did not properly state the value of the diamonds in the audit report of April 30, 1959. Unless there was some negligence or other dereliction of legal duty on the part of PMM in pricing the bit diamonds, there could be no liability.
The court also made findings as to diamond bits which had been sold to oil companies but had never been presented for diamond salvage credit. It found that such bits "constituted a potential liability which would affect the book value of Peticon as shown on the financial statement."
The court also found that Gene Harper (president of Franklin) was aware at the time of the negotiations in February, 1959. "that the oil companies possessed used drilling bits which could be, but had not been presented for salvage diamond credit." C.T. 1624.
No dollar value was placed on this finding, but in Conclusion of Law Number 6 "the failure to disclose liability for redemption of salvage diamonds as set forth in finding 24, . . ." was one of the factors, along with failure to define the valuation formula, and failure to disclose Southerland's affiliations, which constituted "constructive fraud."
Finding Number 24:
"24. None of the Peticon financial statements which have been introduced in evidence (Exhibits 33, 20, AY, AZ, BA, BB, CN, CO, 24, 25, 26 and 27) state the manner in which salvage diamond credits may be redeemed." C.T. 1625.
"23. Gilbert Davies, the retiring General Manager of Peticon, told Russell Smith, his successor, that it was Peticon's policy to redeem salvage diamond credits on purchases of new diamond bits and to refuse to redeem such credits in any other manner. This conversation occurred sometime between mid-April and mid-June of 1959." C.T. 1625.
With respect to the asserted failure to disclose this "potential liability," both Mr. Carman Blough and Mr. Robert Trueblood gave expert testimony that PMM handled this phase of the audit properly. Both testified that it was not necessary to show any such liability. There was no expert testimony to the contrary. Under such circumstances where the answer is one requiring evidence from a professional and that evidence is received, not contradicted and no reason appears to doubt the credibility of the witness or the accuracy or inherent probability of the opinion, the fact should be deemed established. See, e. g., International Shoe Co. v. Federal Trade Commission, 280 U.S. 291, 299, 50 S.Ct. 89, 74 L.Ed. 431 (1929); Ariasi v. Orient Insurance Co., 50 F.2d 548, 551 (9th Cir. 1931).
Their qualifications given in part, supra n. 5.
Mr. Blough explained that an auditor would have no way of knowing how many bits would be returned. Some could be lost in the hole; some discarded or thrown out by workmen or never returned for other reasons.
The principal basis of the claim of over-valuation of inventory came from a subsequent audit and valuation by Arthur Andersen Co., competing certified accountants, who re-examined the valuation of the inventory made by Peat, Marwick, Mitchell Co., and adjusted it downwards in the sum of approximately $465,000.
However, Servicios had already reduced the purchase price of the stock of Peticon by the sum of $200,000 in the settlement of the Colorado litigation because of the same claims which Franklin later made against PMM. In the Colorado litigation Services had sued on the notes and Franklin counterclaimed for rescission and for damages; Franklin had also attempted to join PMM as a codefendant. Likewise, in the Colorado litigation, Franklin alleged in its counterclaim that PMM conspired with Servicios to do the things which it asserted were wrongful and had resulted in damage, just as Franklin has asserted a conspiracy claim in the present litigation.
Appellant argues that the award of compensatory damages for over-valuing inventory, thus increasing the price of the stock, amounts to a double recovery to the extent that the Colorado settlement had already affected a reduction in price for the same reasons. The court found in Conclusion of Law Number 10 that the Colorado settlement did not affect the rights of the parties to this action. We disagree with that conclusion.
Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 348, 91 S.Ct. 795, 28 L.Ed.2d 77 (1971); Aro Mfg. Co. v. Convertible Top Co., 377 U.S. 476, 503, 84 S.Ct. 1526, 12 L.Ed.2d 457 (1964). DePinto v. Provident Security Life Insurance Co., 374 F.2d 37, 49 (9th Cir.), cert. denied, 389 U.S. 822, 88 S.Ct. 48, 19 L.Ed.2d 74 (1967), approved that rule. It is followed in California, Laurenzi v. Vranizan, 25 Cal.2d 806, 155 P.2d 633 (1945), and also in Colorado, Cox v. Pearl Investment Co., 168 Colo. 67, 450 P.2d 60, 63 (1969). See also Prosser, Torts § 46 at 272 (3d ed. 1964). In Cox the Supreme Court of Colorado held, however, that where a settlement agreement contained in express reservation of rights that the rights of those who settled should not be foreclosed against others who may have also been liable for the wrong.
"It is the express intention of the parties that no provision of this stipulation shall be construed as a release of Peat, Marwick, Mitchell Company, or any partnership, group or organization doing business under that name, or any partner thereof, for liability, if any, arising from his services as an accountant."
This reservation of rights together with the attempts of Franklin to join PMM in the Colorado litigation would strongly indicate that Franklin at those times considered PMM a joint tortfeasor. The recovery received from Servicios pursuant to this Colorado settlement would, therefore, reduce pro tanto the amount Franklin could recover from PMM for the same injuries.
"2. The acts of the proposed Third Party Defendant in the course of the transaction between Plaintiff and Defendant were and are inseparable from the transactions and disputes between Plaintiff and Defendant . . . ."
". . . if an injured party receives some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor." 84 Cal.Rptr. at 175, 465 P.2d at 63.
Appellee also cited Gypsum Carrier, Inc. v. Handelsman, 307 F.2d 525 (9th Cir. 1962); United States v. Shipowners Merchants Tugboat Co., 103 F. Supp. 152 (N.D.Cal. 1952), aff'd 205 F.2d 352 (9th Cir. 1953), cert. denied, 346 U.S. 829, 74 S.Ct. 51, 98 L.Ed. 353 (1953); and Publix Cab Co. v. Colorado National Bank, 139 Colo. 205, 338 P.2d 702 (1959). The first two cases arise under admiralty law. While they recognize the collateral source rule as a rule of federal law where applicable, Gypsum Carrier, Inc. points out that in the usual situation, a federal court is called upon to apply it as a rule of state law. Again, assuming Colorado law on damages is the proper rule to apply, the Colorado cases do recognize the rule, but in a situation inapposite to the case under examination.
No question was raised or evidence introduced on this point as to the law of Venezuela which would be the competing conflict of laws jurisdiction.
"The principle of the collateral source doctrine has been recognized by this Court in the following cases: Pueblo v. Ratliff, 137 Colo. 468, 327 P.2d 270; Carr v. Boyd, 123 Colo. 350, 229 P.2d 659; Riss Co. v. Anderson, 108 Colo. 78, 114 P.2d 278; King v. O. P. Baur Co., 100 Colo. 528, 68 P.2d 909. Simply stated, it is that compensation or indemnity received by an injured party from a collateral source, wholly independent of the wrongdoer and to which he has not contributed, will not diminish the damages otherwise recoverable from the wrongdoer. We adopt what we believe to be the majority view and hold that the doctrine is applicable where the source of compensation is wages paid by an employer under an employment rule or policy providing for sick leave and accumulation thereof." 481 P.2d at 724.
Franklin claimed to have suffered one single, indivisible injury under the contract, which was over-valuation of inventory resulting in overstatement of book value of the stock being purchased. The means by which this injury was alleged to have been caused were several: negligence, breach of express and implied warranty, fraud, and conspiracy by both Servicios and PMM. The injury having been determined in the Colorado action against Servicios and no greater injury or damage having been established against PMM for the same alleged injury, a second recovery may not be allowed. In the present action the additional compensation paid and received was not from a "collateral source" but from one charged with causing the same injury with which PMM is being charged.
The court concluded as a matter of law that in the light of Finding of Fact Number 51 the plaintiff was entitled to recover exemplary damages in the amount of $150,000.
"In all civil actions in which damages shall be assessed by a jury for a wrong done to the person or to personal or real property, and the injury, complained of shall have been attended by circumstances of fraud, malice or insult, or a wanton and reckless disregard of the injured party's rights and feelings such jury, in addition to the actual damages sustained by such party, may award him reasonable exemplary damages." Colo.Rev.Stat. 41-2-2.
This statute does not equate punitive damages with constructive fraud. Neither does the Colorado definition equate with constructive fraud "a wanton and reckless disregard of the plaintiff's rights." See United States Nat. Bank v. Bartges, supra, 122 Colo. 546, 224 P.2d 658 (1950).
We disagree with the rationale of the court. Assuming honest but negligent misrepresentation, the fact that the consequences are even of considerable magnitude does not in this case enlarge the "honest but negligent" into "intentional fraud" as of the date when the negligence occurred.
"As I said before, it seems to me that this is a case for exemplary damages because of what I find to be the constructive fraud, substantial negligence and the failure to disclose, as is implicit, but if you can't sustain that without showing — without a finding of malice or insult, I just can't stultify myself in saying that I think that Mr. Southerland was malicious, or that he was insulting." R.T. 43.
Apart from the invalidity of the award of punitive damages under Colorado law, we find difficulty in the court's selection of the law of Colorado as the applicable law upon these facts. That conflict of laws decision was potentially determinative since it was conceded that the law of Venezuela makes no provision for an award of exemplary damages.
Testimony of Dr. Rene de Sola, R.T. Partial Trial at 313.
The basis of Franklin's claim of punitive damages is in tort. It was alleged that the conduct of the defendant was fraudulent, that it was also negligent and that it was the result of a conspiracy. The trial court did not make the type of findings as to choice of law which it should have made in order to determine the rights and liabilities of the parties. Finding of Fact Number 15 adopts the California statutory choice of law rule as to the interpretation of the contract and the rights and obligations which flow from it. (Cal.Civ. Code § 1646.) Without any discussion of the tortious foundation of the claim for punitive damages the court, by way of finding of fact, simply concluded that "Colorado law governs the issues with respect to damages."
Conclusion of Law Number 16 on Partial Trial.
California has declined to follow the traditional "lex loci delicti" rule in all tort cases regardless of the type of wrong or the particular issue involved. In Reich v. Purcell, 67 Cal.2d 551, 63 Cal.Rptr. 31, 432 P.2d 727 (1967), the California Supreme Court held that the forum "must search to find the proper law to apply based upon the interests of the litigants and the involved states." 63 Cal.Rptr. at 33, 432 P.2d at 729. There, the law of Missouri, where the automobile accident occurred, limited damages for wrongful death. Neither Ohio, the domicile of the plaintiffs, nor California, the domicile of the defendants imposed such a limitation. After considering the interests of the domiciles of both parties and the interests of the State of Missouri, the court rejected the law of the place of the wrong and followed the law of Ohio, the domicile of the plaintiffs. This court followed a similar course in a different kind of tort action in Moore v. Greene, supra.
The rationale is likewise that of the American Law Institute. See Restatement (Second) of the Law, Conflict of Laws § 145 (1971). See also James v. Powell, 19 N.Y.2d 249, 279 N YS.2d 10, 225 N.E.2d 741 (1967).
"Probably the most important function of choice-of-law rules is to make the interstate and international systems work well." Restatement (Second) of Conflict of Laws, supra, n. 22, § 6, comment d at 13.
(d) Amount paid to Alexander Grant Co. in the sum of $3,800.
April 30, 1959 $40,354.56 2/8/61 $13,720.77 ($26,633.79) Inventory Diamonds acquired 42,641.54 2/8/61 $12,502.29 ($30,139.25) from customers after April 30, 1959 to September 30, 1960. Credits issued or 19,098.61 2/12/62 $ 4,223.18 ($14,875.43) due October 1, 1960 to August 31, 1961 ____________ Total ($71,648.47)
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