Source: http://gnhllp.com/1990/12/accounting-issues-in-litigation-a-referee-can-blow-the-whistle/
Timestamp: 2018-10-24 01:31:05
Document Index: 178120216

Matched Legal Cases: ['§638', '§639', '§639', '§639', '§639', '§2000', '§2000']

Accounting Issues in Litigation: A Referee Can Blow the Whistle | Goodman Neuman Hamilton LLP
Articles: Accounting Issues in Litigation: A Referee Can Blow the Whistle
Originally published in California Civil Litigation Reporter (December 1990), by Farley J. Neuman.
Commercial litigation frequently involves accounting issues.
How much money was paid to a partner?
How much profit did a company obtain from a particular product?
Were expenses properly allocated between projects, divisions
or contracts?
Discovery for accounting issues can be difficult, complex, and extremely expensive. A trial to decide accounting issues can be equally frustrating. One solution may be the appointment of a referee to help decide the accounting issues and participate in the discovery related to those issues.
Referee To Decide Accounting Issues
Code of Civil Procedure §§638 and 639 give the court the power to appoint a referee to hear and decide accounting issues. Section 638 authorizes a voluntary reference–a reference ordered by the court on agreement of the parties. Under a voluntary reference, the referee may try any issues, whether of fact or law, that the parties agree to submit to the referee, and the referee may render a statement of decision on those issues. Even if the parties do not agree to a reference, §639 authorizes a compulsory reference–a reference which the court may order under limited circumstances. A compulsory reference may be made on motion of any party, or on the court’s own motion. Section 639 provides five circumstances under which a compulsory reference may be ordered, including two specifically related to accounting issues:
(a) When the trial of an issue of fact requires the examination of a long account on either side; in which case the referees may be directed to hear and decide the whole issue, or report upon any specific question of fact involved therein.
(b) When the taking of an account is necessary for the information of the court before judgment, or for carrying a judgment or order into effect.
In other words, the court may order a reference under §639 when a case involves an “examination of a long account” or the “taking of an account.”
Such broad language permits a compulsory reference even in cases that do not involve traditional accounting issues. Most recently, United States Fid. & Guar. Co. v Superior Court (1988) 204 CA3d 1513, 1527, 252 CR 320, 329, affirmed the appointment of a referee to determine the reasonableness of fees charged by independent counsel appointed pursuant to San Diego Navy Fed. Credit Union v Cumis Ins. Soc’y, Inc. (1984) 162 CA3d 358, 208 CR 494. The Cumis counsel submitted a seven-inch thick stack of bills for 17 months of services which, according to the plaintiff, contained many questionable charges. Cumis
counsel challenged the reference of the issue of the reasonableness of the attorneys’ fees, arguing that the referee may properly only consider the billing data to determine the accuracy of the account, and may not address the reasonableness of the fees. The court of appeal held that this issue involved the examination of a long account, therefore the “whole issue,” including the reasonableness, could be referred to the referee under the specific language of CCP §639. Thus, once a long account is involved, a compulsory reference may be made of the entire issue–even issues that go far beyond the parameters of a commonly understood accounting. See Fredendall v Shrader (1920) 45 CA 719, 726, 188 P 580, 583 (determination of market value of oil sold or disposed of by defendant who was improperly in control of an oil company).
However, to avoid the issue of whether a “long account” or the “taking of an account” is involved, it is helpful to include a cause of action for an accounting in either the complaint or in a cross-complaint. If the plaintiff does not state a cause of action for an accounting, the defendant may do so in a cross-complaint. Because an action for an accounting is an equitable action (Verdier v Superior Court (1948) 88 CA2d 527, 530, 199 P2d 325, 327), the action must be tried by the court without a jury (United States Fid. & Guar. Co. v Superior Court (1988) 204 CA3d 1513, 1529, 252 CR 320, 330; Strauss v Summerhays (1984) 157 CA3d 806, 811, 204 CR 227, 230). Thus, when faced with an action for an accounting combined with a motion to appoint a referee, the judge must decide whether to hear and decide the accounting issues without a jury or to delegate the task to a referee. In light of the aversion of most judges to accounting issues, and the congestion of the courts, judges are inclined to grant motions to appoint referees, particularly when a cause of action for an accounting is stated.
Referee for Discovery Purposes
Along with making a motion to appoint a referee to decide the accounting issues, it is often helpful to ask the court also to appoint the referee to decide discovery issues related to the accounting. Requests to discover accounting data often cause disputes for several reasons: Parties do not like to divulge financial information;
Businesses, in particular, have huge quantities of accounting data;
The accounting data often does not mean much unless it is properly organized and explained; and Critical information is often contained only in computer storage.
Code of Civil Procedure §639 (in addition to authorizing a referee for accounting issues) also authorizes the court “(e) to appoint a referee to hear and determine any and all discovery motions and disputes.” When the accounting referee is also empowered to decide discovery issues, discovery disputes are resolved swiftly and economically, and tend to arise less frequently.
Occasionally, a referee is appointed not only to resolve discovery disputes, but to actually conduct discovery. For example, if the referee is a certified public accountant who will actually perform the accounting, the trial court sometimes grants the referee authority to directly interview the parties’ accountants, bookkeepers, and other witnesses, and to directly request and examine original accounting records and related documents. Vesting such investigatory powers on the referee raises both strategic and legal issues.
From a strategic perspective, the process can become much more economical because (1) the parties will generally be more cooperative when dealing with a referee directly, and (2) the referee will attain exactly what he or she needs to examine without relying on one of the parties to conduct the discovery and then presenting the information to the referee. However, in granting such broad powers to the referee, the parties also give up the ability to control the flow of information and evidence, and may not even know what information and evidence the referee actually receives.
From a legal standpoint, there is an issue whether the referee may conduct investigation or whether the referee is bound to receive all evidence through a formal hearing in accordance with the rules of evidence. In Rice v Brown (1951) 104 CA2d 100, 231 P2d 65, the order of reference empowered the referee to examine the parties as well as any other witnesses and to compel the production of documents. The referee conducted his own investigation and did not hold an evidentiary hearing. The court held that there was no authority for such a procedure and that a hearing before a referee must be conducted in the same manner as though it were held before a court. A full discussion of whether this case is well reasoned or would be followed today is beyond the scope of this article. However, Rice has only been cited once. In Abrams v Abrams-Rubaloff & Assocs., Inc. (1981) 114 CA3d 240, 247, 170 CR 656, 659, the court distinguished the holding in Rice from the appointment of a referee under Corp C §2000 to appraise the fair market value of shares of stock. The Abrams court simply stated that Rice
addressed the appointment of a referee under the Code of Civil Procedure, and was therefore not applicable to the appointment of a referee under the Corporations Code. Abrams held that a referee appointed under Corp C §2000 need not conduct a formal hearing.
Should the Referee Be a Lawyer or an Accountant?
Referees for accounting issues are generally lawyers, such as retired judges, or accountants. The type of referee chosen will largely determine how the process will work.
If the referee is a lawyer, then each party generally retains its own certified public accountant, analyzes all of the information itself, and then presents its opinions and conclusions to the referee. After each side presents the testimony and conclusions of the accountants and any other relevant evidence, the lawyer-referee makes a decision and issues a report to the court.
If the referee is an accountant, then the referee normally performs his or her own analysis of the accounting information and a formal hearing is not held. However, under the holding in Rice, it would appear that a formal hearing would be required, although it also appears that the parties could waive the right to a hearing. The accounting documents are presented directly to the referee, and the referee generally asks questions to the accountants and other witnesses. When the referee is an accountant, he or she generally acts more as a special investigator who independently determines the facts. A referee who is a lawyer generally acts more as a judge. Having an accountant-referee normally results in a more economical process. Parties retain more control when there is a lawyer-referee and the parties provide their own accountants.
There are situations when a party would prefer that all the accounting issues be presented to a jury. Thus, that party would not want to file a complaint or cross-complaint that states a cause of action for an accounting, and would not want to move for the appointment of a referee. This is a strategic decision for which there are no absolute rules.
Generally, a party will want a referee to decide the accounting issues if that party has investigated those issues and has determined that its position is consistent with the decision a certified public accountant would likely make. There are other times when a party would rather confuse the accounting issues in hopes of obtaining more than an accountant would want to award.
A party to a case involving accounting issues should always consider the possibility of either appointing a referee to decide the accounting issues, or of having the accounting issues separately heard by the judge without a jury. The issues should be clearly defined before any motion is made to the court. However, keep in mind that the issues may include accounting and related nonaccounting issues. A strategic decision of whether to move for the appointment of a referee should be made after considering the advantages and disadvantages of a trial on the accounting issues, the ability to obtain accurate accounting information, likely discovery problems, and the litigation budget.
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