Court Opinion

ID: 9465980
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:01:59.059039+00
Date Added: 2024-06-11T17:39:28.571400
License: Public Domain

HARLINGTON WOOD, Jr., Circuit Judge,
dissenting in part.
The majority view of this case was my initial view since it appeared that jury questions had been appropriated by the trial court.1 That remains a reasonable view, but after considering the case further I have come to the conclusion that plaintiff failed to establish a prima facie case as to Count III. In reaching that conclusion, I have given consideration not only to the evidence which was admitted, but also to that which was excluded.
Neither party challenges the applicability of Illinois law. The leading Illinois case determining the standard for the direction of verdicts as well as entry of judgments n. o. v. is Pedrick v. Peoria & Eastern R.R. Co., 37 Ill.2d 494, 229 N.E.2d 504 (1967), in which Mr. Justice Underwood in an exhaustive opinion resolved the issue. The case remains a current statement of Illinois law. See Bailey v. City of Decatur, 49 Ill.App.3d 751, 7 Ill.Dec. 452, 364 N.E.2d 613 (4th Dist. 1977). The stated rule, as the majority notes, is that “verdicts ought to be directed and judgments n. o. v. entered only in those cases in which all of the evidence, when viewed in the aspect most favorable to the opponent, so overwhelmingly favors movant that no contrary verdict based on that evidence could ever stand.” Pedrick, 37 Ill.2d at 510, 229 N.E.2d at 513-14. However as a prelude to stating the rule, the Illinois Supreme Court commented:
Clearly, the constitution does, and judges should carefully preserve the right of the parties to have a substantial factual dispute resolved by the jury, for it is here that assessment of the credibility of witnesses may well prove decisive. (See Ill. Const, art. II, sec. 5; Note, 107 U.Pa.L. Rev. 217.) But the presence of some evidence of fact which, when viewed alone may seem substantial, does not always, when viewed in the context of all of the evidence, retain such significance. As the light from a lighted candle in a dark room seems substantial but disappears when the lights are turned on, so may weak evidence fade when the proof is viewed as a whole. Constitutional guaranties are not impaired by direction of a verdict despite the presence of some slight evidence to the contrary (Chamberlain; Blume, “Origin and Development of the Directed Verdict,” 48 Mich.L.Rev. 555, 576-7), for the right to a jury trial includes the right to a jury verdict only if there are factual disputes of some substance.
37 Ill.2d at 504-05, 229 N.E.2d at 510. It must also be borne in mind that allegations of fraud, as distinguished from the ordinary civil case, must be established by clear and convincing evidence. Ray v. Winter, 67 Ill.2d 296, 10 Ill.Dec. 225, 367 N.E.2d 678 (1977); Mack v. Earle M. Jorgensen Co., 467 F.2d 1177 (7th Cir. 1972); Classic Bowl, Inc. v. AMF Pinspotters, Inc., 403 F.2d 463 (7th Cir. 1968); Hubert v. May, 292 F.2d 239 (7th Cir. 1961). In applying the Illinois rules, viewing the evidence most favorably to plaintiff, we are to decide only whether the plaintiff had made out a prima facie case so as to justify permitting a properly instructed jury to make the ultimate factual determinations.
*661Plaintiff’s obviously heavy burden was to affirmatively establish against these particular defendants a prima facie case as to each and every one of the required fraud elements. No aspect of the fraud allegations could be presumed. Classic Bowl, Inc. v. AMF Pinspotters, Inc., 408 F.2d 751 (7th Cir. 1966). No evidence was received on damages, as that issue had been reserved by the trial court. In the business relationships between all these parties, it is evident that there was fraud, fraud against plaintiff by Lebowitz, president of General, and by Lebowitz and Leatherby together against plaintiff. The present case against these defendants is only one aspect of the litigation generated elsewhere by these activities.
One of my concerns with this case was the extraordinary success of defendants in excluding plaintiff’s evidence. Almost all of defendants’ objections were allowed. In objecting to the admission of plaintiff’s documentary evidence, defendants were even more successful as all or almost all their objections were sustained. The result was that plaintiff was required to make numerous offers of proof, possibly well over a hundred. I do not view it as necessary to delve individually into the mass of evidentiary rulings. Some of those evidentiary rulings I consider to have been in error, but I have approached this case on the broader basis by assuming that the more important excluded evidence had been admitted. At best the evidence tells the story of careless auditing by defendants and the devious intentions of Lebowitz and Leatherby. However, viewing all the evidence most favorably to plaintiff, a prima facie case of fraud against these defendants, even with a liberal use of inferences, was not established. Nothing short of pure speculation could save the plaintiff’s case, and neither a jury nor ourselves may indulge in that.
Let us look further at the individual defendants. Colao was a partner and as head of Froggatt’s New York office signed the audit on behalf of the firm. Had his deposition been admitted, which I will consider later, it would, as far as it was completed, show nothing more than negligence in his review of the finished audit. Johnson, Ginsburg and Miller were named merely in their capacities as partners of the firm, although Miller who had been an employee became a partner only after the audit was completed. Cable and Sexton were also employees. Sexton had spent a few hours assembling documents in connection with the audit. Cable, a senior accountant, and another accountant not presently involved, did the audit field work. What they came across in their audit was reported to their superiors, usually Smith. Smith, however, is of more interest and significance.
Smith, not a CPA, was head of Froggatt’s Philadelphia office. He had previously done work for a prior company controlled by Lebowitz in which some financial problems had also developed. They became personal friends and maintained their business and personal relationship after General was formed. When problems also developed in General, Smith suggested that Lebowitz form his own insurance company as a substitute for Leatherby. Lebowitz offered Smith the position of treasurer, along with stock in any newly organized insurance company, provided the financial statements to be prepared reflected a favorable picture and the public stock offering was successful. Smith was interested. Lebowitz also mentioned the possibility of finding an existing insurance company as a substitute for Leatherby. Subsequently Smith assured Lebowitz that he would provide the best financial statement possible. In the first draft submitted to Lebowitz, some entries were based on a loss ratio which Lebowitz found unacceptable. This was favorably revised by Smith by applying what he termed “the rule of reason.” After this 1970 audit was completed, Lebowitz, abandoning his own insurance company idea, decided to try to interest some other insurance company to replace Leatherby. He discussed a prospect list of about 250 insurance companies with Smith. Financial problems continued to develop in General, which also came to Smith’s attention. General arranged for another firm to do the audit for 1971, but that audit was not completed.
*662It is arguable whether any untrue material fact was actually stated in the audit, but I view that as a jury issue. It is also arguable that if it contained an untrue material fact that it was known to be untrue, but I view that also as a jury issue. It is, however, considerably less arguable that plaintiff had any right to rely upon the audit and did in fact rely upon it.
Stern, the president of plaintiff, claims he relied on the audit as a basis for his entering a contract with General. There is no substantial evidence to that effect, only Stern’s self-serving conclusion. According to him, he relied on the 1970 audit in June 1972 when contracting with Lebowitz and again in October of 1972 when contracting with Leatherby and Lebowitz. The financial information prepared by Froggatt was already 16 months old when Stern first received it. There was no privity between Stern and Froggatt. The audit had not been proposed specifically for Stern’s use, but for a possible public stock offering or for use with numerous companies. That possible use does not constitute use only by a limited class of persons. During this time it also came to Stern’s attention that Lebowitz had been indicted by federal authorities in New York. Stern also became aware that there was pending litigation between General and Leatherby. Stern did some independent checking but it was surprisingly limited, shallow and deficient. Stern was a lawyer and a CPA with insurance experience. Considering the evidence admitted and offered, Stern’s own poor business judgment should not be converted into a prima facie case of fraud by these accountants.
The Illinois law as to reliance is stated in Schmidt v. Landfield, 20 Ill.2d 89, 94, 169 N.E.2d 229, 231-32 (1960):
As a general rule one who is guilty of fraudulent misrepresentation cannot interpose a defense that the person defrauded was negligent in failing to discover the truth. The general rule is subject to the qualification, however, that the party seeking relief had a right to rely upon the representation made. This court has pointed out accordingly that “In all cases where it is sought to hold one liable for false representations, the question necessarily arises, whether, under all circumstances, the plaintiff had a right to rely upon them. In determining this question, the representations must be viewed in the light of all the facts of which the plaintiff had actual notice, and also of such as he might have availed himself by the exercise of ordinary prudence.” The rule is well established that a party is not justified in relying on representations made when he has ample opportunity to ascertain the truth of the representations before he acts. When he is afforded the opportunity of knowing the truth of the representations he is chargeable with knowledge; and if he does not avail himself of the means of knowledge open to him he cannot be heard to say he was deceived by misrepresentations. (Citations omitted.)
Stern was chargeable with knowledge.
The final fraud issue requires proof that the false material fact was made for the purpose of inducing the other party to act. Plaintiff clearly failed to establish a prima facie case on this aspect also. Smith knew that Lebowitz wanted to start his own insurance company by a public stock offering or to seek a replacement insurance company for Leatherby. There is, however, no substantial evidence which would expand Smith’s general knowledge of Lebowitz’ possible general purposes into a prima facie finding that the audit was for the purpose of “inducing” plaintiff to act at a much later date. Smith’s activities evidence nothing more than a possible conflict of interest arising out of the job offer possibility, careless supervision of the audit, and a close relationship with Lebowitz, his client, whom he made some effort to please. It doesn’t add up to a prima facie case of fraud.
Plaintiff had four months of trial in which to try to establish a prima facie case of fraud. Perhaps some judges would have played it safe and permitted the jury an opportunity to consider the case. If the *663jury, however, had brought in a fraud verdict for plaintiff, it could not have been permitted to stand. The evidence of fraud was considerably less than clear and convincing.
Plaintiff objects that it was not permitted by the trial court to use the incomplete deposition of defendant Colao, a partner of Froggatt in New York, who signed the audit for the firm with little knowledge about its preparation. There was no need for the majority to consider this issue. The deposition began on June 27, 1977, and resumed on September 13, 1977. On September 23, 1977, plaintiff gave notice of the continuation of the deposition for October 4, 1977. On that date Colao was out of the country. In any event there were five other depositions previously scheduled for that date. Trial had been set for October 11, 1977. Between September 23 and October 31, 1977, there were more than 60 depositions already scheduled. On October 11, the trial was rescheduled to October 18. Also on October 11, 1977, plaintiff served notice to continue the deposition on October 14,1977. On October 14, 1977, there were already three other depositions previously scheduled in New York and Chicago. Subsequently, in the ninth week of trial, plaintiff attempted to use the incomplete Colao deposition. The deposition had not been filed in accordance with Rule 30(f) of the Federal Rules of Civil Procedure or with local Rule 18. The trial court also noted that plaintiff had had over two years in which to complete discovery. I find no error in the court’s ruling under these particular circumstances. Plaintiff argues that the Colao testimony was “crucial,” but gives us little insight as to how it was crucial. At most it was only evidence of Colao’s negligence.
There remains the issue of the pretrial dismissal of Counts I and II which alleged negligence and gross negligence. Defendants argue that defendants as accountants cannot be liable to plaintiff for negligence unless in privity with plaintiff or unless defendants could foresee that plaintiff would rely on the audit. There was, defendants argue, no duty of reasonable care owing plaintiff by defendants. Further defendants argue that plaintiff did not disclaim its own lack of contributory negligence.
Looking to Illinois law, both parties find support in Rozny v. Marnul, 43 Ill.2d 54, 250 N.E.2d 656 (1969). In that case a land surveyor hired by a prior owner of the real estate was held liable to a third party purchaser of the real estate who acted in reliance on the survey. It was held in the circumstances of that case that privity of contract was not applicable and did not bar recovery. The court in coming to that conclusion pays particular attention to the opinion of Mr. Justice Cardozo in Ultramares Corp. v. Touche, Niven & Co., 255 N.Y. 170, 174 N.E. 441 (1931), considered to be a leading case on the issue of accountant’s liability. It was held in Ultramares that no cause of action would lie for negligence to third parties who had loaned money to an insolvent firm in reliance on the defendant’s audit. Mr. Justice Cardozo wrote:
If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate class. The hazards of a business conducted in these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.
225 N.Y. at 179, 174 N.E. at 444.
In Rozny the Illinois Supreme Court'commented, “We agree that the unknown and unlimited liability factor, as so ably stated by Mr. Justice Cardozo in the Ultramares case, is not to be lightly discounted. But we deal here with a defendant who has included in his inaccurate plat an ‘absolute guarantee for accuracy.’” 43 Ill.2d at 66, 250 N.E.2d at 662. The court then carved out an exception specifically setting forth these factors as controlling:
(1) The express, unrestricted and wholly voluntary “absolute guarantee for accuracy” appearing on the face of the inaccurate plat;
*664(2) Defendant’s knowledge that this plat would be used and relied on by others than the person ordering it, including plaintiffs;
(3) The fact that potential liability in this case is restricted to a comparatively small group, and that, ordinarily, only one member of that group will suffer loss;
(4) The absence of proof that copies of the corrected plat were delivered to anyone;
(5) The undesirability of requiring an innocent reliant party to carry the burden of a surveyor’s professional mistakes;
(6) That recovery here by a reliant user whose ultimate use was foreseeable will promote cautionary techniques among surveyors.
43 Ill.2d at 67-68, 250 N.E.2d at 663.
In Count I, plaintiff alleges that “Froggatt knew or should have known that this certified audit would be viewed and relied upon by third parties including plaintiff.” I do not believe that the allegation brings plaintiff within the Rozny exception requiring a showing of liability to a comparatively small group. Had plaintiff amended these allegations to conform to its own proof, the group would be seen not to be small. It would have included, as we have already noted, the general public as Lebowitz was considering forming a new insurance company with a public stock offering. It would also have included several hundred insurance companies as prospects to substitute for Leatherby. The Illinois Supreme Court also took particular note of the survey’s written guarantee of absolute accuracy, which is not claimed in the present case. Nor is there any allegation a corrected audit was prepared, but not distributed. We find no indication in the Illinois law that persuades us that Illinois is ready to broaden the liability of accountants to encompass the situation in this case.
It is recognized in Illinois that the plaintiff has the burden of proof in showing the absence of contributory negligence. However, Rule 8(c) of the Federal Rules of Civil Procedure is considered to be applicable and includes contributory negligence as an affirmative defense. That being so, plaintiff need not allege due care, but lack of contributory negligence nevertheless remains a matter of plaintiff’s proof. Though the plaintiff did not have to allege freedom from contributory negligence, plaintiff would still have had to explain away its reliance upon an outdated audit. The plaintiff, therefore, is in no position to complain about the negligence of defendants that there may be seen in the evidence. It is somewhat of an anomaly that what the defendant must allege, the plaintiff must prove. On this issue I would adopt the reasoning of Judge Foreman in Gilmore v. Witschorek, 411 F.Supp. 491 (E.D. 111. 1976), and his consideration of the authorities cited therein.
As to Count II, the gross negligence count, we are given no support for plaintiff’s view that gross negligence exists in similar cases as a separate cause of action in Illinois. It is generally considered that Illinois does not recognize degrees of negligence as distinguished from wilful and wanton conduct. As to Count II, I do not dissent, but I respectfully dissent from the majority view on Counts I and III.

. Much of the delay in the resolution of this case on appeal results from the change of my initial view.