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
For Amicus Curiae:
Ward Shanahan, Helena, Nontan (h.
I CPA's )
su%mltte8st. November 2, 1989
Filed:
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 ~ t t i c . 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,11Ultramares, 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
(1977).1 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 non-
clients, 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 vice-
president of Intermountain; Robert Hicks, the other 50-percent
shareholder and president of Intermountain; Gary Black, secretary-
treasurer and controller of Montana Merchandising and secretary-
treasurer 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 ~ntermountainand 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--nota 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 accordance
in
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'sand 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
~erchandisingto prove that representations were made, that they
were material and that it had taken action upon them. Once Montana
~erchandisingintroduced 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'sreliance. 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
Bloomgrenlsauditing 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 cross-
examination, the method used to conduct the sampling.
Montana ~erchandising'stwo 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
~erchandisinglsdamages. 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 ~erchandisingwas 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 2 6 - 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 ยง 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
J- ief Justice