Bonhiver v. Graff

• Decision Date: 19 November 1976
• Docket Number: No. 45493,45493
• Citation: 311 Minn. 111,248 N.W.2d 291
• Parties: , 92 A.L.R.3d 371 Homer A. BONHIVER, as Receiver of American Allied Insurance Company, Respondent, v. Philip H. GRAFF, et al., Appellants, Frank J. Delmont Agency, Inc., et al., intervenors, Respondents.
• Court: Minnesota Supreme Court

Page 291

248 N.W.2d 291

311 Minn. 111, 92 A.L.R.3d 371

Homer A. BONHIVER, as Receiver of American Allied Insurance

Company, Respondent, v. Philip H. GRAFF, et al., Appellants, Frank J. Delmont Agency, Inc., et al., intervenors,

Respondents.

No. 45493.

Supreme Court of Minnesota.

Nov. 19, 1976.

Syllabus by the Court

1. For purposes of the statute of limitations, Minn.St. 541.01, a cause of action does not accrue until damage is occasioned. Thornton v. Turner, 11 Minn. 237 (336) (1866).

2. A receiver represents the right of creditors and is not precluded because of the fraudulent acts of former officers of the corporation from bringing suit against accountants who negligently failed to discover the fraud. Magnusson v. American Allied Ins. Co., 290 Minn. 465, 189 N.W.2d 28 (1971).

3. Intervening negligence, to be a superseding efficient cause, must be in no way caused by the defendants' negligence. Medved v. Doolittle, 220 Minn. 352, 19 N.W.2d 788 (1945).

4. There is sufficient evidence to sustain the trial court's finding that defendants' actions were negligent.

5. On the facts of this case, defendant accountants can be held liable for malpractice in negligently producing workpapers and adjusting entries, even though no audited financial statement was completed, when they had actual knowledge that the

workpapers and adjusting entries were being relied upon by the commissioner [311 MINN 112] of insurance in performing a statutorily required examination. Restatement, Torts 2d, Tent.Draft No. 12, § 552

6. Filing of a class action in Federal court does not toll the running of the statute of limitations as to those parties over whom the Federal court lacks subject-matter jurisdiction. American Pipe & Const. Co. v. Utah, 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974), distinguished.

7. On the facts of this case, defendants' liability for malpractice extends to general agent of insurance company where the agent relied upon the commissioner of insurance, whose reliance upon defendants' work was known to defendants.

8. While damages cannot be left to speculation or conjecture, proof to an absolute certainty is not required. Austin v. Rosecke, 240 Minn. 321, 61 N.W.2d 240 (1953). A reasonable damage award will not be set aside when to do so would require this court to engage in speculation or conjecture.

9. When damages are unascertainable prior to judgment, prejudgment interest is not allowed. Potter v. Hartzell Propeller, Inc., 291 Minn. 513, 189 N.W.2d 499 (1971).

[311 MINN 113] Altman, Geraghty, Mulally & Weiss and James H. Geraghty, St. Paul, Meagher, Geer, Markham, Anderson, Adamson, Flaskamp & Brenna, O. C. Adamson II, and Robert M. Frisbee, Minneapolis, for appellants.

Collins & Buckley and Theodore J. Collins, St. Paul, for Bonhiver.

Cochrane & Bresnahan and John A. Cochrane, St. Paul, for Delmont Agency and others.

Magistad & Noonan and Stewart C. Loper, St. Paul, for Delmont Agency, and others.

Heard before SHERAN, C.J., and MacLAUGHLIN, YETKA, SCOTT, and BREUNIG, JJ., and reconsidered and decided by the court en banc.

SHERAN, Chief Justice.

This is another case arising out of the 1965 collapse of American Allied Insurance Company. Two other lawsuits having the same origin have reached this court: Magnusson v. American Allied Ins. Co., 282 Minn. 287, 164 N.W.2d 867 (1969); Magnusson v. American Allied Ins. Co., 290 Minn. 465, 189 N.W.2d 28 (1971). Other courts have also faced issues arising out of the collapse. ¹

The facts relevant to this appeal are as follows: Defendant Schwartz, Frumm & Company (hereafter Schwartz, Frumm) is a firm of certified public accountants with its office in Chicago, Illinois. Defendant Philip Graff, a duly certified public accountant, worked for Schwartz, Frumm from November 1960 to December 1964.

Prior to 1963, members and employees of Schwartz, Frumm [311 MINN 114] had done some accounting work for Phillip Kitzer, Sr., with respect to a garage owned by him, and with respect to Adequate Mutual Insurance Company (Adequate Mutual). The firm corrected for refiling the annual 'convention statement' submitted by Adequate Mutual for the year 1961 or 1962. As originally filed, the statement was unacceptable to the Illinois Department of Insurance. In May 1963, at the request of Kitzer, Sr., and Phillip Kitzer, Jr., Leonard Frumm and an employee, James Holly, journeyed from Chicago to Minneapolis to inspect the books of American Allied Mutual Insurance Company (American Allied Mutual). The Kitzers were interested in purchasing American Allied Mutual for $100,000. Frumm and Holly spent about 10 hours inspecting American Allied Mutual's books, and reported to Kitzer, Sr., that American Allied Mutual was impaired. Frumm and Holly recommended to the Kitzers that they not purchase the company for the price requested, but they purchased it anyway for $20,000.

Upon purchasing American Allied Mutual, the Kitzers transferred its assets and liabilities to a newly formed stock company--American Allied Insurance Company (American Allied). Schwartz, Frumm employees assisted the Kitzers in connection with this acquisition. All of the stock of American Allied was owned by the Kitzers. A subsidiary of American Allied was set up--Allied Realty Company. All of the stock of Allied Realty was ultimately owned by American Allied. The name of American Allied Mutual was changed to United States Mutual Insurance Company (United States Mutual) and a majority of its guaranty fund certificates were owned by Allied Realty. A stock company, Bell Casualty Insurance Company (Bell Casualty), was established and its stock was owned by Allied Realty, as was Bell Mutual Insurance Company (Bell Mutual). In 1965, the Kitzers bought the Phalen Park State Bank. The stock in the bank was transferred 1/3 to American Allied, 1/3 to Allied Realty, and 1/3 to United States Mutual. Thus, the Kitzers owned American Allied; American Allied in turn owned Allied Realty; [311 MINN 115] Allied Realty in turn owned United States Mutual, Bell Mutual, and Bell Casualty. The Phalen Park State Bank was owned 1/3 by United States Mutual (which in turn was owned by Allied Realty, which was itself owned by American Allied), 1/3 by Allied Realty (which was in turn owned by American Allied), and 1/3 by American Allied directly.

In November 1963, Holly left Schwartz, Frumm to become a vice president of American Allied. In August 1964, Holly contacted Frumm and requested help in getting American Allied's books up to date as of June 30, 1964. Frumm sent Graff to St. Paul to do the work. Graff made various entries in the books and records of American Allied and prepared workpapers in the course of his work. On October 5, 1964, the commissioner of insurance of the state of Minnesota sent a team of examiners to examine the books of American Allied. Those examiners worked in the same room with Graff, examined his workpapers, and relied upon the entries he had made in the books, a standard practice. Graff at times personally furnished information to the examiners, and testified that he considered his work to be the 'starting point' for the examiners. By his examiners' reliance upon Graff's entries, the commissioner was led to believe that American Allied was solvent, when in fact the company was insolvent. Had the examination disclosed that the company was insolvent, its continued operation would have been challenged by the commissioner. See, Minn.St.1965, §§ 60.08; 60.12; 60.13; 60.19; 60.875, subds. 3, 6, 23, 39. Cf. Minn.St. 60A.031, subd. 5; 60A.051, subd. 5; 60A.07, subd. 5e; 60A.25; 60B.15; 60B.20.

Because a number of Graff's entries were erroneous, the examination did not disclose American Allied's insolvency. During the existence of American Allied, the Kitzers embezzled over $2,000,000 from the company. Graff's errors involved his failure to investigate and discover the true nature of a number of transactions by which this fraud was taking place. Those errors, upon which the defendants' liability was established, [311 MINN 116] were described in detail in the trial court's findings. ² Basically, they involved transactions between two companies wherein a payment would be recorded in one manner on American Allied's books and in a different manner on the books of the other party to the transaction. The books of the other parties--often related companies such as Bell Mutual, Bell Casualty, or United States Mutual--were readily available to Graff. The court found that his failure to examine those books was negligence.

In the spring of 1965, rumors began circulating that American Allied was insolvent. The commissioner of insurance, at a meeting with several concerned parties, including Frank J. Delmont, intervenor, ³ gave

assurances that American Allied was solvent. In reliance upon those assurances, Delmont, an insurance agent who had become a general agent of American Allied, continued to write insurance with American Allied. American Allied was allowed to continue to do business until June 10, 1965. During the period September 1964 to August 1965, the Kitzers withdrew $849,078.60 in cash

Bonhiver instituted this action in October 1970. Delmont instituted a class action in Federal court on December 31, 1970. He intervened in this action on behalf of the class on March 5, 1974. After a court trial, Bonhiver was awarded damages of $88,350.94, Delmont was awarded damages of $29,000, and the class action was dismissed. The trial court denied plaintiff's post-trial motion for amended findings or a new trial on the issue of damages, and also denied defendants' and intervenors' motions for amended findings. Defendants appealed and the other parties filed notices of review. We affirm.

1. The limitation period on bringing this action is 6 years. Minn.St. 541.05(5). That period commences to run when 'the cause of action accrues.' Minn.St. 541.01. As we have [311 MINN 117] interpreted the rule, the action accrues 'at such...