Chevron Chemical Co. v. Deloitte & Touche

• Decision Date: 15 January 1992
• Docket Number: No. 91-0470,91-0470
• Citation: 483 N.W.2d 314,168 Wis.2d 323
• Parties: CHEVRON CHEMICAL COMPANY, Plaintiff-Respondent, d First Brands Corporation, Plaintiff, v. DELOITTE & TOUCHE, Defendant-Appellant.d . Oral Argument
• Court: Wisconsin Court of Appeals

Page 314

483 N.W.2d 314

168 Wis.2d 323

CHEVRON CHEMICAL COMPANY, Plaintiff-Respondent, ^d First Brands Corporation, Plaintiff, v. DELOITTE & TOUCHE Defendant-Appellant.d

No. 91-0470.

Court of Appeals of Wisconsin.

Oral Argument Jan. 15, 1992.

Opinion Released March 31, 1992.

Opinion Filed March 31, 1992.

For the defendant-appellant the cause was orally argued by John W. Hein and submitted on the briefs of Gibbs, Roper, Loots & Williams, S.C. by John W. Hein and David J. Edquist, of Milwaukee.

For the plaintiff-respondent the cause was orally argued by David L. De Bruin and submitted on the briefs of Kravit, Lammiman & De Bruin, S.C. by David L. De Bruin and Ralph A. Weber, of Milwaukee.

For the American Institute of Certified Public Accountants the cause was submitted on the amicus curiae brief of Cook & Franke, S.C. by L. William Staudenmaier, of Milwaukee, with Willkie Farr & Gallagher by Louis A. Craco and Russell G. Ryan, of counsel, of New York City.

Before MOSER, P.J., and SULLIVAN and FINE, JJ.

MOSER, Presiding Judge.

Deloitte & Touche (Deloitte), a Delaware partnership, appeals from a judgment granting Chevron Chemical Company (Chevron) the sum of $1,646,106 in damages, plus double costs ¹ and disbursements of the action. The judgment from which Deloitte appeals is based upon an order entered January 18, 1991, (1) granting judgment notwithstanding the verdict on a claim of negligent misrepresentation, (2) changing the jury's answer to a special verdict question on a claim of intentional misrepresentation to favor Chevron rather than Deloitte, and (3) setting the dollar amount of damages to Chevron in the absence of a determination by the jury. We hold that because the trial court was incorrect in its initial refusal to grant summary judgment on negligent misrepresentation to Chevron, the subsequent judgment notwithstanding the verdict was correct. Further, we hold that because the amount of damages was contested at trial, the trial court may not determine the amount of damages. Therefore, the judgment of the trial court is affirmed in part and reversed in part, and remanded to the trial court with instructions for trial on the issue of damages.

The American Fuel & Supply Co., Inc. (AFSCo), a company that distributed motor oil, automotive supplies, hardware, and lawn and garden merchandise, hired Deloitte (then Touche Ross & Co.) in the capacity of independent auditor. Deloitte prepared an audit report, dated February 28, 1986, on the December 31, 1985, financial statements (the 1985 financials) of AFSCo. The 1985 financials contained and compared information based upon AFSCo's December 31, 1984 and 1985 balance statements, income statements, statements of changes in financial position and various other materials. One hundred printed copies of the 1985 financials were delivered to AFSCo, which in turn distributed them to its creditors. Chevron was the second largest trade creditor (unsecured) of AFSCo.

In early 1986, Deloitte discovered that, as a result of AFSCo's "rebilling" policy, the 1985 audit was in error. "Rebilling" was a procedure by which AFSCo allowed unsold products to remain in the possession of its distributors, although AFSCo records showed the products had been returned to AFSCo. Subsequently, AFSCo would send new (second) payment statements to those distributors for the previously distributed products already in their possession. As a result of the rebilling practice, Deloitte's printed financial statement contained an error of approximately $900,000. Because of this error, AFSCo was shown as making a profit for the year 1985, although in fact it was in deficit. Chevron relied upon the 1985 financials in its subsequent decisions to extend credit to AFSCo for the purchase of various products.

When Deloitte determined that AFSCo's rebilling practice had resulted in the generation of an incorrect audit report, it urged AFSCo to recall the report. When AFSCo refused, Deloitte indicated its intent to withdraw the 1985 audit and to so advise any entity known to be relying upon them. However, following a meeting at which AFSCo's counsel characterized Deloitte's contemplated notification as a breach of confidence and threatened legal action, Deloitte did not notify AFSCo's vendors of the error in the 1985 financials. Deloitte notified only one creditor, a secured lender who is not a party to this action, that its report on the 1985 financials had been withdrawn and should not be relied upon.

AFSCo filed for bankruptcy on April 23, 1987. On January 30, 1989, Chevron began this action alleging both negligence in the Deloitte audit of the 1985 financials and misrepresentation based upon Deloitte's failure to notify Chevron of Deloitte's withdrawal of its report. Larry Plotkin, AFSCo's president, sole shareholder and director, and guarantor of AFSCo's obligations to Chevron, filed for bankruptcy on October 14, 1989. On September 25, 1990, Chevron was granted partial summary judgment on the misrepresentation claims. ² However, on October 1, 1990, Chevron's motion for summary judgment on its claim of negligent misrepresentation was again denied. After a five-week trial, the jury found that (1) Deloitte was not negligent in the audit of the 1985 financials, ³ (2) Deloitte did not act with intent to deceive Chevron or induce its reliance on the 1985 financials, ⁴ (3) Deloitte was not negligent in failing to notify plaintiffs of the withdrawal of the audit report, ⁵ and (4) Chevron's damages were $715,000. ⁶

On motions after verdict, the trial court granted Chevron judgment notwithstanding the jury's verdict on negligent misrepresentation. The trial court also changed the jury's answer to the question on intentional misrepresentation, on the grounds that there was no credible evidence to support the jury's findings. In addition, the trial court held in the alternative that judgment would be granted as a sanction for the misconduct of Deloitte's counsel, pursuant to sections 805.03 and 804.12(2)(a), Stats. The trial court also found Chevron's damages to be over $1.6 million, disregarding the jury's finding of $715,000 for damages based upon "its reliance on AFSCO's 1985 financial statements" audited by Deloitte. ⁷

We first address the issue of negligent misrepresentation. Because we determine that the trial court's refusal to grant summary judgment for Chevron on the issue of negligent misrepresentation was an error corrected by its subsequent judgment, we need not address the issues of intentional misrepresentation or sanction for attorney misconduct. ⁸

A trial court may grant judgment notwithstanding the jury's verdict when "the verdict is proper but, for reasons evident in the record which bear upon matters not included in the verdict, the movant should have judgment." ⁹ A motion for judgment notwithstanding the verdict does not challenge whether there is sufficient evidence to support fact-finding, but whether the facts that have been found, as a matter of law, permit recovery. ¹⁰ We agree with the trial court's characterization of its post-verdict decision as a question of law when it stated:

The defendant has failed to identify any element of the negligent misrepresentation claim that remained for determination by the jury.... On the undisputed facts in this case as set forth in the Court's decision on September 25, 1990, Touche was negligent as a matter of law in failing to notify plaintiff of the withdrawal of their opinion.

This court reviews a question of law de novo, without deference to the decisions of the trial court. ¹¹ However, we are free to acknowledge a correct statement and application of the law by a trial court. At the summary judgment hearing prior to trial, the trial court correctly stated that under Wisconsin law, negligent misrepresentation has four elements:

(1) a representation of fact made by the defendant,

(2) the representation of fact is untrue,

(3) the defendant was negligent in making the representation of fact, and

(4) plaintiff's belief that the representation was true and reliance thereupon to plaintiff's damage. ¹²

We examine the materials submitted ¹³ to the trial court, as the trial court did, ¹⁴ and agree that sufficient facts were undisputed to establish that three of the above elements of negligent misrepresentation had occurred. At this point, the trial court characterized Deloitte's failure to notify plaintiffs of the withdrawal of the 1985 opinion as a "representation which was untrue and on which plaintiffs relied to their damage." However, the trial court held that the third element (that Deloitte was negligent in making the representation) remained a genuine issue of material fact, ¹⁵ stating "a genuine dispute of fact exists only with respect to defendant's failure of due care...." ¹⁶ At this point we disagree with the trial court.

In general, "accountants' liability to third parties should be determined under the accepted principles of Wisconsin negligence law." ¹⁷ In the context of negligent misrepresentation, Wisconsin law defines a failure to exercise ordinary care as either (1) "mak[ing] misrepresentation under circumstances in which a person of ordinary intelligence and prudence ought reasonably to foresee that such misrepresentation will subject the interests of another person to an unreasonable risk of damage," ¹⁸ or (2) failing to use "the care that is usually exercised by persons of ordinary intelligence and prudence engaged in a like kind of business or profession," a standard that is applied to a "person in a particular business or profession." ¹⁹

Under either standard, Deloitte's conduct falls short. At the summary judgment hearing, the trial court had in fact already held, using the foreseeability standard applied to "a person of ordinary intelligence and prudence," that:

Statements made by [Deloitte's] own employees indicate that [Deloitte] was aware that creditors were relying on these statements. On...