Chevron Chemical Co. v. Deloitte & Touche

• Decision Date: 30 March 1993
• Docket Number: No. 91-0470,91-0470
• Citation: 501 N.W.2d 15,176 Wis.2d 935
• Parties: CHEVRON CHEMICAL COMPANY, Plaintiff-Respondent-Petitioner-Cross Petitioner, First Brands Corporation, Plaintiff, v. DELOITTE & TOUCHE, Defendant-Appellant-Petitioner. . Oral Argument
• Court: Wisconsin Supreme Court

Page 15

501 N.W.2d 15

176 Wis.2d 935

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

No. 91-0470.

Supreme Court of Wisconsin.

Oral Argument March 30, 1993.

Decided June 16, 1993.

Amicus curiae brief was filed by L. William Staudenmaier and Cook & Franke, S.C., Milwaukee and Louis A. Craco, Russell G. Ryan and Willkie Farr & Gallagher, New York, NY, of counsel for the American Institute of Certified Public Accountants.

CECI, Justice.

This case comes before the court on Chevron Chemical Company's (Chevron) petition and cross-petition for review and Deloitte and Touche's (Deloitte) petition for review of a court of appeals decision, Chevron Chemical v. Deloitte & Touche, 168 Wis.2d 323, 483 N.W.2d 314 (Ct.App.1992). The court of appeals affirmed in part and reversed in part a judgment of the circuit court for Milwaukee County, Patricia D. McMahon, Circuit Judge. The issue is whether the entry of judgment as a sanction against Deloitte is appropriate. We conclude that it is and remand for a hearing on damages.

Deloitte performed an audit of the December 31, 1985, financial statements of American Fuel and Supply Company, Inc. (AFSCO). Subsequently, Deloitte discovered that, as a result of an AFSCO policy, the financial statements contained a material error of $900,000. The error caused AFSCO to appear to be making a profit when it was not. Deloitte did not notify Chevron, AFSCO's second largest trade creditor, that it had withdrawn its report on the 1985 financial statements. AFSCO later filed for bankruptcy.

Chevron sued Deloitte, alleging negligence in the performance of the audit. Chevron also alleged intentional and negligent misrepresentation.

The record in this case reveals aggravated, persistent, and contemptuous disregard of the orders and rules of the circuit court on the part of Deloitte. The unprofessional misconduct of counsel in using misleading, if not outright false, statements to the circuit court and in the presence of the jury is conduct that this court will not tolerate. The following examples are illustrative.

Four times during discovery, the circuit court imposed sanctions upon Deloitte. First, the circuit court granted Chevron's motion to compel discovery, awarding costs. The second instance involved Deloitte's failure to produce its audit manuals. The court imposed a third discovery sanction because Deloitte had brought a motion objecting to Chevron's editing videotape depositions. The circuit court denied the motion and ordered Deloitte to pay costs because Chevron had not requested to edit the tape. Finally, the court awarded Chevron costs for time counsel for Chevron had spent traveling to a deposition of an anticipated Deloitte rebuttal witness. Deloitte had attempted to cancel the deposition at a time when Chevron's counsel was already en route to the deposition.

At a pretrial hearing on October 8, 1990, Chevron requested that Mr. Nelson be brought to the trial as a live witness. Nelson was Deloitte's National Consultation Partner in New York City and the person who guided Deloitte's handling of the error in the financial statements. The court asked Deloitte's counsel whether Nelson would be brought to trial. Deloitte's counsel replied:

No. And, Your Honor, we understand he's going in for major surgery, I believe, tomorrow or the next day and will be in the hospital for at least six weeks. We couldn't use him even if we wanted to.

The trial was to start in a week and was expected to last five weeks.

On the first day of trial, the court granted Chevron's request that witnesses be sequestered. Chevron later became concerned that Mr. Mannix, Deloitte's deputy general counsel and a Deloitte witness, was violating the sequestration order by reading the daily transcripts. The court clarified its general sequestration order and then allowed Mannix to read daily trial transcripts because counsel for Deloitte had argued it needed to confer with Mannix to be able to properly put on a defense. When Mannix testified, he said he had not been reviewing transcripts.

At one point during the trial, Chevron designated what portions of Mr. Nelson's deposition it intended to read to the jury. During that deposition, Nelson often could not recall events regarding the case. The next day at trial, Deloitte said that Nelson would be able to come to the trial.

When Nelson testified, he was able to recall events that had escaped him at the deposition. Nelson said he had had conversations with Mr. Wagner in which he was reminded of what he had done and said. Wagner had previously testified for Deloitte and had listened to trial testimony as Deloitte's representative.

After Nelson testified, counsel for Chevron asked the court for permission to voir dire Nelson about his surgery and his availability to come to the trial. Chevron's counsel also pointed out to the court that it thought Nelson had been prepared through discussions with Wagner, in violation of the sequestration order.

Counsel for Deloitte explained that they had been advised that Nelson would be in the hospital for six weeks. Nelson had in fact had hernia surgery. Responding to the court's questions, Nelson testified that he had entered the hospital on the afternoon of October 4 and had been released the morning of October 6. He said his doctor had released him to go back to work on October 25 and had "suggested possibly not even traveling." The court then said it did not like games being played and "the games are over with." The court continued,

Then I get a representation that Mr. Nelson's going to be in the hospital for six weeks. That's a serious representation. And it seems to me before you make that representation you ought to know it's true.... [T]his has been ... an extraordinary day, and I didn't expect another extraordinary thing. I'm just real concerned about that.

The court then addressed whether the sequestration order had been violated. Mr. Nelson had not been exempted from the sequestration order, and the court was concerned because Nelson testified he had talked to Mr. Wagner within the last three days and that Wagner had reminded him of events. The judge said she saw Mr. Mannix looking at her "funny." The court asked Deloitte's counsel if he thought his conduct regarding the sequestration order had been appropriate. Deloitte's counsel admitted that perhaps it had not been. Then, the court said:

And I don't think it's funny.... I don't think it's funny at all.

I think this is very serious.... You have a sequestration order.... There should be no discussions whatsoever....

And to say, 'He just reminded me of what I didn't remember,' how do you separate that from what Mr. Wagner recalls that he testified to on the stand? I don't know how.... That's why I say, this has been an extraordinary day.... I couldn't believe that I heard him say that he's even discussing all those notes and going over them with Mr. Wagner. That's not appropriate.... You just go ahead and ignore the order of this Court.

At another point in the trial, counsel for Deloitte referred to an exhibit, saying it was an article from the Wall Street Journal. Chevron objected and requested a jury instruction that there was no evidence of a Wall Street Journal article. A computer search failed to find such a Wall Street Journal article. Mr. Knox, Chevron's credit manager, later testified that he read the Wall Street Journal to keep track of news events regarding Chevron's significant debtors.

At still another point, counsel for Deloitte was examining Mr. Knox about an exhibit. When he came to a portion of the exhibit that had been redacted for reasons of attorney-client privilege, Deloitte's counsel said, "Now, there's a missing section here. In the original letter there was some content in there regarding AFSCO, wasn't there?" Chevron objected. A sidebar conference was held. The court instructed the jury that a portion of the document was missing because it related to a confidential communication with counsel.

Twice, Deloitte's counsel addressed Chevron's counsel in front of the jury and implied that Chevron had hidden documents. The first time was during the testimony of Mr. Knox. Knox had testified that he believed he had asked for an interim financial statement from AFSCO. Knox said he did not know whether he had made the request in writing. At that point, Deloitte's counsel turned to Chevron's counsel and said:

If there is such a letter, we would like such a letter, counsel. We have asked for it. I see no such letter.

Chevron's counsel objected, and the court admonished Deloitte's counsel: "The questions are directed to the witness."

The second time Deloitte implied Chevron had hidden documents was during the testimony of Mr. Smith, another Chevron employee. Smith testified about a document, saying the one he had been shown was a copy, and the original had been sent to his supervisor. Deloitte's counsel responded by saying, "It's the only one we have received.... If there is another copy, counsel we want it right now. We have never gotten another copy. This is the only one that we know exists."

After the jury left, Chevron objected to Deloitte's conduct. Deloitte's counsel explained his actions, saying in part, "I thought unless I ask that question, made that comment in front of the jury, then the jury is under the impression that we have been holding back the documents rather than plaintiffs' counsel." The court again admonished Deloitte's counsel, this time more severely, saying it thought it had warned Deloitte's counsel about that type of conduct in front of the jury before.

The next morning, Chevron moved for entry of judgment as a sanction. Chevron had reviewed the transcript of the previous day and said it felt the transcript did not adequately capture what had happened. According to Chevron, before...