Cordial v. Ernst & Young

• Decision Date: 13 December 1996
• Docket Number: No. 23088,23088
• Parties: Betty CORDIAL, Plaintiff and Third Party Defendant Below, Appellant, v. ERNST & YOUNG, et al., Defendants and Third-Party Plaintiffs Below, Appellee, v. Hanley CLARK, Third-Party Defendant Below, Appellee.
• Court: West Virginia Supreme Court

Page 248

483 S.E.2d 248

199 W.Va. 119

Betty CORDIAL, Plaintiff and Third Party Defendant Below, Appellant, v. ERNST & YOUNG, et al., Defendants and Third-Party Plaintiffs Below, Appellee, v. Hanley CLARK, Third-Party Defendant Below, Appellee.

No. 23088.

Supreme Court of Appeals of West Virginia.

Submitted Jan. 16, 1996.

Decided Dec. 13, 1996.

[199 W.Va. 121] Syllabus by the Court

1. The Insurance Commissioner, while acting as receiver for an insurer, acts as the representative of interested parties such as the defunct insurer, its policyholders, creditors, shareholders, and other affected members of the public, and any special deputy insurance commissioner appointed by the Commissioner for the purposes of carrying out his duties as receiver under W.Va.Code § 33-27-10, has standing to bring an action to vindicate the rights of such interested parties.

2. " 'The formulation of jury instructions is within the broad discretion of a circuit court, and a circuit court's giving of an instruction is reviewed under an abuse of discretion standard. A verdict should not be disturbed based on the formulation of the language of the jury instructions so long as the instructions given as a whole are accurate and fair to both parties.' Syl. pt. 6, Tennant v. Marion Health Care Foundation, Inc., 194 W.Va. 97, 459 S.E.2d 374 (1995)." Syllabus point 6, Voelker v. Frederick Business Properties Co., 195 W.Va. 246, 465 S.E.2d 246 (1995).

3. " ' "The essential elements in an action for fraud are: (1) that the act claimed to be fraudulent was the act of the defendant or induced by him; (2) that it was material and false; that plaintiff relied on it and was justified under the circumstances in relying upon it; and (3) that he was damaged because he relied on it." Syl. Pt. 1, Lengyel v. Lint, 167 W.Va. 272, 280 S.E.2d 66 (1981).' Syllabus Point 2, Muzelak v. King Chevrolet, Inc., 179 W.Va. 340, 368 S.E.2d 710 (1988)." Syllabus point 2, Bowling v. Ansted Chrysler-Plymouth-Dodge, 188 W.Va. 468, 425 S.E.2d 144 (1992).

4. "Where one person induces another to enter into a contract by false representations, which he is in a situation to know, and which it is his duty to know, are untrue, he, in contemplation of law, does know the statements to be untrue, and, consequently, they are held to be fraudulent, and the person injured has a remedy for the loss sustained by an action for damages. It is not indispensable to a recovery that the defendant actually knew them to be false." Syllabus point 1, Horton v. Tyree, 104 W.Va. 238, 139 S.E. 737 (1927).

5. "Though a purchaser may rely upon particular and positive representations of a seller, yet if he undertakes to inform himself from other sources as to matters easily ascertainable, by personal investigation, and the defendant has done nothing to prevent full inquiry, he will be deemed to have relied upon his own investigation and not upon the representations of the seller." Syllabus point 5, Jones v. McComas, 92 W.Va. 596, 115 S.E. 456 (1922).

6. "It is not necessary that the fraudulent representations complained of should be the sole consideration or inducement moving the plaintiff. If the representations contributed to the formation of the conclusion in the plaintiff's mind, that is enough, although a written agreement, which was executed at the time of the purchase, to take plaintiff's stock at the end of 90 days at a certain price, also operated in bringing him to the same determination." Syllabus point 3, Horton v. Tyree, 104 W.Va. 238, 139 S.E. 737 (1927).

Rudolph L. DiTrapano, Joshua I. Barrett, Debra L. Hamilton, Sean P. McGinley, DiTrapano & Jackson, Charleston, for Plaintiff and Third-Party Defendant Below, Appellant.

John H. Tinney, Carl L. Fletcher, Jr., Spilman, Thomas & Battle, Charleston, James Hamilton, Michael L. Spafford, Swidler & Berlin, Washington, DC, Kathryn A. Oberly, Thomas L. Riesenberg, Ernst & Young, LLP, Washington, DC, for Defendants and Third-Party Plaintiffs Below, Appellees Ernst & Young, et al.

ALBRIGHT, Justice.

Appellant and plaintiff below, Betty Cordial, Deputy Receiver of Blue Cross and Blue Shield of West Virginia, appeals ¹ a jury verdict entered in favor of Ernst & Young in an action for fraud, breach of contract, and negligent misrepresentation. We originally granted this appeal on the sole issue of whether the circuit court erred in giving Defendant's Instruction No. 73. Ms. Cordial complains that the instruction incorrectly stated the law as it related to the independent investigation exception to fraud. After briefs and oral argument, this Court broadened its grant of appeal to include all issues and requested supplemental briefs. We find reversible error, and, therefore, we reverse and remand this action for a new trial.

In July, 1987, the accounting firm of Ernst & Young ("E & Y") ² was hired as an external auditor by Blue Cross and Blue Shield. ³ E & Y was to serve in this capacity during 1987, 1988, and 1989. E & Y's duties as external auditor included the preparation of audits performed according to "Generally Accepted Accounting Principles." This type of audit is commonly referred to a GAAP audit.

The provisions of W.Va.Code §§ 33-2-9 (1980) and 33-24-4 (1981) required the West Virginia Commissioner of Insurance "or his accredited examiners" to visit Blue Cross at least every four years and "thoroughly examine its financial condition and methods of doing business". The Commissioner was authorized by the statutes to appoint personnel who were not his employees to conduct such examinations, presumably as "accredited examiners". Appointed personnel were to be compensated by the Commissioner, and the insurer being examined was obligated to reimburse the State treasury for such compensation. Shortly after E & Y was hired by Blue Cross, E & Y was contacted by the Insurance Commissioner's office. The Insurance Hanley Clark, who is the current Insurance Commissioner, was the Deputy Insurance Commissioner at the time the discussions with E & Y were initiated. In the trial below, he testified that the Department decided to obtain an examiner outside the Insurance Department to do the statutory examination, because the Blue Cross system was very complex. He said that Blue Cross was the largest writer of health insurance in West Virginia, and none of the examiners on the Insurance Department's staff at that time had been the chief examiner in charge of an examination of Blue Cross. Mr. Clark stated that the Insurance Department was interested in engaging E & Y to perform the audit because the Insurance Department was already familiar with E & Y and some of its representatives, having worked with them on another project. In addition, E & Y had been recommended by the Illinois Insurance Department.

[199 W.Va. 123] Department was interested in retaining E & Y's services to perform a W.Va.Code § 33-2-9 audit (the statutory audit) of Blue Cross and Blue Shield required for the year 1987, the last such audit of Blue Cross and Blue Shield having been performed in 1983. This type of audit has been, and is, commonly referred to as a "Statutory Accounting Principles" audit or SAP audit. Specific requirements for SAP audits vary from state to state but are controlled in West Virginia by the statutory provisions mentioned above and by Insurance Department regulations.

Commissioner Clark further testified that the West Virginia Insurance Department was aware that E & Y had already been hired by Blue Cross; however, the Insurance Department wanted a highly qualified accounting firm to handle the examination, and E & Y was the "number one accounting firm in the United States if not the world." Mr. Clark said at one point that the Insurance Department had difficulty in the past with its examinations being well received by Blue Cross. He said that E & Y was acceptable to Blue Cross, and E & Y was in a position to perform the examination in a more time effective and cost effective manner because of its familiarity with Blue Cross' finances.

On December 3, 1987, representatives from the Insurance Department, Blue Cross, and E & Y met to discuss the prospect of E & Y conducting the SAP audit. The record indicates that during the meeting there was a discussion regarding whether E & Y would be able to perform an unbiased and independent analysis of Blue Cross' financial condition, and E & Y made assurances that they would be able to perform an objective audit. Thereafter, E & Y was selected to perform the SAP audit. A letter memorandum dated January 6, 1988, on Ernst and Whinney stationery and addressed to the president of Blue Cross and Blue Shield, discloses the selection of E & Y.

The letter memorandum, introduced below as Plaintiff's Exhibit 13, recites that E & Y had been designated by Blue Cross to "act as independent certified public accountants to examine the financial statements of Blue Cross ... in accordance with generally accepted auditing standards". The letter then sets forth certain advice "[i]n connection with a request of the West Virginia Department of Insurance to have a statutory examination performed". Among the points included in that advice by E & Y was that E & Y was independent of Blue Cross and Blue Shield, that they were "aware of the provisions of the insurance statutes and regulations" of West Virginia "related to accounting and financial matters", that they would conduct the audit in accordance with generally accepted auditing standards and express their opinion "in conformity with accounting practices prescribed or otherwise permitted by the" Insurance Department, that "[i]n performance of this examination" the Insurance Department might "request that we perform additional agreed-upon procedures beyond those which are necessary for expression of an opinion on the financial statements", and that any "[s]uch procedures would be designed by the Department to accommodate its specific needs in fulfilling the requirements of a...