Gammel v. Ernst & Ernst, 36433

• Decision Date: 15 July 1955
• Docket Number: No. 36433,36433
• Citation: 72 N.W.2d 364,54 A.L.R.2d 316,245 Minn. 249
• Parties: , 54 A.L.R.2d 316 Hans N. GAMMEL, Appellant, v. ERNST & ERNST et al., Respondents.
• Court: Minnesota Supreme Court

Page 364

72 N.W.2d 364

245 Minn. 249, 54 A.L.R.2d 316

Hans N. GAMMEL, Appellant, v. ERNST & ERNST et al., Respondents.

No. 36433.

Supreme Court of Minnesota.

July 15, 1955.

Syllabus by the Court.

1. Ordinarily the standard of care applicable to the conduct of auditors or public accountants is the same as that applied to lawyers, doctors, architects, engineers, and others furnishing skilled services for compensation, and that standard requires reasonable care and competence therein.

2--3. A person selected to make a binding Judicial determination upon a matter in dispute between parties performs the functions of an arbitrator or quasi arbitrator, and his actions in making the determination of the issue presented are clothed with judicial immunity.

4. In the absence of an agreement requiring that a person exercise such independent judicial authority in determining disputed matters, he is not immune from charges of negligence in the performance of his work and must furnish it with the same skill and care exercised by an average person engaged in a like trade or profession.

5. Where contract between plaintiff and corporation provided that defendants be selected for specific purpose of making examination and audit of books of such corporation to ascertain its earnings for year 1944, and where oral contract subsequently made by them with defendants was to the same effect, Held that defendants did not thereby acquire status of arbitrators or quasi arbitrators so as to create judicial immunity for their actions in the performance of such services merely because their report was to be binding upon the parties employing them.

6. Where plaintiff has selected forum and presented his proof on an issue, and a judgment is rendered thereon by such forum, he is bound thereby in any subsequent action in which same issue is presented. Where issue of fraud as to defendants' conduct was previously litigated in federal court action between plaintiff and corporation for whom defendants performed their services, Held such issue cannot be relitigated in present action even though defendants were not parties to prior action.

Gerhard J. Bundlie, Merlyn C. Green, Bundlie, Kelley & Maun, St. Paul, of counsel, for appellant.

Dorsey, Colman, Barker, Scott & Barber, Joseph H. Colman, Henry Halladay, and Horace Hitch, Minneapolis, for respondents.

THOMAS GALLAGHER, Justice.

Action by Hans N. Gammel against defendants individually and as a copartnership known as Ernst & Ernst and engaged as public accountants for damages resulting to him from their alleged negligence and fraud in the examination and audit of the books and records of Sanitary Farm Dairies, Inc., for the year 1944. Defendants' motion for dismissal at the close of plaintiff's case was granted on the grounds (1) that the evidence would not support a finding that defendants were guilty of fraud; and (2) that while the evidence might support a finding of negligence nevertheless, because defendants were acting as quasi arbitrators in making the audit, they were immune from liability therefor. This is an appeal from an order denying plaintiff's motion for a new trial.

The facts are as follows: On June 6, 1929, plaintiff as president and principal stockholder of Midway Creamery Company entered into an agreement individually and on behalf of said corporation to merge the latter with Sanitary Farm Dairies, Inc., a Minnesota corporation, under a new Delaware corporation to be formed and also known as Sanitary Farm Dairies, Inc., in which plaintiff was to hold 437 shares of common stock. As a part of the merger agreement the new corporation agreed, without limitation as to time, to purchase plaintiff's stock:

'* * * at a sum of money per share equal to twelve times the net earnings per share of said common stock for the preceding twelve months; * * * In the event of inability of the parties to agree upon earnings * * * for said preceding twelve months an audit shall be made by an independent auditor, the cost of which shall be borne by the parties equally, and the earnings determined by such audit shall be controlling.'

On January 5, 1945, plaintiff notified the corporation that he desired to sell his shares of stock to it in accordance with the agreement and designated the calendar year 1944 as the 'preceding twelve months' period for determination of earnings upon which the sale price was to be based. Thereafter, an audit report for such year was submitted showing total net earnings after taxes of $97,707.68. Because of plaintiff's conviction that this was erroneous, he notified the corporation that he would not accept the report as the basis for the computation of the sales price on his stock.

Subsequently, on November 14, 1945, a written agreement was executed by the plaintiff and by Sanitary Farm Dairies, Inc., which provided that:

'* * * IT IS AGREED by and between the parties hereto that the firm of Ernst & Ernst, accountants of the City of Saint Paul, Minnesota, Shall be retained and hired for the purpose of making an audit of all the books and records of the second party, or such part thereof as may be requested by either party For the purpose of ascertaining and determining the net earnings per share of the common stock of the second party for the twelve (12) months of the calendar year 1944.

'IT IS FURTHER UNDERSTOOD AND AGREED that the cost of making such audit shall be borne equally by the parties hereto, and that, when such audit has been made, it shall be controlling upon the net earnings per share of the second party for the year 1944 and that thereupon the agreement of June 6, 1929 shall be carried out by the parties.' (Italics supplied.)

The defendants were not a party to this agreement. Subsequently, by oral agreement they were employed by the parties thereto to perform the audit described. Before its commencement, a meeting was held by all parties at which it was discussed and its purpose made known to defendants and at which they were advised as to certain items in the prior audit which plaintiff wished checked with great particularity. In June of 1946 this audit was completed and a report thereon submitted to the parties disclosing earnings for the year 1944 of $180,602.90 before taxes.

On July 10, 1946, plaintiff's counsel wrote defendants and Sanitary Farm Dairies, Inc., repudiating this audit, and advising defendants that plaintiff would hold them accountable for any loss resulting to him because of the manner in which the audit was made in the event it was controlling under his stock sales agreement with the corporation. On August 6, 1946, he commenced action against the corporation in the United States district court, therein seeking determination of the correct earnings of the corporation for the year 1944 and contending that he was not bound by defendants' audit with respect thereto because of bias, gross mistake, and fraud in connection therewith.

In this action a separate audit of the corporation books was made by Hines & Wilkerson, certified public accountants, who reported corporate earnings for the year in question amounting to $220,739.23 before taxes. The court thereupon referred the action to a special master, who submitted findings based on such audit and recommended judgment in favor of the corporation on all issues. The court refused to adopt the master's report and substituted its own findings and conclusions and ordered judgment that the audit of Ernst & Ernst was tainted with fraud and bias and that the actual earnings of the corporation for the year in question amounted to $227,475.15 before taxes.

On appeal, the United States court of appeals reversed this determination, Sanitary Farm Dairies, Inc., v. Gammel, 8 Cir., 195 F.2d 106, 118, on the ground that the master's findings could not be set aside or held clearly erroneous 'merely because of a difference in personal persuasion on the evidence or a dissatisfaction with the result reached.' Accordingly, plaintiff was held bound to dispose of his stock on the basis of the audit submitted by defendants and subsequently brought this action against them for damages claimed to have been sustained in the sale because of their negligence and fraud therein.

On appeal plaintiff asserts that defendants are not quasi arbitrators and as such immune from liability for damages resulting from their negligence or fraud in making the audit and report; that they were engaged under ordinary employment contract to perform standard accounting and auditing services; and that, by virtue of the principles ordinarily applicable to such contracts, the duty rested upon them to perform such services with reasonable care and in good faith. Defendants reassert their claim of immunity as quasi arbitrators and contend that the issue of fraud is Res judicata, since it was tried and determined adversely to plaintiff in the latter's action in the United States district court.

1. Ordinarily, the standards of reasonable care which apply to the conduct of auditors or public accountants are the same as those applied to lawyers, doctors, architects, engineers, and other professional men engaged in furnishing skilled services for compensation. Maryland Casualty Co. v. Cook, D.C.E.D.Mich., 35 F.Supp. 160; City of East Grand Forks v. Steele, 121 Minn. 296, 141 N.W. 181, 45 L.R.A.,N.S., 205, Ann.Cas. 1914C, 720. The imposition of such standards does not leave them without adequate protection since their liability in damages arises only as the result of methods or practices in the performance of their work which indicate lack of reasonable care, fraud, or bad faith and since they are entitled to a wide discretion in the selection of such methods and in determining which of several practices or principles is most sound or best suited for the work undertaken by them. Johnson v. Colp, 211 Minn. 245, 300 N.W. 791; Sjobeck v. Leach, 213 Minn. 360, 6 N.W.2d 819. In the instant case under these standards, unless ...