Halla Nursery, Inc. v. Baumann-Furrie & Co.

• Decision Date: 11 May 1990
• Docket Number: No. C9-88-2119,BAUMANN-FURRIE,C9-88-2119
• Citation: 454 N.W.2d 905
• Parties: HALLA NURSERY, INC., Respondent, v.& CO., et al., Petitioners, Appellants.
• Court: Minnesota Supreme Court

Page 905

454 N.W.2d 905

58 USLW 2705

HALLA NURSERY, INC., Respondent, v. BAUMANN-FURRIE & CO., et al., Petitioners, Appellants.

No. C9-88-2119.

Supreme Court of Minnesota.

May 11, 1990.

Syllabus by the Court

1. The trial court did not err in applying the principles of comparative fault in this action by a client against an accountant for negligent failure to discover embezzlements in the client's business.

2. The trial court erred in concluding that its failure to instruct the jury on the effects of comparative fault was a fundamental error of law requiring a new trial.

Charles E. Lundberg, L.H. May, Jr., Bassford, Heckt, Lockhart, Truesdell & Briggs, P.A., Minneapolis, for appellants.

Keith A. Hanson, Fetterly & Gordon, P.A., Minneapolis, for respondent.

Heard, considered and decided by the court en banc with oral argument.

WAHL, Justice.

This appeal arises out of an accountant malpractice action brought by respondent Halla Nursery, Inc., against appellant Baumann-Furrie & Co., an accounting firm, alleging negligent failure of the accountant to discover defalcations in Halla's business. We accepted review, on petition of Baumann-Furrie, of the decision of the court of appeals which held that in an accountant malpractice action for negligent failure to detect embezzlements within the client's business, the client's own contributory negligence in the operation of its business may be raised as a defense only if the client's negligence contributed to the accountant's failure to perform the accounting contract. Baumann-Furrie also seeks review of the court of appeals' holding that the district court did not abuse its discretion in granting Halla a new trial because of the failure of the court to instruct the jury on the effects of its answers to the comparative fault question. We reverse.

Defendants Baumann-Furrie & Co., and Allen L. Furrie, licensed public accountants, provided accounting services to plaintiff, Halla Nursery, Inc., a retail nursery, during the years 1983 through 1985. During this time, Halla's bookkeeper embezzled some $135,000.00 from the company. In 1986, Halla brought this malpractice action against Baumann-Furrie, alleging negligent performance of accounting services in failing to detect the embezzlement activities. Halla also alleged breach of contract, but the case was tried on the theory of negligence. Baumann-Furrie denied liability and raised the affirmative defense of Halla's contributory negligence for, among other things, failing to put in place internal financial controls to protect the company from embezzlement.

On the first day of trial, Halla brought a motion in limine to exclude all evidence of Halla's negligence which did not directly affect Baumann-Furrie's ability to perform the contract and report the truth. The trial court denied this motion and, during the three week trial, admitted evidence of Halla's day-to-day business conduct and practices. The trial court rejected Halla's proposed jury instruction attempting to limit Halla's contributory negligence to any acts or conduct which prevented defendants from detecting the embezzlement. Special verdict questions required the jury to determine whether Baumann-Furrie was negligent in failing to detect the embezzlement while it performed its accounting services for plaintiff and, if so, whether that negligence was a direct cause of damages to plaintiff; whether Halla Nursery was negligent in failing to detect the embezzlement and, if so, whether that negligence was a direct cause of damage to the plaintiff. The standard of care to be applied to Baumann-Furrie was the use of reasonable care in applying that degree of skill and learning which is normally possessed and used by public accountants in good standing, in a similar practice, and under like circumstances. The standard of care to be applied to Halla was the use of reasonable care in the everyday management and operation of the business. The jury was then instructed, if it answered "Yes" to the four preceding questions, to compare the negligence of the two parties and attribute a percentage of fault to each. The trial court cautioned counsel, in chambers, not to comment on the effect of comparative fault, and did not inform the jury, as required by Minn.R.Civ.P. 49.01(2), of the effect of its answers to the comparative fault questions. Halla did not request the Rule 49.01(2) instruction and neither party objected to its omission.

The jury found Halla 80% at fault, and Baumann-Furrie 20% at fault, and assessed damages of $309,761.00. The trial court ordered judgment of no recovery. Halla moved for judgment notwithstanding the verdict or for a new trial. The trial court granted a new trial on the issue of liability, because it determined that it erred in failing to instruct the jury on the effect of the jury's answers to the comparative fault questions, but did so with reluctance because Halla's negligence was so great. Baumann-Furrie appealed the order for a new trial. Halla filed a notice of review claiming the district court erred by allowing the jury to consider its alleged negligence in apportioning fault in an accountant malpractice action, and by admitting evidence of collateral source recoveries. Halla did not order a transcript. There is neither a transcript nor an agreed-upon stipulation of facts on which to decide the case.

The court of appeals held that the trial court had properly granted a new trial and that at the new trial evidence of Halla's contributory negligence could be raised as a defense only if that negligence directly interfered with Baumann-Furrie's ability to perform the contract in accordance with generally accepted accounting practices. The court of appeals refused to consider the collateral source recovery issue in the absence of a transcript. Halla Nursery v. Baumann Furrie & Co., 438 N.W.2d 400, 403, 404 (Minn.App.1989). We granted review to consider the issues regarding comparative fault and the granting of a new trial. The collateral source recovery issue is not before us.

I.

The primary issue raised by the appeal is alternately phrased by the parties as whether comparative fault, pursuant to Minn.Stat. Sec. 604.01 (1988), applies in an accountant malpractice action alleging negligent failure to discover embezzlement in the client's business or whether the contributory negligence of the client may be raised as a defense only where that negligence has contributed to the accountant's failure to perform the contract and report the truth. More succinctly stated, the issue is not whether comparative fault applies, as in light of our cases it does, but whether, in the context of an accountant malpractice action, the scope of the principles of comparative fault should be limited in their application.

The case was tried as a negligence action. The trial court denied Halla's motion in limine and allowed the jury to determine under Minnesota's comparative fault statute, Minn.Stat. Sec. 604.01, whether Halla was negligent in the day-to-day management and operation of its business, and whether that negligence was a direct cause of its damages, then to compare Halla's negligence with that of Baumann-Furrie. The court of appeals reversed, adopting instead the rule of Lincoln Grain, Inc. v. Coopers & Lybrand, 216 Neb. 433, 442, 345 N.W.2d 300, 307 (1984), which held that the contributory negligence of a client in an accountant malpractice case is a defense only where it had contributed to the accountant's failure to perform the contract and report the truth. Halla Nursery, 438 N.W.2d at 402-03.

The Lincoln Grain rule had its genesis in National Surety Corp. v. Lybrand, 256 A.D. 226, 236, 9 N.Y.S.2d 554, 563 (1939), which in turn adopted the principle enunciated in the dissent in Craig v. Anyon, 212 A.D. 55, 67-68, 208 N.Y.S. 259, 269-70 (1925), aff'd mem., 242 N.Y. 569, 152 N.E. 431 (1926). Craig and National Surety were the seminal cases in the developing discussion, by the courts and commentators, of the question of contributory negligence as an affirmative defense to an accountant malpractice action. Craig was the first case to discuss the principle in any depth.

In Craig, the plaintiffs were stockbrokers and commodities brokers who hired the defendant accounting firm to audit their books. After approximately five years of services, during which the accounting firm regularly reported that the company was profitable and the books were proper, the person in charge of plaintiff's commodities department confessed to embezzling over $1,250,000. Plaintiffs sued their accountants alleging breach of contract and negligence. The jury found the accountants liable, and determined the damages to be $1,177,805.26. The appellate court reversed, stating that while it was clear that the accountants were negligent the plaintiffs were not blameless for their losses.

The plaintiffs, in effect, contend that defendants are chargeable with negligence because of failure to detect Moore's wrongdoing, wholly overlooking the fact that although they were closely affiliated with Moore, who was constantly under their supervision, they were negligent in failing properly to supervise his acts or to learn the true condition of their own business and to detect his wrongdoing.

Id. at 67, 212 N.Y.S. at 269. In Craig, Justice Clark dissented, reasoning:

[t]he contract of audit was not one merely to discover if inadvertent clerical errors had been made in the bookkeeping, but was one of protection of the plaintiffs' firm from their own failure to find any error in their books of account. * * * [T]he defendants' work in pursuance of the contract, owing to the manner in which it was performed, failed to save plaintiffs from the consequences of such failure and neglect, which was the very subject of the contract.

Id. at 67-68, 212 N.Y.S. at 269-70.

The National Surety court followed Justice Clark's dissent. In National Surety, during an audit, the accountants...