Harbor Ins. Co. v. Essman

• Decision Date: 05 November 1990
• Docket Number: No. 89-2647,89-2647
• Citation: 918 F.2d 734
• Parties: HARBOR INSURANCE COMPANY, Appellant, v. Norman M. ESSMAN; Stanley E. Feldman; Richard S. Glassman; Fred S. Flegel; Richard M. Flom; Marshall N. Myers, all of the above named defendants as representatives of the partners of Alexander, Grant & Co. now known as Grant, Thornton, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 734

918 F.2d 734

HARBOR INSURANCE COMPANY, Appellant, v. Norman M. ESSMAN; Stanley E. Feldman; Richard S. Glassman Fred S. Flegel; Richard M. Flom; Marshall N. Myers, all of the above named defendants as representatives of the partners of Alexander, Grant & Co. now known as Grant Thornton, Appellees.

No. 89-2647.

United States Court of Appeals Eighth Circuit.

Submitted April 12, 1990.

Decided Nov. 5, 1990.

Linda E. Unger, Chicago, Ill., for appellant.

Stanley Parzen, Chicago, Ill., for appellees.

Before JOHN R. GIBSON, Circuit Judge, HENLEY, Senior Circuit Judge, and BOWMAN, Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

Harbor Insurance Company issued a Directors and Officers insurance policy (D & O policy) to Tiffany Industries, Inc. and ultimately paid a series of claims brought against Tiffany's officers and directors. Thereafter Harbor sued the representatives of Alexander Grant & Company, an accounting firm, claiming that materially false and misleading financial statements prepared by Grant for Tiffany led to Harbor's expenditure of sums for settlement of claims and attorneys' fees. The district court ¹ dismissed claims for negligent and deliberate misrepresentation on the ground that they failed to state claims under Missouri law, and dismissed conspiracy and subrogation claims because they were barred by the statute of limitations. On appeal, Harbor argues that the complaint adequately pleaded claims for negligent and deliberate misrepresentation under Missouri law, and that the statute of limitations did not bar the other claims, primarily because of provisions in a stipulation between the parties regarding the dismissal of an earlier action. We affirm the judgment of the district court.

Tiffany and its officers and directors became enmeshed in substantial litigation, including a suit brought by the Securities Exchange Commission. The D & O policy Harbor had issued was in effect for the period of time involved in the litigation. The claims were ultimately settled or dismissed and thereafter, litigation between Tiffany, its officers and directors, and Harbor commenced.

Tiffany sued Harbor in Missouri state court in January 1981 to recover $435,000 that Tiffany had expended in defense of the SEC lawsuit. Harbor removed the action to the United States District Court for the Western District of Missouri and filed a third party complaint seeking indemnity from Grant and Sheldon Enger, the former managing partner of Grant's St. Louis office. The case was transferred to the Eastern District of Missouri at Harbor's request in 1983. The district court granted a motion to dismiss Harbor's third party complaint against Grant, because as a partnership it was not an entity capable of being sued under Missouri law. The district court also ruled that Harbor had not stated a claim against Enger for indemnification or contribution, but found that Harbor "may have a distinct cause of action against Enger on the theory of negligent preparation of a financial statement." Tiffany Indus., Inc. v. Harbor Ins. Co., 536 F.Supp. 432, 434 (W.D.Mo.1982). Relying upon Aluma Kraft Mfg. Co. v. Elmer Fox & Co., 493 S.W.2d 378 (Mo.Ct.App.1973), the district court found that Enger could be held liable if Harbor proved that (1) Enger knew the financial statements would be utilized by Harbor; (2) knew the statements were being prepared for the purpose of persuading Harbor to issue an insurance policy; (3) knew that Harbor would rely on the statements; and (4) that the statements were false. Tiffany Indus., Inc., 536 F.Supp. at 434. Tiffany settled the claim it asserted against Harbor in this action, and Harbor's claim against Enger was dismissed without prejudice.

In October 1982, Harbor filed an independent action against Grant that was consolidated with other pending Tiffany cases in the Eastern District of Missouri. Harbor named nine current or former partners of Grant's St. Louis office as representatives of the partnership as a whole. The complaint alleged negligent and fraudulent misrepresentation, and sought actual and punitive damages. The Grant partners filed a motion to dismiss, arguing that as a matter of law, they could not be held liable to Harbor because they did not have specific knowledge of Harbor's use of the financial statements, and because Harbor was not within the limited class of persons that might be expected to rely on the statements. The district court denied the motion, stating that in a tort action, the essential question is whether the defendant knew or should have known of the alleged injury. The court found that because Harbor alleged that the partners " 'knew or should have known' that the financial statements they prepared, 'would be distributed to and/or be available to plaintiff as an entity commercially dealing and contracting with Tiffany Industries,' " the complaint sufficiently stated a claim that Harbor was among those who might have foreseeably relied on Grant's audits.

In April 1986, however, Harbor and the Grant partners agreed to dismiss the action without prejudice. The stipulation to dismiss contained a provision that the court's decision with respect to the Grant partners' earlier motion to dismiss would "have the same effect in any subsequently filed action as it had in the Harbor Insurance action." It is evident from the stipulation that by the "Harbor Insurance action" the parties were referring to the action being voluntarily dismissed. The parties further agreed that with respect to the refiling of any claims raised by Harbor in this action, Grant would not raise a statute of limitations defense unless the defense would have been available in the "Harbor Insurance action" at the time it was commenced. ² There were two conditions to this provision: (1) that it applied to claims actually made by Harbor in the "Harbor Insurance action," and (2) that it applied only to the extent that Harbor commenced a new lawsuit within 60 days after the final resolution of Tiffany's claims against Harbor under the D & O policy.

In September 1987, Tiffany filed a second lawsuit against Harbor on the theory that Harbor had acted unreasonably in failing to resolve the question of Tiffany's D & O insurance coverage. This case was settled in January 1988 for $2,000,000 and the lawsuit was dismissed.

The instant action against the Grant partners was then filed on April 7, 1988, less than sixty days after Tiffany's final claim against Harbor was resolved, with Count I alleging negligent and intentional misrepresentation and Count II alleging conspiracy. The Grant partners moved to dismiss and a hearing was held by the district court. The Grant partners argued once more that under Missouri law a claim against an accountant for misrepresentation requires an allegation that the plaintiff was a member of a limited group of persons for whose benefit and guidance the accountant intended to supply the information. By contrast, Harbor's complaint alleged that the financial statements prepared by Grant were "distributed to shareholders and supplied to creditors and others who had the right to rely upon them"; that "Grant held itself out to Harbor and others"; and that the financial statements were "distributed to shareholders, creditors or Harbor," the opposite of a limited group. The partners further argued that the complaint did not allege anything to show that they knew of Harbor's specific reliance on the financial statements. Referring to the district court's earlier refusal to dismiss in the "Harbor Insurance action," the partners argued that foreseeability of reliance is not enough to support liability.

The district court orally granted the motion to dismiss Count II (the conspiracy count) as time-barred, and took the motion to dismiss Count I under advisement. Harbor subsequently filed an amended complaint realleging Counts I and II of the original complaint, and adding Count III, a subrogation claim. Oral argument was again scheduled on a motion to dismiss. The court orally granted the motion to dismiss Count III as time-barred, and once more took under advisement the motion to dismiss Count I.

The court reaffirmed the dismissals of Counts II and III as time-barred, and granted the motion to dismiss Count I for failure to state a claim. Citing Lindner Fund v. Abney, 770 S.W.2d 437 (Mo.Ct.App.1989), the court held that even construing the complaint in the light most favorable to Harbor, Harbor failed to establish it was a member of a limited group of reliant parties. Harbor thereafter moved for leave to file a second amended complaint, which the district court denied. This appeal followed.

I.

We deal first with Harbor's arguments concerning dismissal of the conspiracy and subrogation claims. It is evident that these claims were not asserted in the "Harbor Insurance action." Thus, they are not saved by the stipulation for dismissal relied upon by Harbor. The stipulation specifically provided that it extended "only to claims actually made in the Harbor insurance action by Harbor." The conspiracy was alleged to have lasted from 1974 to May 1978. This action was not filed until April 1988. Missouri's five-year statute of limitations for fraud applies to the conspiracy claim. Mo.Rev.Stat. Sec. 516.120(5) (1986). Accordingly, the...