Hunt v. KMG Main Hurdman, 66751

• Decision Date: 18 September 1992
• Docket Number: No. 66751,66751
• Citation: 839 P.2d 45,17 Kan.App.2d 418
• Parties: Jack R. HUNT, Appellant, v. KMG MAIN HURDMAN and Brent Olney, Appellees.
• Court: Kansas Court of Appeals

Page 45

839 P.2d 45

17 Kan.App.2d 418

Jack R. HUNT, Appellant, v. KMG MAIN HURDMAN and Brent Olney, Appellees.

No. 66751.

Court of Appeals of Kansas.

Sept. 18, 1992.

Syllabus by the Court

1. When there is both a contractual relationship and a relationship that gives rise to a legal duty, such as the attorney-client relationship, the breach of that duty and not of the contract itself gives rise to a tort action.

2. The difference between a tort and contract action is that a breach of contract is a failure of performance of a duty arising or imposed by agreement; whereas, a tort is a violation of a duty imposed by law.

3. If the gravamen of the action is a breach of the legal duty and not of the contract itself, the action is in tort.

4. When elements of both contract and tort are present, the key difference is whether the contract calls for a specific result. When the contract does not call for the specific result at issue, the action is more in the nature of a violation of a duty imposed by law instead of failure to perform a duty arising by reason of agreement. In such a case, the plaintiff's complaint is not that the defendant failed to perform the contract, but that the defendant failed to perform it with due care.

James T. McIntyre, of McMaster & McMaster, Wichita, for appellant.

Christopher W. O'Brien and Calvin L. Wiebe, of Triplett, Woolf & Garretson, Wichita, for appellees.

Before GERNON, P.J., DAVIS, J., and ROBERT J. SCHMISSEUR, District Judge, assigned.

DAVIS, Judge:

This is an action brought by a minority shareholder against bank auditors for breach of contract, negligence, and breach of implied warranties. The trial court held that the gravamen of the action was in tort and, thus, barred by a two-year statute of limitations. We affirm.

In March 1986, Haysville State Bank (the bank) contracted with KMG Main Hurdman to perform an audit. KMG assigned Brent Olney to be the audit partner. The audit was completed in January 1987. In September 1987, the Federal Deposit Insurance Corporation issued a cease and desist order to prevent the bank from engaging in certain practices, including certain speculative investments. The cease and desist order was brought to the attention of the shareholders, including Jack Hunt, the appellant, in September 1987.

Hunt filed suit in December 1990, asserting three grounds against KMG and Olney: breach of a written contract, negligence, and breach of implied warranties. Hunt has conceded that the claims of negligence and breach of implied warranties are barred by the two-year statute of limitations. Hunt asserted before the district court and now on appeal that KMG and Olney breached a written contract by failing to discover and point out in the audit report the bank's improper valuation of certain speculative investments. The district court treated KMG and Olney's motion to dismiss, supported by an affidavit from Olney, as a motion for summary judgment. The court then granted dismissal, finding the breach of contract claim was in fact a claim sounding in tort and barred by the two-year statute of limitations.

The district court specifically declined to rule on other issues raised, including whether Hunt lacked standing and whether he was a proper representative plaintiff to bring a derivative action. Because the trial court's ruling disposed of the case and because we affirm, we do not address these issues.

The question presented is one of law, and our review is unlimited. Under any interpretation, if Hunt's action is contractual, the five-year statute of limitations pertaining to actions involving written contracts applies and his action is timely. K.S.A. 60-511. If, however, the trial court was correct that Hunt's action is a tort action, the two-year statute of limitations applies and the action is time barred. K.S.A.1991 Supp. 60-513(a)(4).

Hunt singles out the following paragraph of the written engagement letter to support his contention that this action is contractual in nature:

"We will advise you promptly if we discover conditions which cause us to believe that material errors or defalcations or other irregularities may exist or if we encounter other circumstances that require us to extend our work significantly. However, an examination based on selective testing is subject to the inherent risk that material errors or irregularities, if they exist, will not be detected.

"At the conclusion of our examination we will submit our report with respect to the financial statements. We will separately advise you of any material weaknesses in internal accounting control that come to our attention and make any recommendations we may have for improving operational procedures to the extent that such matters come to our attention."

Hunt argues that the contract called for a specific result which was not fulfilled by the auditors, resulting in a breach of contract. Hunt's petition addresses KMG and Olney's specific failure to identify for the owners unsafe investments of the bank, alleging that such identification specifically was required by the contract of employment. On the other hand, the auditors claim that the contract does not call for a specific result, but requires the auditors to use sound judgment in accord with their professional standards to identify for the owners problem areas of the bank, including questionable investment practices. They argue that the gravamen of the action is a failure to exercise due care in performing a contractual obligation; and that the action is based on negligence, not on the contract.

The determination of whether a particular action is based on contract or in tort is not always an easy one. The difficulty in approaching this subject is highlighted in the case of Tamarac Dev. Co. v. Delamater, Freund & Assocs., 234 Kan. 618, 619, 675 P.2d 361 (1984) (quoting Prosser, The Law of Torts § 92, pp. 621-22 [4th ed. 1971]:

"These cases, however, ... are inconsistent. The inconsistencies in this area of law have been confirmed by Professor Prosser when he stated:

'Frequently, where either tort or contract will lie and inconsistent rules of law apply to the two actions, the question arises whether the plaintiff may elect freely which he will bring, or whether the court must itself decide that on the facts pleaded and proved the "gist" or "gravamen" of his cause of action is one or the other. As to this the decisions are in considerable confusion, and it is difficult to generalize.

'Where the particular point at issue is one of adjective law only, affecting the suit or its procedure, but not the merits of the cause of action, the courts have tended to be quite liberal in giving the plaintiff his freedom of choice, and have upheld his action of tort or contract as he has seen fit to bring it. Likewise where the point is one affecting substantive rights, but the claim is one for damages to property or to pecuniary interests only, the tendency has been, with some occasional dissent, to allow the election. But when the claim is one for personal injury, the decision usually has been that the gravamen of the action is the misconduct and the damage, and that it is essentially one of tort, which the plaintiff cannot alter by his pleading.... Actually the courts appear to have preserved a great deal of flexibility, and to have been influenced in their decisions by their attitude toward the rule of law in question.' " 234 Kan. at 619, 675 P.2d 361.

Kansas cases have addressed the question in the context of doctors, attorneys, architects, and accountants. In Noel v. Proud, 189 Kan. 6, 367 P.2d 61 (1961), a physician promised a patient, Noel, that the operation he would perform would not worsen Noel's existing partial hearing loss. 189 Kan. at 7, 367 P.2d 61. That warranted result was unfulfilled as evidenced by Noel's subsequent irremediable functionally complete hearing loss. 189 Kan. at 7, 367 P.2d 61. The court held that this was a "special contract for a particular result" and fell under the statute of limitations for contracts. 189 Kan. at 11, 13, 367 P.2d 61.

In Juhnke v. Hess, 211 Kan. 438, 506 P.2d 1142 (1973), an attorney was employed to appeal a condemnation award. The client brought suit against his attorney for the failure of the attorney to file a timely appeal. In his petition, plaintiff alleged that because he could not appeal the award, he was forced to accept the original appraiser's amount and was therefore damaged. 211 Kan. at 439, 506 P.2d 1142. The court held that plaintiff's petition pled a "breach of a specific contract--failure to do that which [the attorney] expressly agreed to perform," namely, file an appeal. 211 Kan. at 441, 506 P.2d 1142. Under these circumstances, the action was contractual in nature.

We addressed the question in Chavez, Executrix v. Saums, 1 Kan.App.2d 564, 571 P.2d 62, rev. denied 225 Kan. 843 (1977). We held that where there is both a contractual relationship and a relationship that gives rise to a legal duty such as the attorney-client relationship, the breach of that legal duty gives rise to a tort action. 1 Kan.App.2d at 566, 571 P.2d 62. If the "gravamen of the action is a breach of the legal duty and not of the contract itself, the action is in tort." 1 Kan.App.2d at 566, 571 P.2d 62. In Chavez, the attorney had represented the deceased father of Chavez in a sale of stock. After the father refused to complete the sale of stock, the attorney, now no longer representing the father, filed an action on behalf of the buyer. 1 Kan.App.2d at 565, 571 P.2d 62. Since the act of representing the buyer was not part of the original contract between the father and the attorney, the...