Hydroculture, Inc. v. Coopers & Lybrand

• Decision Date: 17 September 1992
• Docket Number: CA-CV,No. 1,1
• Citation: 848 P.2d 856,174 Ariz. 277
• Parties: HYDROCULTURE, INC., Plaintiff-Appellant, Cross-Appellee, v. COOPERS & LYBRAND, Defendant-Appellee, Cross-Appellant. 90-381.
• Court: Arizona Court of Appeals

Page 856

848 P.2d 856

174 Ariz. 277

HYDROCULTURE, INC., Plaintiff-Appellant, Cross-Appellee, v. COOPERS & LYBRAND, Defendant-Appellee, Cross-Appellant.

No. 1 CA-CV 90-381.

Court of Appeals of Arizona Division 1, Department C.

Sept. 17, 1992.

Reconsideration Denied Nov. 10, 1992.

Review Denied April 13, 1993. ^*

[174 Ariz. 278] Robbins & Green, P.A. by Philip A. Robbins, Sally C. Shanley, Phoenix, for plaintiff-appellant, cross-appellee.

Snell & Wilmer by Warren E. Platt, George J. Coleman, Gary Beren, Phoenix, for defendant-appellee, cross-appellant.

OPINION

McGREGOR, Judge.

Plaintiff Hydroculture, Inc. (Hydroculture) appeals from the summary judgment and directed verdict entered in favor of defendant Coopers & Lybrand (Coopers). Hydroculture's appeal presents the question whether an independent public accounting firm's client can bring an action against the accounting firm for negligence in performing an independent audit. We hold the client can bring such an action and reverse the trial court's holding to the contrary.

Coopers cross-appeals from the trial court's orders denying Coopers' motions for summary judgment and motion for security for costs. We affirm the orders challenged in the cross-appeal because disputed issues of fact precluded summary judgment and Coopers' motion for security for costs was not timely filed.

I.

Hydroculture engaged in commercial hydroponics, the growing of plants in a nutrient solution in a greenhouse environment. In 1968, Hydroculture became a public corporation and registered with the Securities and Exchange Commission (SEC). SEC regulations required Hydroculture to hire an independent public accounting firm to audit its annual financial statements in conformity with generally accepted accounting principles (GAAP) ¹ and to submit to the SEC certain forms, including audited financial statements. 17 C.F.R. §§ 210.2-02, 240.13a-1 (1973).

In October 1972, Hydroculture hired Coopers as its independent public accounting firm. Coopers designated Thomas McKibben the partner in charge of the Hydroculture audit. Coopers became involved with Hydroculture's general financial affairs and assisted Hydroculture with matters such as bookkeeping, drafting contracts, and selecting a controller. Coopers audited Hydroculture's fiscal year 1972 financial statements as required by SEC regulations.

McKibben died in October 1973, after the end of fiscal year 1973 but prior to beginning the 1973 audit. James Kunkel replaced McKibben as the partner assigned to Hydroculture.

In October 1973, Coopers began auditing Hydroculture's fiscal year 1973 financial statements. Hydroculture's goal in 1973, as it had been in 1972, was to recognize as much income on its financial statements as allowable under GAAP. During the audit, Coopers concluded that Hydroculture had to reverse the recognition of certain income Hydroculture had already recorded during 1973. ² The income allegedly improperly recognized during 1973 involved three matters the parties refer to as the Glendale, Dameron, and Georgia transactions. Hydroculture had recognized income from each transaction on its books and quarterly financial statements for fiscal year 1973. Hydroculture contends it recognized the income from the three transactions pursuant to advice from Coopers.

Kunkel met with Hydroculture in November 1973 to discuss the audit and informed Hydroculture it could not properly recognize all the income from the three transactions. Hydroculture asked Coopers to reconsider and argued that, based on Coopers' previous advice, recognition of income on the three transactions conformed with GAAP. Coopers informed Hydroculture it would not issue an unqualified opinion on the financial statements unless Hydroculture reversed the income recognized on the three transactions. ³

Hydroculture knew it could fire Coopers and retain a different independent accounting firm and considered doing so. Hydroculture's representatives testified they concluded they lacked sufficient time to hire another firm. Hydroculture finally reversed the income on the three transactions and issued its 1973 financial statements in accord with Coopers' advice. Coopers issued an unqualified opinion on the financial statements.

After filing its 1973 financial statements with the SEC and disseminating them to the financial community, Hydroculture found itself unable to obtain financing for continued operations and filed for bankruptcy in 1975. Although Hydroculture came out of reorganization in 1976, it never became a profitable company.

Coopers filed a claim in the bankruptcy court to recover fees for its accounting services. Hydroculture counterclaimed for accounting malpractice. Coopers moved to dismiss the counterclaim, asserting the bankruptcy court lacked jurisdiction over malpractice actions. Four years later, the bankruptcy court ruled on Coopers' motion by dismissing Hydroculture's counterclaim.

Shortly after the bankruptcy court dismissed its counterclaim, Hydroculture filed this action for accounting malpractice in superior court, alleging Coopers performed negligently in its auditing capacity and its advising capacity. Coopers filed three motions relevant to the present appeal and cross-appeal. First, Coopers moved for summary judgment, asserting the statute of limitations barred Hydroculture's action. The trial court denied the motion both as a matter of law and because it found genuine issues of material fact remained.

Second, Coopers moved for an order requiring Hydroculture to post security for Coopers' costs, pursuant to Rule 67(d), Arizona Rules of Civil Procedure. The trial court denied the motion as untimely.

Third, Coopers again moved for summary judgment, asserting that, as a matter of law, it could not be held liable to Hydroculture for its actions as an independent auditor. Coopers also asserted that, as a matter of law, its actions were not the proximate cause of any damages Hydroculture might have incurred. Finally, Coopers argued it was entitled to summary judgment because the doctrines of equitable estoppel, quasi-estoppel, estoppel by oath, and waiver barred Hydroculture's claims.

The trial court found as a matter of law that Coopers could not be liable for actions taken in its role as an independent auditor and granted summary judgment in Coopers' favor on the issue of auditor liability. Finding genuine issues of material fact, the court denied summary judgment as to Hydroculture's alternative theory that Coopers acted negligently in its capacity as an advisor. The court also denied Coopers' motion for summary judgment based on estoppel and waiver.

The case proceeded to trial on Hydroculture's theory that Coopers acted negligently in its advisory capacity. After hearing Hydroculture's expert witness testify outside the presence of the jury, the trial court concluded that his testimony concerned only Coopers' role as auditor and did not apply to Coopers' role as advisor. The judge therefore refused to admit the expert testimony. ⁴ After Hydroculture rested, the trial court granted Coopers' motion for a directed verdict because Hydroculture lacked expert testimony to establish its negligence claim.

Hydroculture timely appeals from the summary judgment on its claim asserting auditor liability and from the directed verdict. We have jurisdiction over the appeal pursuant to Ariz.Rev.Stat.Ann. ("A.R.S.") § 12-2101.B.

Coopers timely cross-appeals from the denial of its motions for summary judgment and its motion for security for costs. For the reasons discussed below, we have jurisdiction over the cross-appeal pursuant to A.R.S. § 12-2102.A.

II.

Hydroculture first contends the trial court erred by concluding, as a matter of law, that Coopers could not be liable to its client for negligence in performing an audit. In response, Coopers contends the trial court properly granted summary judgment because (1) as a matter of law, Coopers' duty to the public transcends its duty to Hydroculture, (2) Hydroculture did not present any expert testimony to support its negligence claim in response to Coopers' motion for summary judgment, and (3) as a matter of law, Coopers did not cause any damages Hydroculture may have incurred as a result of issuing the financial statements reversing the recognition of income. Because we will uphold a grant of summary judgment on any valid legal basis, we review all Coopers' arguments regarding auditor liability. See Glaze v. Marcus, 151 Ariz. 538, 540, 729 P.2d 342, 344 (App.1986).

A.

To determine whether Coopers, acting as an independent auditor, owed a duty to Hydroculture we examine the nature of the relationship between the two parties. The question of duty is one of law for the trial court and a question we review de novo. Markowitz v. Arizona Parks Bd., 146 Ariz. 352, 354, 706 P.2d 364, 366 (1985). An accountant owes a duty to the client to render services with the degree of skill and competence exercised by members of the accounting profession and in accordance with accepted professional standards. ⁵ See Sato v. Van Denburgh, 123 Ariz. 225, 227, 599 P.2d 181, 183 (1979) ("negligent performance of professional services by an accountant sounds in tort"); see generally Russel L. Wald, Annotation, Accountant's Malpractice Liability to Client, 92 A.L.R.3d 396, 411-31 (1979).

Coopers does not dispute that an accountant performing an audit owes a duty of care to its client. Coopers argues, however, that as an independent auditor, it owed a duty to the public to report Hydroculture's transactions in accordance with GAAP and that its duty to the public supersedes any duty to Hydroculture. Therefore, Coopers concludes, it cannot be liable to Hydroculture for alleged negligence in performing the audit.

Coopers relies primarily on United States v. Arthur Young & Co., 465 U.S. 805, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984) and In re Touche, Niven, Bailey & Smart, 37 S.E.C. 629 (1957). We conclude neither...