Industrial Indemnity Co. v. Touche Ross & Co., A055844

• Decision Date: 26 February 1993
• Docket Number: No. A055844,A055844
• Citation: 13 Cal.App.4th 1086,17 Cal.Rptr.2d 29
• Court: California Court of Appeals Court of Appeals
• Parties: , 61 USLW 2562 INDUSTRIAL INDEMNITY CO., Plaintiff and Appellant, v. TOUCHE ROSS & CO., Defendant and Appellant.

Page 29

17 Cal.Rptr.2d 29

13 Cal.App.4th 1086, 61 USLW 2562

INDUSTRIAL INDEMNITY CO., Plaintiff and Appellant, v. TOUCHE ROSS & CO., Defendant and Appellant.

No. A055844.

Court of Appeal, First District, Division 3, California.

Feb. 26, 1993.

Laura R. Craft, Peter D. Teague, Steefel, Levitt & Weiss, San Francisco, for plaintiff and appellant.

Paul A. Renne, William S. Freeman, Vernon M. Winters, Yvonne Gonzalez Rogers, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, for defendant and appellant.

CHIN, Associate Justice.

Touche Ross & Co. (Touche) appeals from an order granting the motion of plaintiff and cross-appellant Industrial Indemnity Co. (Industrial) for a new trial on the issue of damages. It contends that the trial court abused its discretion in granting the motion. Applying the Supreme Court's recent decision in Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745, we agree. Therefore, we reverse the new trial order. We also reject Industrial's cross-appeal from the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Buttes Gas and Oil Co. (Buttes) was a publicly traded company which leased drilling rigs to major oil companies, drilled for oil and gas, and owned oil and gas, agricultural and mineral properties. For many years, Touche conducted annual audits of Buttes's general purpose financial statements and prepared standard audit opinions for Buttes. In March 1984, Touche issued an unqualified or "clean" audit opinion with respect to Buttes's 1983 financial statements.

Dimensional Credit Corporation (DCC) was organized to make short-term, unsecured loans at a reasonable cost to small- and medium-sized, publicly held companies like Buttes. DCC obtained capital to fund the loans by selling commercial paper to institutional investors. In making lending decisions, DCC used a quantitative credit model to screen out loan applicants on the basis of their creditworthiness. DCC developed the first version of its credit model during the spring of 1984.

To make its program work, DCC needed a surety to guaranty repayment of the commercial paper in the event of the borrower's default. On December 7, 1984, Industrial and DCC closed a "Surety Support Agreement" (dated as of September 1, 1984) by which Industrial agreed to be surety for the program. Industrial also was a start-up investor in DCC.

The DCC credit committee, which DCC formed in the spring of 1984, began evaluating Buttes as a potential borrower in June 1984. To facilitate the process, Buttes supplied DCC with its 1983 financial statements and Touche's audit opinion. The credit committee conditionally approved Buttes in June 1984. However, in July, after revising the credit model, the credit committee rejected Buttes and deferred its further consideration pending additional On December 14, Buttes drew down the entire $10 million line of credit. DCC renewed the loan an additional 60 days in February 1985. In April 1985, because it had not received Buttes's 10-K for the 1984 fiscal year, it renewed the loan for only 30 days. After receiving the 10-K, DCC decided not to renew the loan and demanded repayment. Buttes defaulted, and Industrial, as surety, had to repay the holders of the commercial paper.

investigation. In October, after again revising the model, the credit committee approved Buttes for a 60-day, $10 million line of credit.

In May 1987, Industrial filed suit against Touche. The matter eventually went to trial in August 1991 on Industrial's first amended complaint. The court submitted the case to the jury on four theories: (1) professional negligence; (2) negligent misrepresentation; (3) intentional misrepresentation; and (4) fraudulent concealment. With respect to the professional negligence claim, the court also instructed on the affirmative defense of comparative negligence. The jury returned a general verdict for Industrial and awarded damages of $1.

Industrial made two posttrial motions. In one, it moved "for a new trial on damages, subject to additur; or for a new trial limited to apportionment of fault; or alternatively, for a new trial on all issues." In the other, it moved for judgment notwithstanding the verdict on the negligent misrepresentation claim. After hearing, the trial court denied the latter motion. It granted in part the former motion, ordering a new trial "on the issue of damages only, unless ... [Touche] files a consent to an additur to the damages awarded by the jury to the total sum of $9,095,000...."

Touche now appeals the order granting a limited new trial. Industrial has filed a "PRECAUTIONARY CROSS APPEAL" in which it asks that we reverse the judgment if we reverse the new trial order.

DISCUSSION

Touche Appeal

1. Standard of Review

A trial court's decision to grant a new trial is a matter of discretion which we will not reverse absent abuse. (Mazzotta v. Los Angeles Ry. Corp. (1944) 25 Cal.2d 165, 169, 153 P.2d 338.) Where, as here, the trial court's order grants a new trial only on the issue of damages, we review the evidence relating to both liability and damages to determine whether the order constitutes an abuse of discretion. (Kralyevich v. Magrini (1959) 172 Cal.App.2d 784, 791, 342 P.2d 903; Harper v. Superior Air Parts, Inc. (1954) 124 Cal.App.2d 91, 92, 268 P.2d 115.) If that evidence is insufficient as a matter of law to support a judgment in favor of the moving party, we must reverse. (Mazzotta, supra, 25 Cal.2d at p. 168, 153 P.2d 338; Salvetti v. Byrd (1963) 222 Cal.App.2d 418, 421, 35 Cal.Rptr. 185; Kingen v. Weyant (1957) 148 Cal.App.2d 656, 660, 307 P.2d 369; Martin v. Smith (1951) 103 Cal.App.2d 894, 897, 230 P.2d 679.)

2. Bily Applies Retroactively

Because we must judge the sufficiency of the evidence against the applicable law, we must first determine what the applicable law is. Bily states the law in California as it relates to accountants' liability to third parties. (Bily v. Arthur Young & Co., supra, 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745.) It holds in part that accountants are not liable to third parties for general negligence, and expressly overrules International Mortgage Co. v. John P. Butler Accountancy Corp. (1986) 177 Cal.App.3d 806, 223 Cal.Rptr. 218, on this point. (Bily, supra, 3 Cal.4th at p. 405, fn. 15, 11 Cal.Rptr.2d 51, 834 P.2d 745.) The Supreme Court filed Bily on August 27, 1992, almost one year after the jury returned its verdict in this case. We must therefore decide whether Bily applies retroactively. ¹

"The general rule that judicial decisions are given retroactive effect is basic in our legal tradition." (Newman v. Emerson Radio Corp. (1989) 48 Cal.3d 973, 978, 258 Cal.Rptr. 592, 772 P.2d 1059.) "With few exceptions and even after expressly considering suggestions to the contrary, California courts have consistently applied tort decisions retroactively even when those decisions declared new causes of action or expanded the scope of existing torts in ways defendants could not have anticipated.... [Citations.]" (Id., at pp. 981-982, 258 Cal.Rptr. 592, 772 P.2d 1059.) At the same time, the Supreme Court has consistently "recognized the potential for allowing narrow exceptions to the general rule of retroactivity when considerations of fairness and public policy are so compelling ... that, on balance, they outweigh the considerations that underlie the basic rule. A court may decline to follow the standard rule when retroactive application of a decision would raise substantial concerns about the effects of the new rule on the general administration of justice, or would unfairly undermine the reasonable reliance of parties on the previously existing state of the law. In other words, courts have looked to the 'hardships' imposed on parties by full retroactivity, permitting an exception only when the circumstances of a case draw it apart from the usual run of cases." (Id., at p. 983, 258 Cal.Rptr. 592, 772 P.2d 1059.)

Applying these principles, the Supreme Court in Newman held that Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373, applies retroactively. ² (Newman v. Emerson Radio Corp., supra, 48 Cal.3d at p. 976, 258 Cal.Rptr. 592, 772 P.2d 1059.) It based its holding on the following factors: (1) Foley did not overrule a prior Supreme Court decision; (2) the doctrine that Foley overruled, although expressed in a consistent line of appellate cases, had stood for less than six years before the Supreme Court granted review on the issue; (3) the appellate cases applying the overruled doctrine either "uncritically adopted" it or engaged in "incomplete analyses"; (4) the purpose behind the rule Foley announced was fully consistent with its retroactive application; (5) no one had acquired vested rights or entered into a contract based on the former rule; (6) Foley involved "not a matter of procedural interpretation but a substantive rejection of a form of recovery"; and (7) the number of retrials due to retroactive application would not seriously disrupt the administration of justice. (Newman v. Emerson Radio Corp., supra, at pp. 986-992, 258 Cal.Rptr. 592, 772 P.2d 1059.)

The existence of similar factors in this case leads us to a similar conclusion regarding Bily. Bily does not overrule a prior decision of the Supreme Court. Nor does it even overrule a consistent line of appellate cases. Rather, it overrules a single appellate decision, International Mortgage Co. v. John P. Butler Accountancy Corp., supra, 177 Cal.App.3d 806, 223 Cal.Rptr. 218, which had stood for less than five years before the Supreme Court granted review in Bily. In Bily, the Supreme Court criticized the analysis in International Mortgage Co., finding that the decision "fail[ed] to consider" the relevant policy factors and assumed, "[w]ithout support or analysis," that the concept of privity made no sense in any tort context. (Bily v. Arthur Young & Co., supra, 3 Cal.4th at p. 405, fn. 15, 11 Cal.Rptr.2d...