Lien v. McGladrey & Pullen

• Citation: 509 N.W.2d 421
• Decision Date: 20 January 1994
• Docket Number: No. 18220,18220
• Parties: Thomas E. LIEN and Judith J. Lien, Plaintiffs and Appellees, v. McGLADREY & PULLEN, Defendant and Appellant.
• Court: Supreme Court of South Dakota

Page 421

509 N.W.2d 421

Thomas E. LIEN and Judith J. Lien, Plaintiffs and Appellees, v. McGLADREY & PULLEN, Defendant and Appellant.

No. 18220.

Supreme Court of South Dakota.

Argued Aug. 31, 1993.

Decided Dec. 15, 1993.

Rehearing Denied Jan. 20, 1994.

Glen H. Johnson, Johnson Huffman P.C., Rapid City, for plaintiffs and appellees.

Allen G. Nelson, Bangs, McCullen, Butler, Foye & Simmons, Rapid City, Michael J. Bleck, Oppenheimer, Wolff & Donnelly, Minneapolis, MN, Richard L. Miller, Jr., McGladrey & Pullen, Chicago, IL, for defendant and appellant.

SABERS, Justice.

A sole-shareholder of construction company was taxed as a result of a corporate redemption of preferred stock claimed to be based upon advice received from accounting firm. Jury found firm liable for professional negligence. Firm appeals. We reverse and remand on damages.

FACTS

In 1981, Tom Lien Construction, Inc. (Lien Construction) ¹ issued 2,400 shares of preferred stock to Tom Lien (Lien). Lien Construction redeemed Lien's preferred stock in 1985 in exchange for cancellation of Lien's personal debt to the corporation. Lien claims the redemption was done on the advice of his accounting firm, McGladrey & Pullen (McGladrey), who prepared his corporate and individual tax returns for that year.

Liens were subsequently audited by the Internal Revenue Service (IRS) and their 1985 individual tax return was reviewed. The IRS assessed additional tax and interest resulting from the redemption of the preferred stock. Lien paid the IRS in 1990.

Lien filed a complaint against McGladrey alleging negligence on the part of McGladrey in its advice and representation with respect to the redemption of the 2,400 shares of preferred stock. The jury found for Lien and awarded damages in the amount of $95,392.00. McGladrey appeals.

DISCUSSION

Accountants are held to the same standard of reasonable care as are other professional people, including lawyers, doctors and architects. Vernon J. Rockler & Co. v. Glickman, Isenberg, Lurie & Co., 273 N.W.2d 647, 650 (Minn.1978). To recover in professional negligence against McGladrey, Lien needed to prove a duty (the existence of an accountant-client relationship), the breach of that duty (the failure of McGladrey to discharge its duty of reasonable care), factual causation (that "but for" the advice, Lien would not have made the redemption), proximate causation (that increased tax liability was a foreseeable consequence of McGladrey's advice), and damages (that Lien actually suffered increased tax liability due to McGladrey's advice). Id. (citation omitted). See also Thomas v. Cleary, 768 P.2d 1090, 1092 (Alaska 1989) (elements of a cause of action for professional negligence are duty, breach of that duty, proximate cause and actual loss or damage) (citing Linck v. Barokas & Martin, 667 P.2d 171, 173 n. 4 (Alaska 1983); Budd v. Nixen, 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433, 436 (1971); Olson, Clough & Straumann, CPA's v. Trayne Properties, 392 N.W.2d 2, 4 (Minn.App.1986)).

1. Implied Contract

Jury Instruction No. 19 provided the standard of care which applies to the conduct of auditors or certified public accountants.

. . . . .

This standard, which requires that an accountant exercise that degree of skill and competence reasonably expected of persons in his profession in the community, is implied in the contract for professional services and is brought about by the accountant-client relationship. The contract, therefore, creates the relationship out of which arises the duty to exercise reasonable care to render skillful performance according to local professional standards. (Emphasis added.)

McGladrey argues that Lien failed to prove that a written contract to provide personal tax planning advice existed. According to McGladrey, absent such a contract, there could be no duty to exercise reasonable care and therefore, no breach of that duty.

SDCL 53-1-3 provides that "[a] contract is either express or implied. An express contract is one, the terms of which are stated in words. An implied contract is one, the existence and terms of which are manifested by conduct." SDCL 53-1-3. There is no doubt that a contract existed between McGladrey and Lien Construction creating an accountant-client relationship. This accountant-client relationship was outlined yearly in the form of a "letter of understanding" signed by Clayton Trulson of McGladrey and Lien of Lien Construction. According to the "letter," in addition to initiating ideas or observations that McGladrey believed would help achieve the objectives of Lien Construction, McGladrey agreed to respond to inquiries Lien "might have about financial or other business matters."

An implied contract, a fiction of the law adopted to achieve justice where no true contract exists, is a contract, the existence and terms of which are manifested by conduct. Weller v. Spring Creek Resort, Inc., 477 N.W.2d 839, 841 (S.D.1991) (citations omitted).

A contract is implied in fact where the intention as to it is not manifested by direct or explicit words by the parties, but is to be gathered by implication or proper deduction from the conduct of the parties, language used, or acts done by them, or other pertinent circumstances attending the transaction.... [The] facts are viewed objectively and if a party voluntarily indulges in conduct reasonably indicating assent he may be bound even though his conduct does not truly express the state of his mind.

Id. (citations omitted). See also Famous Brands, Inc. v. David Sherman Corp., 814 F.2d 517, 520 (8th Cir.1987) (citations omitted). Under South Dakota law, the existence of an implied contract between parties creates a genuine issue of material fact that must be decided by a jury. Id. at 520-21.

As noted above, in the express contract between McGladrey and Lien Construction, McGladrey agreed to initiate ideas or observations that McGladrey believed would help achieve the objectives of Lien Construction as well as respond to inquiries Lien "might have about financial or other business matters." Following the close of Lien Construction's fiscal year on March 31, 1984, McGladrey prepared a document listing items for discussion that they had noted during the audit. Listed as an item for discussion under Stockholder's Equity was the point that "Tom Lien Construction, Inc. should consider paying off the note receivable by permanently retiring preferred stock." Lien testified that in the fall of 1984, he asked auditor Dan Loveland of McGladrey whether he could exchange the preferred stock for the note receivable. Lien claims Loveland told him he would check it out and get back to him. Lien testified he called Loveland again in November, 1984, and Loveland told him that he did not see any problem and that he could go ahead with it (exchange the stock for the note). ² According to Lien, this was the advice that he relied upon when he redeemed the stock for the note. We find sufficient facts upon which the jury could have found an implied contract between McGladrey and Lien creating an accountant-client relationship and the duty to exercise reasonable care.

2. Advice and Reasonable Reliance

McGladrey argues that Lien failed to prove that McGladrey advised Lien to redeem the stock, or that, if he were so advised, his reliance upon that advice was reasonable. Whether tax advice was given to Lien and whether he reasonably relied upon that advice are questions of fact, to be determined by the trier of fact, the jury. See Rockler, 273 N.W.2d at 650. See generally Halla Nursery, Inc. v. Baumann-Furrie & Co., 438 N.W.2d 400, 402-03 (Minn.Ct.App.1989) (citation omitted) (whether a client negligently dealt with its accountant and whether the negligence contributed to the accountant's failure to perform its contract in accordance with generally accepted accounting standards are fact questions for the jury's determination), rev'd on other grounds, 454 N.W.2d 905 (1990). Our responsibility on appeal is to determine whether these factual findings are clearly erroneous. Rockler, 273 N.W.2d at 650. These "factual findings can be held clearly erroneous only if upon a review of the entire evidence we are left with the definite and firm conviction that a mistake has been made." Id. (citations omitted).

As noted above, Lien testified that he was advised by McGladrey that he could go ahead with the redemption of the stock and that he relied upon this advice when he redeemed the stock. Given this testimony, the letter of understanding, the notation by McGladrey that Lien Construction should consider redeeming the stock for the outstanding loan, and that McGladrey prepared the tax return of Lien Construction and the personal income tax return of the Liens, McGladrey has failed to show that the jury's finding that Lien reasonably relied upon McGladrey's advice was clearly erroneous.

3. Avoidable Tax

McGladrey's next alleged error is that Lien failed to prove that the additional tax was avoidable. Once again, whether Lien successfully proved that the tax was avoidable is a question of fact, for the trier of fact, the jury. See Rockler, 273 N.W.2d at 650 (whether client established damages is a finding of fact).

Lien's expert witness (whom McGladrey classifies as a "non-tax" expert) testified that had Lien held his preferred stock until 1991, he would have been able to "deduct his $240,000 preferred stock as part of the [tax] basis against his proceeds," and would not have suffered any damages. McGladrey's own expert witness (whom McGladrey classifies as a "tax" expert), when asked "whether this tax that was imposed could have been avoided in any event" testified that "once the redemption took place, it's highly unlikely that anything could have been done to eliminate that tax obligation." McGladrey's expert further testified that if the jury determined that Lien had asked for and received tax advice which resulted in the redemption of the preferred stock,...