Lincoln Grain, Inc. v. Coopers & Lybrand

• Decision Date: 10 February 1984
• Docket Number: No. 83-094,83-094
• Citation: 345 N.W.2d 300,216 Neb. 433
• Parties: LINCOLN GRAIN, INC., a Kansas corporation, Appellant, v. COOPERS & LYBRAND, a partnership, Appellee.
• Court: Nebraska Supreme Court

Page 300

345 N.W.2d 300

216 Neb. 433

LINCOLN GRAIN, INC., a Kansas corporation, Appellant, v. COOPERS & LYBRAND, a partnership, Appellee.

No. 83-094.

Supreme Court of Nebraska.

Feb. 10, 1984.

Syllabus by the Court

1. Actions: Pleadings. The character of an action as one in tort or on contract is determined by the nature of the grievance, not by the form of the pleadings, with consideration being given to the facts which constitute the cause of action.

2. Actions: Pleadings. Where a petition contains a cause of action for breach of contract, additional averments appropriate to a tort action will not change the action from contract to tort.

3. Action: Pleadings. One may sue in tort when there has been negligence in the performance of a contract.

4. Appeal and Error. Ordinarily, the Nebraska Supreme Court will dispose of a case on appeal on the theory on which it was presented in the lower court.

5. Trial: Evidence: Appeal and Error. The appropriate standard of review for an assignment of error directed at the exclusion of evidence is one of abuse of discretion, as the admission or exclusion of evidence is a matter left largely to the sound discretion of the trial court, which must determine the relevancy and possible prejudicial effect of the proffered evidence.

6. Rules of Evidence: Words and Phrases. "Unfair prejudice," in the context of Neb.Rev.Stat. § 27-403 (Reissue 1979), is such prejudice as has a tendency to suggest a decision on an improper basis.

7. Negligence. The assumption of risk doctrine is predicated upon an implied consent to be treated negligently, and generally relates to one voluntarily undertaking a known risk even though he is otherwise in the exercise of reasonable care.

8. Negligence. A plaintiff who voluntarily assumes a risk of harm arising from the negligent conduct of the defendant cannot recover for such harm.

9. Negligence. The contributory negligence of the client is a defense in an accountant malpractice action only where such negligence has contributed to the accountant's failure to perform his contract and to report the truth.

10. Jury Instructions. The true meaning of a set of instructions is to be determined from a consideration of all that is said in them and not from picking out and emphasizing one errant word.

11. Jury Instructions. An instruction should be couched in neutral and nonargumentative language.

12. Tort-feasors: Negligence: Liability. The doctrine that an intervening act cuts off the liability of a tort-feasor comes into play only when the intervening cause is not foreseeable.

13. Directed Verdict. A motion for directed verdict is to be treated as an admission of the truth of all competent evidence submitted on behalf of the party against whom the motion is directed; such party is entitled to have every controverted fact resolved in his favor and to have the benefit of every inference which can reasonably be deduced from the evidence.

Karen B. Flowers and David M. Geier of Bauer, Galter & Geier, Lincoln, for appellant.

Maureen E. McGrath of Kutak Rock & Huie, Omaha, and Joseph A. Clark, III of Coopers & Lybrand, New York City, for appellee.

BOSLAUGH, WHITE, HASTINGS, CAPORALE, SHANAHAN, and GRANT, JJ.

CAPORALE, Justice.

In this appeal plaintiff-appellant, Lincoln Grain, Inc., a grain dealer, challenges the judgment entered, pursuant to a jury's verdict, dismissing its action against defendant-appellee, Coopers & Lybrand, public accountants, which alleges that Lincoln Grain was damaged by Coopers & Lybrand's negligent failure to perform its contractual duties in accordance with generally accepted auditing standards. We reverse and remand for a new trial.

This marks the second appearance of these parties before this court in matters related to the instant case. In Lincoln Grain v. Coopers & Lybrand, 215 Neb. 289, 338 N.W.2d 594 (1983), hereinafter referred to as Lincoln Grain I, we held that any causes of action Lincoln Grain might have had for the alleged malpractice in conducting audits for the 1973 and 1974 fiscal periods were barred by the 2-year period of limitations prescribed in Neb.Rev.Stat. § 25-222 (Reissue 1979).

In this action Lincoln Grain pleads that it engaged Coopers & Lybrand to conduct an audit for the fiscal year ending June 30, 1975, and that Coopers & Lybrand failed to conduct that audit in accordance with generally accepted auditing standards. In its answer Coopers & Lybrand asserts a variety of defenses, including claims that Lincoln Grain assumed the risk of employee fraud and was contributorily negligent. In addition, Coopers & Lybrand sued the directors and officers of Lincoln Grain as third-party defendants, claiming that if Coopers & Lybrand were found liable to Lincoln Grain, the third-party defendants would become liable to Coopers & Lybrand for their failure to properly discharge their duties to Lincoln Grain. No issue as to the propriety of that third-party action is presented to us.

The record establishes that Lincoln Grain, Inc., engaged Coopers & Lybrand, as it had in past years, to perform an audit of Lincoln Grain's financial statements for the aforesaid fiscal period and render an opinion thereon. As part of that audit, Coopers & Lybrand investigated the accuracy of the valuation placed upon the inventory of Lincoln Grain's Iowa division. The Iowa division was involved in the buying and selling of grain and other agricultural commodities, but had no storage or shipping facilities. Its inventory consisted only of contracts to sell or purchase commodities. At the end of the fiscal year a value was placed upon the inventory by reference to the market price for the particular commodity as of that day.

On June 30, 1975, Lincoln Grain valued the inventory of its Iowa division at nearly $2 million, and included this valuation in compiling its financial statements. On September 12, 1975, Coopers & Lybrand issued a report which stated: "In our opinion, the aforementioned financial statements present fairly the financial position of Lincoln Grain, Inc. at June 30, 1975 and the results of its operations and changes in its financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year."

The generally accepted auditing standards in evidence include the following with respect to fieldwork: "2. There is to be a proper study and evaluation of the existing internal control as a basis for reliance thereon and for the determination of the resultant extent of the tests to which auditing procedures are to be restricted. 3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination."

In November of 1975 the treasurer of Lincoln Grain became concerned with the large cash needs of the Iowa division and began to investigate the reasons. In early 1976 the manager of the Iowa division, who was also a vice president of Lincoln Grain, admitted to falsifying the inventory valuations. Later investigation determined that instead of having a nearly $2 million inventory as of June 30, 1975, the inventory of the Iowa division had only a $143,000 value. The Iowa division closed for new business in February of 1976.

Lincoln Grain contends that if the audit had been conducted in accordance with generally accepted auditing standards, the fraudulent activities of its employee would have been discovered at an earlier time, and that it was damaged by the delayed discovery. Specifically, Lincoln Grain complains, among other things, that Coopers & Lybrand failed to discover that the actual commodity contract prices on some of the contracts checked by Coopers & Lybrand did not correspond with those listed on the inventory; that nearly half the freight rates listed on the inventory were wrong; and that the figure used to value the net position was not consistent with available external market information.

Lincoln Grain assigns as error the actions of the trial court in (1) refusing to receive into evidence Lincoln Grain's exhibit 10; (2) submitting the assumption of risk defense to the jury; (3) submitting the contributory negligence defense to the jury; and (4) charging the jury in the language of instruction Nos. 9, 10, and 11.

It seems appropriate to begin our analysis with a review of the nature of the action before us. Although the dividing line between breaches of contracts and torts is often dim and uncertain, it has been said that the character of an action as one in tort or on contract is determined by the nature of the grievance, not by the form of the pleadings, with consideration being given to the facts which constitute the cause of action. Driekosen v. Black, Sivalls & Bryson, 158 Neb. 531, 64 N.W.2d 88 (1954); 1 Am.Jur.2d Actions § 8 (1962). While in Fuchs v. Parsons Constr. Co., 166 Neb. 188, 88 N.W.2d 648 (1958), we said that where a petition contains a cause of action for breach of contract, additional averments appropriate to a tort action will not change the action from contract to tort, we have also said that one may sue in tort when there has been negligence in the performance of a contract. Driekosen v. Black, Sivalls & Bryson, supra. The injury in such a case results not from a breach of the contract but from negligence in the performance of it, for accompanying every contract is a common-law duty to perform with care, skill, reasonable expediency, and faithfulness the thing agreed to be done. A negligent failure to observe any of these conditions is a tort as well as a breach of contract. Driekosen v. Black, Sivalls & Bryson, supra; 74 Am.Jur.2d Torts § 24 (1974). Moreover, to the extent there is a choice, 74 Am.Jur.2d, supra, the parties elected to try this case as if it were one in tort. Ordinarily, as we do in this case, we will dispose of a case...