Lindner v. Barlow, Davis & Wood

• Decision Date: 12 December 1962
• Citation: 27 Cal.Rptr. 101,210 Cal.App.2d 660
• Court: California Court of Appeals Court of Appeals
• Parties: Marjorie D. LINDNER, Plaintiff and Appellant, v. BARLOW, DAVIS & WOOD, a partnership, William P. Barlow, H. Vannoy Davis and Thomas S. Wood, Defendants and Respondents. Civ. 20500.

Page 101

27 Cal.Rptr. 101

210 Cal.App.2d 660

Marjorie D. LINDNER, Plaintiff and Appellant, v. BARLOW, DAVIS & WOOD, a partnership, William P. Barlow, H. Vannoy Davis and Thomas S. Wood, Defendants and Respondents.

Civ. 20500.

District Court of Appeal, First District, Division 1, California.

Dec. 12, 1962.

Rehearing Denied Jan. 4, 1963.

Hearing Denied Feb. 6, 1963.

Leslie L. Roos, Roos, Jennings & Haid, San Francisco, for appellant.

Willard S. Johnston, Ackerman, Johnston, Johnston & Mathews, San Francisco, for respondents.

BRAY, Presiding Justice.

Plaintiff appeals from an adverse judgment in a nonjury trial, in an action for alleged malpractice by defendants.

QUESTIONS PRESENTED.

1. Sufficiency of findings and evidence to support them.

2. West plaintiff's examination of defendant Wood improperly restricted?

EVIDENCE.

Plaintiff is the widow of Clarence Lindner who died in January, 1952. Defendants are certified public accountants, engaged in the practice of accounting, including tax phases thereof. From time to time, since before 1948, defendants were employed by Clarence Lindner and plaintiff to prepare federal and California income tax returns, income tax estimates, and to do related accounting work as requested.

For many years Lindner had been and at the time of death was publisher of the San Francisco Examiner; director and vice president of Hearst Publishing Company, Inc., the owner of the Examiner; and director and vice president of Hearst Consolidated Publications, Inc., the owner of all the stock of Hearst Publishing Company, Inc.

For a period of approximately five years commencing in about March, 1952, Hearst Publishing Company, Inc. (hereinafter called Hearst) paid plaintiff certain monies in weekly installments pursuant to and in accordance with a resolution of its board of directors. These payments were made after deducting United States income tax withheld by Hearst, and by it remitted to the government.

The payments were made pursuant to and as part of a plan, practice, custom and policy of Hearst to make payments to widows of deceased publishers and certain lesser executive who had rendered long and faithful service. This practice was known to Lindner during his lifetime. He and Hearst contemplated that if he remained faithfully in Hearst's employment and service, his widow would receive such payments.

In March, 1952, Garrett McEnerney, of the law firm of McEnerney & Jacobs, Hearst's attorney, who was also attorney for plaintiff as executrix of her husband's will and for her individually in all matters arising out of his death, informed plaintiff that Hearst would make such payments, subject to Hearst's obligation to withhold federal income taxes thereon on the grounds that they constituted taxable income to plaintiff; at about that time plaintiff received a copy of the above mentioned resolution.

In April, 1952, plaintiff told defendant Wood that she was to receive payments from Hearst, that McEnerney had advised her that Hearst would withhold taxes thereon, and that Wood should speak to Attorney Haile, an employee of McEnerney & Jacobs. Wood was informed by Haile that Hearst would withhold the taxes. Wood so informed plaintiff.

There is a conflict in the testimony of plaintiff and Wood as to whether plaintiff protested to Wood that the payments should not constitute taxable income.

In February, 1953, Hearst issued a withholding statement (W-2 form) and McEnerney & Jacobs forwarded it to plaintiff. This showed the belief of plaintiff's counsel that said weekly payments made in 1952 were taxable, and showed the withholding and payment by Hearst of plaintiff's federal income taxes thereon. In April, 1952, defendants prepared an amended estimate of plaintiff's 1952 income tax and in April, 1953, defendants prepared plaintiff's 1952 income tax return with the withholding statement attached. The latter was accompanied by defendants' written statement to plaintiff that said return was based upon records and information not independently verified by them. Both statements showed the Hearst payments as taxable income and were signed and filed by plaintiff without comment. In the years 1954 through 1957, Hearst sent plaintiff similar withholding statements. She in turn sent them to defendants, who prepared each year's returns showing the payments as taxable income. Each return was accompanied by a written statement to the effect that such return was based upon information not independently verified by defendants. Each was signed and filed by plaintiff without comment.

In April, 1957, plaintiff read of a tax court decision holding that corporation payments to the widow of a deceased executive were not taxable. She then consulted with lawyers who filed for her claims for refund of the federal income taxes paid on account of the Hearst payments for the years 1954, 1955 and 1956. The claims were denied. Suit was then filed thereon and in November, 1958, the suit was settled by the refund to plaintiff of all of said taxes plus interest. Thereafter, plaintiff obtained administrative refund of the California income taxes paid for the years 1953 to 1956, inclusive.

March 13, 1959, this action was commenced. The action is essentially one for alleged malpractice of defendants as certified public accountants. It is based partly on contract and partly on negligence. Court I is for the recovery of the 1952 federal taxes plus interest, alleged to have been lost through defendant's negligence, because any claim therefor was barred by the statute of limitations. Count II for the 1953 federal taxes, and count III for the 1952 California taxes are likewise based upon negligence. Counts IV, V, and VI are respectively for the same recovery, but based on alleged breach of contract.

1. FINDINGS AND EVIDENCE.

Plaintiff conceded that defendant acted properly and without negligence in the preparation of each year's tax returns. She claims, however, that defendants breached an alleged duty to file protective claims for refund or to advise plaintiff to do so through an attorney. Plaintiff contends that such a duty arises where a doubtful question exists with respect to whether or not payments are taxable income and that defendants knew, or should have known, that such doubtful question existed.

The court's findings on certain key questions of fact in the case, in supported, make consideration of most of the questions of law and of other findings raised by plaintiff immaterial. The findings on the key questions of fact are: (1) That defendants were employed to do the work on the basis of data, records, and information supplied by plaintiff, by her attorneys, and by others designated by her, without independent verincation by defendants. (2) That plaintiff never disclosed the existence of the Hearst resolution to defendants and they did not learn of its existence until the bringing of this action. (3) That defendants understood that the McEnerney law firm was plaintiff's counsel in regard to the payments here involved. (4) That the care, skill and learning ordinarily possessed by certified public accountants in San Francisco did not require defendants to file or advise plaintiff to file claims for refund or require the accountants to make independent investigations; that it is the accepted standard of practice in San Francisco of certified public accountants engaged in income tax work in such a case as this to rely upon withholding statements (W-2 forms) issued by corporate payors as to taxable status of moneys so reported. (5) That plaintiff at no time protested to defendants that the Hearst payments were not taxable income.

As to (1) the evidence clearly shows that the agreement between plaintiff and defendants did not contemplate independent verification of the data received by defendants from plaintiff. As to (2) plaintiff concedes that at no time did she inform defendants of the Hearst resolution. As to (3) defendant Wood testified that it was his understanding that plaintiff was being advised by the McEnerney firm. The McEnerney firm was the attorney for Mrs. Lindner as executrix of her husband's estate and in all matters arising out of her husband's death including 'these Hearst payments.' The fact that plaintiff had Wood contact an employee of that firm justified such an assumption. There was no evidence that Wood was ever informed to the contrary. As to (4) there was expert evidence to the effect that certified public accountants in San Francisco rely upon the withholding forms unless the client indicates that he is not satisfied that the payments indicated thereon are taxable.

'[A]ccountants have been recognized as 'a skilled professional class * * * subject generally to the same rules of liability for negligence in the practice of their profession as are members of other skilled professions.'' (Hawkins, Professional Negligence Liability of Public Accountants, (1959) 12 Vanderbit L.Rev. 797; see also Prosser on Torts, p. 132; Rest., Torts, § 299, comment d, p. 805.)

As members of a skilled profession they are experts. The duty of experts is well expressed in Gagne v. Bertran (1954), 43 Cal.2d 481, 489, 275 P.2d 15, 21: 'The services of...