Lumbermens Mut. Cas. Co. v. Thornton

• Decision Date: 19 November 2002
• Docket Number: No. WD 60134.,WD 60134.
• Citation: 92 S.W.3d 259
• Parties: LUMBERMENS MUTUAL CASUALTY COMPANY and Reliance Insurance Company, Appellants, v. Grant THORNTON, John R. Gunter, Bruce E. Moore, Lawrence Redler, Kent Gedman, and Grant Thornton, L.L.P., Respondents.
• Court: Missouri Court of Appeals

92 S.W.3d 259

LUMBERMENS MUTUAL CASUALTY COMPANY and Reliance Insurance Company, Appellants, v. Grant THORNTON, John R. Gunter, Bruce E. Moore, Lawrence Redler, Kent Gedman, and Grant Thornton, L.L.P., Respondents.

No. WD 60134.

Missouri Court of Appeals, Western District.

November 19, 2002.

Motion for Rehearing and/or Transfer to Supreme Court December 24, 2002.

Application for Transfer Denied January 28, 2003.

Bernard Balkin, Kansas City, for appellants.

Mark Brennan, Kansas City, for respondents.

RONALD R. HOLLIGER, Judge.

Western Container Corporation retained respondents (hereinafter "Grant Thornton" or "Thornton") to perform financial audits of its books for fiscal years ending September 30 for 1992, 1993, 1994, 1995, and 1996. Sometime later it was discovered that Western Container's controller had stolen over $334,000 from Western Container during those years. Appellants Lumbermens Mutual Casualty Co. (hereinafter "Lumbermens") and Reliance Insurance Company (hereinafter "Reliance") issued policies of fidelity insurance to Western Container for the years identified. After payment of the losses under the policies, Lumbermens and Reliance (collectively "the plaintiffs"), as subrogees, sued Grant Thornton for professional negligence and breach of contract in the performance of those audits. The trial court granted summary judgment in favor of Grant Thornton. Because the trial court erred in finding that there was no legal duty owed by Grant Thornton to Western Container regarding the embezzlements and because there were material facts remaining in dispute, we now reverse.¹

On appeal, Lumbermens and Reliance claim that the trial court erred in granting summary judgment because it failed to recognize the admitted duty of Grant Thornton to carry out their audits of financial statements in accordance with generally accepted auditing standards. Lumbermens and Reliance claim that the trial court, when granting summary judgment, improperly intruded upon the fact-finding function of the trier of fact in determining that no such duty existed. Lumbermens and Reliance argue that the determination of what are generally accepted accounting principles and auditing standards and whether those standards were met is a matter for expert opinion testimony. They further contend that because both parties offered expert testimony to support their position and it was established that genuine issues of fact existed, this precluded the grant of summary judgment.

Factual and Procedural Background

In the course of the audits for the years in question it appears to be undisputed that Thornton did not discover Horton's defalcations nor did it evaluate or make any suggestions to Western Container about deficiencies in its internal accounting control policies. While the audits were to be conducted in accordance with generally accepted auditing standards, the engagement letters signed by Western Container and Grant Thornton explained that "an audit is not a special examination designed to detect defalcations or fraud, nor a guarantee of the accuracy of the financial statements and is subject to the inherent risks that errors, irregularities, or illegal acts, if they exist, might not be detected." As required by the engagement letters, Grant Thornton received representation letters from Western Container, signed by President Richard M. Horton, Vice President Rick N. Johnson, and Controller Susan Horton (daughter of the President who was also the principal shareholder), stating that there had been no irregularities involving management or employees who had significant roles in the internal control structure of Western Container.

During these fiscal years, Controller Susan Horton committed various acts of theft from Western Container. She issued payroll checks to herself in excess of her salary, issued duplicate payroll checks to herself, issued unauthorized checks to herself from the general account, and charged personal purchases to Western Container's credit cards.

On June 18, 1996, Western Container filed a proof of loss with both Lumbermens and Reliance to recover the losses suffered as a result of the acts of Ms. Horton. Subsequently, Lumbermens paid Western Container $154,026.73 and Reliance paid $179,999.70. Upon payment, Lumbermens and Reliance received an assignment of claims from Western Container and were subrogated to the rights of Western Container for claims against Ms. Horton and all others who might be responsible for the losses incurred. As subrogees of such claims, Lumbermens and Reliance brought suit against Grant Thornton alleging negligence and breach of contract in the performance of their auditing services. Generally, Lumbermens and Reliance claimed in their first amended petition that Grant Thornton failed to analyze, review, and assess material weaknesses in Western Container's internal control environment, structure, and procedures, and failed to design procedures or provide recommendations that would remedy those weaknesses.

Grant Thornton filed their answer denying these allegations and asserting various defenses. Grant Thornton alleged that as subrogees of Western Container, Lumbermens and Reliance were subject to all of Grant Thornton's defenses against Western Container. Among those defenses, Grant Thornton alleged that the claims of Lumbermens and Reliance were barred by Western Container's breach of contract in that Western Container provided incorrect and false information to Grant Thornton that interfered with the performance of the audit.

On September 4, 1998, Grant Thornton filed a motion for summary judgment claiming that they did not make material misstatements or omissions and did not fail to disclose any matter that they were obligated to disclose during the audits of the financial statements of Western Container. Grant Thornton further claimed that Western Container's misrepresentations precluded any recovery as a matter of law. In their suggestions in support, Grant Thornton alleged that they had no general duty to report undetected material internal control weaknesses to Western Container and that their audit reports contained no material misstatements. Finally, Grant Thornton claimed that the actions of Western Container in providing misstatements and false representations precluded recovery by Lumbermens and Reliance because Grant Thornton relied on these representations in conducting the audits. Specifically, the representation letters stated that there had been no irregularities involving individuals who had significant roles in the internal control structure. Three officers — the President, Vice-President and the Controller, signed each of the representation letters. The Controller, Susan Horton, was responsible for the losses.

On July 21, 1999, the trial court found that "[t]he defendants' engagement letters read in conjunction with Western Container's representation letters, clearly demonstrate that no duty existed nor was created under the terms of these letters, that defendants were to report material weaknesses in internal controls to Western Container." Furthermore, the court found that no duty existed under generally accepted auditing standards and that Lumbermens and Reliance were subject to all defenses against Western Container. Lumbermens and Reliance appeal the trial court's granting of summary judgment in favor of Grant Thornton.

Standard of Review

Rule 74.04(c)(3) provides that summary judgment shall be granted when "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." We review the summary judgment record in the light most favorable to Lumbermens and Reliance, against whom judgment was entered. ITT Commercial Fin. Corp. v. Mid-Am. Marine Supply Corp., 854 S.W.2d 371, 376 (Mo. banc 1993). To defeat a motion for summary judgment, a genuine issue must be real and substantial, Id. at 378, and not merely "argumentative, imaginary or frivolous." Rustco Prods. Co. v. Food Corn, Inc., 925 S.W.2d 917, 922 (Mo.App.1996). Nevertheless, the non-movant is entitled to the benefit of all reasonable inferences supported by the record. Martin v. City of Washington, 848 S.W.2d 487, 489 (Mo. banc 1993). Because the propriety of entering summary judgment is a question of law, our review is essentially de novo, and we give no deference to the trial court's findings or determination. ITT, 854 S.W.2d at 376.

A defending party seeking summary judgment must show either (1) facts that will negate any one of the elements of the plaintiffs claim; (2) that the plaintiff has not been able to put forth and will not be able to produce evidence that would allow the trier of fact to find the existence of any one of the elements of the plaintiffs claim; or (3) that there is no genuine dispute as to the existence of each of the facts necessary to support a properly pleaded affirmative defense. Id. at 381. In a negligence case, a motion seeking summary judgment may test whether a defending party had any legal duty to the claimant. See Stitt by Stitt v. Raytown Sports Ass'n, Inc., 961 S.W.2d 927, 930 (Mo.App.1998). Summary judgment is frequently inappropriate in a negligence case particularly where the issue is whether there are facts upon which the trier of fact could find a breach of an admitted or otherwise established duty. See, e.g., O.L. v. R.L., 62 S.W.3d 469, 473 (Mo.App.2001).²

The Duty Analysis

It seems implicit in the parties' arguments that they do not agree as to the source of any duty owed by Thornton to Western Container in connection with the audits. A legal duty owed by one to another may arise from at least three sources: (1) it may be proscribed by the legislative branch; (2) it may arise because the law imposes a duty based on the relationship between the parties or because under a particular set of circumstances an actor must exercise due care to avoid foreseeable injury; or (3) it may arise because a...