Lumbermens Mutual Casualty Insurance v. Thornton et al

• Decision Date: 05 December 2000
• Citation: 36 S.W.3d 398
• Parties: (Mo.App. W.D. 2000) . Lumbermens Mutual Casualty and Reliance Insurance Company, Appellants v. Grant Thornton, et al., Respondents. WD57848 Missouri Court of Appeals Western District Handdown Date:
• Court: Missouri Court of Appeals

36 S.W.3d 398 (Mo.App. W.D. 2000)

This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court.

Lumbermens Mutual Casualty and Reliance Insurance Company, Appellants v. Grant Thornton, et al., Respondents.

WD57848

Missouri Court of Appeals Western District

Handdown Date: 12/05/2000

Appeal From: Circuit Court of Jackson County, Hon. Justine E. Del Muro

Counsel for Appellant: Bernard L. Balkin

Counsel for Respondent: Mark W. Brennan

Opinion Summary: Lumbermens Mutual Casualty Company and Reliance Insurance Company appeal summary judgment in favor of defendants Grant Thornton, an accounting firm from whom Lumbermens and Reliance sought reimbursement for payments made to Western Container for losses suffered by Western Container as a result of employee theft which was undetected by Grant Thornton's audits. Lumbermens and Reliance alleged negligence and breach of contract by Grant Thornton in the performance of auditing services for Western Container. Grant Thornton counterclaimed against Lumbermens and Reliance alleging negligence, breach of contract, and common law fraud, and sought damages, including attorneys' fees and costs, of defending this action. Lumbermens and Reliance claim on appeal 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, and that there were genuine issues of disputed fact.

DISMISSED.

Division One holds: This court has no jurisdiction to hear Lumbermens and Reliance's appeal since the trial court judgment is not final, having left unresolved the counterclaim of Grant Thornton. Although the summary judgment was certified under Rule 74.01(b), the court retained jurisdiction over Grant Thornton's counterclaim. However, Grant Thornton's counterclaim arises out of the same series of transactions as Lumbermens and Reliance's claims, specifically, the contracts formed by the engagement letters in which Grant Thornton agreed to provide auditing services and Western Container agreed to provide financial information. Since the counterclaim is factually intertwined with the reimbursement claims of Lumbermens and Reliance, the court's decision on summary judgment cannot be final without disposing of the counterclaim. Because not all claims have been determined, there is no appealable judgment.

Opinion Author: Patricia Breckenridge, Judge

Opinion Vote: DISMISSED. Holliger, P.J., Breckenridge and Smart, JJ., concur.

Opinion:

Lumbermens Mutual Casualty Company and Reliance Insurance Company appeal the trial court's order granting summary judgment in favor of defendants Grant Thornton.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. Because both parties offered expert testimony to support their position and it was established that genuine issues of fact existed, this precluded a granting of summary judgment. In addition to the trial court's alleged error concerning the existence of a duty, Lumbermens and Reliance claim that the court erred by ignoring disputed issues of fact concerning Grant Thornton's failure to meet the professional standards required of them. Because this court finds that Grant Thornton's unresolved counterclaim causes the judgment not to be final, this court does not have jurisdiction to hear this case. The appeal is dismissed.

Factual and Procedural Background

During the 1992 through 1996 fiscal years,² Western Container, a corporation affiliated with Americraft Carton Group, Inc., suffered losses in excess of $334,000, as a result of the fraudulent and dishonest conduct of its Controller, Susan J. Horton. Between July 1, 1992, and June 30, 1995, Lumbermens issued fidelity insurance bonds on behalf of Western Container insuring it from fraudulent or dishonest conduct of its employees. Reliance issued similar policies beginning in July 1, 1995. Additionally, during this time, Western Container had employed Grant Thornton to audit its financial statements. 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, 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. The total amount of theft over the five fiscal years was reported to be in excess of $334,000.

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 of 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 concerning their performance of the 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.

Along with their answer, Grant Thornton filed a counterclaim against Lumbermens and Reliance claiming negligence, breach of contract and common law fraud. Grant Thornton stated that they provided audits of the financial statements provided by Western Container. In their claim for negligence, Grant Thornton alleged that Western Container owed a duty to Grant Thornton to provide representations concerning those statements to Grant Thornton in a non-negligent manner and to disclose any irregularities and errors relating to the financial reporting process. Thus, Grant Thornton alleged that Western Container and Ms. Horton acted negligently by supplying misrepresentations about the financial statements. Relying on the financial statements and representations, Grant Thornton issued their audit reports. Next, Grant Thornton claimed that Western Container acted fraudulently in communicating the representations to Grant Thornton and in failing to disclose the irregularities and errors. Finally, Grant Thornton alleged breach of contract in failing to disclose the irregularities and errors relating to the financial reporting process. This breach was based upon signed engagement letters in which Western Container agreed to provide written representations. In the counterclaim, Grant Thornton sought damages, including attorneys' fees and costs, suffered as a result of defending this action.³ 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. Each of the representation...