Micro Enhancement v. Coopers & Lybrand, LLP

• Decision Date: 28 February 2002
• Docket Number: No. 19352-7-III.,19352-7-III.
• Citation: 40 P.3d 1206,110 Wash.App. 412
• Court: Washington Court of Appeals
• Parties: MICRO ENHANCEMENT INTERNATIONAL, INC., a Washington corporation, Appellant, v. COOPERS & LYBRAND, LLP, a New York partnership, and Gordon Budke and Rhoda P. Budke and the marital community composed thereof, and PriceWaterhouseCoopers, LLP, a Delaware limited liability partnership, Respondents and Cross-Appellants.

40 P.3d 1206

110 Wash.App. 412

MICRO ENHANCEMENT INTERNATIONAL, INC., a Washington corporation, Appellant, v. COOPERS & LYBRAND, LLP, a New York partnership, and Gordon Budke and Rhoda P. Budke and the marital community composed thereof, and PriceWaterhouseCoopers, LLP, a Delaware limited liability partnership, Respondents and Cross-Appellants.

No. 19352-7-III.

Court of Appeals of Washington, Division 3, Panel One.

February 28, 2002.

David A. Hoff, Janissa A. Strabuk, Tousley, Brain, Stephens, PLLC, Seattle, for Appellant.

Stephen L. Farnell, Kevin J. Curtis, Winston & Cashatt, Spokane, Evan L. Schwab, Curt R. Hineline, Margarita V. Latsinova, Dorsey & Whitney, Seattle, for Respondents.

OPINION PUBLISHED IN PART

SWEENEY, J.

This accounting malpractice case was tried to a jury on contested facts and theories of law over the course of a seven and a half week trial. The accountants won.

Micro Enhancement International, Inc. (MEI) is a software company, that was looking to float an initial public offering of stock. Its theory of the case was essentially that it would have successfully sold its initial public offering except for delays caused by the incompetence and misrepresentations of its public accountants, Coopers & Lybrand (now PriceWaterhouseCoopers) and its Spokane principal, Gordon Budke (hereafter collectively referred to as Coopers).

Coopers' theory of the case is essentially that it competently discharged its responsibilities in auditing MEI's financial statements and provided timely financial advice, considering the circumstances. But even if it did fail to timely or competently advise, these failures did not undermine MEI's initial public offering. The failure of the offering resulted instead from MEI's precarious financial position, its inability to market its main product (Share Builder), or the incompetence and lack of regulatory qualification of its underwriter, J.E. Liss & Company.

A jury found against Coopers and Mr. Budke on negligence and against Coopers on breach of contract. But the jury also found that there was no causal relationship between the damages sustained by MEI and the negligence or breach of contract.

These questions structure our discussion on appeal:

(1) Whether the trial court erred by allowing the jury to consider the negligence of MEI's underwriter, J.E. Liss & Company— an entity MEI did not sue. (2) Whether the trial court erred by instructing the jury on superseding intervening cause not attributable to the defendants as the sole proximate cause of MEI's damages.

(3) Whether the trial court should have allowed MEI to amend its complaint three days before trial, or, at the close of its case, to add an additional cause of action against Coopers for breach of a fiduciary duty.

(4) Whether the court should have allowed MEI to present its negligent misrepresentation claim to the jury.

(5) And whether Coopers' failure to notify MEI that it considered MEI a high-risk client violated the Consumer Protection Act.

We conclude that (1) MEI failed to argue the reasons it now argues on appeal to support its objection to the inclusion of J.E. Liss & Company as an entity against whom the jury could find fault; (2) the court properly instructed the jury on superseding intervening cause in light of substantial evidence that other non-concurrent causes besides the negligence of Coopers proximately caused MEI's damages; (3) the trial judge did not abuse his considerable discretion in denying MEI's motion to add an additional claim for breach of fiduciary duty. And MEI failed to show that Coopers owed such a duty in any event. (4) The court properly rejected MEI's negligent misrepresentation claim as unsupported by any evidence; and, (5) the contractual relationship between these sophisticated commercial enterprises did not have the capacity to deceive the consuming public and did not therefore implicate the Consumer Protection Act.

In the unpublished portion of the opinion, we address numerous assignments of error to rulings on evidence made by the trial judge. We find tenable grounds and tenable reasons for each ruling and therefore no abuse of discretion. Accordingly, we affirm the judgment. We also dismiss without reaching the merits a cross-appeal by Coopers in which it claims the trial court erred in certain evidentiary rulings.

FACTS

HISTORY

MEI is a Spokane-based software company. For several years, it successfully developed and marketed barcode scanning products used for grocery store inventory control and pricing. In 1992, MEI began developing a new patented kiosk marketing system called Share Builder. MEI intended that Share Builder replace paper grocery coupons and reward frequent shoppers.

By the fall of 1994, MEI focused its entire competitive strategy on developing and marketing Share Builder. But MEI needed capital to fund Share Builder so MEI planned an initial public offering (IPO) of stock.

Chief Executive Officer (CEO) Timothy Staples hired Spokane's only Big 6 firm, Coopers & Lybrand, to audit MEI's financial statements for stock registration purposes. Coopers promised prompt, local decision making by Mr. Budke and the use of national consultants as needed to ensure appropriate service. Coopers immediately designated MEI as a high-risk client and placed it on a "Special Attention List." Report of Proceedings (RP) at 1,460-61. But it did not tell MEI. The special attention designation meant Coopers would perform additional procedures and reviews for internal risk management purposes and this would result in additional expense to MEI.

Coopers expected to deliver its 1993 and 1994 audit report by April 14, 1995. But Coopers and MEI disagreed over what Coopers viewed as MEI's overly aggressive positions on the recognition of income. Coopers also disagreed with MEI over recognition of other assets and allocation of expenses. Finally, they disagreed into the fall of 1995 over whether MEI's 1994 year-end financial statement had to include a "going concern" paragraph—an expression of doubt by the auditor that MEI would remain in business beyond one year.

Mr. Staples finally agreed to include the going concern paragraph in the 1994 financial statements. But the disagreement over "going concern" and related footnotes delayed a scheduled November 20, 1995 filing of the Securities and Exchange Commission (SEC) registration statement for the IPO.

THE UNDERWRITER

Jerome Liss is a Milwaukee investment banker. His brokerage firm is J.E. Liss & Company (Liss). MEI agreed with Liss to agree at some future date to underwrite by "firm commitment" 1,000,000 shares of MEI common stock at an anticipated offering price of $5 per share. In a "firm commitment" underwriting, the underwriter becomes personally obligated to purchase the stock upon effectiveness of the registration statement. This is as opposed to a "best efforts" underwriting, where the issuing company, not the underwriter, bears the risk of the underwriter's inability to sell the stock.

Mr. Liss was a veteran at "best efforts" stock offerings. He hoped to take his company to another level by making the MEI offering his first "firm commitment" underwriting. Mr. Liss claimed $3.5 million personal net worth and a staff of in-house brokers with large client bases gave him the financial wherewithal to underwrite the MEI offering. But he actually intended to form an underwriter syndicate to make the commitment to purchase the stock. This would help him break into the closed fraternity of firm commitment underwriters.

On March 6, 1996, Liss and MEI executed a formal underwriting agreement. Liss represented that his firm had the authority to act as lead underwriter of the "several underwriters" named in the agreement. But there were no other underwriters named in the agreement; none were yet enlisted. CEO Staples nonetheless believed that the agreement would ultimately obligate Liss on a "firm commitment" basis to purchase the entire 1,000,000-share offering. But the agreement contained an escape clause. The clause allowed Liss to abandon the offering without penalty at any time before effectiveness of the registration statement.

Any commitment by Liss was then illusory.

Ultimately, in December 1996, Mr. Liss sent MEI a letter withdrawing from the IPO. He claimed that his inability to obtain financial information due to Coopers' excessive delays was "most distressing." Ex. 943.

SEC REGISTRATION

MEI filed its SEC registration statement on December 19, 1995, after it received the audited 1993 and 1994 financial statements. The offering anticipated sale of 1,000,000 shares of common stock at an offering price of between $5.00 and $7.50 per share, to be underwritten by Liss. MEI represented that it expected significant revenue growth in 1996 and 1997 from Share Builder installations in possibly 100 additional grocery stores for existing customer Roundy's. The registration statement did contain a going concern paragraph, but with accompanying explanations. The registration statement also warned prospective investors that MEI had losses for 1993, 1994, and the 9 months ending September 30, 1995. And it further warned that generating revenue, obtaining financing, or succeeding in an intensively competitive market was uncertain.

The SEC responded with a comment letter requiring explanation by April 24, 1996, on 43 items in the registration statement. Three items required comments on accounting issues by Coopers; one expressed concern about Liss:

According to SEC records, the Underwriter [Liss] has participated in only one other registration statement declared effective by the SEC. Assuming the foregoing is accurate, please include a separate risk factor concerning the relative inexperience of the Underwriter in public offerings of the nature contemplated by the Registration Statement. Please request the Underwriter to supplementally provide the staff with a letter representing that as of the date of

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