National Medical Transp. Network v. Deloitte & Touche

• Citation: 72 Cal.Rptr.2d 720,62 Cal.App.4th 412
• Decision Date: 27 February 1998
• Docket Number: No. D024940,D024940
• Court: California Court of Appeals
• Parties: , 98 Cal. Daily Op. Serv. 2063, 98 Daily Journal D.A.R. 2850 NATIONAL MEDICAL TRANSPORTATION NETWORK, Plaintiff and Respondent, v. DELOITTE & TOUCHE et al., Defendants and Appellants.

Page 720

72 Cal.Rptr.2d 720

62 Cal.App.4th 412, 98 Cal. Daily Op. Serv. 2063,

98 Daily Journal D.A.R. 2850

NATIONAL MEDICAL TRANSPORTATION NETWORK, Plaintiff and Respondent, v. DELOITTE & TOUCHE et al., Defendants and Appellants.

No. D024940.

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

Feb. 27, 1998.

Cooley Godward Castro Huddleson & Tatum, Cooley Godward LLP, Paul A. Renne, San Francisco, Michael G. Rhodes, San Diego, Heller Ehrman White & McAuliffe, M. Laurence Popofsky, San Francisco, Michael L. Rugen and Alan A. Harley, for Defendant and Appellant.

Bryant, Clohan, Ott, Maines & Baruh, LLP, Palo Alto, Robert L. Maines, Meredith Fahn, Willkie Farr & Gallagher, Louis A. Craco, Michael R. Young, Mary L. Gerdes and Richard I. Miller as Amicus Curiae on behalf of Defendant and Appellant.

Corona & Balistreri, Richard D. Corona, San Diego, and Daniel S. Levinson, for Plaintiff and Respondent.

KREMER, Presiding Justice.

Defendants Deloitte & Touche and Gordon Johns appeal a judgment after jury trial favoring plaintiff National Medical Transportation Network (Medtrans) on its claims for professional negligence, breach of contract and negligent interference with prospective economic advantage. ¹ Defendants claim instructional errors, evidentiary error and the lack of substantial evidentiary support for various jury findings. Finding instructional errors plus insufficient evidence of causation, we reverse the judgment.

I INTRODUCTION

Seeking to obtain capital contributions by investors, Medtrans hired defendants as independent auditors to issue an opinion about its financial condition. After unsuccessfully seeking to resolve disagreements with Medtrans's management about the need for adjustments to the company's financial statements, defendants resigned without issuing an audit opinion. Although hiring successor auditors, Medtrans lost a potential $10 million capital investment.

Medtrans brought this lawsuit against defendants for committing professional negligence by withdrawing prematurely from the auditing engagement, breaching the parties' engagement contract by not issuing an audit opinion to plaintiff, and negligently interfering with Medtrans's prospective economic advantages with successor auditors and a potential investor by making defamatory statements impugning the honesty of Medtrans's management.

At trial Medtrans asserted defendants' wrongdoing caused it to lose a potential $10 million capital investment. Defendants claimed that under professional standards governing auditors they had good cause to resign from their engagement with Medtrans based upon their determinations that Medtrans's management was uncooperative, made unreliable financial representations and impaired defendants' independence by making threats. The parties disputed whether defendants' resignation was with good cause. However, the trial court gave a jury instruction not mentioning good cause but indicating instead that defendants' resignation was wrongful if unduly prejudicial to Medtrans's interests or occurring before Medtrans had reasonable opportunity to engage a successor auditor. The jury awarded Medtrans almost $10 million in damages against defendants.

Defendants contend the jury instruction on resignation misstated the professional standard governing their conduct; Medtrans did not meet its burden to show its damages were caused by defendants; admission of "baseless" testimony by Medtrans's damages expert was prejudicial error; the jury instruction on negligent interference with prospective economic advantage lacked the necessary element of independent wrongfulness; and Medtrans did not prove all elements of its cause of action for negligent interference with prospective economic advantage.

We reverse the judgment, concluding (1) the trial court prejudicially erred in giving an incorrect jury instruction on the standard governing defendants' resignation from their professional engagement with Medtrans; (2) the record was devoid of substantial evidence that defendants caused Medtrans's alleged damages for breach of contract; and (3) the jury instruction on negligent interference with economic advantage omitted the tort's "independent wrong" material element. In light of the disposition based on those issues, we do not reach defendants' attacks on the admission of Medtrans's damages expert's testimony or the sufficiency of the evidence for the finding defendants negligently interfered with Medtrans's prospective economic advantage.

II FACTS

In determining whether the court erred in instructing the jury on the standard governing defendants' withdrawal from their professional auditing engagement with Medtrans, we view the evidence in the light most favorable to defendants. (Cf. Blackwell v. Hurst (1996) 46 Cal.App.4th 939, 943, 54 Cal.Rptr.2d 209; Maxwell v. Powers (1994) 22 Cal.App.4th 1596, 1607, 28 Cal.Rptr.2d 62; Bernal v. Richard Wolf Medical Instruments Corp. (1990) 221 Cal.App.3d 1326, 1338, 272 Cal.Rptr. 41.) ²

In 1988 ambulance service provider Medtrans retained as its independent auditor the predecessor of national accounting and auditing firm Deloitte.

For fiscal years ending March 31, 1988, through March 31, 1991, Deloitte audited and issued reports on Medtrans's financial statements.

By 1992 Medtrans was highly leveraged, in need of cash and unable to pay its bills currently. Since Medtrans's primary lender had demanded repayment of its $12 million line of credit, Medtrans was seeking a replacement lender. Although Medtrans owed almost $2 million on its payroll tax obligations and its chief financial officer spent much of his time trying to cut the company's budget, Medtrans's chief executive officer Roberts drew a $400,000 salary.

As a partner in Deloitte, defendant Johns supervised the audit of Medtrans's financial statements for the fiscal year ending March 31, 1992 (fiscal 1992). At that time Medtrans's chief executive officer Roberts and Medtrans's president Morgan each owned 50 percent of Medtrans's common stock.

On June 9, 1992, with the fiscal 1992 audit in progress, Medtrans's chief financial officer Ensz resigned effective June 26, 1992.

On June 18, 1992, for the purpose of saying he could not sign a management letter attesting to the accuracy of Medtrans's financial statements since he did not think those statements were presented fairly, Ensz initiated a meeting with Johns. ³ At the meeting Ensz Meanwhile, as the fiscal 1992 audit proceeded, Roberts sought to convince William Blair & Company (Blair) to invest capital in Medtrans. Based on unaudited financial statements provided by Roberts showing $1.9 million in profits during fiscal 1992, Blair preliminarily projected Medtrans's potential earnings in 1995 would be $5.7 million. Although those unaudited statements prepared showed fiscal 1992 earnings of $1.9 million, defendants concluded based on their own audit procedures that Medtrans actually lost about $500,000. Defendants proposed adjustments to Medtrans's financial statements. Attempting unsuccessfully to resolve the parties' differences, defendants worked with Medtrans for about eight weeks before eventually concluding Medtrans was stonewalling.

                alerted Johns to four or five matters relevant to the audit.  Ensz said that upon informing Roberts that those matters were not properly entered in Medtrans's journals, Roberts told Ensz to leave the journals as they were and "let's see" if the auditors "find it." 4  Questioning Roberts's character for honesty because of some things Roberts advocated in presenting financial information, Ensz also stated he lacked faith in the integrity of Roberts and Medtrans's financial statements
                

On July 9, 1992, as part of the attempted resolution of the parties' disagreements, defendants met with Roberts for their first substantive discussions about the audit. A very focused Roberts vocally and explicitly emphasized the importance of Medtrans's pre-tax earnings because of the potential that Blair might invest in the company. At the meeting defendants expressed concerns about Medtrans's practice of retaining inadvertent overpayments or duplicate payments from patients or insurers and treating such payments as earned income in its accountings. Johns presented Roberts with about $2.5 million in suggested adjustments involving the accounts receivable reserve account. Roberts told Johns: "You better not propose any adjustment that will queer my deal or you'll be sorry." Johns was shocked by Roberts's comments and felt threatened by Roberts. Soon after the meeting, Johns contacted Bluey, the partner in Deloitte's national office responsible for advising on troublesome situations and difficult clients. Johns expressed concern about Medtrans's commitment to fairly stated financial statements. Stating "we should not be associated with companies that threaten us," Bluey advised that defendants should resign unless Roberts agreed to the proposed adjustments. Johns said he wanted to give Medtrans time to analyze defendants' receivable reserve analysis since a $2 million to $3 million adjustment would be a shock for a company of Medtrans's size.

On July 27, 1992, Blair signed a non-binding letter of intent agreeing to consider investing $10 million for 50 percent of Medtrans's common stock. Blair's letter of intent specified various conditions requiring satisfaction before Blair proceeded further. Blair's audit firm, Ernst & Young, assisted in Blair's investigation of Medtrans.

On July 30, 1992, at a meeting with defendants, Medtrans presented a memorandum about its accounts receivable reserve, Medtrans's first response to defendants' proposed adjustments to its unaudited financial statements. The parties also discussed defendants' conclusion that Medtrans's unaudited financial statements improperly recognized $80,000 income on a purported equipment sale from one subsidiary of Medtrans to another. Roberts reiterated the importance...