Peat, Marwick, Mitchell & Co. v. Superior Court

• Court: California Court of Appeals
• Writing for the Court: HANING; LOW; KING; KING
• Citation: Peat, Marwick, Mitchell & Co. v. Superior Court, 245 Cal.Rptr. 873, 200 Cal.App.3d 272 (Cal. App. 1988)
• Decision Date: 14 April 1988
• Docket Number: No. A038891,A038891
• Parties: PEAT, MARWICK, MITCHELL & CO. (Now registered with Board of Accountancy as Peat, Marwick, Main & Co.), Petitioner, v. Contra Costa County SUPERIOR COURT, Respondent, PEOPLE of the State of California, et al., Real Parties in Interest.

Page 873

245 Cal.Rptr. 873

200 Cal.App.3d 272

PEAT, MARWICK, MITCHELL & CO. (Now registered with Board of Accountancy as Peat, Marwick, Main & Co.), Petitioner, v. Contra Costa County SUPERIOR COURT, Respondent PEOPLE of the State of California, et al., Real Parties in Interest.

No. A038891.

Court of Appeal, First District, Division 5, California.

April 14, 1988.

As Modified April 19, 1988.

Review Denied July 28, 1988.

Boake Christensen, James B., Lewis, Leslie G. Landau, McCutchen, Doyle, Brown & Enersen, San Francisco, for petitioner Peat, Marwick, Mitchell & Co.

No appearance for respondent Contra Costa Superior Court.

John K. Van De Kamp, Atty. Gen., Randall P. Borcherding, Deputy Atty. Gen., San Francisco, for real party in interest People of the State of Cal.

Jan T. Chilton, Robert L. Lofts, Donald J. Querio, Severson, Werson, Berke & Melchior, San Francisco, for real party in interest Com'r of Corporations.

HANING, Associate Justice.

The accounting firm of Peat, Marwick, Mitchell & Company (Peat Marwick), defendant in an accounting malpractice action, petitions for extraordinary relief from an order precluding it from controverting plaintiffs' evidence on certain elements of the malpractice allegations. After Peat Marwick merged with KMG Main Hurdman (Main Hurdman), the accounting firm retained by plaintiffs as their expert witness, the trial court made the preclusion order to prevent the compromise of confidential information and to preserve the integrity of the judicial process. Peat Marwick contends the trial court was without power to enter a preclusion order in the absence of statutory authorization, and that any such power the court did enjoy was abused under the facts of this case.

We summarily denied Peat Marwick's petition, but the California Supreme Court granted review and transferred the matter back to this court with directions to issue the alternative writ. We issued the writ and heard oral argument. We conclude that the petition is without merit.

I

A

The underlying action concerns the financial failure of Western Community MoneyCenter (MoneyCenter), a Contra Costa based thrift and loan corporation and former Peat Marwick client. At the time of its failure MoneyCenter had approximately 12,000 thriftholders, mostly Contra Costa residents, with accounts reportedly totalling about $98 million. On April 20, 1984, the California Commissioner of Corporations (Commissioner) placed MoneyCenter in liquidation. On May 29, 1984, the Commissioner, in the name of the People of the State of California (the People) filed suit on behalf of MoneyCenter thriftholders, creditors and the liquidation estate. The suit sought to recoup an estimated $25 million deficit allegedly caused by the intentional and negligent mismanagement by MoneyCenter officers and directors. On November 15, 1984, the Commissioner, joined by the Attorney General, filed a first amended complaint adding Peat Marwick as a defendant based on an allegedly negligent audit which contributed to the MoneyCenter decline. The People alleged that MoneyCenter's failure resulted from "the mismanagement of that financial institution by the officers and directors responsible for it, the intentional misconduct of certain of those officers and directors and the failure of its certified public accountants to properly audit its financial affairs."

The following background facts are allegations taken from the People's complaint.

Peat Marwick had been hired by MoneyCenter in September 1982 to audit MoneyCenter's financial affairs. One purpose of the audit was to provide financial reports to the Commissioner and to each MoneyCenter thriftholder, in conformity with Financial Code section 18406. ¹ Peat Marwick misrepresented that its auditing personnel were adequately trained and that its proposed audit methods complied with applicable law. Peat Marwick conducted the audit and in early 1983 issued its audit reports which contained inaccurate and misleading information concerning MoneyCenter's financial solidity as of December 31, 1982. These reports overstated MoneyCenter income, falsely stated a net income of over $1 million, understated the loan loss reserve, and failed to mention the deficiencies of MoneyCenter's books and records. It is further alleged that Peat Marwick was not an independent auditor "because of its dual role as auditor and management consultant, its preparation of missing accounting documents for MoneyCenter which it then proceeded to audit, and the negotiations by at least one member of Peat Marwick's supporting staff for the acquisition of an equity interest" in the holding company which owned all MoneyCenter stock.

Peat Marwick did not notify the Commissioner, creditors, or thriftholders when it discovered the inaccuracies of its audit. Had the Commissioner been made aware of the audit's falsity, he could have taken appropriate corrective steps. In reliance on the inaccurate audit, the Commissioner allowed MoneyCenter to continue its operations; thriftholders continued to place their funds with MoneyCenter and creditors continued to extend credit. As a proximate result of reliance on the audit, MoneyCenter became insolvent and the creditors and thriftholders were damaged by an alleged deficit, or shortfall, in the liquidation estate of over $25 million.

The People's complaint sets out 11 causes of action against MoneyCenter officers and directors and others, alleging claims of improper intercorporate transfers, negligent management, breach of fiduciary duty and misrepresentations of the financial condition of MoneyCenter. Three additional causes of action, the Eleventh, Twelfth and Thirteenth, accuse Peat Marwick of negligently performing its audit, of breaching its contract with MoneyCenter to perform the audit in compliance with general accounting principles, and of negligently misrepresenting its audit's conclusions. Peat Marwick is also named as defendant in two causes of action alleging unfair competition and untrue and misleading advertising. (Bus. & Prof. Code, § 17200, 17500.)

B

The facts of Peat Marwick's merger with the People's accounting expert are the foundation of the trial court's preclusion order, and are taken almost entirely from the trial court's findings of fact. These findings are binding on this court unless unsupported by substantial evidence. (Foot's Transfer & Storage Co. v. Superior Court (1980) 114 Cal.App.3d 897, 902, 171 Cal.Rptr. 1.) Peat Marwick has not shown, indeed has not attempted to show, that the findings of fact are unsupported by substantial evidence. Peat Marwick has for the most part merely restated its own evidence, and not the contrary evidence on which the trial court relied. (See Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881, 92 Cal.Rptr. 162, 479 P.2d 362.) Accordingly, we recite the facts as found by the trial court, and supported by the record.

After the People initiated their MoneyCenter lawsuit in May 1984, they recognized the need to retain an accounting firm as an expert witness in the forthcoming complicated litigation. Of the available "Big Eight" accounting firms, Main Hurdman appeared the best qualified. In the autumn of 1984 the People retained Main Hurdman as a professional accounting litigation expert in the MoneyCenter action. There were two primary aspects to Main Hurdman's role as expert--Peat Marwick's professional negligence, and the amount of the deficit, or shortfall, in the MoneyCenter liquidation estate.

With respect to professional negligence, Main Hurdman concluded that Peat Marwick's 1982 audit of the MoneyCenter books was negligently performed and the People had a valid case of accounting malpractice against Peat Marwick. In particular, Main Hurdman advised the People that instead of a one million dollar profit, the MoneyCenter had incurred a multi-million dollar loss. Much of Main Hurdman's work on the issue of professional negligence had been completed by the end of 1984, by which time Peat Marwick had been named and served as a defendant. Main Hurdman then actively assisted the People's attorneys in formulating litigation strategy related to the 1982 audit. After the issue of accounting malpractice had been addressed, the People directed Main Hurdman to assess, as the measure of damages, the precise amount of the deficit in the MoneyCenter liquidation estate. The estimated shortfall ultimately rose to $41 million from the $25 million alleged in the complaint.

For almost the entire time Main Hurdman was the People's litigation expert, it and defendant Peat Marwick were in the process of negotiating a merger. Shortly after Main Hurdman was retained by the People, merger negotiations commenced. The trial court found that the merger's genesis could be traced back to December 1984 and January 1985 when there were "early exchanges of information." Although fully aware of the manifest conflict of interest which would be created by a merger between Peat Marwick as defendant and Main Hurdman as plaintiffs' expert, Main Hurdman continued discussions and negotiations with Peat Marwick throughout the spring and summer of 1985. The negotiations ended in September 1985 when certain international partners of Main Hurdman disagreed with the proposed merger.

For what the trial court found were "undoubtedly ... good business reasons," the negotiations were cloaked in secrecy, complete with code names to disguise the real parties. In spite of these efforts at secrecy there was a "leak" to the press and a story appeared in the Wall Street Journal. However, before the People's attorneys learned anything of the proposed merger, Main Hurdman's regional managing partner assured them in early September 1985 that there was no truth to the "rumors" of merger talks between Peat Marwick and Main Hurdman. Having this assurance, the People continued with Main Hurdman as their chosen expert.

In March 1986 the People learned that Mr. Richard Miller,...