U.S. Nat. Bank of Oregon v. Fought

• Jurisdiction: Oregon
• Parties: UNITED STATES NATIONAL BANK OF OREGON, a national banking association, and Investment Service Company, a wholly-owned subsidiary, Respondents, v. John A. FOUGHT, Jr., and James A. Jones, dba John Fought & Co., a partnership, Petitioners. CA 14150; SC 27155.
• Citation: U.S. Nat. Bank of Oregon v. Fought, 630 P.2d 337, 291 Or. 201 (Or. 1981)
• Court: Oregon Supreme Court
• Decision Date: 23 June 1981

Page 337

630 P.2d 337

291 Or. 201

UNITED STATES NATIONAL BANK OF OREGON, a national banking association, and Investment Service Company, a wholly-owned subsidiary, Respondents, v. John A. FOUGHT, Jr., and James A. Jones, dba John Fought &amp Co., a partnership, Petitioners.

CA 14150; SC 27155.

Supreme Court of Oregon.

Argued and Submitted Nov. 7, 1980.

Decided June 23, 1981.

John R. Faust, Jr., Portland, argued the cause, for petitioners. With him on the briefs were Kenneth E. Roberts, Ridgway K. Foley, Jr., and Schwabe, Williamson, Wyatt, Moore & Roberts, Portland.

William H. McAllister, Portland, argued the cause, for respondents. With him on the briefs were Richard C. Josephson, and Stoel, Rives, Boley, Fraser & Wyse, Portland.

Before HOWELL, ^* P. J., and LENT, LINDE, PETERSON, and TANZER, JJ.

LENT, Justice.

This is an action at law for damages allegedly resulting from misrepresentation. The case was tried without a jury, and the trial judge made findings of fact, from which he concluded that plaintiff ¹ was not entitled to prevail and therefore entered judgment for defendants. Upon plaintiff's appeal, the Court of Appeals held that plaintiff had pleaded and proved a cause of action for "fraud" ² and reversed and remanded for entry of judgment in plaintiff's favor. U. S. National Bank v. Fought, 46 Or.App. 635, 612 P.2d 754 (1980).

We allowed defendants' petition for review, ORS 2.520, 289 Or. 587 (1980), to consider whether under the facts pleaded and the facts found by the trial judge plaintiff is entitled to recover.

Factual Background

We take the factual background ³ from the trial judge's findings of fact. We believe it desirable to set forth this background in order that our discussion of the issues may be better understood.

Miller's International, Inc., (herein "MI") in August of 1976 was indebted to plaintiff in an amount in excess of.$1.4 million upon loans. MI was in default on payment on the loans. Defendants were a firm of certified public accountants and had been performing accounting and auditing services for MI for several years. Defendants had prepared financial statements on the operation of MI, which had been supplied to the plaintiff at various times prior to August, 1976.

In August, 1976, MI, acting through its president, Kenneth Miller, agreed with plaintiff that all cash flow, proceeds of inventory and collections from accounts receivable would be deposited in a cash collateral account to be controlled by plaintiff. From that account plaintiff agreed to make additional advances to MI for payment of items approved by plaintiff.

At about the same time, MI discharged its in-house bookkeeper and defendants began to perform bookkeeping, as well as accounting, services for MI. Defendant Jones was primarily responsible for the bookkeeping. Miller told plaintiff to rely on Jones for financial information, and Jones confirmed this to plaintiff.

To obtain payment of items from the cash collateral account, MI would present to the plaintiff every two weeks a list of checks that MI desired to have approved. Those that plaintiff approved would then be issued. The lists were prepared by defendants' employees and were brought to plaintiff by either Miller or Jones.

In November, 1976, Miller began to divert funds from MI by either obtaining cash from, or endorsing checks payable to, MI and depositing the monies in his personal bank account in a different bank. Miller used part of the diverted funds to pay bills of MI which plaintiff would not have authorized to be paid. During November and December, 1976, and January, 1977, defendants were aware of Miller's activities in this respect. Miller told Jones not to reveal these activities to plaintiff.

Defendants continued to prepare "financial information," and Jones would personally present lists of checks for plaintiff's approval. When doing so, Jones did not disclose to the plaintiff Miller's activities. Defendants knew that Miller was using the diverted funds for purposes which plaintiff would not have authorized. Plaintiff was unaware of Miller's diversions of funds.

During all of this time defendants were award of the terms of the agreement between MI and the plaintiff that all of such funds should have been deposited in the cash collateral account.

In December, 1976, plaintiff discovered a discrepancy between MI's receipts and deposits to the cash collateral account. At a meeting held among plaintiff's employees, Miller, defendant Fought and Jones on January 14, 1977, Miller and the defendants were questioned about the discrepancy. Fought responded that he would look into the matter. Jones said nothing and "wilfully" withheld disclosure of Miller's activities from plaintiff.

From the onset of the diversions to the time of the meeting of January 14, defendant prepared no financial statements verifying or certifying the financial position of MI.

We now quote directly from the trial judge's findings:

"What defendants Fought and Jones did do was to present a list of checks to the plaintiff, knowing them to be false, and by nonverbal conduct representing them as true, knowing the bank was relying on the false lists to its damage. The actions of the defendant (sic) were on the very edge of fraud. The bank was damaged over $100,000 by the accountants' conduct."

The trial judge concluded that one element of fraud was missing. He relied upon language of this court from McFarland v. Carlsbad Sanatorium Co., 68 Or. 530, 535, 137 P. 209 (1914), which was, in turn, quoted from Rolfes v. Russel, 5 Or. 400 (1875), stating that one of the elements which had to be proved was that the false representations had to be made with "intent to defraud." The trial judge found that "plaintiff has not proven by clear and convincing evidence that the CPA firm intended to defraud" plaintiff.

Plaintiff has at all times asserted a right to recover under 3 Restatement (Second) of Torts, § 551 (1977) (hereinafter § 551). ⁴ With respect to the claim of right to recover under § 551, the trial judge found that defendants were not "parties" to the transaction and "Further, the 'duty' and 'reasonable care' language refers to negligence which I find cannot form a basis of recovery."

He concluded that defendants had no duty to disclose under § 551.

In the Court of Appeals

Upon appeal plaintiff contended that upon the facts found by the trial judge, plaintiff was entitled to judgment because

"defendants both defrauded the Bank and violated their duty to disclose material facts under the Restatement (Second), Torts §§ 550 and 551 (1977). ⁵

Defendants contended that in the trial court plaintiff had neither alleged nor proved "fraud" and had failed to establish a case under § 551 because defendants owed no duty to plaintiff under that section and because the trial court was correct in stating that the theory of recovery under that section was "essentially one of negligence."

The Court of Appeals found it unnecessary to determine whether § 551 was applicable because, as observed at the outset of this opinion, that court agreed with plaintiff that it had pleaded and proved "fraud." ⁶

Pretrial Proceedings

In order to understand the way in which this cause was presented to the trial court, a review of proceedings prior to trial is of assistance.

In its amended complaint, upon which it eventually went to trial, plaintiff pleaded that during the fall of 1976 defendants prepared financial statements ⁷ on the operations of MI and that these statements were supplied to plaintiff with defendants' knowledge and consent. Plaintiff pleaded the agreement with MI defendants' awareness thereof, Miller's diversion of the funds and defendants' knowledge thereof, Jones' part in the delivery of the lists of checks, and that the defendants failed to disclose to plaintiff Miller's diversions. Plaintiff alleged that it relied upon the "financial statements" prepared by defendants and the lists of checks as "indicating" that the only funds of MI, available to pay its obligations were those in the cash collateral account and that all funds receivable by MI were being deposited in that account.

Up to that point in the amended complaint, the word "representation" had not appeared in any form. At that point, in paragraph IX on page 3 of the amended complaint, plaintiffs alleged:

"Such representations were false when made and known by defendants to be false. Defendants further knew, or should have known, that plaintiff was relying on such representation."

The amended complaint alleged damages in the amount of $105,706.67. ⁸

Defendants filed an answer and subsequently an amended answer joining issue as to liability and an affirmative answer alleging that plaintiff's damages, if any, were caused by plaintiff's negligence in certain particulars. Plaintiff demurred to the affirmative defense on the ground "that contributory negligence is not a defense to an intentional tort," citing Kubeck v. Consolidated Underwriters, 267 Or. 548, 555, 517 P.2d 1039 (1974); Restatement (Second) Torts, §§ 481, 545A; Prosser, Law of Torts 426, § 65 (4th ed. 1971).

In Kubeck the plaintiff sought to recover upon an insurance policy. The defense was that the policy had been issued in reliance upon plaintiff's material misrepresentation concerning the characteristics of the chattel covered. The insurer negligently relied upon the misrepresentation. The issue was whether the reliance, in such circumstances, was justifiable, i. e., whether there was a right to rely. To resolve that issue, this court discussed cases holding that a "fraud-feasor" will not be entitled to prevail by showing the negligence of the other party in believing the misrepresentation.

2 Restatement (Second) of Torts, § 481, states the rule that when the defendant is subject to liability because his conduct is intended to cause injury, contributory negligence will not bar recovery.

3 Restatement (Second) of Torts, § 545A, appears in...