Vanderbilt Growth Fund, Inc. v. Superior Court

• Decision Date: 12 May 1980
• Parties: VANDERBILT GROWTH FUND, INC., Vanderbilt Income Fund, Inc., and Pegasus Income & Capital Fund, Inc., Petitioners, v. The SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent; ARTHUR YOUNG & COMPANY, a partnership, Real Party in Interest. Civ. 58503.
• Court: California Court of Appeals Court of Appeals

Page 621

164 Cal.Rptr. 621

105 Cal.App.3d 628

VANDERBILT GROWTH FUND, INC., Vanderbilt Income Fund, Inc., and Pegasus Income & Capital Fund, Inc., Petitioners, v. The SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent ARTHUR YOUNG & COMPANY, a partnership, Real Party in Interest.

Civ. 58503.

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

May 12, 1980.

Hearing Denied July 9, 1980.

Greenberg & Glusker, Arthur N. Greenberg and Norman H. Levine, Los Angeles, for petitioners.

Macdonald, Halsted & Laybourne, Travers D. Wood, Los Angeles, Lawrence D. Steckmest, Marina, Carl D. Liggio, New York City, and Eugene R. Erbstoesser, Marina Del Rey, for real party in interest.

No appearance for respondent.

LILLIE, Associate Justice.

Petitioners Vanderbilt Growth Fund, Inc., Vanderbilt Income Fund, Inc., and Pegasus Income & Capital Fund, Inc., seek a writ of mandate directing respondent Superior Court to vacate two orders granting motions of real party in interest Arthur Young & Company (Arthur Young) for summary adjudication of the issues of certain damages in petitioners' action against Arthur Young based on negligence and breach of contract. ¹ On March 5, 1980, we issued an alternative writ.

The first cause of action (negligence) of petitioners' second amended complaint alleges: Each of the petitioners is an open-end, diversified investment company having its principal place of business in Los Angeles. Arthur Young, an accounting firm, audited the financial statements of each petitioner for the year ending December 31, 1973, and gave its opinion dated January 25, 1974, that such financial statements fairly represented the net assets of each petitioner as of December 31, 1973, in accordance with generally accepted accounting principles. In performing the audit and rendering its opinion, Arthur Young breached the duty of care which it owed to petitioners by (among other omissions) failing to discover the inadequacy or nonexistence of the collateral for certain securities owned by petitioners and by failing to determine that certain restricted securities held by petitioners had not been properly valued. But for such breach of duty, petitioners would have discovered the impropriety of certain investments made on their behalf by some of their officers and directors, and would have discovered the existence of a scheme to defraud petitioners which was entered into by such officers and directors and by petitioners' investment advisors. As a "direct and proximate" result of Arthur Young's conduct, petitioners suffered damages totaling $4,210,000, as follows: petitioners failed to discover that their investments in three debentures of Burreson & Co. in the face values of $500,000, $350,000, and $650,000, respectively, were worthless until after Burreson had filed a petition for reorganization under the Bankruptcy Act, at which time it was too late for petitioners to take action to protect said investments, and until after petitioners had invested an additional $500,000 in other worthless securities; petitioner Pegasus Income & Capital Fund, Inc. (PIC) failed to discover that its investment of $900,000 in securities of Oh Boy$ Industries, Inc., was worthless or virtually worthless until it was too late for PIC to take action to protect said investment, and until after PIC had invested an additional $1,310,000 in other worthless securities. ²

The second cause of action (breach of contract) incorporates all of the allegations of the first, and alleges in addition: Prior to December 1973, each of the petitioners entered into a separate contract with Arthur Young whereby the latter agreed to act as auditor for each petitioner and each agreed to compensate Arthur Young for its services. Arthur Young breached said contracts by its failure to act with reasonable care or in accordance with generally accepted accounting principles. By reason of such breaches, petitioners were damaged as alleged in the first cause of action and were further damaged in that they paid to Arthur Young, pursuant to the contracts, fees of $18,550, $19,340, and $20,310.

On June 21, 1979, Arthur Young moved for summary adjudication of the issue of damages (in both the first and second causes of action) allegedly occasioned by petitioners' purchases of the Burreson securities. ³ Papers were filed in support of and in opposition to the motion. On August 30, 1979, the motion was granted, the court's minute order stating: "The court finds the following issue to be without substantial controversy: (P) Plaintiff's (petitioners') Burreson-related damages at trial are zero."

On November 23, 1979, Arthur Young filed another motion for summary adjudication of the issue of damages, this time seeking an order determining that the damages of petitioner PIC in both causes of action allegedly occasioned by its purchase of Oh Boy$ securities are zero. Hearing on the motion was scheduled for December 10, 1979. On November 29, pursuant to PIC's ex parte application, the court continued the hearing to December 21, 1979. On December 3, PIC noticed a motion for continuance of the hearing to March 1980 on the ground that PIC needed time for discovery or "further investigation" to ascertain facts necessary to enable it to oppose the motion for summary adjudication of the issue of its Oh Boy$ damages. The motion for continuance was denied on December 18, 1979. Papers supporting and opposing the motion for summary adjudication were filed. On December 31, 1979, the court granted the motion, its order stating: "The Court finds the following issue to be without substantial controversy: (P) Plaintiffs (PIC's) Oh Boy$ Industries, Inc., related damages at trial are zero."

Petitioners contend: (1) each of Arthur Young's motions for summary adjudication was improperly granted because triable issues of fact exist on the question whether Arthur Young's negligence prevented petitioners from recovering their Burreson and Oh Boy$ damages, and (2) respondent court erred in refusing to grant petitioner PIC a continuance to conduct additional discovery and investigation.

Burreson Damages

A defendant moving for summary judgment must conclusively negate a necessary element of the plaintiff's case or establish a complete defense, and thereby demonstrate that under no hypothesis is there a material factual issue which requires the process of a trial. (Tresemer v. Barke (1978) 86 Cal.App.3d 656, 661-662, 150 Cal.Rptr. 384.) "If the defendants' declarations in support of a motion for summary judgment establishes a complete defense to plaintiff's action or demonstrates an absence of an essential element of plaintiff's case, and the plaintiff's declaration in reply does not show that a triable issue of fact with respect to that defense or that essential element exists, no amount of factual conflicts upon other aspects of the case will affect the result and the motion for summary judgment should be granted." (Frazier, Dame, Doherty, Parrish & Hanawalt v. Boccardo, Blum, Lull, Niland, Teerlink & Bell (1977) 70 Cal.App.3d 331, 338, 138 Cal.Rptr. 670, 673.)

In support of its motion for summary adjudication of the issue of petitioners' Burreson damages, Arthur Young submitted petitioners' admissions and answers to interrogatories ⁴ which showed: petitioners purchased debentures of Burreson in the total amount of $1,500,000 between July 10 and October 23, 1973; the value of these debentures (without considering collateral of $10,500 which was transferred to petitioners) was zero at all times from July 10 1973, to June 10, 1974, when Burreson filed its petition for reorganization under the Bankruptcy Act; as of October 30, 1973, Burreson was delinquent in interest and principal payments of $1,500,000; its financial condition was "poor and deteriorating"; as of December 31, 1973, Burreson was unable to make payments on its debentures held by petitioners.

Petitioners' second amended complaint alleges that as a "direct and proximate result" of Arthur Young's negligence and breach of contract in performing its audit for the year ending December 31, 1973, each petitioner "failed to discover that a . . . debenture of Burreson & Co. in its portfolio was worthless until after Burreson & Co. had filed a petition for reorganization pursuant to Chapter X of the Bankruptcy Act, at which time it was too late for (each petitioner) to take action to protect its said investment . . . " In support of its motion for summary adjudication of the issue of damages, Arthur Young showed that Burreson and its debentures were worthless before and after Arthur Young's audit, and at all times preceding Burreson's bankruptcy. Thus, regardless of any negligence or breach of contract by Arthur Young in failing to discover the financial condition of Burreson and its debentures, petitioners could not have recovered or protected their investments in the debentures. ⁵

In opposition to Arthur Young's motion, petitioners submitted their own answers to interrogatories in which petitioners stated that if, prior to Burreson's bankruptcy, they had "been aware of the facts surrounding the transaction," they could have recovered all or some of their Burreson investments by: (1) refusing to agree, in March 1974, to a modification of the terms of the debentures; (2) accelerating payment of the debentures and attempting to attach Burreson's assets; (3) preventing Charter Diversified Services, Inc. (the parent corporation of petitioners' investment advisors) from pledging $500,000 paid by petitioners for the debentures, to a bank as collateral for a loan made by the bank to Charter; (4) attempting to prevent or cancel Burreson's transfer to third parties of the notes and trust deeds securing the debentures; and (5) seeking the appointment of a receiver to prevent dissipation of Burreson's assets.

Papers submitted on a motion for summary judgment must be directed to the issues raised by the pleadings. (Keniston v. American Nat....