Western Sec. Bank v. Llp

• Decision Date: 30 December 2010
• Docket Number: No. DA 09–0404.,DA 09–0404.
• Citation: 249 P.3d 35,359 Mont. 34,2010 MT 291
• Parties: WESTERN SECURITY BANK and Glacier Bancorp, Inc., Plaintiffs and Appellants,v.EIDE BAILLY LLP, Defendant and Appellee.
• Court: Montana Supreme Court

359 Mont. 34

249 P.3d 35

2010 MT 291

WESTERN SECURITY BANK and Glacier Bancorp, Inc., Plaintiffs and Appellants,

v.EIDE BAILLY LLP, Defendant and Appellee.

No. DA 09–0404.

Supreme Court of Montana.

Argued and Submitted June 10, 2010.Decided Dec. 30, 2010.

For Appellants: Kyle A. Gray (argued), W. Scott Mitchell, and Robert L. Sterup; Holland & Hart LLP, Billings, Montana.For Appellee: W. Anderson Forsythe, Moulton Bellingham PC, Billings, Montana, Peter A. Koller (argued) and Thomas J. Shroyer, Moss & Barnett, Minneapolis, Minnesota.Justice BRIAN MORRIS delivered the Opinion of the Court.

[359 Mont. 36] ¶ 1 Glacier Bancorp, Inc. (Glacier) appeals the order of the Thirteenth Judicial District Court, Yellowstone County, granting summary judgment to Eide Bailly LLP (Eide). Western Security Bank (Western) appeals the judgment of the District Court awarding a special jury verdict in favor of Eide. We affirm in part, reverse in part, and remand for further proceedings.

¶ 2 We review the following issues on appeal:

¶ 3 Did the District Court properly grant summary judgment to Eide based upon its conclusion that Eide did not owe Glacier a duty of care?

¶ 4 Did Glacier fail to plead with sufficient particularity its fraudulent misrepresentation claim?

¶ 5 Did Western's fraudulent misrepresentation claim and its negligent misrepresentation claim fail to state claims upon which relief could be granted?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 6 Intermountain Mortgage Company (IMC) was a Montana corporation in the business of lending money to home purchasers. IMC borrowed money for its home loans through a warehouse line of credit from First Citizens Bank (FCB). FCB was a subsidiary of Citizens Development Corporation (CDC). The lending agreement between IMC and FCB required IMC to procure for FCB's benefit an annual audit of its balance sheet and income statement to be performed by a certified public accounting firm. FCB used the audit reports yearly in deciding whether to renew, and for how much, IMC's warehouse line of credit. IMC chose Eide to perform the audits. Eide began performing the annual audits of IMC's financial statements in 1989. Eide never entered any contractual agreements with FCB, CDC, Glacier, or Western.

¶ 7 Eide agreed to perform the annual audits in accordance with generally accepted accounting principles. Eide's engagement letter had informed that “because we will not perform a detailed examination of all transactions, there is a risk that a material misstatement may exist and not be detected by us.” Eide further agreed to render an opinion on the fairness of IMC's financial statements. Eide's audits resulted in the issuance of “unqualified opinions” regarding IMC's financial statements. An unqualified opinion represents with reasonable assurance, rather than absolute assurance, that the audited financial statements do not contain material misstatements.

¶ 8 CDC announced in November 2005 that it would be selling its stock. Glacier investigated whether to purchase CDC. Glacier, a bank holding company, owns subsidiary banks in Montana and several other western states. Glacier reviewed the financial information of CDC's subsidiary banks, including FCB. Glacier reviewed Eide's most recent audit reports of IMC as part of its due diligence investigation.

¶ 9 Glacier publicly announced its merger with CDC on April 20, 2006. The sale closed on September 30, 2006. Glacier merged FCB into Western, its existing Montana state-chartered subsidiary bank. Western took over the line of credit to IMC that FCB previously had issued. IMC disclosed on February 8, 2007, that its chief financial officer, Angela Hakala (Hakala), had been manipulating the financial records of IMC.

¶ 10 Hakala's financial manipulation concealed the diversion of approximately $7.2 million that had been used to support IMC's business operations. Hakala's manipulation of funds had occurred during the years when Eide had issued unqualified opinions of IMC's financial statements. Hakala's misconduct had led IMC to overstate its assets, income, and profits. Hakala's misconduct left IMC unable to repay its loans to Western.

¶ 11 Glacier and Western filed a joint complaint against Eide on November 21, 2007, that contained a single count entitled professional negligence. Glacier and Western claimed that they had relied upon Eide's audit reports of IMC's financial statements in the purchase of CDC. Glacier and Western alleged that IMC's deposits and loans with FCB “constituted a substantial portion” of CDC's deposits and that Glacier had relied upon the accuracy of Eide's audit reports in establishing a price for the purchase of CDC.

¶ 12 Glacier moved for partial summary judgment on April 14, 2008. Glacier sought a declaration regarding the duty of care that accountants owe to third parties when no privity of contract exists between the parties. Eide responded with a cross-motion for summary judgment. Eide argued that its auditors owed no duty of care to third parties like Glacier due to a lack of “near privity” between the parties and because Eide had not intended to have Glacier use the audit reports in evaluating the merger with CDC.

¶ 13 The parties disputed specifically the applicability of this Court's decisions in Thayer v. Hicks, 243 Mont. 138, 793 P.2d 784 (1990), and Jim's Excavating Service v. HKM Associates, 265 Mont. 494, 878 P.2d 248 (1994). The District Court determined that the near privity rule from Thayer applied to Glacier's claim. The court granted summary judgment to Eide on the grounds that Glacier had failed to establish that Eide owed it a duty under the Thayer near privity approach, or, alternatively, under the Restatement (Second) of Torts § 552 (1977) approach.

¶ 14 Glacier further argued that its complaint alleged a fraudulent misrepresentation claim. The District Court dismissed Glacier's fraudulent misrepresentation claim for insufficient pleading and noted that “the word fraud is absolutely absent from the Complaint.” These summary judgment rulings of August 6, 2008, effectively ended Glacier's involvement with the litigation before the District Court.

¶ 15 Western, who had not been a party to the cross-motions for summary judgment, filed an amended complaint on October 8, 2008. Western added a claim for negligent misrepresentation and a claim for fraudulent misrepresentation. The court dismissed the two new claims on the basis that they failed to state a claim upon which relief could be granted.

¶ 16 Western proceeded to trial. Trial lasted nine days. The court instructed the jury to determine Eide's duty of care to Western according to the Thayer near privity standard. The jury returned a special verdict finding that Eide owed Western a duty of care and that both Western and Eide had been causally negligent. The jury allocated seventy percent causal negligence to Western and thirty percent causal negligence to Eide.

¶ 17 Western appeals the court's application of the Thayer standard, appeals the dismissal of its negligent misrepresentation claim and its fraudulent misrepresentation claim, and seeks a new trial based upon various evidentiary rulings and the court's jury instructions. Glacier appeals the court's summary judgment ruling and the court's dismissal of its fraudulent misrepresentation claim.

STANDARD OF REVIEW

¶ 18 We review de novo a district court's grant or denial of a summary judgment motion. Cole v. Valley Ice Garden LLC, 2005 MT 115, ¶ 4, 327 Mont. 99, 113 P.3d 275. We review de novo a district court's ruling on a motion to dismiss pursuant to M.R. Civ. P. 12(b)(6). Cowan v. Cowan, 2004 MT 97, ¶ 10, 321 Mont. 13, 89 P.3d 6. This Court will not disturb a district court's ruling on the grant or denial of a motion to amend the pleadings absent an abuse of discretion. Stipe v. First Interstate Bank–Polson, 2008 MT 239, ¶ 27, 344 Mont. 435, 188 P.3d 1063. We review jury instructions in their entirety in order to determine if they fully and fairly instruct the jury on the law applicable to the case. Peterson v. St. Paul Fire & Marine Ins. Co., 2010 MT 187, ¶ 22, 357 Mont. 293, 239 P.3d 904. We conduct plenary review to the extent the district court bases its discretionary ruling upon a conclusion of law. Jacobsen v. Allstate Ins. Co., 2009 MT 248, ¶ 26, 351 Mont. 464, 215 P.3d 649.

DISCUSSION

¶ 19 Did the District Court properly grant summary judgment to Eide based upon its conclusion that Eide did not owe Glacier a duty of care?

¶ 20 The District Court concluded that the Thayer near privity approach controlled the issue of whether Eide owed Glacier a duty of care. The court granted summary judgment to Eide in light of its determination that Eide did not know or intend that Glacier would rely on Eide's audit reports in the Glacier–CDC merger transaction. The court alternatively concluded that Eide did not owe Glacier a duty of care under the Restatement (Second) of Torts § 552.

¶ 21 We first draw a distinction between a claim against an accountant for professional negligence and a claim against an accountant for negligent misrepresentation. The California Supreme Court recognizes the tort of professional negligence as “separate and distinct” from the tort of negligent misrepresentation. Bily v. Arthur Young & Co., 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 834 P.2d 745, 768 (1992). This Court has not squarely addressed the issue. This Court instead has assumed that the two claims represent separate causes of action. May v. ERA Landmark Real Est., 2000 MT 299, ¶¶ 42–43, 302 Mont. 326, 15 P.3d 1179; Durbin v. Ross, 276 Mont. 463, 472, 916 P.2d 758, 763–64 (1996).

¶ 22 A professional negligence claim asserts that the accountant negligently performed its professional services. These professional services often involve the performance of an audit. The plaintiff in any professional negligence action “must prove that the professional owed him a duty, that the professional failed to live up to that...