Lien v. McGladrey & Pullen

further the matter remanded versed Clarke, supra.

proceedings. and remanded.

Reversed WUEST,

MILLER, C.J., and

HENDERSON, SABERS

AMUNDSON, JJ., participating. Lien, E. LIEN and Judith J.

Thomas Appellees,

Plaintiffs and

v. PULLEN, Defendant &

McGLADREY Appellant.

No. 18220. Dakota.

Supreme Court of South Aug. 1993.

Argued 15, 1993.

Decided Dec.

Rehearing Denied Jan. Johnson, P.C.,

Glen H. Johnson Huffman Rapid City, plaintiffs appellees. Nelson, McCullen, Butler, Bangs, Allen G. Simmons, Foye Rapid City, & Michael J. Bleck, Oppenheimer, Donnelly, Wolff & Min- MN, Miller, Jr., neapolis, Richard L. McGla- Pullen, drey IL, Chicago, & for defendant appellant. SABERS, Justice.

A compa- sole-shareholder of construction ny corporate was taxed as a result of a redemption preferred stock claimed to be accounting based advice from received firm. professional found firm liable for negligence. appeals. Firm We reverse and remand on

FACTS (Lien Construction, In Tom Lien Inc. Construction)1 2,400 pre- issued shares of (Lien). ferred stock to Tom Lien Lien Con- preferred struction redeemed Lien’s stock exchange 1985 in for cancellation of Lien’s personal debt corporation. Lien claims the was done on the ad- firm, accounting vice of his & (McGladrey), prepared corpo- Pullen who rate year. and individual tax returns for that Subchapter corpora- 1. Lien construction was a S herein. solely tion owned Lien at all times material standard, requires that by the This an ac- subsequently audited

Liens were (IRS) degree of skill and countant exercise and their Service Internal Revenue competence expected per- tax return was reviewed. individual community, profession sons in his additional tax and interest assessed The IRS implied professional in the contract pre- the of the resulting from for brought by about the ac- services and is paid the IRS in 1990. stock. Lien ferred contract, relationship. countanbclient The McGladrey complaint against Lien filed a therefore, relationship creates the out of McGladrey part of alleging negligence on the duty the to exercise which arises reason- representation respect with advice and its performance able care to render skillful 2,400 redemption of the shares of the to according professional to local standards. The found for Lien preferred stock. added.) (Emphasis $95,- damages in amount of and awarded McGladrey argues that Lien failed to prove McGladrey appeals. 392.00. provide personal that a written contract to planning According tax advice existed. contract, McGladrey, absent such a there DISCUSSION duty to care could be no exercise reasonable held to the same Accountants are therefore, duty. no breach of that as are other of reasonable care standard provides “[a] SDCL 53-1-3 contract is including lawyers, people, doc professional express implied. express or An con- either J. Rockler & Co. tors and architects. Vernon one, are tract is the terms of which stated Co., Glickman, 273 Isenberg, Lurie & v. one, implied An contract is the exis- words. (Minn.1978). 647, To recover in 650 N.W.2d by of which are manifested tence and terms McGladrey, against negligence professional There is no conduct.” 53-1-3. doubt SDCL (the duty prove a existence Lien needed to McGladrey that a contract existed between relationship), the breach an accountant-client creating an accoun- and Lien Construction (the McGladrey to duty failure of of that relationship. tant-client This accountant- care), duty factual discharge its of reasonable yearly in relationship was outlined client (that advice, for” Lien “but causation understanding” signed by of a “letter of form redemption), proxi not have made the would McGladrey Clayton and Lien of Trulson (that liability increased tax mate causation According “let- to the Lien Construction. consequence of a foreseeable McGla- was ter,” initiating ideas or obser- in addition to (that advice), drey’s Lien actu help believed would vations liability tax due to ally suffered increased Construction, objectives of Lien achieve the omitted). advice). (citation Id. inquiries McGladrey agreed respond 1090, Cleary, P.2d Thomas v. 768 See also “might about financial or other Lien have 1989) (elements (Alaska of a cause 1092 matters.” business duty, negligence are professional action duty, proximate cause and of that breach contract, of the implied An a fiction (citing v. Baro damage) or Linck actual loss justice no true adopted to achieve where law (Alaska Martin, 171, 4 P.2d 173 n. kas & 667 contract, exists, a the existence contract is Nixen, 195, 1983); 6 Cal.3d 98 Cal. Budd v. by con which are manifested and terms of Olson, 433, (1971); Rptr. P.2d 436 Resort, Inc., Spring v. Creek duct. Weller Straumann, Trayne v. Clough & CPA’s (S.D.1991) (citations 839, 841 477 N.W.2d (Minn.App. Properties, 392 N.W.2d omitted). 1986)). implied in fact where A contract by to it is not manifested

intention as Implied Contract explicit parties, but direct or words by implication proper gathered tois be provided No. 19 parties, from the conduct deduction applies to the conduct standard of care which them, used, language or acts done public of auditors or certified accountants. attending pertinent other circumstances are facts [The] transaction.... advised, objectively party and if a voluntari- viewed rebanee advice was ly reasonably indulges given in conduct indicat- reasonable. Whether tax advice was ing though he bound even assent be Lien and whether he rebed truly express fact, his conduct does not questions that advice are to be deter of his mind. fact, state jury. mined the trier of See Rockler, generally at 650. See (citations omitted). Id. See also Famous Nursery, Halla Inc. v. Baumann-Furrie & Brands, Corp., Inc. v. David Sherman Co., (Minn.Ct.App. 402-03 (8th Cir.1987) (citations F.2d omit- 1989) (citation omitted) (whether neg ted). a cbent law, Dakota Under South existence ligently dealt with its accountant and wheth parties implied of an contract cre- between negbgence er the contributed to the accoun genuine ates a issue of material fact that perform tant’s failure to its contract in accor jury. must be decided a Id. at 520-21. generally accepted accounting dance with above, express in As noted contract questions jury’s standards fact are for the Construction, McGladrey and between Lien determination), grounds, rev’d on other McGladrey agreed to initiate ideas or obser- (1990). responsibibty Our on N.W.2d McGladrey help that believed would vations appeal is to determine whether these factual objectives achieve the of Lien Construction Rockler, clearly findings are erroneous. respond inquiries “might as as Lien well findings at 650. These “factual can financial have about or other business mat- clearly only if upon be held erroneous a Following ters.” the close of Lien Construc- review of the entire evidence we are left with 31, 1984, year tion’s fiscal on March McGla- the definite and firm conviction that a mis drey prepared listing a document items for (citations omitted). take has been made.” Id. they during that had discussion noted an audit. Listed as item discussion under above, As noted Lien testified that he was Equity point was the that Stockholder’s by McGladrey go advised that he could ahead Construction, “Tom Lien Inc. should consider redemption with the of the stock and that he paying permanent- off the note receivable upon rebed this advice when he redeemed ly retiring preferred stock.” Lien testified testimony, the stock. this Given the letter of that in fall he asked auditor Dan understanding, by McGladrey the notation McGladrey Loveland of whether he could that Lien Construction should consider re- exchange preferred stock for the note loan, deeming outstanding the stock for the Lien claims Loveland told him receivable. McGladrey prepared and that tax return get it out and he would check back to him. personal of Lien Construction and the in- again Lien he in testified called Loveland Liens, McGladrey come tax return of the has November, 1984, and Loveland told him that jury’s finding failed to show that the that any problem he did and that not see he could upon McGladrey’s Lien rebed ad- go (exchange ahead with it the stock for the clearly vice was erroneous. note).2 Lien, According to this was the ad- 3. Avoidable Tax vice that he relied when he redeemed the stock abeged for the note. We find sufficient next error is that prove facts could have found Lien failed to that the additional tax implied McGladrey an again, contract between and was avoidable. Once whether Lien creating successfully Lien an proved accountant-client relation- that tax was avoid fact, ship duty fact, question and the to exercise reasonable able is a for the trier of Rockler, care. jury. See 273 N.W.2d at 650 (whether cbent estabbshed is a 2. Advice and Reasonable Reliance fact). finding of McGladrey argues that Lien failed (whom prove McGladrey expert McGladrey advised Lien to Lien’s that witness stock, that, redeem the if expert) he were so classifies as a “non-tax” testified that prior exchange also Lien testified that to the audit in cated at this time that he could his note possible he asked Loveland if it was preferred for the stock. up clean his financial statement. Loveland indi- testimony testify, would have until allowed preferred stock Lien held his had $240,- that as able to “deduct his demonstrated Lien received benefits have been he would part preferred [tax] as of the basis of the stock preferred stock a result of the issuance dividends, that, and would not have proceeds,” against his which included because MeGladrey’s own ex- any pay suffered Lien did not have to the tax until (whom McGladrey classifies as a pert witness failing in in Lien’s erred to factor this tax expert), when asked “whether “tax” money.3 time value of avoided imposed could have been that was A review of the record indicates redemp- that “once the any event” testified McGladrey asked Lien’s whether he unlikely any- highly it’s place, tion took leading him had come across information to eliminate that thing have been done could to believe that Lien had a constructive divi- McGladrey’s expert further obligation.” tax objected, problem dend 1982. Lien Lien if determined that testified opinion, he did not have an witness stated received tax advice which had asked for and appeared and the trial court to sustain the preferred in the resulted ground on the of relevance. Fol- stock, McGladrey did not meet the conduct of conference, lowing a re- bench placed dam- standards and he professional questioning, topic. on a sumed but different $75,000. approximately Whether ages at MeGladrey’s expert was asked wheth- When from a tax provide opinion an Lien failed “to damage er Lien’s claim took into consider- of whether a tax expert regarding the issue everything that should considered in ation be avoided,” could have been paid which was assessing damages, he that Lien the testified jury reasonably the could immaterial because as a result of the issuance received benefits McGladrey provided one. Our conclude redemption of preferred of the stock and the evi- of the record indicates sufficient review exchange extinguishment the stock in of upon jury could determine dence objected to the note. Lien and moved strike that, McGladrey’s negligence, Lien absent answer, arguing legally that it was the entire tax. not have incurred the additional would jury impermissible attempt to to tell the McGladrey to show otherwise. has failed they should consider other items of benefit to Therefore, damages would be the sustained ex- corporation. Lien or the The was following alleged error. final but for the McGladrey to make cused and was allowed on the Defense 4. Restrictions proof proof. an offer of The offer of was McGladrey argues that the trial court expert permitted to if was testi- testimony by its refusing in to allow erred testify fy, would that Lien received bene- he of Lien’s ex expert and cross-examination preferred stock fits from the issuance of the damages. According to regarding pert dividends, revenue, compensa- and including McGladrey, precluded it from cross-ex was expert to consider that Lien’s failed tion and amining expert regarding his knowl Lien’s money in and the time value of these benefits edge relating tax to the of all the issues damages. The was sus- computing transaction, “flip side” of the specifically, the tained. $48,680 whereby Lien received transaction accurately in Although $200,000 the was note repay to the and did not have damage award $56,120 McGladrey to reduce the structed and in accrued interest. evidence,”4 by the “appropriate credit shown argues expert that if its would have been also brief, person property According McGladrey's reply expert or harm suffered in its loss 3. to $192,000 proximately divi- proved by would have also stated that the been the evidence to have Defendant, due to the dend assessed the IRS was in fact negligence of the caused the liquidation unpaid the of Lien's note rather than have been an- such loss or harm could whether however, McGladrey, stock. of the not, namely: ticipated or proof. of did not address this in its offer liability tax in- amount of income 1. The curred, any, proximate as a result of the if part: provided No. 26 in 4. appropriate negligence less of the Defendant question you decide for the Plaintiffs on the If by the evidence. credit shown liability you the amount of must then fix of money fairly compen- and which will following of sate them for of the elements meaningless knowledge, experience, was the the instruction because and of fairness McGladrey opportunity expert by inquiring changes to was denied to as what testimony present expert opinion, or evidence to es- conditions would affect his conducting in inquiry, subject such an “appropriate credit.” This was tablish requirements 403, upon expert an Fed.R.Evid. error. The data rests cross-examiner is not limited may fully inquired to facts find- opinion be into ing support in the record. cross-examination. And the incorrectness insufficiency of such data be established § McCormick on Evidence by calling expert ques- other witnesses and professional negligence action, In a tioning opinion them as to their of the validi- appropriate damages measure of is the ty prior grounds. of the witness’ 3A John taxpayer difference between what the would Henry Wigmore, in Evidence Trials at Com- negligence, have owed absent the and what (Chadbourn 1970). § mon Law rev. they paid negli because of their accountant’s precise scope While cross-exami- gence, plus Thomas, incidental nation of witnesses rests within the (trial 768 P.2d at 1091-92 n. 5 court erred in court, discretion of the trial this discretion allowing taxpayer damages as all recover applied should not in be a narrow or re- corporate liquidation). taxes owed manner, especially respect stricted with permitted Just as Lien’s testify was experts opinions who deal as to matters regarding incurred as a result truly knowledge not the common advice, negligent so must experience laymen. testimony be allowed to elicit discrediting computations Lien’s demonstrating (John § 1 McCormick on Evidence Wil benefits which generally Lien received. See 1992) eds., Strong liam et al. 4th (citing ed. Wiggins 3, Constr. Co. v. Joint Sch. Dist. No. Co., Polk v. Ford Motor 529 F.2d (1967) 35 Wis.2d (8th Cir.1976), denied, cert. 426 U.S. 96 (citation omitted) (expert opinions may be (“[T]he 2229, S.Ct. 832 L.Ed.2d weakness challenged by cross examination and defense underpinnings [expert’s] opinions in the of testimony). Because we reverse and remand may developed upon be cross-examination proper for a damages, determination as to we goes weight and such to the weakness and McGladrey’s allegation do not reach that credibility testimony.”)). § “SDCL 21-1-13.1 contemplate does not an process On cross-examination in the prejudgment award of interest where the probing qualifications, experi- the witness’ damages highly were uncertain as to amount ence, bases, assumptions and opposing legal obligation.” and may require expert counsel to disclose facts, data, opinions and underlying by 5. Misconduct Court and Counsel expert’s opinion previously not disclosed. McGladrey argues that conduct on respect facts, data, opinions With or part of Counsel for Lien and Circuit forming expert’s opinion, the basis of the Judge Fitzgerald prejudicial constituted er during disclosed on direct examination or According McGladrey, ror. Lien’s counsel cross-examination, may the cross-examiner leading questions asked unfair of Lien’s ex whether, explore how, and if so the non- pert “factually unsupported” and questions in fact, any data, opinion existence of or McGladrey’s cross-examination of expert and contrary the existence of a version of the Judge Fitzgerald erroneously interrogated fact, data, opinion supported by the improperly witnesses and com evidence, expert’s opinion. would affect the mented on a material fact at issue. Similarly expert may be cross-exam- respect ined with agree material reviewed Judge Fitzgerald While we that may expert but temporarily sight does have lost of his role this (that rely. not permitted Counsel is also proceeding to test judge rather than advo- ed). 2. The cost incurred the Plaintiffs in con- (Emphasis nection with the IRS audit[.] add- interests), that this is one of those eases would be record indi- a client’s

cate of alone, retry damages on as the to ob- difficult to MeGladrey’s counsel failed cates that proper jury not have a view of the Judge Fitzgerald’s or Lien’s would ject to either Ransom, case. also Prouse v. of their wit- entire See interrogation counsel’s (Idaho 1313, 734, App. 791 P.2d objections must made to Idaho be “[S]ueh ness. 1989) (stating precise “the effect of allow it to correct when in order to the trial court mistakes, quantify” and that the properly not the error is difficult to and an its jury’s perception “might have affected this well cannot be reviewed raised below Johnson, award,” judgment must be v. 441 the the entire appeal.” Anderson court on Mullen, (S.D.1989) (citations vacated); omit- Roberts v. 446 S.W.2d ted). (noting (Tex.Civ.App.1969) No. 3 89 the Texas Su Additionally, holding liability preme Court’s that “issues prejudicial effect could have corrected may had in tort cases are indivisible and Fitzgerald’s questioning have Judge judgment improper to it to reverse a jury.5 has failed upon the all case for trial on the issue of affirm remand the prejudicial error. We demonstrate my opinion damages only”). It is this reverse and except issue which we issues case, it be for a to hear the determination of dam- would better proper for a remand attempting evidence before to make a entire ages. proper determination of the measure dam AMUNDSON, J., MILLER, C.J., and I for a new trial on all ages. would remand the issues. concur.

WUEST, J., specially. concurs HENDERSON, (dissenting). Justice HENDERSON, J., dissents. held and a verdict was A fair trial was against McGladrey entered for the Liens WUEST, (concurring specially). Justice McGladrey filed a Motion & Pullen. except majority opinion I with the concur trial, or, alternatively, a new Judgment NOV damage retry only the for the remand proceedings Full motion was denied. it be occasions when There are issue. level. were had at the trial court retry only one or a case to proper to remand Centrol, jury to function of the determine writing in Inc. It is the my two issues. See Cutler, (S.D. v. Morrow, credibility of witnesses. Mash 898-99 v. (S.D.1992). jury However, A is entitled to 1992) J., 642 (Wuest, dissenting). it N.W.2d by to accept of facts as testified the version that where “dam generally stated has been reject the other side’s parties and closely con one of the inseparable, or ages awarded are testimony. State Bank v. West issues, on Farmers partial a reversal other nected with (S.D.1983). rum, This Court 631 permissible.” damages is not question of the Lytle v. to reverse. not seek reasons § 1918 n. 92 should Appeal and Error 5B C.J.S. (S.D.1978). These (1958). Likewise, Morgan, 270 N.W.2d in a case when the issues time- they are intertwined, platitudes; not sound part in one are so that an error are observed result, rules of review appellate honored may entire it is trial affect the reviewing As the by this for decades. justice and would be Court “in interest of not the court, required to view evidence we are retry piece case parties the to the unfair to light in a Unitedbank-Victoria, therefrom reasonable inferences 734 all Kneip v. meal.” Al winner. to the verdict I most favorable (Tex.App.1987). believe S.W.2d lí anything or said has seemed I have done provided: Jury No. 3 Instruction indicate, disregard you it and form will to so by anything I have said I have not intended your own conclusion. done, may by any questions that I have or Jury included appears No. 3 was It Instruction made, asked, by any ruling to I have According sponte. by Judge Fitzgerald sua suggest you find to be intimate or what should "pret- Judge Fitzgerald, No. 3 is facts, I believe or disbelieve going the or that just ty I and "one that am standard” up constantly engraved witness. here for me." have objections to this instruction. There were no Co., berts v. Mutual Serv. Cas. Ins. 80 S.D. Liens’ taxes could have been avoided and (1963). 303, 123 (plus explained) McGladrey’s N.W.2d described wit testimony. Jury nesses’ accept chose not to injustice in There is no the result of this Rather, appellant’s jury version. accept Therefore, case. I cannot vote for the con- testimony ed Liens’ and exhibits. The com opinion proceed- reverses ference putation of the verdict award is within the ings judgment court, entered the trial jury sound discretion of the as triers of fact. upon jury’s based verdict. Inc., Kent v. Supply, Allied Oil & an extensive trial. There was Note (S.D.1978). N.W.2d 512 majority opinion the tendered confines and Supposedly, upon a reversal is based a facts to two short paragraphs. distills the preclusion of cross-examination of Liens’ wit- is, faulty essentially, for it This fails to ade- True, ness. cross-examination should not be quately upon address the scenario However, precluded. we do not have such a jury acted. Without the facts addressed Rather, shortcoming before us. an offer of properly, the issues cannot be dissected and proof spread was on the record but was applied to settled law. Infused in some of denied the trial court. When the trial facts, smattering the issues are a all court proof, denied the offer of the trial court to a skewed conclusion reversal. called to the attention of counsel that his end, In majority writing the tendered ruling was based the fact that he and all —but the Bottomed on affirms testimony previous- listened to such the exclusion of evidence the trial court ly in the trial when there was no strenuous (the test), abuse discretion the tendered (see 312). transcript trial at Fur- writing damage reverses the award. No- thermore, concerning subject, the same writing expressed where said is it permitted counsel was to cross- Judge Fitzgerald abused his discretion. Ma- examine a witness of concerning Liens jority opinion argues was pertaining same matters proof. to the offer of opportunity present denied the evidence short, McGladrey In protect failed to “appropriate on credit” from 1985 based record and should not be heard to set aside objections concerning sustained a “con- Robinson, this verdict. Smolnikar v. problem in structive dividend 1982.” McGla- (S.D.1992). 518-19 drey also fails to cite in his brief where such during restrictions occurred trial. He has vitality The of this verdict has been record, failed to make the thus no error has purloined by appellate decision and has de- been shown. See Farm Credit Bank St. stroyed jury’s calling. Therefore, I re- Brakke, (N.D.1992). Paul v. 483 N.W.2d 167 spectfully dissent. Liens’ testified $95,392.00. Further,

amount of

described how he arrived at his conclusion.

No was made. did not

properly protect the record. Weaver v.

Boortz, (S.D.1981). 301 N.W.2d 673 McGla

drey’s argued counsel before the

Case Details

Case Name: Lien v. McGladrey & Pullen

Court Name: South Dakota Supreme Court

Date Published: Dec 15, 1993

Citation: 509 N.W.2d 421

Docket Number: 18220

Court Abbreviation: S.D.