Opinion
No. 2-047 / 00-580.
Filed July 31, 2002.
Appeal from the Iowa District Court for Polk County, RICHARD G. BLANE, Judge.
A public accounting firm appeals from judgment entered against it in an action brought by its client. AFFIRMED.
Thomas D. Hanson, Fred E. Beaver, and Clark G. McDermott of Hanson, Bjork Russell, L.L.P., Des Moines, and Donald W. Rose, Assistant General Counsel of KPMG, L.L.P., New York, New York, for appellant.
Patrick M. Roby and Paula L. Roby of Elderkin Pirnie, P.L.C., Cedar Rapids, for appellee.
Richard I. Miller, General Counsel of American Institute of Certified Public Accountants, New York, New York, and Thomas H. Walton of Nyemaster, Goode, Voigts, West, Hansell O'Brien, P.C., Des Moines, for amici curiae American Institute of Certified Public Accountants and Iowa Society of Certified Public Accountants.
Heard by MAHAN, P.J., and ZIMMER and EISENHAUER, JJ.
KPMG Peat Marwick (KPMG), a public accounting firm, appeals from a $1,239,033.32 judgment in an action brought by its client, Kemin Industries, Inc. (Kemin). KPMG contends (1) Kemin failed to prove its damage claim, (2) Kemin failed to show KPMG proximately caused its damage, (3) Kemin failed to establish any negligence, and (4) numerous errors of law justify a new trial. We affirm.
I. Background Facts and Proceedings . Kemin is a manufacturer and processor of agricultural feed products. KPMG is a public accounting firm Kemin hired in the 1980s to provide tax and auditing services.
By 1992, Kemin was doing a great deal of business in Latin America. It was Kemin's policy and practice to secure its Latin American accounts with a stand-by letter of credit. Kemin's largest foreign account and its largest overall account receivable was with the Mexican company, Pabsa/Idea (Idea). During most of 1992, Kemin's credit policy allowed Idea up to $200,000 in unsecured accounts receivable. Any accounts receivable over $200,000 had to be secured by a letter of credit.
Doug Cagwin, Kemin's controller, was responsible for the accounting department in 1992 and early 1993. In October 1992, Cagwin was notified the letters of credit securing the Idea account had lapsed. Cagwin failed to inform Kemin's management of the lapsed letters of credit and repeatedly misled them about the Idea account. During 1992, the Idea accounts receivable grew from $933,985 to $3,551,000.
In preparing the 1992 audit report, the KPMG staff did not inquire as to the existence of letters of credit. Conflicting testimony was presented as to whether KPMG representatives were advised by anyone from Kemin about the letter of credit and when the information was conveyed.
On May 10, 1993, Cagwin informed Kemin's management there was no letter of credit. Kemin immediately began collection attempts, which were largely unsuccessful. Because the market for its product had changed, Kemin no longer had the same leverage it had in December 1992. By September 1993, it became apparent Kemin would not be able to collect the bulk of its receivable.
Kemin brought a claim against KPMG, asserting the auditor's failure to discover and disclose certain irregularities concerning the Idea account receivable caused Kemin to delay intensive collection efforts until it had become uncollectible. Kemin was awarded a jury verdict, which KPMG appealed and Kemin cross-appealed. In Kemin Industries, Inc. v. KPMG Peat Marwick LLP, 578 N.W.2d 212 (Iowa 1998), the supreme court held KPMG's evaluation of the Idea receivable and its collectibility were proper. However, the court concluded the jury's damage award was irreconcilable with the trial court's instructions. It ordered a new trial on the narrow issue of whether Kemin could prove KPMG caused it damage by breaching some duty to discover the non-existence of a letter of credit during the course of its audit.
A verdict was returned in the second trial, finding KPMG negligent and assessing damages at $1,230,000. The jury found KPMG's duty to discover and report the absence of the letter of credit arose on February 15, 1993 and Kemin first became aware of such absence on May 10, 1993. The trial court denied KPMG's motions for new trial and judgment notwithstanding the verdict. Judgment was entered, after application of comparative fault and interest, in the amount of $1,239,033. KPMG appeals.
II. Damages . KPMG contends the district court erred in denying its motion for directed verdict because Kemin failed to prove its damage claim. KPMG argues Kemin failed to prove the Idea debt was not collectible. It also argues substantial evidence does not establish KPMG proximately caused any damage to Kemin.
We review the district court's denial of KPMG's motion for directed verdict for errors at law. See McClure v. Walgreen Co., 613 N.W.2d 225, 230 (Iowa 2000). We must view the evidence in the same light as the district court in determining whether the evidence generated a jury question. Id. Therefore, we must view the evidence in the light most favorable to the opposing party. Id. Directed verdict must be denied where the opposing party has presented substantial evidence on each element of the claim. Id. Evidence is substantial if a jury could infer a fact from the evidence. Gibson v. ITT Hartford Ins. Co., 621 N.W.2d 388, 391 (Iowa 2001).
A. Amount of Damages . KPMG argues a directed verdict was warranted because Kemin failed to prove Idea's debt was not collectible. It argues it is undisputed Idea was solvent at all times relevant to this case, and therefore the debt is collectible as a matter of law.
In Kemin I, the supreme court rejected KPMG's claim the evidence was insufficient to permit the jury to find that the Idea receivable was collectible at any time pertinent to Kemin's claim for damages. Kemin I, 578 N.W.2d at 218. KPMG now argues the reverse.
In articulating the burden of proof in a legal malpractice claim, our supreme court has said:
If the solvency of the prior defendant is known beyond question — for example, a tort claim against the state or an insurance claim within policy limits — a court may hold without other proof that the entire judgment would have been collectible. But if the prior defendant was an individual or other entity whose solvency is not known beyond question, the client must introduce substantial evidence from which a jury could reasonably find that a prior judgment would have been collectible in full, or could reasonably find the portion of the judgment which would have been collectible.Pickens, Barnes Abernathy v. Heasley, 328 N.W.2d 524, 526 (Iowa 1983). KPMG cites this language to support its argument that Kemin failed to prove it could not collect the account receivable from Idea.
We find the court's language in Pickens is not controlling in the case at bar. The purpose of requiring plaintiffs in legal malpractice cases to prove the collectibility of the judgment is to prohibit plaintiffs from being placed in a better position as a result of their lawyer's malpractice than they would have been had the attorney not been negligent. Beeck v. Aquaslide `N' Dive Corp., 350 N.W.2d 149, 10-61 (Iowa 1984). Pickens simply lessens this burden by waiving the requirement in rare cases where solvency is beyond question. However, KPMG attempts to interpret this language to create an additional burden for Kemin.
The concern in legal malpractice cases is not present in this case. Kemin was required to prove by a preponderance of the evidence that (1) it was able to collect all or part of the Idea account receivable on December 31, 1992, and (2) it was unable to collect all or part of the receivable on May 10, 1993. The crux of Kemin's claim is it couldn't recover what it otherwise would have recovered but for KPMG's negligence. Whether Idea was solvent does not impact the collectibility of the account receivable. In this instance, solvency does not equate to collectibility.
We find substantial evidence supports Kemin's claim for damages.
B. Proximate Cause . KPMG next argues it was entitled to a directed verdict because there was insufficient evidence its conduct proximately caused any damages. KPMG argues Kemin knew enough information during the pertinent time period to spur it to action against Idea, yet it chose not to act. KPMG asserts, even had it informed Kemin in late 1992 or early 1993 that the letter of credit did not exist, there is no evidence Kemin would have done anything differently.
When a party challenges the sufficiency of evidence to support the jury's factual findings, we examine the record to determine whether those findings are supported by substantial evidence. City of Cedar Falls v. Cedar Falls Cmty. Sch. Dist., 617 N.W.2d 11, 16 (Iowa 2000). In so doing, we must view the evidence in the light most favorable to the verdict, taking into consideration all reasonable inferences the jury may have made. Id. The factual issues of negligence and proximate cause are for the jury to resolve, and only in exceptional cases may we decide them as a matter of law. Id.
We find substantial evidence supports the jury's verdict. Kemin's president testified he would have cut off all future shipments to Idea and begun collection attempts had he learned there was no security. The credibility and weight of this testimony was for the jury. Nichols v. Schweitzer, 472 N.W.2d 266, 275 (Iowa 1991). However, testimony of a witness may be so impossible and absurd and self-contradictory that it should be deemed a nullity by the court. Graham v. Chicago N.W. Ry. Co., 143 Iowa 604, 615, 119 N.W. 708, 711 (1909). Given the actions taken by Kemin once error was discovered, we do not find the testimony to be absurd. We also find a reasonable jury could reject KPMG's assessment that Kemin had enough knowledge to act at an earlier date but failed to do so.
III. Duty . KPMG argues the trial court erred in failing to direct a verdict because Kemin failed to establish any negligence. It claims Kemin failed to introduce expert testimony to support its claim of professional negligence. KPMG also contends it had no duty independent of the audit.
Kemin's expert witness testified a number of things discovered in the course of the audit should have triggered KPMG's duty to investigate the existence of a letter of credit to secure the Idea account. He testified KPMG's failure to do so violated the generally accepted auditing standard requiring due care in the performance of duties. We reject KPMG's and amici's attempt to characterize this as an "independent duty." In Kemin I, the court held a jury could conclude, based on similar testimony, the auditors should have verified the existence of the letter of credit. Substantial evidence supports the claim of professional negligence.
IV. Errors of Law . KPMG lastly asserts various errors of law justify a new trial. We review a trial court's refusal to grant a new trial for abuse of discretion. Gorden v. Carey, 603 N.W.2d 588, 590 (Iowa 1999).
A. Failure to produce witness . First, KPMG complains Kemin was not ordered to produce a key witness at retrial who had testified in the first trial. Instead, the witness's prior testimony was read into evidence. KPMG correspondingly claims the court should have instructed the jury on the adverse inference that may be made from a party's failure to produce a witness.
In ruling on KPMG's motion for new trial, the district court recounted the record on how this issue developed at trial. The court concluded it never ruled on KPMG's motion to produce the witness. KPMG's failure to obtain a ruling from the district court on the production of the witness precludes us from considering it on appeal. Meier v. Senecaut, 641 N.W.2d 532, 537 (Iowa 2002) ("It is a fundamental doctrine of appellate review that issues must ordinarily be both raised and decided by the district court before we will decide them on appeal.")
KPMG next argues new trial was warranted because the district court failed to give the jury its requested instruction on absent witness. The district court found the requested instruction was not accurate, potentially confusing to the jurors, inconsistent with other instructions, and an impermissible comment on the evidence. On review, we find the district court did not abuse its discretion in so finding. See Rife v. D.T. Corner, Inc., 641 N.W.2d 761, 766 (Iowa 2002) ("We will find an abuse of discretion when the court bases its decision on clearly untenable grounds or to an extent clearly unreasonable.").
B. Failure to strike witness . KPMG contends the court should not have allowed Kemin to offer testimony from a fact witness who it claims had essentially received a monetary "bonus" for her testimony. The district court found the exclusion of a witness to be a radical remedy, and instead allowed KPMG to cross-examine the witness about the "bonus" agreement and offer the agreement as an exhibit. KPMG was also permitted to argue the witness's credibility in summation. We find these actions to be appropriate as the credibility of witnesses and weight given their testimony is the province of the jury. Nichols, 472 N.W.2d at 275.
C. Jury instructions . KPMG complains of the court's ruling disallowing any of its proposed jury instructions as not having been timely submitted. Iowa Rule of Civil Procedure 1.602(5) allows the court to impose sanctions upon a party who fails to obey a scheduling order. Here, proposed jury instructions were to be submitted to the court seven days before trial. KPMG timely submitted a set of instructions. The trial lasted almost two weeks. On the morning the case was to be submitted to the jury, KPMG submitted a new set of "substitute" instructions that substantially differed from its original proposed jury instructions. At that time, counsel for both parties had discussed the jury instructions with the court at great length, the jury was waiting, and Kemin's counsel had plans that necessitated the submission of the case to the jury that day. Given that KPMG had already submitted a set of proposed instructions the court considered, we do not find the court abused its discretion in disallowing KPMG's "substituted" instructions.
KPMG argues its substituted instructions were warranted by the evidence. Despite having deemed KPMG's substituted instructions as untimely, the district court addressed and rejected each of KPMG's arguments in turn. The court concluded KPMG's substituted instructions B and BB were not warranted because they addressed whether various officers and employees of the company were informed of the non-existence of the letter of credit, which was not an issue in the case. Several Kemin employees admitted they were informed that the letters of credit had expired, but were reassured by Doug Cagwin the information was wrong. Instead, the court properly determined the issue for the jury to decide was what the officers and employees believed about the existence of the letter of credit and so instructed.
KPMG argues the district court erred in not instructing the jury pursuant to its substituted instructions C and D, which defined the duties owed to Kemin by its employees and officers. The court concluded these instructions were not warranted because the instruction given on defendant's affirmative defense of comparative fault was sufficient. The court found KPMG was not precluded from arguing the duties Kemin's employees owed to it as they pertained to the comparative fault instruction. We find new trial is not warranted under this issue.
KPMG contends the district court erred in not instructing the jury on its substituted instruction M, which would have limited Kemin's damage to the additional credit it extended Idea. Kemin theorized that had it learned of the non-existence of the letter of credit earlier, it could have begun the process of collecting on Idea's account receivable at a time when Kemin's product was in high demand, a situation that did not exist on May 10, 1993. If the jury agreed with Kemin's theory, its damages would not be confined to the additional credit extended, but to the pre-existing debt that Kemin may have recovered had it known earlier of the letter of credit. The district court properly rejected instruction M as it allowed proper consideration of Kemin's proof.
Finally, KPMG argues substantial evidence did not support the court's instructions on damages and KPMG's duty to Kemin. We have already found substantial evidence to support each issue in sections II and III of this opinion. As a result, we find no error in the jury instructions given by the court.
D. Admissibility of evidence . Lastly, KPMG asserts the court erred by allowing into evidence insufficient funds checks, evidence that Doug Cagwin falsified Kemin financial documents after December 31, 1992, and a re-taped recording of Cagwin's May 10, 1993 voice-mail message with additional voices expressing shock and surprise. KPMG claims this evidence is irrelevant and prejudicial.
In denying KPMG's motion for new trial, the district court found the evidence was relevant. However, it recognized how the probative value of the evidence could be outweighed by the danged of unfair prejudice. See Iowa R. Evid. 5.403. As a result, the district court instructed the jury in each instance as to the limited purpose of the evidence. Such instructions render the evidence harmless and not prejudicial. Linge v. Iowa State Highway Comm'n, 260 Iowa 1226, 1236, 150 N.W.2d 642, 648 (1967). We must assume the jury followed the instructions and no prejudice resulted. Id.
V. Conclusion . We find the district court properly denied KPMG's combined motion for new trial and judgment notwithstanding the verdict. As a result, we affirm.
AFFIRMED.