Commendations

 

Firm Prevails in Employment Action, June 2011

SAN FRANCISCO, CA - Plaintiff-construction workers alleged they were employees and not independent contractors. The Firm represented the Defendants, property owners, who, after a four-week trial in the San Francisco Superior Court, not only defeated all of Plaintiffs' six causes of action but were awarded $250,000 against the lead Plaintiff on Defendants' cross-complaint for violations of the California Contractor Licensing Statute.

 

 

 

 

 

 

 

Interaction with Co-Defense Counsel
in Accountant Malpractice Actions
by Timothy F. O’Leary

Under the decision in Bily v. Arthur Young (1992) 3 Cal.4th 370, an auditor can be held liable for professional negligence only to the party who "contracts for or engages" the accountant's services. Id. at 406. Other courts of appeal have extended the rationale of Bily to decisions other than those involving claims by investors against auditors. See, FSR Brokerage, Inc. v. Superior Court (1992) 35 Cal.App.4th 69.

No published California decision has yet extended the Bily decision to a case other than that dealing with an investor suing an auditor. Since, in an audit engagement, the accountant is performing the highest level of attestation which an accountant can perform (as compared to a review or compilation, for example), the argument can be made that if an auditor cannot be held liable to a third party for negligence, then an accountant who was performing a lower level of scrutiny similarly should not be held liable for negligence to third parties who neither contract for nor engage the accountant's services.
Another question which the Courts of Appeal have failed to address is whether an accountant who successfully defends a claim by a third party can similarly obtain an order dismissing a cross-complaint for indemnity brought by another co-defendant in the case. Under the decision in Allis-Chalmers v. Superior Court (1983) 168 Cal.App.3d 1155, 1159, one Court of Appeal has held that a defendant who prevails on a motion for summary judgment as to a plaintiff is entitled to a similar order as to a cross-complainant based on res judicata. One court stated the rule this way:

There can be no indemnity without liability. In other words, unless the prospective indemnitor and indemnitee are jointly and severally liable to the plaintiff there is no basis for indemnity.

Munoz v. Davis (1983) 141 Cal.App.3d 420, 425, cited in Allis-Chalmers, supra, 168 Cal.App.3d at 1159.


One could foresee a situation where the co-defendant (for example, a company whose financial statements the auditor assisted in preparing), would seek a cross-complaint for indemnity against the accounting firm. Though the investors' claim for negligence against the auditors failed, could not the company, who "contracted for or engaged" the auditor, have a direct cause of action against the accounting firm? Or, based on the Allis-Chalmers decision, should the dismissal of the main action lead to a dismissal of the cross-complaint for indemnity as well?

The court's ruling might hinge on whether the company was simply seeking indemnity, or was also seeking affirmative relief. If the company separately could claim that the errors committed by the accounting firm caused it damage separate and apart from the damage caused by the investors who relied on the financial statements (i.e., the financial statements helped conceal embezzlement by senior management, for example), then arguably the company's claim against the accounting firm should still lie based on a direct action for damages.

Alternatively, if the accounting firm succeeded in dismissing the main action based on a procedural defense (i.e., statute of limitations), that defense might not apply to a cross-complaint for indemnity. Indemnity actions, for example, are tolled until the party seeking indemnity suffers "actual damage," which does not occur until the party seeking indemnity makes a payment in the main action. Department of Transportation v. Superior Court (1980) 26 Cal.3d 744, 751.

Another issue confronting accountants in cooperating with co-defendants is the ability to keep communications confidential, and to share or suppress expert witness opinions. We are not aware of any published decisions in California asserting that the "joint defense" privilege is applicable, to allow one defendant to consult with a co-defendant while both lawyers are present and maintain the confidentiality of such communications. But compare, Raytheon Co. v. Superior Court (1989) 208 Cal.App.3d 683, 687 (granting petition for writ of mandate and remitting to trial court question of whether circulation of confidential communications to co- defendant was reasonably necessary to accomplish purpose for which lawyer was consulted, and thus a privileged communication under Evidence §912).

Based on the decision in County of Los Angeles v. Superior Court (1990) 222 Cal.App.3d 647, 657-658, it appears that a co-defendant may withdraw an expert after the expert has been disclosed, but before the expert has testified. In County of Los Angeles, the Court of Appeal disqualified a law firm which attempted to communicate with a disclosed expert prior to that expert's deposition. The Court of Appeal held that the expert remained a consultant until the expert actually testified, and that the expert's disclosure did not transform the consultant into an expert unless he was deposed. Compare, however, Williamson v. Superior Court (1978) 21 Cal.3d 829, 836, (finding that co-defendant's agreement to suppress expert's report in return for an indemnification agreement was void as against public policy).