BILY v. ARTHUR YOUNG COMPANY

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Court of Appeal, Sixth District, California.

Robert R. BILY, Plaintiff and Respondent, v. ARTHUR YOUNG & COMPANY, Defendant and Appellant.

J.F. SHEA CO., INC., et al., Plaintiffs and Appellants, v. ARTHUR YOUNG & COMPANY, Defendant and Appellant.

No. H003695.

Decided: July 20, 1990

Timm A. Verduin, Karl D. Belgum, Dianne P. Urhausen, Thelen, Marrin, Johnson & Bridges, Paul H. Dawes, Latham & Watkins, San Francisco, for plaintiff and appellant J.F. Shea Co. Kirk G. Werner, Marie L. Fiala, M. Laurence Popofsky, Robert B. Hawk, Melanie C. Gold, Heller, Ehrman, White & McAuliffe, San Francisco, Carl D. Liggio, John Matson, Arthur Young & Co., New York City, for defendant and appellant Arthur Young & Co. Bruce Simon, Joseph W. Cotchett, Susan Illston, Burlingame, Karen Karpen, San Francisco, Michael Liberty, Cotchett & Illston, Burlingame, for plaintiff and respondent Robert Bily. John L. Boos, Laura D. Cooper, Pettit & Martin, San Francisco, for amicus curiae.

Arthur Young & Company, a firm of certified public accountants, appeals from judgments and postjudgment orders obtained against it, on the ground of its asserted professional negligence, by 13 plaintiffs none of whom were clients of Arthur Young.   We are called upon to reassess the nature and scope of duties of certified public accountants, acting as independent auditors, to persons and entities other than their clients;  we must also address several procedural issues.   The question to which all parties have assigned first priority is whether Arthur Young should have been subject to the rule, applied in International Mortgage Co. v. John P. Butler Accountancy Corp. (1986) 177 Cal.App.3d 806, 818, 223 Cal.Rptr. 218, that an independent auditor will be liable “to those third parties who reasonably and foreseeably rely” on negligently prepared and issued unqualified audited financial statements, regardless whether the third parties were in contractual privity with, or their reliance was actually foreseen by, the auditor.   We shall conclude that the foreseeability rule is sound and was applicable.   We shall sever and reverse those parts of one of the judgments and one of the orders which inure to the benefit of plaintiff Richard L. King, and shall direct certain other partial reversals and modifications on procedural grounds, but shall affirm the judgments and orders in all other respects.

Osborne Computer Corporation, a manufacturer of portable microcomputers, experienced phenomenal growth in 1980, 1981, and 1982.   In 1981 it engaged Arthur Young to audit its financial statements.

To raise capital essential to its continued growth Osborne Computer Corporation planned to make an initial public offering of its stock early in 1983.   In mid-January 1983 it was decided that the offering should be postponed for several months.   To operate until the postponed offering could be made, corporate management sought “bridge financing” in the form of loans from banks (the “bridge lenders”).   To provide security for the bank loans Osborne Computer Corporation entered into a “warrant purchase agreement” with a group of investors (the “warrant investors”).   The warrant investors provided security in various forms, most of them by executing irrevocable standby letters of credit in favor of bridge lender Security Pacific National Bank.   In return the warrant investors received warrants to purchase Osborne Computer Corporation stock, at an apparently attractive price, immediately after the public offering.

Also in early 1983, several individuals and entities (the “stock buyers”) bought sizeable blocks of Osborne Computer Corporation stock from major shareholders of the corporation.

All of the 13 plaintiffs were either warrant investors or stock buyers or (in one instance) both.   All but one of the plaintiffs assertedly relied on an unqualified audit opinion issued by Arthur Young in January 1983 with respect to Osborne Computer Corporation's consolidated financial statements for a period of years ending in November 1982.

There were significant weaknesses in Osborne Computer Corporation's internal accounting procedures.   As a result the November 1982 financial statements were far too optimistic.

Later in 1983 Osborne Computer Corporation proved unable to cope with the cumulative impact of its own poor business planning and strong competition from other computer manufacturers and went into bankruptcy.   The bridge lenders called in the standby letters of credit, which were paid by warrant investors' banks. Osborne Computer Corporation's stock was reduced to nominal value and the warrants became worthless.   These plaintiffs among others sued Arthur Young and others in separate lawsuits which were then coordinated.   (Code Civ. Proc., § 404 et seq.)

The coordinated actions culminated in a lengthy jury trial.   Certain of the plaintiffs' claims were settled, and certain of their theories of recovery were abandoned, along the way.   The jury rejected theories of fraud and negligent misrepresentation, but returned verdicts against Arthur Young, on a theory of professional negligence, in favor of plaintiff Robert Bily (an outside director of Osborne Computer Corporation who was a stock buyer) and 12 “Shea plaintiffs” (who were, variously, warrant investors, stock buyers, or both).   Judgments on the verdicts were entered and subsequently amended;  the trial court made several postjudgment orders.

Arthur Young and the Shea plaintiffs appeal.

DUTIES OF INDEPENDENT AUDITORS

Osborne Computer Corporation engaged Arthur Young as an independent auditor, to review the corporation's financial statements in accordance with generally accepted auditing standards (GAAS) for the purpose of issuing, if appropriate, unqualified opinions to the effect that as of given dates the financial statements “present fairly the financial position” of the corporation “and the results of its operations and the changes in its financial position for the year then ended, in conformity with generally accepted accounting principles [GAAP] applied on a basis consistent with that of the preceding year.”   (American Institute of Certified Public Accountants (AICPA) Professional Standards, AU § 411.01.)   When it issued its January 1983 unqualified audit opinion Arthur Young was aware of Osborne Computer Corporation's proposed initial public offering of stock, and it thereafter became aware of the bridge financing and the warrant purchase agreement, but it was not aware of particular potential investors either individually or as members of identifiable classes.

At trial the plaintiffs' factual theories were

(1) That the consolidated financial statements overstated Osborne Computer Corporation's financial condition, as of November 1982, by approximately $3 million;

(2) That the overstatement was primarily due to “material weaknesses” in Osborne Computer Corporation's “internal accounting controls,” but that Arthur Young did not respond appropriately to the material weaknesses;

(3) That when Osborne Computer Corporation thereafter found several accounting anomalies, and recalled Arthur Young to examine them, Arthur Young still failed to take appropriate steps;  and

(4) That as a consequence of Arthur Young's issuance of, and failure to remedy, its January 1983 unqualified opinion the investors lost the full amount of their investments.

The jury awarded the investors approximately 75 percent of the amounts they allegedly had lost.

Except as to stock buyer Richard L. King (the Shea plaintiff who did not rely on the financial statements), and in tangential support of its argument that certain evidence should not have been admitted, Arthur Young does not challenge the sufficiency of the evidence to support the verdicts.   Instead, Arthur Young asserts that the trial court erred to its prejudice in three respects relevant to its professional duties:

First, by incorrectly defining the applicable standard of care, and allowing improper evidence and argument on the issue.

Second, by improperly defining the scope of Arthur Young's professional duty.

Third, by improperly allowing evidence and argument to the effect that Arthur Young had not discharged its duty to Osborne Computer Corporation to inform the corporation of material weaknesses in internal accounting controls.

1. Standard of care.

 With respect to professional negligence the trial court instructed the jury, in part, that “[i]n performing professional services for a client, ․ Arthur Young ․, as an independent auditor, has the duty to have that degree of learning and skill ordinarily possessed by a reputable certified public accountant practicing in the same or a similar locality and under similar circumstances.  [¶] It is ․ Arthur Young['s] ․ further duty to use the care and skill ordinarily used in like cases by reputable members of its profession practicing in the same or similar locality under similar circumstances, and to use reasonable diligence and its best judgment in the exercise of its professional skill.   And in the application of its learning in an effort to accomplish the purpose for which it was employed.”

Arthur Young asked for an instruction that “[t]he standard of ordinary skill and competence for accountants is defined by generally accepted accounting procedures, or GAAP, and generally accepted auditing standards, or GAAS.”   The trial court refused this instruction, and instead instructed the jury that “[i]n determining whether Arthur Young fulfilled its professional duties, you may consider among other evidence whether or not its work complied with ․ GAAP and ․ GAAS.”

Arthur Young argues it was error to permit the jury to consider GAAS and GAAP “merely as evidence along with other unspecified evidence”;  it asserts that “[t]he standard of care applicable to the accounting profession is exclusively defined by GAAS and GAAP.”

We conclude the jury was properly instructed.

 Unquestionably GAAS and GAAP are monumental and commendable codifications of customs and practices within the profession of certified public accountancy.   But it is the general rule that adherence to a relevant custom or practice does not necessarily establish the actor has met the standard of care.  (Bullis v. Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 809, 148 Cal.Rptr. 22, 582 P.2d 109;  Pauly v. King (1955) 44 Cal.2d 649, 655, 284 P.2d 487;  3 Harper, James & Gray, Law of Torts (2d ed. 1986) § 17.3, p. 579;  Prosser & Keeton, Torts (5th ed. 1984) § 33, p. 195.)   In essence Arthur Young asks us to declare an exception, for independent auditors, to the general rule.

Arthur Young suggests the exception has already been declared, in California, in International Mortgage Co. v. John P. Butler Accountancy Corp., supra, 177 Cal.App.3d 806, 223 Cal.Rptr. 218.

In International Mortgage a certified public accountant firm, Butler, had been engaged to audit Westside Mortgage, Inc.'s financial statements for a given year, and had issued an unqualified opinion.   The financial statements showed Westside's net worth to be more than $175,000, but in fact its net worth was less than $100,000.   Westside contracted with International Mortgage for the purchase and sale of Federal Housing Administration insured loans.   Because its net worth was in fact less than $100,000, Westside was not qualified to do business in such loans.   Westside breached certain of its contracts with International Mortgage, gave International Mortgage a promissory note for the damage thus caused, and then defaulted on the note.

International Mortgage sued Butler, on negligence and negligent misrepresentation theories.   Butler moved for summary judgment, arguing that it owed “no duty of care to a third party who was not specifically known to the accountant as an intended recipient of the audited financial statement.”   (177 Cal.App.3d at p. 810, 223 Cal.Rptr. 218.)   It appeared that “Butler had no knowledge of [International Mortgage] at the time of the audit, nor did [International Mortgage] contact Butler to verify the financial statements' accuracy.   Further, Butler was unaware of [International Mortgage's] receipt of, and reliance upon, Westside's financial statements.”   (Ibid.)

The trial court granted summary judgment for Butler.   The Court of Appeal reversed, stating the foreseeability rule.

Butler had argued that a more limited rule of liability was required for accountants because (among other considerations) an accountant “does not control his client's records․”  (177 Cal.App.3d at p. 816, 223 Cal.Rptr. 218.)   Responding to this argument, the Court of Appeal pointed out that “the accountant does not guarantee that the client's financial statements are completely true and without fault․  [I]n issuing an opinion, the auditor is guaranteeing only that the numbers comply with the AICPA's standardized accounting rules and procedures, the GAAP.   Further, the auditor is guaranteeing that he tested for GAAP compliance using generally accepted auditing standards (GAAS).   The auditor is not guaranteeing the client's records and resulting financial statements are perfect;  only that any errors which might exist could not be detected by an audit conducted under GAAS and GAAP.   Thus, the auditor's degree of control over the client's records is unimportant;  the auditor need only control his or her abilities to apply GAAS and GAAP to a given audit situation.”  (177 Cal.App.3d at pp. 817–818, 223 Cal.Rptr. 218.)

Arthur Young regards the Court of Appeal's statement as a declaration “that an auditor's duties are limited by GAAS and GAAP ․,” and “that GAAS and GAAP controlled the standard of care․”

Arthur Young's reading of International Mortgage overtaxes the concepts of GAAP and GAAS.   In an unqualified opinion the auditor must state whether his examination was made in accordance with GAAS and that the financial statements fairly present the client's financial position in conformity with GAAP (AICPA Professional Standards, AU §§ 110.01, 411.02), and in this sense it may be said, as International Mortgage does, that the auditor guarantees application of GAAS and compliance with GAAP.   But International Mortgage ' s point was only that the auditor is not expected to guarantee perfection.   For at least two reasons it would be wholly unsatisfactory to say, and International Mortgage does not say, that in the context of a claim for professional negligence either GAAP or GAAS, or a combination of the two, provides a legally adequate standard of care for the auditor:

First, neither GAAS nor GAAP is now, or may ever be, so comprehensive as to afford a predictable and repeatable standard of professional responsibility in all conceivable situations.   As one commentator has acknowledged:   “In situations that are not specifically addressed by the AICPA Professional Standards, a CPA merely has an obligation to use professional care.   Although this requires a CPA to comply in good faith with GAAP and GAAS, neither of these concepts have been clearly defined.”  (Hagen, Certified Public Accountants' Liability for Malpractice:  Effect of Compliance with GAAP and GAAS (1987) 13 J. Contemporary Law 65, 85, 87;  cf. also Cannon, Tax Pressures on Accounting Principles and Accountants' Independence (1952) 27 Accounting Rev. 419, 421, quoted in Thor Power Tool Co. v. Commissioner (1979) 439 U.S. 522, 544 fn. 22, 99 S.Ct. 773, 787 fn. 22, 58 L.Ed.2d 785.)

Second, in any event so categorical a rule would inappropriately entrust to the accountancy profession itself the balancing of interests implicit in any determination of duty and breach.

Under the general rule GAAS and GAAP, as compilations of custom and practice, will be relevant and thus admissible as “evidence to be considered in determining the proper standard of care” (Bullis v. Security Pac. Nat. Bank, supra, 21 Cal.3d at p. 809, 148 Cal.Rptr. 22, 582 P.2d 109), and in many if not most cases an accountant who has complied with GAAS and found compliance with GAAP will be found, in turn, to have satisfied the applicable standard.   But this is not to say that GAAS and GAAP define the standard of care.   Certified public accountants, like other professionals, must meet the standards of expertise and diligence common to their profession as proved with respect to the facts of particular cases by the testimony of suitably qualified expert witnesses.   The trial court so instructed the jury.   There was no error.

 Our conclusion enables us to deal relatively briefly with Arthur Young's further contentions regarding the standard of care.

In summation counsel for Bily urged the jury to apply “your common sense, irrespective of GAAS and GAAP” to the duty issue.   Arthur Young considers this “clearly improper.   The jurors, as lay persons, were not qualified to evaluate the appellant's professional conduct based on their own perception of what was proper.”

The jury was properly instructed to determine the standard of care “only from the opinions of the certified public accountants who have testified as expert witnesses as to such standard.”   We presume in support of the judgment that the jury followed the instruction (cf. Tramell v. McDonnell Douglas Corp. (1984) 163 Cal.App.3d 157, 171, 209 Cal.Rptr. 427), which we deem sufficient to have vitiated any tendency counsel's summation might have had to lead the jurors to disregard the professional standard of care.   In any event there was no contemporaneous objection;  the point may be deemed waived.   (Grimshaw v. Ford Motor Co. (1981) 119 Cal.App.3d 757, 797, 174 Cal.Rptr. 348.)

 Before trial Arthur Young had moved in limine to exclude from trial evidence concerning Arthur Young's internal accounting manuals and any argument that Arthur Young had not complied with its own manuals, upon the theory that the relevant standard of care was prescribed by GAAS and GAAP and that the internal manuals were irrelevant to GAAS and GAAP.   The motion was denied, evidence concerning the internal manuals was received at trial, and counsel for the Shea plaintiffs argued in summation that Arthur Young's apparent failure to assign a “concurring partner,” arguably required by its internal manuals although not by GAAS, was “institutional failure at a very senior level.”   In this court Arthur Young characterizes the evidence as irrelevant and the argument as prejudicial.

Our conclusion that GAAS and GAAP do not conclusively define the accountant's professional standard of care vitiates Arthur Young's argument.   Internal manuals could properly be deemed relevant to the broader standard of care.   (Cf. Bullis v. Security Pac. Nat. Bank, supra, 21 Cal.3d 801, 809–811, 148 Cal.Rptr. 22, 582 P.2d 109;  Hartford Acc. & Indem. Co. v. Bank of America (1963) 220 Cal.App.2d 545, 561, 34 Cal.Rptr. 23.)   The pertinent summation was brief, there was no contemporaneous objection, Arthur Young had every opportunity to respond, and the jury was properly instructed.

2. Scope of duty.

 To prove professional negligence the plaintiffs were required to show not only that Arthur Young had breached its duty to act in accordance with the applicable standard of care, but also that it had owed this duty of care to these plaintiffs.   The crux of Arthur Young's appeal is its assertion that any duty of care it owed did not extend to Bily or to the Shea plaintiffs.

The trial court instructed the jury that “[a]n accountant owes a further duty of care to those third parties who reasonably and for[e]seeably rely on an audited financial statement prepared by the accountant.”   Throughout the trial and on appeal Arthur Young has maintained that this view of the law, taken directly from International Mortgage Co. v. John P. Butler Accountancy Corp., supra, 177 Cal.App.3d 806, 820, 223 Cal.Rptr. 218, is incorrect, and that the scope of its liability should properly have been limited to those with whom it was in “either a relationship of contractual privity ․ or a relationship sufficiently intimate to be equated with privity” (Credit Alliance v. Arthur Andersen & Co. (1985) 65 N.Y.2d 536, 537, 493 N.Y.S.2d 435, 437, 483 N.E.2d 110, 112, amended at 66 N.Y.2d 812, 498 N.Y.S.2d 362, 489 N.E.2d 249;  cf. Ultramares Corp. v. Touche (1931) 255 N.Y. 170, 174 N.E. 441), or at most, under section 552 of the Restatement Second of Torts, to those “for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it” and who suffer loss “through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.”

Neither the privity rule, nor the Restatement rule as developed upon in the decisions of other jurisdictions, would have brought Bily or the Shea plaintiffs within the scope of Arthur Young's duty of care.   Under the trial court's instruction, the jury necessarily concluded that Bily and each of the Shea plaintiffs were third parties who reasonably and foreseeably relied on Arthur Young's January 1983 unqualified opinion.   Arthur Young argues that the jury was incorrectly instructed.

The fundamental premise of California negligence law is the statement of Civil Code section 1714 that “[e]very one is responsible ․ for an injury occasioned to another by his want of ordinary care or skill in the management of his property or person ․,” qualified by the judicial rule that “[i]n order to limit the otherwise potentially infinite liability which would follow every negligent act, the law of torts holds defendant amenable only for injuries to others which to defendant at the time were reasonably foreseeable.”  (Dillon v. Legg (1968) 68 Cal.2d 728, 739, 69 Cal.Rptr. 72, 441 P.2d 912.)   Particular cases may raise the difficult question whether, on the basis of sufficiently compelling policy considerations (Rowland v. Christian (1968) 69 Cal.2d 108, 112, 70 Cal.Rptr. 97, 443 P.2d 561;  Biakanja v. Irving (1958) 49 Cal.2d 647, 650, 320 P.2d 16), the limit of the actor's duty should be drawn somewhere within the outer boundary of reasonable foreseeability.  (See generally 3 Harper, James & Gray, Law of Torts, supra, § 18.2, p. 671.)

Arthur Young seeks such a limit for independent auditors, by way of either the privity rule or the Restatement rule.

The first published California decision to consider this specific proposition was International Mortgage, which rejected both the privity rule and the Restatement rule, and adopted the foreseeability rule reflected in the instruction Arthur Young challenges here.   New Jersey and Wisconsin had previously adopted a foreseeability rule for accountant liability (Rosenblum v. Adler (1983) 93 N.J. 324, 461 A.2d 138, 145, 153;  Citizens State Bank v. Timm, Schmidt & Co. (1983) 113 Wis.2d 376, 335 N.W.2d 361, 366);  Mississippi did so after International Mortgage was decided (Touche Ross v. Commercial Union Ins. (Miss.1987) 514 So.2d 315, 322–323).

Arthur Young articulately and vigorously maintains that International Mortgage was incorrectly decided and that either the privity rule or the Restatement rule is, as a matter both of tort analysis under the decisions of this and other jurisdictions and of sound public policy, preferable to the foreseeability rule in the context of claims against independent auditors.   Arthur Young argues that most American jurisdictions limit the scope of auditors' liability more strictly than does International Mortgage, that even the California tort precedents do not support the International Mortgage rule, and that the rule creates an intolerable “unlimited potential liability” for accountants.   Amicus curiae California Society of Certified Public Accountants (“CSCPA”) has submitted a brief in broad support of Arthur Young's position.   Upon careful consideration of these arguments we conclude, consistent with International Mortgage, that California should follow the foreseeability rule, and that in this respect the jury was properly instructed.

a. Ultramares and Credit Alliance.

A certified public accountant will almost invariably perform his or her professional services in the context of a contract (or “engagement”) between the accountant and a client.   Historically, claims for negligent performance of contract were subject to the concept of privity, which limited the scope of the performer's duty of care to parties to the contract.  (Cf. Winterbottom v. Wright (1842) 10 M & W 109, 152 Eng.Rep. 402;  see generally Biakanja v. Irving, supra, 49 Cal.2d 647, 649, 320 P.2d 16;  3 Harper, James & Gray, Law of Torts, supra, § 18.5, pp. 705–711;  Prosser & Keeton, Torts, supra, § 93, pp. 667–671.)   The leading American case for application of the privity rule to accountants, to avert anticipated “liability in an indeterminate amount for an indeterminate time to an indeterminate class,” is Ultramares Corp. v. Touche, supra, 255 N.Y. 170, 174 N.E. 441, 448.   The New York Court of Appeals subsequently slightly extended its rule:  “Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports ․:  (1) the accountants must have been aware thatthe financial reports were to be used for a particular purpose or purposes;  (2) in the furtherance of which a known party or parties was intended to rely;  and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance.”  (Credit Alliance v. Arthur Andersen & Co., supra, 65 N.Y.2d 536, 493 N.Y.S.2d 435, 443, 483 N.E.2d 110, 118, amended at 66 N.Y.2d 812, 498 N.Y.S.2d 362, 489 N.E.2d 249.)

Arthur Young submits that Credit Alliance's “vigorous reaffirmation” of Ultramares “together with adoption of the Ultramares rule by several other states, has dispelled any doubts concerning its precedental force”;  it counts eleven states in which privity rules comparable to those of Ultramares or of Credit Alliance have been adopted and retained.   Arthur Young perceives the Ultramares rule “not as a mechanical application of archaic contract principles, but as shorthand for a fundamental policy decision:  that only a third party's immediate proximity to the accountant's intended purpose imposes a reciprocal duty of care.   The unlimited class of foreseeable users of information cannot reasonably expect an accountant to undertake an obligation to them.”

We are unpersuaded by Arthur Young's argument.

Whatever the status of the privity rule in other jurisdictions, its vitality in California is limited at best.   The precursor of Ultramares' concern for indeterminate liability was the statement in Winterbottom v. Wright, supra, 10 M & W 109, 152 Eng.Rep. 402, involving a contract for repair of a mail coach which collapsed, injuring a third party, that “[u]nless we confine the operation of such contracts as this to the parties who entered into them, the most absurd and outrageous consequences, to which I can see no limit, would ensue.”  (10 M & W, at p. 114.)   California long ago dismissed the apprehension expressed in Winterbottom v. Wright as fallacious (Dillon v. Legg, supra, 68 Cal.2d 728, 743, 69 Cal.Rptr. 72, 441 P.2d 912), and recognized that the general privity rule applicable to negligence in the performance of a contract had been “greatly liberalized” and that “[t]he determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.  [Citations.]”  (Biakanja v. Irving, supra, 49 Cal.2d 647, 649, 650, 320 P.2d 16;  cf. J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 804, 157 Cal.Rptr. 407, 598 P.2d 60.)   The fact, sometimes advanced to justify application of the privity rule, that the claimant's injuries are not physical but purely economic, would not in and of itself impede such a claim in California.  (J'Aire Corp. v. Gregory, supra, 24 Cal.3d 799, 806, 157 Cal.Rptr. 407, 598 P.2d 60.)

Nor is the scope of the modern independent auditor's function as clearly subject to his contractual engagement as the accountant's might have been when Ultramares declared that “public accountants are public only in the sense that their services are offered to any one who chooses to employ them.”  (Ultramares Corp. v. Touche, supra, 255 N.Y. 170, 174 N.E. 441, 448.)   Just over seven years ago, in a matter involving Arthur Young, the U.S. Supreme Court recognized the distinction between the role of an attorney, as “the client's confidential adviser and advocate,” and that of the independent certified public accountant:  “By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client.   The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public.   This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.”   (United States v. Arthur Young & Co. (1984) 465 U.S. 805, 817–818, 104 S.Ct. 1495, 1502–1503, 79 L.Ed.2d 826.)   In this light the relevance of privity of contract to the liability of the independent auditor is questionable at best.

b. Restatement section 552.

Section 552 of the Restatement Second of Torts declares a perception of “negligent misrepresentation” which appears to fall somewhere between a negligent misstatement of facts and California's tort of deceit by negligent misrepresentation, stating in pertinent part that “[o]ne who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information,” but that liability “is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it;  and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.”  (Rest.2d Torts, § 552, pp. 126–127.)

If obliged to choose between the privity rule and the Restatement rule Arthur Young would apparently favor the Restatement rule, which it finds to be “clearly the majority rule” in accountant liability cases, directly or indirectly endorsed in 18 states.   Arthur Young suggests that “for many courts the Restatement represents a satisfactory compromise between their discomfort with the traditional privity approach and the ‘spectre of unlimited liability.’ ”

Although somewhat broader than the Credit Alliance version of the privity rule, the Restatement rule was nonetheless intentionally limited, in light of “the extent to which misinformation may be, and may be expected to be, circulated, and the magnitude of the losses which may follow from reliance upon it,” in order to promote “the important social policy of encouraging the flow of commercial information upon which the operation of the economy rests.”  (Rest.2d Torts, § 552, com. a, pp. 127, 128.)

Arthur Young would adopt the Restaters' reasoning.   It refers to “broader societal interests in encouraging the production and dissemination of information,” arguing “the fact that accounting is not an exact science but an art makes it doubtful that claims for professional malpractice will be significantly reduced by expanding negligence liability.”   According to Arthur Young, too broad an expansion of liability exposure will tend as well to cut back on the quantity of “economic information” disseminated, and “[i]f the quantity of information discouraged is large, and the marginal value of the improved quality is small, then expansion of liability results in a net loss to society.”

We agree with Justice Wiener's cogent criticism of the Restatement rationale:  “The placing of liability on the fortuitousness of whether the name of the bank is disclosed or whether a class of lending institutions were known to the accounting firm ․ does not appear to rest upon sound analytical considerations.   If the purpose of imposing liability is to increase the flow of accurate information this hardly turns on the state of mind of the accountant․  The concept of negligence presumes that a mistake could have been prevented through the use of reasonable care.   The incentive to convey accurate information in commerce and prevent mistakes should not be diminished by the good faith of the accountant nor by the scope of his initial conversation with his client.   Insulating the accountant from liability on the basis of chance considerations with the likelihood of additional inaccurate information being disseminated should not serve as the underpinning for a rule of liability.”  (Wiener, Common Law Liability of the Certified Public Accountant for Negligent Misrepresentation (1983) 20 San Diego L.Rev. 233, 252.)

c. California “suppliers of information” cases.

Arthur Young next asserts that the California Supreme Court “has unambiguously rejected the foreseeability test in third party negligence claims ․ against other professional suppliers of information[,]” that its “formulation of duty closely parallels the Restatement,” and that it assigns importance to policy considerations “closely akin to those underlying ․ Ultramares.”   In Arthur Young's view the California cases establish that “intent to influence” a foreseen user “is the essential prerequisite for ․ a duty of care” in the accountancy context.

In support of these generalizations Arthur Young cites and discusses four cases, only two of them from the Supreme Court, which considered whether a duty of care extends, respectively, from the scrivener of an invalid will to one of its intended beneficiaries (Biakanja v. Irving, supra, 49 Cal.2d 647, 320 P.2d 16), from a title insurance company to an individual whose previously-recorded lis pendens was omitted from the company's title report (Stagen v. Stewart–West Coast Title Co. (1983) 149 Cal.App.3d 114, 196 Cal.Rptr. 732), from a real estate appraiser who grossly undervalued a piece of real property to an individual who invested money, in reliance on the appraisal, at the behest of the mortgage company which had contracted for the appraisal (Christiansen v. Roddy (1986) 186 Cal.App.3d 780, 231 Cal.Rptr. 72), and from an attorney who negligently misadvised his clients to “persons with whom the client in acting upon the advice deals wholly at arm's length” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 339, 134 Cal.Rptr. 375, 556 P.2d 737).

None of the four cases supports Arthur Young's broad generalizations or its position in this case.

It is obvious, to begin with, that such roles as the defendants in the four cases may have played as “professional suppliers of information” are readily distinguishable from that of an independent auditor who “assumes a public responsibility” for correctly certifying public financial reports.  (United States v. Arthur Young & Co., supra, 465 U.S. 805, 817–818, 104 S.Ct. 1495, 1502–1503.)

There are other fundamental distinctions as well.   The result in Biakanja v. Irving depended in measurable part on the foreseeability of harm to a foreseen plaintiff;  the Supreme Court had no occasion to consider whether the scrivener would have been liable to plaintiffs who were foreseeable but not foreseen.  Stagen v. Stewart–West Coast Title Co. and Christiansen v. Roddy apply the rules of California's statutory tort of deceit by negligent misrepresentation, defined in Civil Code sections 1709 and 1710 (see generally Hale v. George A. Hormel & Co. (1975) 48 Cal.App.3d 73, 82–85, 121 Cal.Rptr. 144), under which the defendant must have made the incorrect factual statement with the intent to induce the plaintiff to rely on it.  (Gagne v. Bertran (1954) 43 Cal.2d 481, 487–488, 275 P.2d 15;  Eddy v. Sharp (1988) 199 Cal.App.3d 858, 864, 245 Cal. Rptr. 211;  Christiansen v. Roddy, supra, 186 Cal.App.3d 780, 785–787, 231 Cal.Rptr. 72.)   Here the plaintiffs tendered, and the jury rejected, negligent misrepresentation theories.   The question before us is whether the jury was properly permitted to return verdicts against Arthur Young on a theory of professionally negligent misstatement.   Cases on the intent element of deceit by negligent misrepresentation are not germane to that question.  Goodman v. Kennedy is significant for its analysis of the scope of an attorney's liability for negligent advice given confidentially to a client and not made known to the third-party plaintiffs.   The result in Goodman v. Kennedy was controlled by the Supreme Court's perception of the attorney's role as a confidential adviser, a role readily distinguishable from that of an independent certified public accountant functioning as an auditor.  (Cf. United States v. Arthur Young & Co., supra, 465 U.S. 805, 817–818, 104 S.Ct. 1495, 1502–1503.)

d. Foreseeability and “unlimited potential liability.”

Arthur Young argues that those who advocate a foreseeability rule rely too heavily on “an analogy between the duty requirement for accountants' liability and the demise of the privity doctrine in products liability law [,]” by “[l]ikening the auditor's report to a ‘product’ sent into the stream of commerce․”  Arthur Young submits that the accountant's product (unlike a manufacturer's) “can be disseminated without limit to the general public, resulting in unlimited potential liability.”

The product liability analogy may be a straw man.   None of the cases or commentators that have applied or argued for a foreseeability rule have gone so far as to suggest the stream-of-commerce analysis of strict products liability cases should be applied to determine the scope of an accountant's duty of care.

The focus of Arthur Young's concern is “unlimited potential liability.”   Arthur Young assumes that because of the intangible and readily communicable nature of an accountant's product, the foreseeability rule imposes no practical limit on the scope of the accountant's duty and thus is indistinguishable, as a practical matter, from strict liability:  If the auditor issues an unqualified opinion on what prove to be misleading financial statements, then without regard to the degree of care exercised by the auditor, and certainly without any meaningful limitation on the class of potential plaintiffs, anyone who puts the audited financial statements to one of the uses for which such statements may be deemed intended, and who is consequently harmed, may have recourse against the auditor.

In support of its position Arthur Young cites three relatively recent California Supreme Court cases:  Elden v. Sheldon (1988) 46 Cal.3d 267, 250 Cal.Rptr. 254, 758 P.2d 582 (which involved the question of liability for a plaintiff's emotional distress upon witnessing fatal injuries to his unmarried cohabitant), Nally v. Grace Community Church (1988) 47 Cal.3d 278, 253 Cal.Rptr. 97, 763 P.2d 948 (liability of a clergyman-counselor to the parents of a suicide victim he had counseled), and Thing v. La Chusa (1989) 48 Cal.3d 644, 257 Cal.Rptr. 865, 771 P.2d 814 (liability for emotional distress of a mother who neither saw nor heard the accident which injured her son).   Arthur Young relies particularly onThing's statement “that ‘[f]oreseeability proves too much․  Although it may set tolerable limits for most types of physical harm, it provides virtually no limit on liability for nonphysical harm.’   It is apparent that reliance on foreseeability of injury alone in finding a duty, and thus a right to recover, is not adequate when the damages sought are for an intangible injury.”   (Thing v. La Chusa, supra, 48 Cal.3d 644, 663–664, 257 Cal.Rptr. 865, 771 P.2d 814.)

 As we have acknowledged, in an appropriate case compelling policy considerations may require that the scope of duty be less extensive than the scope of reasonable foreseeability.  Biakanja v. Irving, supra, 49 Cal.2d 647, 650, 320 P.2d 16, listed five such considerations;  in Rowland v. Christian, supra, 69 Cal.2d 108, 112–113, 70 Cal.Rptr. 97, 443 P.2d 561, the Supreme Court added two more;  the recent Supreme Court decisions illustrate that the lists are not immutable and that the essential question remains whether, in each case as it arises, “ ‘the plaintiff's interests are entitled to legal protection against the defendant's conduct.’ ”  (Dillon v. Legg, supra, 68 Cal.2d 728, 734, 69 Cal.Rptr. 72, 441 P.2d 912.)

But in its nature and in the nature of the judicial process this is not a question that can be answered for the case before us on the basis of perceived trends in other cases involving other facts, other issues, and other policy considerations.   Of course we must, and we shall, give close and respectful attention to the opinions of our Supreme Court, and shall apply them as the law requires in the discharge of our duty to decide each case properly brought before us on its individual merits.   Each of the three cases Arthur Young cites involves much-mooted issues of policy in specific factual contexts;  neither the policy issues nor the facts are closely analogous to those of this case.

We conclude Arthur Young's concern for “unlimited potential liability” is ill-founded.

In the first place, the accountant will in no event be liable if the work upon which his or her unqualified opinion is based has been done in accordance with a professional standard of care.   If the sheer volume of the client's transactions or the manner of their recordation is such that the reasonably competent professional accountant, applying appropriate tests and techniques, nevertheless issues an unqualified opinion on misleading financial statements, then he or she has not violated the duty of care:  The fact the financial statements are misleading does not itself compel a conclusion the auditor who certified them was negligent.

Given a breach of the duty of care, the foreseeability rule would extend liability for the breach only to those persons and entities who reasonably relied on the negligently-prepared unqualified opinion and whose reliance was reasonably foreseeable by the professionally sophisticated auditor.

The rule is workable;  it defines a finite and manageable class.

To begin with, the class will be limited to those who are foreseeably interested in the client:  To those who may reasonably be expected to consider doing something to, for, with, or about the client.

Within the class of interested persons many categories could be eliminated.   For example, in most cases it would not be reasonable to expect casual buyers of the client's product to rely on its audited financial statements.

And at least as a practical matter the accountant will be concerned only with those users whose reasonably foreseeable reliance will entail a risk of substantial loss if the financial statements prove to be misleading.   Most commonly such users would be substantial investors and lenders whom a professionally sophisticated accountant could reasonably expect to be active in the relevant market, in light of circumstances such as the client's own solicitation of investments or loans.

The foreseeability rule is also fair, given the indisputable reality of certified public accountancy.   The evidence in this case suggests that preparation of audit opinions for public dissemination is or can be most remunerative, and that the work is desired and actively pursued by accountants.   The market is captive:  The audit opinions required by investors, lenders, and the inevitable regulators can be provided only by certified public accountants.   And as the clients and their financial plans become larger, the realities of the market dictate that they should go to larger accounting firms and pay correspondingly larger accountant fees.   The sophisticated certified public accountant must be charged with a full understanding of the stakes, the rewards, and the risks of an engagement in such a context.   The liability rule we endorse is no more than commensurate with the remunerative potential of the business.

Arthur Young argues that “efficient—and fair—risk allocation are best served by limiting accountants' liability․”  Arthur Young to some extent and amicus CSCPA to a considerable extent rely, for factual support for their policy arguments, on data as to claims history and the availability and costs of insurance that were not presented to the trial court and by the same token are not properly before us as part of the record on appeal.   True to our role as a reviewing court, we decline to consider these matters.   This factual presentation might more properly, and efficiently, be tendered in the first instance to the Legislature which is better situated, both theoretically and practically, to provide any necessary solution to the problem Arthur Young and CSCPA perceive.

Arthur Young's premises—that there is a general societal need for audited financial reports, that the need is for quantity rather than quality, that to make accountants liable to foreseeable users for negligently-prepared audits will drive the price of such audits up beyond the ability of some clients to pay for it, and that in other cases the cost will be inequitably spread to the general public rather than to users of the audited financial reports—are uniformly self-serving.   We find them neither attractive nor persuasive.

Finally, Arthur Young suggests that liability insurance is not the panacea the proponents of the foreseeability rule would have us believe.   The short answer is that our conclusions are not based on any assumption as to the availability of liability insurance, or as to its efficacy relative to any other form of cost-spreading or risk-allocation.

SUMMARY

In sum we find the foreseeability rule, as applied in International Mortgage, to be consistent with California's basic rule of responsibility for the reasonably foreseeable consequences of a failure to meet an applicable standard of care, and we discern no compelling policy reason to place additional limits on the scope of an independent auditor's duty.

3. Internal accounting controls.

One of the first steps an auditor must take is to assess the sufficiency of the audit client's internal accounting controls:  Accounting plans, procedures, and records adequate to keep track of the company's assets and to assure that the company could prepare reliable financial statements, in accordance with generally accepted accounting principles.  (AICPA Professional Standards, AU § 320.28.)   If controls are sufficient, then the auditor may, consistent with sound professional practice, place some degree of reliance upon the audit client's own accounting.   If, on the other hand, the audit client's internal accounting controls are weak, then the auditor must examine the client's entries more carefully and make more tests to verify the accuracy and fairness of the client's financial statements.

If perceived flaws in the audit client's plans, procedures, and records are so serious as to amount to material weaknesses in internal accounting controls, then according to industry standards the auditor must not only increase its vigilance but also “communicate” the perceived material weaknesses to “senior management” and to the audit client's board of directors or to the board's audit committee.  (Id. § 323.01.)   Absent special circumstances the communication is deemed confidential and the auditor will have neither the duty nor the right to advise third parties of the material weaknesses.   Nor will the existence of material weaknesses necessarily preclude issuance of an unqualified audit opinion:  The auditor may work around the weaknesses by applying rigorous inspection and testing of entries and by recommending adjusting entries to the client.

It is undisputed that Osborne Computer Corporation lacked adequate internal accounting controls.   There is substantial evidence to support further conclusions that the deficiencies were so serious as to amount to material weaknesses, and that Arthur Young discovered, or should have discovered, the material weaknesses.   It is undisputed that Arthur Young did advise certain Osborne Computer Corporation managers of weaknesses in the company's internal accounting controls, but did not characterize the weaknesses as material weaknesses or communicate its findings to senior management, to the board, or to the board's audit committee.

Before trial Arthur Young, by motion in limine, sought to exclude evidence “relating to” its “alleged nondisclosure of” the material weaknesses.   The crux of Arthur Young's argument was that the evidence would be irrelevant to the plaintiffs' alleged reliance on Arthur Young's unqualified opinion.

The trial court denied the motion.   Thereafter Arthur Young did almost nothing further to control the impact of the evidence.   We find no relevant objection to counsel's argument and no request for an instruction to limit the use of the evidence.

On appeal, Arthur Young argues that the denial was reversible error.   Its argument embodies at least two additional contentions:  That the jury was improperly instructed as to the reliance element of International Mortgage, and that the evidence of record is insufficient to support a conclusion that Arthur Young's asserted failure to report was the proximate cause of cognizable damage to the investors.

a. Admissibility.

 Analysis of the objection that evidence of alleged nondisclosure of material weaknesses was irrelevant required that the fact to be proved be identified, and that it then be determined whether the fact was of consequence to the determination of the action and was disputed, and whether the evidence tended in reason to prove (or to disprove) the fact.  (Evid.Code, §§ 140, 210, 350;  cf. generally 1 Witkin, Cal.Evidence (3d ed. 1986) §§ 286–287, pp. 255–258.)

Arthur Young's in limine motion proceeded from the premise that the fact to be proved was that Arthur Young had failed to communicate material weaknesses to the appropriate people at Osborne Computer Corporation.   Arthur Young argued in essence that this fact was not of consequence to the determination of the action, reasoning that it owed no duty to the plaintiffs to disclose the material weaknesses either to them or to Osborne Computer Corporation.   It makes a similar argument on appeal.

We conclude the evidence was relevant and therefore that the trial court's ruling was not error.

Arthur Young's assumption that the only fact to be proved was the failure to communicate itself is unsound.   The plaintiffs' factual premise was that Arthur Young had directly or indirectly led the plaintiffs to believe Osborne Computer Corporation's financial statements fairly and reliably reflected the company's financial condition when in fact they did not.   The plaintiffs took the position that one reason the financial statements were so grossly misleading was that Osborne Computer Corporation lacked adequate internal accounting controls.   It was Arthur Young's undisputed responsibility to determine whether the financial statements fairly represented the company's financial condition, and for this purpose to perform certain auditing tests.   The nature and rigor of the tests to be performed would depend on the degree to which Arthur Young could reasonably rely on Osborne Computer Corporation's internal accounting controls.   The plaintiffs asserted that Arthur Young had either failed to exercise professional skill sufficient to discover, or had discovered but for whatever reason had mischaracterized or disregarded, the fact that Osborne Computer Corporation lacked adequate internal accounting controls, and in any event had failed to apply auditing tests and procedures sufficient to compensate for the lack of internal controls, and that this failure led directly to Arthur Young's issuance of a wholly unwarranted unqualified opinion.

Under this analysis the fact to be proved was Arthur Young's failure to recognize, or to respond appropriately to, the material weaknesses.   This fact was of consequence, and was disputed.   Arthur Young's failure to communicate the weaknesses was simply evidence tendered to prove that fact.   It is clear, and Arthur Young does not dispute, that given material weaknesses Arthur Young would have been obliged by the standards of its profession to report those weaknesses to Osborne Computer Corporation.   One legitimate inference from proof that Arthur Young had not made the required communication would be that Arthur Young had not recognized, or had recognized but had disregarded, material weaknesses:  The evidence tended in reason to prove the fact.   Thus the evidence was relevant.

That our analysis may vary somewhat from that applied by the trial court is of no consequence:  “When evidence is properly received the basis for the court's ruling is not material.”  (People v. Williams (1988) 44 Cal.3d 883, 911, 245 Cal.Rptr. 336, 751 P.2d 395;  cf. Wilcox v. Berry (1948) 32 Cal.2d 189, 192, 195 P.2d 414.)

b. Instruction as to reliance.

 Arthur Young also argues that the trial court, by failing to make clear to the jury that the plaintiffs could recover from Arthur Young for professional negligence only if and to the extent that they had relied on Arthur Young's unqualified opinion, improperly permitted the plaintiffs to exploit the evidence of Arthur Young's failure to communicate the material weaknesses.

Unquestionably the plaintiffs did emphasize evidence that Arthur Young had breached a duty to communicate the material weaknesses to Osborne Computer Corporation, and unquestionably counsel for the plaintiffs did argue this evidence to the jury in a way such as to suggest Arthur Young could be found liable for this breach without any showing of reliance by the plaintiffs.

Arthur Young complains specifically of the following passage from the trial court's professional negligence instruction:

“The essential elements of common law professional negligence, each of which must be proved to recover damages are as follows:

“The elements of a cause of action in court for professional negligence are, one, the duty of the professional to use such skill, prudence and diligence as other members of his profession commonly possess and exercise.

“Two, a breach of that duty.

“Three, a legal causal connection between the negligent conduct and the resulting injury.

“And four, actual loss or damage resulting from the professional's negligence.

“A legal cause of loss is a cause which is a substantial factor in bringing about the loss.   In performing professional services for a client, defendant Arthur Young & Company, as an independent auditor, has the duty to have that degree of learning and skill ordinarily possessed by a reputable certified public accountant practicing in the same or a similar locality and under similar circumstances.

“It is defendant Arthur Young and Company's further duty to use the care and skill ordinarily used in like cases by reputable members of its profession practicing in the same or similar locality under similar circumstances, and to use reasonable diligence and its best judgment in the exercise of its professional skill.   And in the application of its learning in an effort to accomplish the purpose for which it was employed.

“An accountant owes a further duty of care to those third parties who reasonably and foreseeably rely on an audited financial statement prepared by the accountant.   A failure to fulfill any such duty is negligence.”

The last paragraph of this passage was drawn from International Mortgage.   Arthur Young argues that in the context of the preceding paragraphs “the [International Mortgage ] reliance instruction was merely permissive;  the jury was not required to find that reliance existed in order to enter malpractice verdicts in [plaintiffs'] favor․”  To demonstrate that the jury could have been misled, Arthur Young submits that it was misled in the case of plaintiff King, who had not relied on the financial statements.   Arthur Young argues the King verdict makes clear that the jury believed it was not required to find reliance.   Arthur Young goes so far as to suggest that evidence of its failure to communicate material weaknesses, counsel's argument, and the asserted deficiencies of the trial court's instruction somehow coalesced to create an “internal control theory” of recovery under which the jury was allowed, notwithstanding Goodman v. Kennedy, supra, 18 Cal.3d 335, 134 Cal.Rptr. 375, 556 P.2d 737, to find Arthur Young liable to third persons solely on the basis of confidential communications between Arthur Young and its audit client Osborne Computer Corporation.

None of the individual elements of the instruction states the law incorrectly in the abstract.   It is true that the instruction inartfully combines an enumeration of the elements of a client 's claim against a negligent provider of professional services with International Mortgage 's holding as to the scope of an auditor's duty to third persons.   With the benefit of hindsight the instruction might have been tailored to make clearer the interrelation between standard of care and scope of duty.   But we cannot agree that the instruction as given was significantly confusing or misleading.   Nor do we regard the King verdict—at $67,500 the smallest of the individual verdicts, and less than 2 percent of the total of all verdicts rendered—as a persuasive indication that the jury was in fact misled.   The King verdict was an anomaly, unsupported by the evidence, and we shall reverse the judgment as to King on that ground.   But the anomaly was by no means sufficient to rebut presumptions that the jury understood (Morris v. Associated Securities, Inc. (1965) 232 Cal.App.2d 220, 224–225, 42 Cal.Rptr. 607) and followed (cf. Tramell v. McDonnell Douglas Corp. (1984) 163 Cal.App.3d 157, 171, 209 Cal.Rptr. 427) the instruction.

c. Evidence of proximate cause.

Arthur Young also argues that “the evidence presented at trial on the subject of internal control failed as a matter of law to prove causation under that theory” and that because this court cannot determine from the record that the jury's verdicts were not based on this “theory” of recovery the judgments must be reversed.

We reject this argument because we are satisfied that the trial court's instruction was sufficient to forestall a leap from the evidence of failure to communicate material weaknesses directly to a conclusion that Arthur Young was liable to the plaintiffs.   In our view the instruction sufficiently directed the jury that such liability could be imposed only by way of foreseeable reliance on Arthur Young's unqualified opinion.   We presume the jury followed the instruction.

4. The Richard L. King judgment.

 We find no evidence in this record sufficient to bring plaintiff King within the scope of Arthur Young's duty as we have defined it.   King was a stock buyer;  he was not involved in the warrant transactions.   There is no evidence that King relied on the audit opinion.   King acknowledged he had not seen an Osborne Computer Corporation financial statement before he invested, and testified that he had relied only on information he was given in conversations with an agent of the seller and with an officer of Osborne Computer Corporation.   The Shea plaintiffs argue that King's investment loss is proximately attributable to the misleading advice he received from the Osborne Computer Corporation officer who was misled, in turn, by Arthur Young's negligence.   Whether or not this theory is valid as a matter of cause, it is too attenuated as a matter of scope of duty.   We shall reverse the judgment with respect to King.   King's testimony makes clear he cannot prove a better professional negligence case against Arthur Young;  we shall direct that judgment be entered for Arthur Young upon King's claim.

PROCEDURAL ISSUES

Arthur Young contends that a settlement offer by the Shea plaintiffs under Code of Civil Procedure section 998 was ineffective, and therefore that the trial court should not have awarded substantial expert witness costs to the Shea plaintiffs.

By their own appeals the Shea plaintiffs assert that the trial court erred:

(1) By awarding nearly $90,000 in expenses, under Code of Civil Procedure section 128.5, against the Shea plaintiffs;

(2) By granting Arthur Young substantial offsets, against certain of the Shea plaintiffs, for settlement of those plaintiffs' complaint against Osborne Computer Corporation's bankruptcy estate;  and

(3) By improperly refusing to instruct the jury on the Shea plaintiffs' theory that Arthur Young was liable to them as an aider and abettor of Osborne Computer Corporation's alleged fraud.   The Shea plaintiffs characterize this last assertion as a “defensive cross-appeal,” asking that the ruling be reversed “[i]n the event this case is remanded on other grounds.”   Because our conclusions will not require a remand for further jury trial we shall not reach the Shea plaintiffs' “defensive cross-appeal.”

1. Code of Civil Procedure section 998.

 Shortly before trial the Shea plaintiffs collectively offered, under Code of Civil Procedure section 998, to allow judgment to be taken for them and against Arthur Young “in the total sum of $2,500,000.00 with the parties to bear their own costs.”   The offer did not specify how the $2.5 million was to be allocated among the plaintiffs.   Arthur Young took no action with respect to the offer.

The Shea plaintiffs received verdicts aggregating more than $3 million.   They then claimed $641,865.80, under subdivision (d) of section 998, for costs of the services of expert witnesses.   The trial court awarded the Shea plaintiffs $400,000 in “witness fee costs.”   On appeal Arthur Young renews its contention, urged unsuccessfully in the trial court, that section 998 does not extend to a “collective offer.”   Arthur Young argues that the offer, “by requiring collective settlement with all of the [plaintiffs] and by failing to specify how much each individual [plaintiff] would receive on his separate claim,” did not comply with section 998.

We agree with the Court of Appeal in Hurlbut v. Sonora Community Hospital (1989) 207 Cal.App.3d 388, 254 Cal.Rptr. 840 that “[t]o consider plaintiffs' joint settlement offer as valid would deprive defendant of the opportunity to evaluate the likelihood of each party receiving a more favorable verdict at trial.   Such an offer makes it impossible to make such a determination after verdict.”  (207 Cal.App.3d at p. 410, 254 Cal.Rptr. 840.)   Accordingly we conclude that the Shea plaintiffs' collective settlement offer was not sufficient to invoke section 998 remedies and therefore that the Shea plaintiffs were not entitled to recover costs of the services of expert witnesses.  (Cf. Code Civ. Proc., § 1033.5, subd. (b)(1).)

2. Code of Civil Procedure section 128.5.

The trial court first scheduled trial for January 6, 1986, and set deadlines in late 1985 for expert-witness designation and discovery.   The Shea plaintiffs designated an accounting expert, Badecker, and a damages expert, Hansen.

Counsel met to set up a deposition schedule, and agreed that at the time of their depositions, the plaintiffs' experts would be “fully prepared with respect to their testimony to be presented during [the plaintiffs'] case in chief” and that no later than two weeks prior to the deposition of each expert his or her proponent would produce “all documents provided to the expert, and all documents created by or relied upon by the expert with respect to the testimony he is expected to give.”

Before Badecker's deposition began, counsel for the Shea plaintiffs furnished to counsel for Arthur Young a typewritten document, consisting of 44 single-spaced pages plus a one-page “index,” prepared by Badecker.   The words “PRELIMINARY OBSERVATIONS” or “PRELIMINARY” appear at the top of each of the 44 pages of text.

At Badecker's deposition, counsel for Arthur Young referred to Badecker's document as “your report,” and counsel for the Shea plaintiffs interjected that “I would prefer that we not use the word ‘report,’ because I believe that is going to have a different significance at trial.”   Counsel for Arthur Young agreed to “call it whatever he wishes to call it,” and Badecker characterized the document as “a summary of the issues and preliminary conclusions”;  counsel then agreed to call it a “summary.”

In the course of four deposition sessions counsel for Arthur Young examined Badecker in detail concerning the summary, often asking him to verify that he adhered to various of the conclusions stated.   At one point, in response to counsel's comment that she was using a certain word because Badecker had used it in his summary, Badecker responded “I realize that, and at such time as I am required to write a final report, that correction will be made in what is now a summary.”   At another point counsel for Arthur Young asked counsel for the Shea plaintiffs “that we be provided with the results of any additional analysis that's done by Mr. Badecker or anyone acting under his direction.”   Counsel for the Shea plaintiffs responded equivocally.   Later counsel for the Shea plaintiffs characterized the summary as “just preliminary sketches of a report”;  counsel for Arthur Young immediately disagreed with the characterization “[i]n light of our agreement to make our witnesses available in a state of trial readiness.”

Trial did not proceed as set in January 1986.   The trial court ultimately reset trial for April 1987, and set a March 1987 deadline for exchange of trial exhibits.

Among the exhibits delivered by the Shea plaintiffs in March was a 210–page report prepared by Badecker.

Arthur Young promptly filed an in limine motion to preclude the Shea plaintiffs from examining Badecker “about opinions not disclosed to Arthur Young at the time of his deposition,” including the conclusions contained in the 210–page report.   Arthur Young argued that the Shea plaintiffs “have denied Arthur Young's disclosure and discovery rights with respect to Badecker's newly formed report and opinions.”

In response the Shea plaintiffs asserted that neither the law nor counsel's agreements had required them to disclose Badecker's testimony before trial, and that the “preliminary summary” and deposition testimony had adequately disclosed the substance of the report.

The trial court ruled the Shea plaintiffs had unfairly violated a duty “to comply with the letter and spirit of the discovery statute, the accords of the party, and court orders” and, implicitly, “to make the quality, quantity and timeliness of the information exchanged such that the discovery law is, indeed, complied with.  [¶]  Of necessity in this complex case that means unequivocally that the other side must have the information in time to depose the experts again, if necessary, and to acquaint their counterpart experts with the newly furnished information, giving them time to study, respond and consult with counsel.”   The court concluded that “[t]he only practical way out” was to give Arthur Young an opportunity to study the report and further to depose Badecker.  “This will undoubtedly consume considerable time and money.   The time must come from an appropriately calendared recess in this trial․  The money, perhaps, should come in large part from the [Shea plaintiffs] as a sanction for this unacceptable interference in the orderly process of this complex litigation.”   During trial Arthur Young conducted three more days of deposition of Badecker and one and a half more of Hansen.

After the verdicts Arthur Young moved for an award of nearly $150,000 in “sanctions” for expenses incurred in studying the report, conducting further deposition sessions, and preparing their accountant expert to testify.   The trial court characterized the motion as “a request for appropriate attorney fees and costs pursuant to section 128.5 of the Code of Civil Procedure.”   Section 128.5 provides for an award of “any reasonable expenses, including attorney's fees,” occasioned by “bad faith actions or tactics that are frivolous or solely intended to cause unnecessary delay.”   The trial court ordered the Shea plaintiffs to pay $89,860.76 to Arthur Young.

The Shea plaintiffs filed a timely notice of appeal from this postjudgment order.   They argue there was no showing of impropriety sufficient to support an award under section 128.5, and in any event that the amount of the award was excessive.

a. The conduct.

 The Shea plaintiffs argue that their 1985 production of Badecker's summary and other writings, and of Badecker himself for four days of deposition, satisfied the then-applicable statutory requirement, as construed by the courts, that the proponent of an expert witness “ ‘disclose the substance of the facts and the opinions to which the expert will testify, either in his witness exchange list, or in his deposition, or both.’ ”   (Williams v. Volkswagenwerk Aktiengesellschaft (1986) 180 Cal.App.3d 1244, 1257–1258, 226 Cal.Rptr. 306.)   As to the parties' acknowledged agreement that at deposition their experts would be fully prepared for trial, the Shea plaintiffs assert that no one has claimed Badecker was not ready, or that he did not identify the subject areas of his eventual testimony.   The Shea plaintiffs further argue that the parties' agreement did not foreclose additional trial preparation during the postponement.   Finally, they argue that the trial court's order went beyond the authority granted by section 128.5, because the court found neither bad faith, nor frivolous tactics, nor tactics intended to cause unnecessary delay.

These arguments misconstrue both the trial court's concerns and the breadth of section 128.5.

Manifestly the plan of the court and of the parties, in 1985, was that each party should have an unlimited opportunity, at deposition, to learn what other parties' experts intended to say at trial.   This plan would have served not only “the ․ spirit of the discovery statute” but also the administrative needs of this complex multiparty coordination proceeding.   Certainly the plan was in no way analogous to the minimal statutorily-compelled disclosure of experts addressed in Williams v. Volkswagenwerk Aktiengesellschaft, supra, 180 Cal.App.3d 1244, 226 Cal.Rptr. 306.

No one has suggested that during the postponement Badecker should have done no further work on his testimony.   But in this case all of the circumstances dictated that the burden of giving timely notice of Badecker's further work should have fallen on the Shea plaintiffs as Badecker's proponents.   Badecker's testimony would obviously be at the core of the Shea plaintiffs' case.   The record amply supports a conclusion that Badecker's further work was both substantial and significant, and that the deposition testimony he gave in 1985 was correspondingly devalued.   These facts would necessarily have been far more apparent to the Shea plaintiffs and their counsel than to counsel for Arthur Young.

The Shea plaintiffs protest they were never apprised of “the practical mechanics” of disclosure of Badecker's additional work.   From counsel as obviously competent as the Shea plaintiffs' are, such a protest is disingenuous.   When, at the end of December 1986, the trial court reset the matter for trial beginning three and a half months later, counsel should immediately have notified counsel for Arthur Young of Badecker's additional work, to give Arthur Young a fair opportunity to decide for itself whether to schedule additional discovery.

In sum it was the Shea plaintiffs' failure to take obvious steps to serve the plan originally formulated by the court and counsel that threatened delay of the court proceedings and required special arrangements and additional cost to permit Arthur Young to complete legitimate trial preparation.

 The Legislature intended, when it enacted section 128.5 in its original form in 1981, “to broaden the powers of trial courts to manage their calendars and provide for the expeditious processing of civil actions by authorizing monetary sanctions now not presently authorized by the interpretation of the law in [Bauguess] v. Paine (1978), 22 Cal.3d 626 [150 Cal.Rptr. 461, 586 P.2d 942].”  (Stats.1981, ch. 762, § 2, p. 2968.)   The section provides for payment not of “sanctions” as such but of “any reasonable expenses, including attorney's fees, incurred by another party as a result of” the enumerated actions or tactics.  (Code Civ.Proc., § 128.5, subd. (a).)  Hence neither the Legislature's broad intent nor any implication of a punitive purpose requires that the language of the section be strictly construed.   To the contrary, section 128.5 should be liberally construed to effect its purpose (cf. City of Long Beach v. Bozek (1982) 31 Cal.3d 527, 537, 183 Cal.Rptr. 86, 645 P.2d 137, judgment vacated and cause remanded (1983) 459 U.S. 1095, 103 S.Ct. 712, 74 L.Ed.2d 943, reiterated (1983) 33 Cal.3d 727, 728, 190 Cal.Rptr. 918, 661 P.2d 1072;  Mungo v. UTA French Airlines (1985) 166 Cal.App.3d 327, 333, 212 Cal.Rptr. 369), and to vest substantial discretion in the trial court, to be exercised with due regard for the need for diligent advocacy.  (Cf. Luke v. Baldwin–United Corp. (1985) 167 Cal.App.3d 664, 667–669, 213 Cal.Rptr. 654;  Bach v. McNelis (1989) 207 Cal.App.3d 852, 878–879, 255 Cal.Rptr. 232.)

We acknowledge the alternative view that section 128.5's language “requires both a subjective element of bad faith and an objective element of frivolousness or unwarranted delay” (Abbett Electric Corp. v. Sullwold (1987) 193 Cal.App.3d 708, 711–712, 238 Cal.Rptr. 496) but respectfully conclude that a broader construction of section 128.5 is more consistent with its stated purpose.

The record supports the trial court's decision to award expenses under section 128.5.

b. The amount.

 The Shea plaintiffs considered Arthur Young's demand for nearly $150,000 “breathtaking,” and the trial court disallowed one element of the demand and reduced another by half to reach its final figure of $89,860.76.

The Shea plaintiffs argue that in light of the “reasonable expenses” standard of section 128.5 the trial court's award was “grossly out of proportion to [their] conduct.”   In their view Arthur Young would have incurred these expenses even if Badecker's additional work had been disclosed more promptly.   Citing Deyo v. Kilbourne (1978) 84 Cal.App.3d 771, 793, 149 Cal.Rptr. 499, the Shea plaintiffs suggest that the award improperly left Arthur Young in a better position than if the acts complained of had not occurred.

The issue thus raised is whether the expenses on which the trial court based its award were incurred “as a result of” the Shea plaintiffs' perceived impropriety.  (Code Civ.Proc., § 128.5, subd. (a).)  We are satisfied that the trial court adequately took this issue into consideration when it reduced Arthur Young's claim by approximately 40 percent.   In the context of this complex high-stakes litigation the trial court could properly have concluded the award was reasonable.

The Shea plaintiffs also argue there was no proof in the trial court of the actual amount of additional expenses incurred.   They seize upon the trial court's statement that Arthur Young's submission “amounts simply to a compilation of hours and expenses․”  Arthur Young's itemization is detailed and informative, and was submitted under penalty of perjury.   The record is sufficient to support the award.

3. Offsets.

 Under the warrant purchase agreement, in April 1983 six of the Shea plaintiffs gave irrevocable standby letters of credit in favor of Security Pacific National Bank for a total of $2,325,000.

In September 1983 Osborne Computer Corporation filed for bankruptcy protection.   Security Pacific National Bank and the other bridge lenders filed proofs of claim in the bankruptcy as priority creditors by virtue of their unrepaid secured loans to Osborne Computer Corporation.   Security Pacific National Bank also presented the irrevocable standby letters of credit for payment.   The six Shea plaintiffs' banks honored the letters of credit and paid the $2,325,000, and the six Shea plaintiffs submitted proofs of claim in the bankruptcy proceeding.

In June 1986 several warrant investors who had given letters of credit, including the six Shea plaintiffs, filed a complaint in the bankruptcy proceeding to establish their right to subrogate to the priority status of Security Pacific National Bank and the other bridge lenders with respect to their bankruptcy claims.  (Cf. 11 U.S.C. § 509(a).)   In November 1986 these warrant investors settled and released the claims represented by their complaint against the Osborne Computer Corporation bankruptcy estate in consideration of (1) payment by the bankruptcy estate of 10 cents for each dollar claimed and (2) assignment by the bankruptcy estate to these warrant investors of any cause of action Osborne Computer Corporation might have against Arthur Young.   By virtue of the payment, the six Shea plaintiffs received a total of $232,500.   Pursuant to the assignment the six Shea plaintiffs (and certain others) then filed an action against Arthur Young which has come to be known as “Osborne II.”   Apparently Osborne II has been neither settled nor tried.

After judgment on the verdicts in this action, the Shea plaintiffs moved to amend the judgment to add prejudgment interest and to take account of offsets due Arthur Young by virtue of earlier settlement of the Shea plaintiffs' claims against other defendants.   There was no dispute as to most issues, but the trial court was called upon to determine what offsets, if any, should be given to reduce the six Shea plaintiffs' shares of the judgment against Arthur Young for the settlement of their complaint against the Osborne Computer Corporation bankruptcy estate.

The trial court allowed offsets for both the cash settlement and the “reasonable value” (to be determined after this matter is final) of the assigned Osborne II claims.   The Shea plaintiffs seek review of the trial court's conclusions.

In defense of the offsets Arthur Young invokes both the general proscription against double recovery and the special rule, embodied in Code of Civil Procedure section 877, for offsetting the amount of certain tort settlements.

“The general rule of compensatory damages bars double recovery for the same wrong.”  (Krusi v. Bear, Stearns & Co. (1983) 144 Cal.App.3d 664, 673, 192 Cal.Rptr. 793.)   Thus “payments by one tort feasor on account of a harm for which he and another are each liable, diminish the amount of the claim against the other whether or not it was so agreed at the time of payment and whether the payment was made before or after judgment.   Since the plaintiff can have but one satisfaction, evidence of such payments is admissible for the purpose of reducing pro tanto the amount of the damages he may be entitled to recover.  [Citations.]”  (Laurenzi v. Vranizan (1945) 25 Cal.2d 806, 813, 155 P.2d 633;  cf. Carr v. Cove (1973) 33 Cal.App.3d 851, 854, 109 Cal.Rptr. 449;  De Cruz v. Reid (1968) 69 Cal.2d 217, 226, 70 Cal.Rptr. 550, 444 P.2d 342.)

Code of Civil Procedure section 877 embodies the rule against double recovery (Krusi v. Bear, Stearns & Co., supra, 144 Cal.App.3d 664, 673, 192 Cal.Rptr. 793;  cf. Carr v. Cove, supra, 33 Cal.App.3d 851, 854, 109 Cal.Rptr. 449), but for a limited purpose.   The section was enacted as one of a series of provisions to abrogate common-law rules (1) that there was no right of contribution among joint tortfeasors and (2) that a release given to one joint tortfeasor would operate to release all joint tortfeasors.  (Cf. Comment (1958) 9 Hastings L.J. 180, 180–185.)   At the time of the trial court proceedings in this action section 877 provided that a release to less than all “tortfeasors claimed to be liable for the same tort ․ [¶] ․ shall reduce the claims against the others in the amount stipulated by the release, the dismissal or the covenant, or in the amount of the consideration paid for it whichever is the greater․” 1

A recurring issue under section 877, and the crux of the problem here, is whether persons or entities who obtain releases from the plaintiff before verdict or judgment against other defendants are “tortfeasors claimed to be liable for the same tort” as the other defendants.   Surely the concept extends at least to “a single indivisible harm ․ sustained as a result of the independent, separate, but concurring tortious acts of two or more persons.”   (3 Harper, James & Gray, Law of Torts, supra, § 10.1, pp. 3–4 (fns. 9, 10 omitted);  cf. Turcon Construction, Inc. v. Norton–Villiers, Ltd. (1983) 139 Cal.App.3d 280, 282–284, 188 Cal.Rptr. 580;  Sanchez v. Bay General Hospital (1981) 116 Cal.App.3d 776, 796, 172 Cal.Rptr. 342.)   But section 877 has been said not to apply to a party whose “role is not that of a tortfeasor” (County of Los Angeles v. Superior Court (1984) 155 Cal.App.3d 798, 803, 202 Cal.Rptr. 444), and it has been suggested that in a case in which settling and nonsettling tortfeasors had all been named in the complaint, the section should apply only to those counts of the complaint in which the settling tortfeasors were named and under which the nonsettling tortfeasors were ultimately found liable (Knox v. County of Los Angeles (1980) 109 Cal.App.3d 825, 832, 835–837, 167 Cal.Rptr. 463).

Here the Shea plaintiffs argue that Osborne Computer Corporation (as represented by its bankruptcy estate) should not have been treated as “one ․ of a number [with Arthur Young] of tortfeasors claimed to be liable for the same tort,” under section 877, because the claim the bankruptcy estate settled was in essence contractual rather than in tort.   Arthur Young responds that section 877 applies because regardless of the Shea plaintiffs' legal theories they “alleged but one indivisible injury against both Arthur Young and Osborne [Computer Corporation]—the loss of their warrant investments.”   Arthur Young further argues that the broad release given by the Shea plaintiffs in the bankruptcy settlement “plainly encompassed [their] tort claims against Osborne [Computer Corporation].”

Clearly the Shea plaintiffs did regard Osborne Computer Corporation as a tortfeasor.   Their complaint alleged a variety tortious conduct by Osborne Computer Corporation, in support of a theory that Arthur Young (among other defendants) should be held liable as Osborne Computer Corporation's aider and abettor.

We nevertheless conclude that in the novel circumstances of record section 877 does not apply to the bankruptcy settlement.   The claim the Shea plaintiffs in fact asserted by their complaint in the bankruptcy was not a tort claim and was distinguishable from their potential tort claim both theoretically and as a practical matter.   The only commonalities between the claims were in the transactions from which they arose and in the essentially coincidental similarity between their amounts.   These commonalities are insufficient, in this case, to invoke section 877.

The essence of the claims the warrant investors asserted against Arthur Young, and could have asserted directly against Osborne Computer Corporation, was that under the warrant purchase agreement they had been improperly induced to pay far more than they ultimately received.   The six Shea plaintiffs who participated in the bankruptcy settlement agreed to be liable on their standby letters of credit for a total of $2,325,000.   In return they received warrants to purchase stock for $40 per share.   As events developed the six Shea plaintiffs were required to pay the $2,325,000 and the stock value fell so far as to render the warrants worthless.   Their harm, and thus their measure of recovery on claims asserted directly against Arthur Young and potentially against Osborne Computer Corporation, was the difference between what they paid and what they received.   Because they assertedly received nothing, the difference was equal to the amount they paid, but it remains true that their measure of recovery was the difference.

The claims the six Shea plaintiffs ultimately asserted by complaint in the bankruptcy were wholly independent of the value of the warrants and of any asserted wrongdoing by Arthur Young, or Osborne Computer Corporation, or anyone else.   The six Shea plaintiffs professed simply to be entitled to enforce for their own benefit the creditors' rights of the three banks which had lent money to Osborne Computer Corporation in the course of the bridge financing.   The banks had sought to obtain repayment of their loans and had achieved priority creditor status in the bankruptcy.   Through the standby letters of credit the six Shea plaintiffs had paid the $2,325,000 toward discharge of Osborne Computer Corporation's obligation to the banks, and they claimed to be subrogated to this extent to the banks' priority position in the bankruptcy.   Upon this theory the measure of the six Shea plaintiffs' recovery would have been the amount they had paid toward discharge of Osborne Computer Corporation's debts.   The banks' creditors' claims, to which the six Shea plaintiffs professed to be subrogated, were in no material sense based on, or related or alternative to, the tort claims the Shea plaintiffs were simultaneously pursuing against Arthur Young and might have pursued against Osborne Computer Corporation.

In these circumstances we conclude the consideration the bankruptcy estate paid for the release given by the six Shea plaintiffs was wholly attributable to the subrogation claim and that the release cannot be deemed a “release ․ to one or more of a number of tortfeasors claimed to be liable for the same tort” within the meaning of section 877.   The breadth of the release language, characteristic of most professionally-drafted releases, does not alter our conclusion.

Arthur Young suggests that our conclusion may be viewed as a precedent for innovative manipulation of theories of recovery against tortfeasors in order to avoid section 877 offsets.   We need hardly stress that we can decide only this case;  we do not expect its unusual facts to foster abuse of section 877.

Our conclusion does not resolve the separate question whether, apart from section 877, the aggregate of the judgment and the proceeds of the bankruptcy settlement will afford the Shea plaintiffs a proscribed windfall.   We accept the premise that these plaintiffs may not recover more in the aggregate, against all defendants upon all theories arising out of the warrant transaction and cognate events in the spring of 1983, than “the amount of damages which will fully compensate [them] for [their] injury.”  (Jaramillo v. State of California (1978) 81 Cal.App.3d 968, 970, 146 Cal.Rptr. 823.)   Arthur Young argues that the amount necessary fully to compensate these plaintiffs was set by the jury's verdict, and that for this reason the amount of the bankruptcy settlement should be offset to avoid double recovery.   Were all of the claims tort claims, and thus presumably evaluated by the jury (under tort instructions) in reaching its verdicts, the argument would be persuasive.   But the jury was never asked to evaluate the subrogation theory, and we cannot validly surmise what value the jury would have given it.   The jury's determination, for reasons not made clear by the verdicts, that the plaintiffs should recover only 75 percent of the amount of their tort claims should not limit the plaintiffs' total recovery on their subrogation claims for, coincidentally, the same amount.

These plaintiffs paid $2,325,000 on account of Osborne Computer Corporation's obligations to the bridge lenders;  absent any showing of a reason to discount that figure we shall assume it to be the amount necessary fully to compensate these plaintiffs under their subrogation theory.   After offsets, the portion of the judgment and of other settlements allocable to these six plaintiffs with respect to the warrant transaction aggregates three quarters of this figure, or $1,743,750.   Assuming payment of this amount, these plaintiffs would not reach the double recovery limit until they had received nearly $600,000 more.   The cash portion of the bankruptcy settlement was $232,500.   Osborne II has not yet been evaluated;  if and when Osborne II is tried, any recovery can and should be limited if necessary to abide by the double recovery limitation.   At this stage the fact Osborne II is or may be in essence a tort action is, again, coincidental:  Having accepted assignment of the cause of action is settlement of their subrogation claims, these plaintiffs may pursue Osborne II to the extent necessary to achieve full compensation on their subrogation theory.

Our conclusions render consideration of the parties' remaining contentions unnecessary.

DISPOSITION

In Coordination Proceeding No. 1805 (Santa Clara County Superior Court), In Re Osborne Securities Cases:

a. With respect to the five-page amended judgment filed November 17, 1987, and entered nunc pro tunc as of July 17, 1987:

1. Paragraph 2 (which provides “That plaintiff Richard L. King take $71,949 from defendant Arthur Young & Company”), on page 2, is severed from the rest of the said judgment and is reversed with directions to enter judgment for defendant Arthur Young & Company and against plaintiff Richard L. King.

2. The determination that Arthur Young & Company is entitled to offsets against plaintiffs J.F. Shea Co., Inc., First Century Partnership II, William D. Kilduff, Montgomery Ventures, Hambro International Venture Fund Offshore and Hambro International Venture Fund in connection with any aspect of their settlement of bankruptcy claims in Kilduff, et al. v. Osborne Computer Corporation, et al., Adversary Proceeding No. 3–85–0362LK, is severed from the rest of the said judgment and is reversed with directions to determine that Arthur Young & Company is entitled to no such offset and (if necessary) to modify the judgment amounts accordingly.

b. With respect to the order after Arthur Young's motion to tax costs of Shea plaintiffs and Bily, filed October 20, 1987, and the final order establishing plaintiffs' entitlement to court costs and adjudicating Arthur Young's motion for reconsideration, filed November 17, 1987:

1. The determination that the Shea plaintiffs are or may be entitled to expert witness costs in the amount $400,000 by virtue of Code of Civil Procedure section 998, is severed from the rest of each order and is reversed with directions to enter an order that the Shea plaintiffs shall not be entitled to such expert witness costs.

2. In the order filed November 17, 1987, the award of $1,622.14 in costs to Richard King is severed from the rest of the order and is reversed with directions to enter an order that as between Richard L. King and Arthur Young & Company, only, each party shall bear his or its own costs.

c. The cause is remanded to the trial court for the limited purpose of complying with the directions hereinabove set forth.

d. Except as hereinabove explicitly set forth the judgments and orders appealed from are affirmed.   Bily and the Shea plaintiffs other than Richard L. King shall recover their costs on appeal.   As between Richard L. King and Arthur Young & Company, only, each party shall bear his or its own costs on appeal.

FOOTNOTES

1.   Effective Jan. 1, 1988, after the amended judgment was entered and the notices of appeal were filed in this action, Code of Civil Procedure section 877 was substantially broadened to extend to nontort obligations.

CAPACCIOLI, Acting Presiding Justice.

COTTLE and BAMATTRE–MANOUKIAN, JJ., concur.

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