Congregation of the Passion, Holy Cross Province v. Touche Ross & Co.

Appellate Court of Illinois, First District · Contracts

Contractsbreach of contractprofessional malpracticeeconomic lossremittituraccountant malpracticeengagement letternegligent misrepresentation

Facts

Congregation retained Touche Ross under annual engagement letters to prepare unaudited financial statements and, as to investments, to inspect or confirm securities and test market values by reference to published quotations. Congregation had investments managed by Newell, including open arbitrage positions in government securities, and Touche Ross reported those positions at margin or net cash rather than actual market value, while footnotes disclosed that the positions were not reported at market value. The evidence showed substantial differences between the values reported by Touche Ross and the actual market values from 1976 through 1980, and Melchert admitted major errors in the reports. After the Newell accounts collapsed and deficits were incurred, Congregation sued Touche Ross for negligence, fiduciary breach, and breach of contract.

Issue

Whether Congregation could recover economic losses against its accountant in negligence despite the parties' contracts, whether prior federal litigation collaterally estopped Congregation's claims, and whether the trial court properly handled the jury's separate damages awards on the negligence and contract counts. The case also presented whether the evidence and instructions supported liability and whether remittitur could stand without plaintiff consent on the contract count.

Rule

Collateral estoppel applies only when the identical issue was actually and fully litigated in the prior case, there was a final judgment on the merits, and the party against whom estoppel is asserted was a party or in privity with a party to the prior adjudication. Under Moorman, economic losses are generally not recoverable in tort, but they are recoverable when one who is in the business of supplying information for the guidance of others in their business transactions makes negligent misrepresentations. A trial court may order remittitur of an excessive verdict, but it may not reduce damages by remittitur over the plaintiff's objection; refusal to consent requires a new trial on damages.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Denver, Alpine Harbor Clinic hired Stone & Reed Analytics, a public accounting firm, under annual engagement letters to prepare unaudited financial statements and to verify securities values by checking published market quotations. The firm negligently reported a derivatives portfolio at figures supplied internally rather than market value, and the clinic suffered only financial loss after continuing to rely on the reports.

If the clinic sues the accounting firm in negligence for its financial losses, which is the strongest argument that the claim is not barred by the economic loss doctrine?

Explanation. The majority held that economic losses are generally not recoverable in tort, but an exception applies when a defendant is in the business of supplying information for the guidance of others in business transactions and makes negligent misrepresentations. The court applied that exception to accountants. It did not hold that all professionals or all service contracts fall outside the doctrine. (Derived from Congregation of the Passion, Holy Cross Province v. Touche Ross & Co. (n.d.).)