Mattco Forge, Inc. v. Arthur Young & Co. (52 Cal. App. 4th 820, 1997)

Opinion

KLEIN, P. J.

Appellants and cross-respondents Arthur Young & Company, Richard E. Lamping, Thomas W. Blumer and Ernst & Young (collectively Arthur Young) appeal the judgment following jury verdicts in favor of respondent Mattco Forge, Inc. (Mattco).

Because of prejudicial instructional error, the judgment is reversed, except for the award for out-of-pocket expenses and the interest thereon.

Cross-appellant Mateo Minguez (Minguez), owner of Mattco, appeals the judgment upon the granting of a directed verdict in favor of Arthur Young, which judgment is affirmed.

Background Information

This fact situation has spawned 11 years of convoluted and costly litigation, beginning in September 1985 in the federal court in Cincinnati, Ohio. Mattco, a parts manufacturer, filed a federal civil rights action against General Electric (GE), claiming GE’s elimination of Mattco as an approved subcontractor was racially motivated. The case eventually was transferred to the United States District Court for the Central District of California, where it was bitterly contested for three and one-half years.

In August of 1987, GE filed a counterclaim against Mattco alleging Mattco had engaged in bid-rigging fraud while doing business with GE. GE also filed a summary judgment motion going to the merits of the alleged discrimination action, which was denied.

The federal suit bogged down in extremely lengthy, extraordinarily expensive, highly contested discovery disputes, involving at least six motions to dismiss and for other sanctions. Among other allegations in the motions, GE argued Mattco had fabricated documents, with the assistance of its forensic accountant Arthur Young. The federal litigation finally culminated before trial with mutual dismissals, and the case was dismissed with prejudice in March 1989.

Within about six months, in July 1989, Mattco sued Arthur Young in the Los Angeles Superior Court and ultimately went to trial on its second amended complaint alleging eight causes of action including, inter alia, accounting malpractice. Subsequently, only three causes of action were tried: professional negligence, fraudulent misrepresentation and fraudulent concealment.

Before trial, Arthur Young moved for summary judgment, contending Mattco’s unclean hands during the course of the federal lawsuit and the litigation privilege barred Mattco’s complaint as a matter of law. The motion was granted and Mattco appealed.

On appeal, in Mattco Forge, Inc. v. Arthur Young & Co. (1992) 5 Cal.App.4th 392 [6 Cal.Rptr.2d 781], this court reversed. We held “. . . the federal district court decided that [Mattco and Minguez] had attempted to ‘fraudulently increase the damages they seek to claim in this action, altered and fabricated estimate sheets used to help calculate those damages.’ The [federal] court further found that [Mattco and Minguez] ‘knowingly produced those false estimate sheets to [GE], and thereby perpetrated a fraud upon [GE], this Court, and the judicial process.’

“. . . But the federal district court did not adjudicate a dispute between Mattco and Arthur Young, it made no findings on the allegations relating to the causes of action in the case at bench. Thus, the federal district court findings satisfy neither the first, second, nor the third prong required to apply the collateral estoppel doctrine [on the issue of unclean hands.]” (5 Cal.App.4th at p. 407.)

After the case was remanded, Arthur Young refiled a cross-complaint against Mattco’s former attorneys, Helmer and Neff, alleging, inter alia, fraud and complete and partial indemnity. In September 1993, Helmer and Neff entered into a purported good faith settlement with Mattco so as to bar Arthur Young’s cross-complaint against them, although Helmer and Neff had not been sued by Mattco. The trial court herein found the settlement agreement to be in good faith.

On appeal, this court again reversed in Mattco Forge, Inc. v. Arthur Young & Co. (1995) 38 Cal.App.4th 1337 [45 Cal.Rptr.2d 581]. We found the trial court abused its discretion in ruling the settlement agreement was in good faith because there was no substantial evidence the settlement was proportionate to Helmer and Neff’s liability.

The current appeal is from jury verdicts in favor of Mattco for a total award of $42 million, including punitive damages. The trial against Arthur Young lasted more than 4 months and involved approximately 40 witnesses, 880 marked exhibits and 10,000 combined pages of clerk’s and reporter’s transcripts. Briefs on appeal span more than 190 pages.

The main issue on appeal is whether the trial court erred in ruling that Mattco was not required to establish that absent Arthur Young’s negligence, Mattco would have prevailed in the underlying case.

Since we conclude the trial court’s fundamental instructional ruling was erroneous and prejudicial, regretfully, once more we must reverse and remand, thus prolonging the seemingly endless litigation.

Facts and Procedure

1. Trial evidence in the superior court.

Mattco is a manufacturing company located in Paramount, California, which supplies forged metal parts to various businesses, including GE, for which Mattco did 60 jobs over a 4-year period. The company is wholly owned by Minguez, a native of Argentina and naturalized United States citizen.

In the preparation of its federal racial discrimination lawsuit against GE, Mattco hired the accounting firm of Arthur Young as damage consultant and expert witness to assist in Mattco’s calculation of lost profits when GE delisted Mattco as a supplier.

Richard Lamping, managing partner at Arthur Young, met with Minguez and gave him a “glossy promotional brochure” which represented that the firm’s litigation support professionals were specially trained in legal procedures. However, the person who was assigned to the job, Tom Blumer, had no training or experience in litigation support.

Blumer reviewed Mattco’s business documents, including the 60 job folders on the GE jobs. He found 26 estimate sheets were missing. The estimate sheets were work sheets used by Mattco to approximate its costs in formulating bids to prospective customers.

For the 26 missing estimate sheets, Blumer asked Minguez to create workups that would reflect how he would have estimated costs on those jobs, and to prepare 26 new estimate documents. Minguez did so, and they were put into the respective 26 job folders without identification showing they were not original business records.

Blumer assembled packets of information on each of the 60 jobs and intermingled the original and the new business records. GE made a demand for production of documents, including a request for all documents Arthur Young had relied on in calculating damages. In response, the packets Blumer had assembled on the 60 jobs were given to Mattco’s attorneys, Helmer and Neff, and subsequently to GE, without advisement of the recreated 26 estimate sheets.

After examining the above records and other evidence obtained through discovery, GE brought a counterclaim against Mattco for procurement fraud or bid rigging. Lamping’s deposition was taken. He testified he had not relied upon the newly created estimate sheets in calculating damages.

Unrelated to Arthur Young’s involvement in the case, GE discovered information during discovery which it believed proved Mattco had destroyed other documents, hidden witnesses, and that Mattco’s vice-president, Marilyn Nickles, had committed perjury. Based on this evidence, GE filed motions to dismiss, charging Mattco with this misconduct.

At one point in the federal proceedings, federal Judge Richard Gadbois suggested nothing more should be done pending resolution of sanction motions because, “there’s not going to be a whole lot left of this case to do anything about when I get through with it.”

In Judge Gadbois’s subsequent sanction order, he repeated statements that “Ms. Nickles ‘has been shown beyond anything resembling a serious doubt to be a multiple perjurer’ and . . . that ‘in view of her position at Mattco, there is no way [Mattco and Minguez] can avoid the extremely serious consequences of that finding.’ ”

Judge Gadbois’s sanction order then found that “in an attempt to fraudulently increase the damages they seek, [Mattco and Minguez] altered and fabricated estimate sheets used to help calculate damages. The Court further [finds] that [Mattco & Minguez] knowingly produced those false estimate sheets to [GE], and thereby perpetrated a fraud upon defendants, this Court, and the judicial process. [10 • • • [ID It is also undisputed that [Mattco and Minguez and Lamping] relied on the fabricated estimate sheets in calculating their damages .... [ID The Court finds the foregoing actions of [Mattco and Minguez] have irreparably tainted all of the evidence produced up to this point by [Mattco and Minguez and] the Court feels dismissal of the [Mattco and Minguez’s] case would be appropriate. [Mattco and Minguez’s] conduct was willful and in bad faith. Damages are central to the matters in controversy between the parties and fraudulent evidence of damages would directly interfere with the rightful decision of the case. . . . [10 . . . Due to the overwhelming taint [Mattco and Minguez] have placed upon their evidence concerning damages, no such evidence of damages previously produced or prepared for this action shall be admitted in this action. [ID . . . Due to the intimate involvement of the accounting firm of Arthur Young in the production of [Mattco and Minguez’s] evidence concerning damages, Arthur Young is prohibited from involvement in any future production of evidence concerning [Mattco and Minguez’s] damages in this action, and no work papers, files, or any other materials produced by Arthur Young in the past to calculate [Mattco and Minguez’s] damages shall be used in any future production of evidence on that subject. [ID . . . For the purpose of compensating [GE] for the litigation costs they have borne due to [Mattco and Minguez’s] misconduct, [GE] will submit to the Court an accounting of its attorneys’ fees, costs and expenses relating to the production of evidence concerning [Mattco and Minguez’s] damages in this action.”

After GE submitted its evidence in accordance with this order, Judge Gadbois granted $1.4 million in sanctions. The order stated the action would be dismissed if the monetary sanction of $1.4 million were not paid within 45 days and further stated, “[t]his Court’s . . . Order for Sanctions only partially resolves [GE’s] pending motions to dismiss. . . . After payment of the sanction for the fabrication of evidence, the Court will consider further briefing by the parties as to the appropriate penalty for [Mattco and Minguez]’s destruction of evidence.”

Sanctions were not paid; the parties settled and mutually dismissed their respective lawsuits.

All of the above evidence relating to the federal lawsuit, and in particular, Arthur Young’s participation in recreating the 26 estimate sheets was introduced, and expanded upon in massive detail, and sharply controverted throughout the trial.

2. Trial court’s rulings on evidentiary burdens.

Throughout the proceedings, Arthur Young urged to the trial court that Mattco had to meet the burden of a trial-within-a-trial, i.e., that Mattco had to prove it would have reached trial in the federal lawsuit, prevailed and obtained a judgment against GE. The trial court was adamant in rejecting this approach.

The trial court ruled, “[o]nly in lawyer negligence do you have the standard that you have got to show that you would have gotten the collectable judgment; in other words, the kind of ‘but for’ rule, which may still exist insofar as lawyer malpractice is concerned . . . .” (Italics added.) The trial court added, “If I am wrong, the Court of [Appeal] will have to tell me. [