Legal MalpracticeA bank brought a legal malpractice claim against its former law for its representation in a negligence suit against an accounting firm (CPA) that performed auditing services. The underlying lawsuit alleged the CPA negligently audited the financial statements of one of the bank’s clients. The bank didn’t foreclose on the client’s loans based on CPA’s financial statements, which didn’t uncover problems with its inventory. They also didn’t disclose a secret bank account in which the client was diverting cash.

In the case against CPA, CPA successfully moved to have the bank’s sole expert witness excluded from testifying because he wasn’t qualified to offer an opinion on the standard of care applicable to CPA. The case went to the jury, which returned a verdict in favor of CPA.

In the malpractice action against the law firm, the bank alleged that the firm negligently retained an unqualified expert witness. The malpractice case resulted in a verdict for the bank. This appeal followed.

The law firm claimed the bank’s evidence in support of its malpractice claim was deficient in several ways, including that there was insufficient evidence to show its breach of duty in not retaining a qualified expert proximately caused the bank’s injury.

Judge Michael Mullins of the Iowa Court of Appeals noted in his opinion that the bank asserted its accounting expert in the malpractice action and CPA was negligent when it failed to conduct the required testing and independent verification of the inventory and cash accounts. The expert claimed the audit didn’t conform to the applicable auditing and accounting standards. The bank also offered the testimony of the lawyers representing the bank in the lawsuit. The bank argued that this testimony supplied the sufficient evidence to sustain its burden.

The bank’s expert at the malpractice trial testified that the client made a practice of taking money and putting in another account. The expert stated that they failed to “dig deeply enough into what was going on.” The expert was unable to testify as to precisely when the over-reporting of inventory and the diverting of cash had started, but he testified that based on his review of the record, “this had been a practice of [the client] and an element of its business for some period of time.” The law firm faulted this evidence as insufficient because the expert was unable to testify as to precisely when the misconduct of the client started. However, Judge Mullins held that this challenge goes to the weight the jury should give to the expert’s opinions, not the sufficiency of the evidence. The Court of Appeals concluded that the evidence of the proximate cause in the underlying CPA lawsuit was sufficient based on the testimony of the law firm’s own attorneys, who stated their investigation concluded the financial statements prepared by CPA were inaccurate, and the expert’s testimony that based on his review of the record the inventory and cash practices of the client had been going on “historically.”

Finally, the law firm challenged the sufficiency of the evidence by claiming that the bank failed to offer evidence to prove that had an accounting expert testified at the CPA trial, the result of the trial would have been different.

The bank’s legal expert testified at the malpractice action that an accounting expert opinion on the issue of the applicable standard of care for an auditor was “essential” to the CPA lawsuit, noting that based on his review of the CPA lawsuit that after the exclusion of the bank’s auditing expert, “no witness testified that the CPA firm was negligent.”

The law firm’s attorneys repeatedly reported to the bank during the CPA lawsuit that expert opinion was necessary and essential to maintaining the action against the accounting firms. The law firm stated that retaining the expert was required “or our suit would have been dismissed.” The law firm also informed the bank prior to the CPA trial that the case would come down to a “battle of the experts” and depended on which of the experts the jury believed.

Judge Mullins noted that the jury had no expert to inform them CPA performed negligently but had three experts who testified on CPA’s behalf that there was no negligence in the performance of the audit. Despite evidence that the lack of an expert witness affected the outcome of the CPA trial, the law firm claimed the bank needed to offer evidence that a qualified expert would have resulted in a verdict in favor of the bank and argued that the malpractice jury needed expert testimony to support the assertion that the missing expert testimony on the auditing standard of care would have made a difference to the CPA jury.

The Court of Appeals, however, held that there was sufficient evidence to support submitting this malpractice case against the law firm to the jury. It rejected the law firm’s claim because it found the evidence sufficient to prove all the necessary elements of the legal malpractice case.

 

By: Kurt Mattson, LLM, J.D.
20+ years of legal experience