Summary
rejecting the argument that the accountant-client privilege does not apply to an accountant's work papers and finding no waiver merely because the "auditor's financial statements and annual reports . . . were distributed to the public and to the stockholders of the company"
Summary of this case from Rosania v. Grp. O, Inc.Opinion
No. 21921
Decided December 13, 1965. Rehearing denied January 19, 1966.
Original proceeding to compel trial court to order certified public accountants to answer certain questions pursuant to deposition. Rule to show cause issued.
Rule Discharged.
1. CORPORATIONS — Stockholders — Accountant-Client Privilege — Waiver. It does not lie within power of stockholder, or minority of stockholders, or majority of stockholders to function in such manner as to bring about statutory waiver of accountant-client privilege with reference to corporation and its certified public accountants.
2. Discretion — Waiver — Account-Client Privilege — Governing Officials — — Statute. Discretion to waive protection of C.R.S. 1963, 154-1-7(7) pertaining to accountant-client privilege can only be exercised by the governing officials of the corporation, namely, the officers or board of directors.
3. Directors — Management — Statute. C.R.S. 1963, 31-5-1 provides that the business and affairs of a corporation shall be managed by a board of directors which shall exercise all the powers of the corporation.
4. CONSTITUTIONAL LAW — Rights — Personal Privilege — Waiver. The right to trial by jury, the right to counsel, the right not to incriminate one's self, and related matters are known as alienable constitutional rights or as rights in the nature of personal privilege for the benefit of the person who may seek their protection, and such rights, whenever assertable, may be waived.
5. WITNESSES — Accountant-Client Privilege — Protection — Inviolative — Statute — Constitution. The accountant-client privilege created by statute for the benefit of persons who may seek its protection as witnesses is equally inviolable whether created by statute or constitutional provision.
6. ESTOPPEL — Waiver — Voluntary Action — Consequences. An effective waiver requires voluntary action based upon knowledge of consequences.
7. WITNESSES — Corporations — Books and Records — Examination — Statute — Confidential Communications. The fact that C.R.S. 1963, 31-5-17 provides that a corporation shall keep complete books and records of account and that a qualified shareholder shall have the right to examine them and make extracts therefrom does not operate to nullify the provisions of the witness statute with regard to confidential communications.
8. CORPORATIONS — Records — Indiscriminate Examination. The indiscriminate examination by stockholders of corporate records is not favored.
9. Confidential Relationship — Certified Public Accountants — Contract — Directors. The confidential relationship existing between the certified public accountants and the corporation came into being by contractual relations between them, the corporation acting through its authorized board of directors.
10. WITNESSES — Accountant-Client Privilege — Waiver — Reports — Publication — Distribution — Court Action. There is no merit to argument of counsel for petitioners that statutory accountant-client privilege was waived by absorbing corporation in that the auditor's financial statements and annual reports prepared and published long prior to commencement of district court action were distributed to public and stockholders of company.
11. Privilege — Accountant — Client — Statute. The privilege created by statute is not the privilege of the accountant but that of the client.
12. Attorney — Client — Privilege — Equitable Estoppel. Argument of petitioners that absorbing corporation is "equitably estopped" to assert accountant-client privilege is untenable.
Original Proceeding.
Gorsuch, Kirgis, Campbell, Walker and Grover, James H. Turner, for petitioners.
Haskell, Helmick, Carpenter Evans, John R. Evans, Bradford Wells, for respondents.
THIS is an original proceeding commenced in this court by the above named petitioners who sought the issuance of a rule, directed to the respondents, to show cause why the prayer of their petition should not be granted. Upon consideration of the allegations set forth in the petition this court issued the rule; the respondents have filed their "Answer"; and the question presented for our determination is whether the rule should now be discharged.
The controversy grows out of certain procedures which took place in an action pending in the district court of the City and County of Denver, in which the petitioners here were the plaintiffs, and John H. Lowell, Thomas H. Murphy, Bruce Kistler, Peat, Marwick, Mitchell Co., a partnership, and John C. Eigeman were the defendants.
The record indicates that the petitioners were stockholders in a corporation to which we will refer as Synkoloid. Involved in the district court action is a corporation known as The Clute Corporation, and the defendants Lowell, Murphy and Kistler were directors thereof. It was alleged in the complaint in the district court action that the defendant Lowell proposed to Weck that a merger of Synkoloid with Clute would be of mutual benefit to the stockholders of both companies; that Weck on behalf of himself and all other stockholders of Synkoloid negotiated with the three defendants who were directors of Clute concerning the terms of the proposed merger; that the defendant directors of Clute made false and fraudulent representations concerning the financial condition of the company, which were relied upon in bringing about the merger, all to the damage of plaintiffs in the sum of $1,500,000. It was further alleged that the partnership of Peat, Marwick, Mitchell Co. and John E. Eigeman, as accountants, had prepared false and misleading financial statements which were known by all the defendants to be false; that these statements were prepared in a wanton and reckless manner with utter disregard of the rights of the plaintiffs; and that a conspiracy had been entered into by all the defendants to cheat, wrong and defraud the stockholders of Clute. The plaintiffs in that action served upon the partnership a notice for the production of documents in its possession belonging to Clute, which were used in preparation of the financial statements above mentioned.
At the hearing on this motion the defendant John C. Eigeman, one of the partners, filed his affidavit in which it was asserted that the documents were privileged under the provisions of C.R.S. 1963, 154-1-7(7), which provides that:
"A certified public accountant shall not be examined without the consent of his client as to any communication made by the client, to him in person or through the media of books of account and financial records, or his advice, reports or working papers given or made thereon in the course of professional employment nor shall a secretary, stenographer, clerk or assistant of a certified public account be examined without the consent of the client concerned concerning any fact, the knowledge of which he has acquired in such capacity."
The judge thereupon entered an order requiring production of the documents which were sought by the motion of the plaintiffs, conditioned, however, upon obtaining consent from The Clute Corporation. Meanwhile, that corporation was undergoing reorganization proceedings under Chapter X of the Bankruptcy Act in the United States District Court, which had appointed a trustee of the corporate property. No waiver of the privilege of the statute was obtained.
Plaintiffs then sought to take the deposition of the defendant Eigeman and one Harry T. Lewis, Jr. They refused to answer certain questions on the ground that they were Certified Public Accountants working for the defendant partnership, and that the information called for by the questions was privileged and in the absence of consent from Clute they could not lawfully be compelled to answer. In major part, the position of the accountants was sustained by the trial court. The plaintiffs then filed the petition in this court, with a brief in support thereof, and, as already stated, the rule to show cause issued.
It is argued by counsel for petitioners that:
"1. The accountant-client privilege (C.R.S. 1963 154-1-7(7) does not apply to an accountant's work papers, reports, and financial statements, nor to communications between the accountants and their client and between each of them and third persons, which result in financial statements and an audit report thereon to bar their disclosure to shareholders of the corporation in an action by the shareholders against former officers and directors of the corporation and against the accountants, which action is based upon negligence, gross negligence, fraud and conspiracy in the preparation and audit of the corporation's financial statements.
"2. The accountant-client privilege )assuming arguendo that it applies in these circumstances) with respect to The Clute Corporation's financial statements and auditor's report thereon and to all subsidiary documents in the accountants' possession such as their work papers, reports and other documents and to communications between the accountants and their client and between each of them and third persons, was waived by The Clute Corporation when it delivered to the public, to its shareholders and to the plaintiffs its financial statements and auditors' opinion thereon.
"3. The Clute Corporation and its trustee are estopped to assert the accountant-client privilege under the circumstances presented here."
The statute upon which the respondents rely was enacted in 1929 and has been considered by this court in only one case (Hopkins v. People, 89 Colo. 296, 1 P.2d 937); however, the matter decided in that case has no relevance to the instant action. Seven separate classifications of persons are included under the terms of the full statute and in each classification it is provided that such persons "shall not be examined" as a witness. The first paragraph of C.R.S. 1963, 154-1-7 includes the following:
"There are particular relations in which it is the policy of the law to encourage confidence and to preserve it inviolate; . . ."
[1-3] Express directions concerning the manner in which the protection of the statute shall be waived are contained in C.R.S. 1963, 154-1-8 as follows:
"OFFER TAKEN AS CONSENT. If a person offer himself as a witness, that is to be deemed a consent to the examination; also the offer of a wife, husband, attorney, clergyman, physician, surgeon or certified public accountant as a witness, shall be deemed a consent to the examination, within the meaning of subsections (2), (3), (4), (5) and (7) of section 154-1-7.
It does not lie within the power of a stockholder, or a minority of stockholders, or a majority of the stockholders to function in such manner as to bring about this statutory waiver. The discretion to waive the protection afforded by the statute can only be exercised by the governing officials of the corporation, namely, the officers or the board of directors. C.R.S. 1963, 31-5-1, provides in pertinent part that,
"The business and affairs of a corporation shall be managed by a board of directors which shall exercise all the powers of the corporation, . . ."
If in the opinion of one or more stockholders the board of directors of the company refuses to exercise a discretionary power pursuant to the desires of such stockholders their remedy is to elect a board of directors who will function according to their wishes.
[4-6] This court considered the question of a waiver of personal privileges in the case of Geer v. Alaniz, 138 Colo. 177, 331 P.2d 260, where we find, inter alia, the following statement:
"The right to trial by jury, the right to counsel, the right not to incriminate one's self, and related matters are known as alienable constitutional rights or as rights in the nature of personal privilege for the benefit of the person who may seek their protection. Such rights, whenever assertable, may be waived, . . ." (Emphasis supplied.)
The privileged status of the communications between Clute and its certified public accountant stands in the same position. The privilege created by the statute "for the benefit of the persons who may seek their protection," is equally inviolable whether created by statute or constitutional provision.
" . . . An effective waiver requires voluntary action based upon knowledge of consequences." Toland v. Strohl, 147 Colo. 577, 364 P.2d 588.
Consent to the giving of testimony by a certified public accountant could not be given by the corporation until there was pending litigation in which a participant has made a demand for the testimony in question. The party then entitled to invoke the protection of statute could voluntarily act with full "knowledge of the consequences." With reference to one litigant he might see fit to waive the protection of the statute, and as to another he might elect to claim the benefits thereof.
The brief filed by the petitioners seems to imply that any recovery which might be secured in the district court action would benefit all of the stockholders of The Clute Corporation. This, of course, is not true for the reason that although plaintiffs' action is a class action brought for a special class of persons, the only persons coming within that class are the former stockholders of the Synkoloid Company who have now become stockholders of The Clute Corporation. Stockholders of Clute who had never been stockholders of Synkoloid would derive no benefit whatever from a successful prosecution of plaintiffs' claim.
[7,8] The fact that C.R.S. 1963, 31-5-17, provides that a corporation shall keep "complete books and records of account and shall keep minutes of the proceedings of its shareholders and board of directors; . . . and shall keep "a record of its shareholders, . . ."; and the further fact that a qualified shareholder shall have the right to examine "its books and records of account, minutes and record of shareholders and make extracts therefrom" does not operate to nullify the provisions of the witness statute above quoted. This statute was adopted in the year 1929 and for many years prior thereto there were statutory provisions authorizing the examination of corporate books and records by stockholders. A history of the cases decided by this court under these different statutes, and a study of the statutory provisions themselves, clearly indicate that the indiscriminate examination by stockholders of corporate records is not favored. See Dines, et al. v. Harris, 88 Colo. 22, 291 Pac. 1042, in which the holdings in Wire v. Fisher, 66 Colo. 545, 185 Pac. 469, and Jameson v. Hanawalt, 67 Colo. 153, 186 Pac. 717, were expressly overruled.
In 1958 significant changes were made in the statute. Prior thereto it provided for examination by stockholders of "all the books, accounts and papers" of a corporation. The amendment of 1958, however, restricted the right of inspection to "complete books and records of account." The confidential relationship existing between the certified public accountants and the corporation came into being by contractual relations between them and the corporation acting through its authorized board of directors. This contractual relationship could not be created in any manner except through the authorized management of the corporation. A waiver of the protection of the witness statute could likewise only be brought about by those duly constituted officers who are charged with the responsibilities of managing the affair of the corporate entity.
It is admitted in the instant case that the petitioners have been given full access to the "books and records of account" of The Clute Corporation. The complaining stockholders can make their own audit of these books, prepare their own work sheets, and reach their own conclusion therefrom. If upon trial of the issues involved in the case, in order to refute the conclusions of the stockholders' audit, the certified public accountants employed by the corporation are called as witnesses, with the consent of the corporation, then the privilege of immunity from giving testimony would be waived.
There is no merit to the argument of counsel for petitioners that the privilege created by the statute has been waived by The Clute Corporation in that the auditor's financial statements and annual reports prepared and published long prior to the commencement of the district court action were distributed to the public and to the stockholders of the company. It would be an innovation in legal thinking upon the subject of waiver, to hold that a witness had waived his right to claim a privilege by accepting employment by a corporation several years prior to the commencement of an action in which an attempt is made to compel him to testify notwithstanding the privilege created by the statute.
There has been no waiver on the part of the Clute Corporation which is not even made a party to the litigation. The privilege created by the Colorado statute is not the privilege of the accountant but that of the client, and it is clear from the record before us that The Clute Corporation, both by its court appointed trustee in bankruptcy and by the attorney for the corporation, has repeatedly asserted the privilege.
The argument that The Clute Corporation is "equitably estopped" to assert the privilege is untenable. The argument in this connection seems to be that the defendants in the district court action by words and conduct committed a fraud and led the plaintiffs to act upon the assumption that certain facts were true and that they should not be permitted to deny the truth of those facts if such denial would injure the plaintiffs. This argument is a re-statement of their claim of misrepresentation and is not "equitable estoppel." The plaintiffs in the district court will be heard on their claim of false representations. It cannot now be considered by this court under the misnomer of estoppel.
The rule is discharged.
MR. JUSTICE FRANTZ and MR. JUSTICE MCWILLIAMS dissent.