The Bank of New Orleans and Trust Company, First Nationalbank of Commerce, (substituted Proper Party9-21-83), Plaintiff-appellant, v. Monco Agency, Inc., et al., Defendants, Arthur Young &company, Defendant- Appellee, 823 F.2d 888 (5th Cir. 1987)

The Bank of New Orleans and Trust Company (BNO) appeals from the district court's summary judgment dismissing its negligence claim against Arthur Young & Company (Arthur Young) on the ground that the claim was prescribed under Louisiana's one-year statute of limitations governing negligence actions. Finding that BNO has properly alleged that Arthur Young is liable to BNO in solido with other defendants who were timely sued, we hold that litigation against those defendants interrupted prescription under Louisiana law. We reverse the district court's judgment and remand for further proceedings on BNO's claim against Arthur Young.

Arthur Young conducted an independent audit of Monco Agency, Inc. (Monco) and its subsidiary Cotton Belt Insurance Company (CBIC) for the fiscal year ending December 31, 1980. Monco was a holding company, and CBIC was in the bail bond and surety business. Arthur Young's 1980 financial statements showed that Monco and CBIC were solvent companies. BNO asserted before the district court that it relied on this audit report as well as in-house reports representing the corporations' subsequent financial condition in extending a loan in November 1981 to Monco for over $1.6 million. BNO extended an additional loan of $500,000 to Monco in January 1982. To secure payment of these loans, Monco pledged shares of CBIC stock.

The Monco loan went into default in March 1982. By July 1982, CBIC had been adjudicated insolvent in Texas, placed in receivership in Tennessee, and faced similar measures in California as well as in other states. BNO officers met with CBIC's appointed receiver in Tennessee (CBIC's state of incorporation) who informed them that CBIC had bail bond losses estimated at $13 million. The BNO officers were also told that many of the outstanding bail bond claims were "old," dating back to February 1979.

BNO filed suit against Monco and its president and principal shareholder Oliver Montagnet on July 1, 1982, approximately three and one-half months after it first learned of CBIC's difficulties and had reason to be concerned over the Monco loan. BNO alleged violations of federal securities laws¹  and the Louisiana Blue Sky Law²  on the ground that it had extended loans in excess of $2.1 million to Monco in reliance on Monco's and Montagnet's misstatements and omissions of material fact concerning the operations of Monco's wholly owned subsidiary CBIC.

In August 1983, BNO and Arthur Young negotiated an agreement whereby any subsequent action brought by BNO against Arthur Young in connection with the 1980 audit report would be deemed filed as of August 10, 1983. BNO filed a third amended complaint in May 1984 naming Arthur Young as an additional defendant and seeking to hold Arthur Young liable in solido for its losses as a result of the Monco loan. BNO alleged that Arthur Young was negligent in failing to conduct the 1980 audit in accordance with generally accepted auditing standards, which would have revealed that CBIC was in financial difficulty arising out of its bail bond activities in several states. BNO alleged that CBIC was in fact insolvent as of December 31, 1980, contrary to Arthur Young's 1980 audit report. BNO further alleged that it relied on Arthur Young's financial statements as well as Monco's in-house reports in extending over $2.1 million in loans to Monco.

Arthur Young moved for summary judgment, arguing that BNO's professional malpractice claim was prescribed under Louisiana's one-year statute of limitations for such a claim. See La.Civ.Code Ann. art. 3492 (West Supp.1987).³  Arthur Young asserted that BNO knew or should have known of a potential negligence claim against Arthur Young on the basis of misleading or false information in the 1980 audit report over a year before the stipulated filing date of BNO's action against Arthur Young. BNO responded that it did not have constructive or actual knowledge of a potential claim against Arthur Young arising from the 1980 audit until early 1983. BNO also asserted that it was seeking to hold Arthur Young liable in solido with Monco and Montagnet, and that timely suit against those defendants interrupted prescription as to Arthur Young. The district court agreed with Arthur Young that BNO had constructive knowledge of a potential negligence claim before August 10, 1982. The court also held that prescription was not interrupted on the basis of in solido liability.

BNO makes the two arguments on appeal which it urged before the district court: 1) since it seeks to hold Arthur Young liable in solido with other defendants who were timely sued, prescription was interrupted; and 2) it did not have actual or constructive knowledge of a potential claim against Arthur Young until after August 10, 1982.

Arthur Young raises three arguments against interrupting prescription on the basis of in solido liability. First, Arthur Young contends that the August 1983 prescription agreement between BNO and Arthur Young precludes a finding of interruption on the basis of BNO's timely July 1982 suit since BNO expressly agreed to deem August 10, 1983 as the filing date. Second, Arthur Young contends BNO's position that timely suit against alleged solidary obligors interrupted prescription was not properly raised in the pleadings in the district court. And third, Arthur Young claims that solidary liability is not available as a matter of law in this case.

The August 1983 prescription agreement provides in pertinent part:

In consideration of foregoing the filing of suit at this time by the Bank of New Orleans and Trust Company, Arthur Young & Company agrees to treat any action brought by or on behalf of the Bank of New Orleans and Trust Company or its successor in interest, First National Bank of Commerce, in connection with Arthur Young & Company's audit of and report on the consolidated financial statements of Monco Agency, Inc. for the period ended December 31, 1980, as having been brought as of August 10, 1983....

Arthur Young argues that the wording of this agreement is unambiguous, that any suit brought by BNO in connection with Arthur Young's 1980 audit of Monco would be treated "as having been brought as of August 10, 1983." Arthur Young contends that this agreement supercedes BNO's attempt to append an exception that prescription was interrupted by the filing of an earlier, timely suit against solidary obligors. Arthur Young further submits that Louisiana law supports the enforcement of parties' agreements concerning prescription. See, e.g., McDermott, Inc. v. M-Electric & Construction Co., 496 So. 2d 1105, 1111-12 (La.Ct.App.1986) (upholding agreement shortening the applicable prescriptive period).

Arthur Young's reliance on Louisiana case law in this instance is unavailing. The agreement in the case at bar does not identify the applicable prescriptive period. The agreement merely stipulates the date at which a lawsuit brought by BNO against Arthur Young in connection with its 1980 audit would be deemed filed. When BNO added Arthur Young as a defendant to its lawsuit against Monco and Montagnet in May 1984, the agreement treated the addition as if it had been made on August 10, 1983. That is the entire sum and substance of the agreement. It does not discuss or consider the effect of the earlier, timely lawsuit alleging fraud on the part of Monco and Montagnet. It does not purport to restrict BNO's ability to allege Arthur Young's in solido liability with these defendants.

Arthur Young contends that BNO is precluded from asserting its solidary liability interruption theory because it did not plead it before the district court. In particular, Arthur Young claims that the one-year statute of limitations with respect to BNO's negligence claim had run on its face, since the alleged negligent audit took place in 1980 and the complaint was not filed until August 1983. To overcome this patent deficiency in pleading, Arthur Young asserts, BNO was required to allege with specificity its position that prescription was interrupted by the timely June 1982 filing.

BNO did, in fact, plead Arthur Young's solidary liability in the third amended complaint's prayer for relief:

WHEREFORE, plaintiff, The Bank of New Orleans and Trust Company, prays:

(A) For judgment ... in favor of plaintiff, First National Bank of Commerce, and against defendants, [Monco, Montagnet and others] and Arthur Young and Company, jointly, severally, and in solido rescinding plaintiff's purchase of securities alleged herein and awarding plaintiff, on account of said recission [sic], the sum of $2,158,111.10.... [emphasis added]

BNO repeated this allegation of solidary liability in the following paragraph (B), stating an alternative theory of recovery.

Arthur Young submits that this pleading is deficient since a prayer for relief is not a part of the cause of action itself and does not supplement the facts alleged in the body of the complaint. See, e.g., WICO Corp. v. Willis Industries, 567 F. Supp. 352, 355 (N.D. Ill. 1983). This is wrong on two counts. First, the Federal Rules of Civil Procedure are based on the concept of "notice pleadings." See Wright & Miller, 5 Federal Practice and Procedure: Civil Sec. 1202 (1969). Technicalities and pleading niceties give way to substance. Fed. R. Civ. P. 1 and 8(a). Second, Arthur Young's position ignores the fact that BNO's prayer for relief is a product of the facts alleged in preceding paragraphs. The omission of the words "solidary liability" in the part of the complaint which addressed Arthur Young's role in BNO's extension of credit to Monco and the resulting monetary loss did not detract from the overall thrust of the allegations. The facts alleged in the body of the complaint combined with the specific allegation of solidary liability in the prayer for relief were sufficient to put the court and Arthur Young on notice that BNO was seeking to hold Arthur Young liable in solido with Monco and Montagnet.

If BNO had failed to expressly plead its prescription interruption theory in specific terms in the third amended complaint it would not be precluded from asserting its claim before the district court. Arthur Young relies on Mann v. Adams Realty Co., 556 F.2d 288 (5th Cir. 1977), for the proposition that a complaint fails to state a claim upon which relief can be granted if it shows on its face that prescription has run. Mann recognizes that a Rule 12(b) (6) motion to dismiss for failure to state a claim, see Fed. R. Civ. P. 12(b) (6), is an appropriate method for raising the affirmative defense of prescription. Mann, 556 F.2d at 293. This case, however, does not present a Rule 12(b) (6) issue. Arthur Young did not even move for a Rule 12(b) (6) dismissal.⁴  If it had, the parties could have addressed the prescription issue in that context. However, the factual issue as to when BNO had constructive knowledge of a potential claim against Arthur Young was not one that could be readily resolved at that stage of the proceedings. Indeed, this very issue was contested through the discovery process for over two years before the district court's summary judgment in favor of Arthur Young. No procedural impediment precluded the district court from further considering BNO's alternative argument--which BNO asserted in memoranda submitted in response to Arthur Young's motion for summary judgment--that prescription was interrupted on the basis of the earlier, timely suit filed against Arthur Young's alleged solidary obligors. The issue of interruption was expressly raised, the parties briefed and argued the issue before the district court, and that court decided the matter on the merits. The issue was properly raised below and preserved for review on appeal.

Alternatively, Arthur Young contends that BNO did not satisfy its burden under Fed. R. Civ. P. 56 of submitting evidence with respect to Arthur Young's concurrent fault and solidary liability at the summary judgment stage. Arthur Young submits that BNO was required to go "beyond the pleadings and ... designate 'specific facts showing that there is a genuine issue for trial.' " Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986) (quoting Rule 56(e)).

Whether Arthur Young is liable in solido with the other defendants for BNO's loss is the ultimate issue in this case, and in the district court BNO must prove that Arthur Young's negligence played a part in causing its loss on the Monco loan. The focus of Arthur Young's summary judgment motion, however, was not factual liability. Arthur Young did not submit or argue facts which showed that it did not conduct the audit in question or that BNO did not rely on the audit in extending the loan. Arthur Young asserted instead that BNO's claim was prescribed on the basis of BNO's constructive knowledge of a potential claim before August 1982. BNO's position that prescription was interrupted was raised in response to Arthur Young's affirmative defense that the statute of limitations had run and was based on factual assertions in pleadings and memoranda.

BNO did not fail to sustain its summary judgment burden. It properly raised the argument that prescription was interrupted on the basis of the earlier, timely suit against Monco and Montagnet as alleged solidary obligors. Arthur Young argues, however, that BNO has failed to show a "relationship between Arthur Young and BNO" or the falsity of Arthur Young's representations in the 1980 audit. These assertions that BNO must prove solidary liability at the summary judgment stage erroneously would impose a burden on BNO to prove its negligence case before trial.

BNO's challenge to the district court's holding that prescription was not interrupted claims that both Arthur Young and the defendants sued in July 1982 are liable to BNO for the same loss on the Monco loan and thus are liable in solido.

Arthur Young does not dispute the fact that the filing of suit against a solidary obligor interrupts prescription with regard to all other solidary obligors. See La.Civ.Code Ann. art. 2097, revised as La.Civ.Code Ann. art. 1799 (West Supp.1987).⁵  Rather, Arthur Young simply argues that it cannot be held solidarily liable as a matter of law.

Article 2324 of the Civil Code provides that " [p]ersons whose concurring fault has caused injury, death or loss to another are also answerable, in solido." La.Civ.Code Ann. art. 2324 (West Supp.1987). In addition, article 2091, in effect at the time in question, provided " [t]here is an obligation in solido on the part of the debtors, when they are all obliged to the same thing, so that each may be compelled for the whole...." La.Civ.Code Ann. art. 2091.⁶ 

BNO's allegations before the district court satisfy either definition of solidary liability provided in the Civil Code. BNO alleged that Monco and Montagnet made false statements or omissions of material fact concerning the financial condition of Monco and CBIC in connection with loan negotiations in 1981 between Monco and BNO. In May of 1981, Arthur Young issued the audit report for the fiscal year ending December 31, 1980. BNO alleged that, had Arthur Young properly audited Monco and CBIC and issued financial statements reflecting the true financial condition of Monco and CBIC, the misstatements in Monco's in-house reports the following year could not have occurred; that Monco and Montagnet used the erroneous audit report to misrepresent Monco's and CBIC's financial condition in 1981; that it relied both on Arthur Young's report and the ensuing in-house reports, which combined to cause BNO's loss of over $2.1 million.

BNO asserts that the "concurring fault" of Monco, Montagnet, and Arthur Young caused this loss. All defendants are liable to BNO for the "same thing"--BNO's loss as a result of the Monco loan. Under BNO's theory of the case, all defendants are solidary obligors. Full performance by one solidary obligor here would relieve the others of liability to BNO. See Billiot v. American Hospital Supply Corp., 721 F.2d 512, 513-14 (5th Cir. 1983) (applying articles 2324 and 2091, court finds that negligent physician and manufacturer of defectively designed product may be deemed solidary obligors for purposes of interrupting prescription).

Arthur Young counters that BNO's claims against Monco and Montagnet were based on federal and state securities laws and that BNO's claim against Arthur Young, conversely, is grounded on negligence under the Civil Code. Arthur Young contends that since federal law governs BNO's federal securities claims, there can be no solidary obligation under Louisiana law. Similarly, Arthur Young urges that Louisiana's Blue Sky statute is not a part of the Civil Code and that therefore the general solidary obligor provisions in the Civil Code do not encompass securities law violations. Arthur Young further reads the Louisiana Blue Sky statute, see La.Rev.Stat.Ann. Sec. 51.714 (West Supp.1987)⁷  as limiting the class of wrongdoers who may be held liable for state securities violations.

Arthur Young has cited no authority for its position that BNO was required to sue the initial defendants under the Civil Code in order to interrupt prescription as to the negligence claim against it. There is no basis in logic or law for requiring that the source of liability be found in the Civil Code and sued upon pursuant to a specific codal authority before such liability may be deemed joint, several, or in solido with that of others. Indeed, La.Civ.Code Ann. art. 1797 (West 1987) provides: "An obligation may be solidary though it derives from a different source for each obligor." Moreover, the Louisiana Blue Sky Law does not exclude categories of persons as potential solidary obligors; rather, it provides that persons such as "general partners," and "officers" who control the defendant seller shall be "jointly and severally" liable. The Blue Sky Law merely provides a statutory cause of action for securities fraud. It does not effect the character of that fraud for purposes of classification under the Louisiana Civil Code.

Arthur Young contends that Monco and Montagnet and Arthur Young are not "obligated to the same thing." Arthur Young submits that Monco and Montagnet were sued for rescission--in other words, to void the contract and recover the money BNO loaned to Monco in exchange for pledged CBIC stock--while Arthur Young was sued for mere negligence in preparing the 1980 audit. Arthur Young claims that since it was not a party to the loan transaction it could never be held liable for rescission, to void the Monco loan contract, or to return the consideration paid for the CBIC stock. Arthur Young misses the point. One thing BNO seeks is to recover damages sustained as a result of the Monco loan default. While different theories of recovery are asserted as to Monco and Montagnet, all defendants are allegedly obligated to the same thing insofar as recovery of the loan loss is concerned. Recovery of the loan loss damages against either Monco and Montagnet or Arthur Young under any theory would satisfy this common demand as to all defendants.

Arthur Young contends that solidary liability is not applicable because Monco and Montagnet were sued for fraud and Arthur Young was not. There is no impediment to holding one fraudulent defendant and one "merely" negligent defendant liable in solido when their concurrent fault has caused a single loss if they are obligated for the same thing. As this court observed in Equilease Corp. v. Smith International, Inc., 588 F.2d 919, 929 (5th Cir. 1979):

Logically, a party may be held individually liable for negligence whether the damage caused to the plaintiff takes the form of fraud or bodily injury. And we perceive no impediment to binding a defendant who acts negligently in solido with those who commit an intentional tort when the same harm to the plaintiff results, provided, of course, that each party is legally at fault.

Here the same harm to BNO has resulted from BNO's asserted intentional fraud on the part of Monco and Montagnet and negligent accounting practices on the part of Arthur Young.

Arthur Young relies on the Louisiana Third Circuit's recent decision in Bertrand v. St. Paul Fire and Marine Ins. Co., 491 So. 2d 474 (La.App. 3d Cir.), cert. denied, 494 So. 2d 541, 543 (La.1986), in which the court rejected interruption of prescription of an action against an alleged solidary obligor in circumstances Arthur Young says are analogous to those in its case. In Bertrand, an action was brought to enjoin a hospital and physicians from destroying evidence surrounding the death of a patient. Following the date on which a medical malpractice action would have prescribed, the original complaint was amended to include malpractice claims against the original defendants and one additional physician, who was named for the first time. The state appellate court held that the amendment related back and thus exempted the plaintiff's claims against the originally named defendants from prescription; however, the court also held that the amendment did not relate back with respect to the physician named for the first time. The court rejected the argument that prescription was interrupted by the original action seeking injunctive relief against the physician's alleged solidary obligors.

Arthur Young submits that the Louisiana court refused to allow interruption as to this physician because "there was no pleading filed putting him on notice that some form of judicial relief was being sought arising from his participation in the events surrounding Bertrand's death, and putting him on notice that his evidence concerning it should be collected and preserved." Id. at 481. By analogy, Arthur Young contends that the fraud claims against Monco and Montagnet could not have put it on notice of a possible negligence action against it in regard to the 1980 audit.

Arthur Young's reliance on Bertrand to define sufficient notice with respect to Louisiana prescription is misplaced. Bertrand determined that the amendment adding a malpractice claim did not relate back so as to permit the claim against the newly named defendant. Solidary liability was not the issue. The Louisiana court refused to interrupt prescription because article 2097 required a timely suit against a solidary obligor to interrupt prescription as to another. In Bertrand, there never was a timely malpractice suit. The untimely malpractice amendment could not relate back to the earlier filed injunction action. The relief being sought in the initial action--preservation of evidence--did not demand the same thing--damages stemming from a patient's death due to medical malpractice. Arthur Young, on the other hand, knew or could have known from the date of the initial action that BNO was seeking to recover its loss on the Monco loan. Timely suit against an alleged solidary obligor which was jointly liable for that loss put Arthur Young "on notice" for purposes of interrupting prescription.

Arthur Young contends that its fault was not concurrent with that of Monco and Montagnet. Arthur Young asserts that fraudulent and negligent acts can never be concurrent under article 2324 of the Louisiana Civil Code. Article 3556 of the Louisiana Civil Code states that there are three degrees of fault: the gross, the slight, and the very slight. "The gross fault is that which proceeds from inexcusable negligence or ignorance; it is considered as nearly equal to fraud." La.Civ.Code Ann. art. 3556. To equate fraud with negligence is to ignore these defined degrees of fault. This truism is immaterial in the present setting.

Article 2324 speaks of "concurring fault." It does not consider degrees of fault. Under this court's reasoning in Equilease fraud can concur with negligence:

In Louisiana, the basis of all delictual recovery is fault. The notion of fault encompasses, besides the doing of an unlawful act, both the intentional harming of another (dolus) and the negligent harming of another (culpa) . See Stone, Tort Doctrine in Louisiana: The Concept of Fault, 27 Tul.L.Rev. 1, 8-13 (1952).

True, imposing solidary liability on co-delinquents, when one has committed a willful harm and the other a negligent one, may lead to inequitable results if there is no apportionment of fault between the defendants. The one who is negligent is rarely equally at fault with the one who intends to harm. But the same inequity results when one tortfeasor is grossly negligent and the other is only slightly negligent. The remedy lies in regulating contribution rather than limiting the ambit of Article 2324.

588 F.2d at 929 n. 12. Similarly, we hold that article 2324 encompasses both fault that takes the form of willful harm and negligence. See Billiot, 721 F.2d at 513-14 (combining negligence and product liability is to the same effect).

Finally, Arthur Young makes reference to the ground on which the district court apparently determined that Arthur Young and the other defendants could not be solidary obligors: because Arthur Young could not be liable to Monco and Montagnet for contribution under the federal securities laws as joint tortfeasors. Again, Arthur Young advances a correct statement of the law which has no applicability to the present issue. Monco and Montagnet as intentional tortfeasors could not seek contribution from Arthur Young as a negligent party. However, the determinative inquiry under the Louisiana Civil Code is not the right to contribution, but whether the concurring fault of all three defendants caused BNO's loss and whether all defendants are obligated to the same thing. Arthur Young is clearly not liable for the alleged fraud, but BNO is not precluded from seeking to hold it responsible in solido for its role in conducting the allegedly improper audit which enabled Montagnet and Monco to perpetrate that fraud and allegedly concurred to cause BNO's loss.

BNO has properly alleged that Arthur Young is liable in solido for its negligence in connection with the 1980 audit and representations of Monco's and CBIC's financial condition. The timely June 1982 suit against alleged solidary obligors Monco and Montagnet thus interrupted prescription with regard to Arthur Young. We hold only that prescription was interrupted as a matter of law. We express no opinion as to whether BNO had constructive knowledge of a potential claim against Arthur Young before August 10, 1983. Obviously, we express no view on the merits of the claims asserted. The district court's judgment dismissing BNO's claim against Arthur Young is

REVERSED AND REMANDED.