author: JUSTICE HUNT

text:
    EUGENE B. THAYER and Montana Merchandising, Inc., Plaintiff and Respondent, v. ROBERT G. HICKS, JR. and Seman, Koontz, Jacobsen & Bloomgren, a Partnership, Defendants and Appellants.
    No. 88-426.
    Submitted Nov. 2, 1989.
    Decided May 25, 1990.
    Rehearing Denied June 20, 1990.
    793 P.2d 784.

      Joseph M. Sullivan, argued, Robert J. Emmons, Great Falls, for defendants and appellants.
    Joe Bottomly, Bottomly Law Offices, Great Falls, for plaintiff and respondent.
    Ward Shanahan, Helena, for amicus curiae Am. Inst. CPA’s.
   JUSTICE HUNT

delivered the Opinion of the Court.

Montana Merchandising, Inc. brought this action against the accounting firm of Seman, Koontz, Jacobsen & Bloomgren (Bloomgren) in the District Court of the Eighth Judicial District, Cascade County, claiming damages arising from Bloomgren’s negligent performance of an audit of Intermountain Merchandising, Inc., and its negligent misrepresentation of financial information in that audit. By a vote of 9 to 3, a jury returned a verdict in favor of Montana Merchandising in the amount of $339,308. Bloomgren appeals. We affirm in part and reverse in part.

The following issues are raised on appeal:

1. To what extent does an accountant owe a duty of care to third parties with whom he is not in privity?

2. Did the District Court err in instructing the jury that an accountant’s failure to comply with generally accepted auditing standards (GAAS) or generally accepted accounting principles (GAAP) constitutes negligence as a matter of law?

3. Did the District Court err in instructing the jury that, in a negligent misrepresentation action, reliance on representations is presumed?

4. Did the District Court err in submitting the issue of causation to the jury?

5. Did the District Court err in failing to reduce the jury verdict?

6. Did the District Court err in granting pre-judgment interest to Montana Merchandising?

7. Did the District Court err in its award of costs to Montana Merchandising?

Montana Merchandising, Inc. is a Great Falls grain-trading company established in 1973 by Eugene Thayer, its president and majority shareholder. In 1974, Thayer and Robert Hicks, Jr. formed another corporation called Intermountain Merchandising, Inc. Hicks was the president and active manager of Intermountain. Thayer, only a passive investor in the corporation, was vice-president. Gary Black was secretary-treasurer. Black, a certified public accountant, was also secretary-treasurer and controller of Montana Merchandising.

Thayer and Hicks each contributed $5,000 to Intermountain’s formation. Intermountain then borrowed $25,000 from First National Bank. With this money, Intermountain purchased a bookstore, Reader’s World. In 1975, Intermountain founded a Hallmark shop, known as Tiffany’s Attic. In 1976, it acquired two other separate corporations, Yellowstone Merchandising and Security Equipment. Yellowstone sold retail art supplies and office equipment. Security Equipment sold handguns and law enforcement supplies.

In January, 1977, Intermountain purchased Skyline Distributing, a wholesale art, craft and hobby supplier. With this purchase, Intermountain intended to greatly expand its operations. The Skyline inventory cost $300,000.

In early 1977, Intermountain’s debt to the bank, which was personally guaranteed by both Thayer and Hicks, totaled approximately $400,000. The corporation was highly leveraged and needed an infusion of capital to service the debt. Because Hicks was unwilling or unable to supply any additional capital, he proposed that Thayer purchase his interest in the corporation in exchange for cash and Reader’s World, one of the more successful of Intermountain’s assets. The parties contemplated that, after Thayer acquired Hicks’s stock, Montana Merchandising would supply capital through loans to or investments in Intermountain.

In order to determine the value of Hicks’s stock and the financial condition of the corporation, Allen Bloomgren, a partner in the defendant accounting firm, was hired to perform an audit of Intermountain. The parties dispute whether Bloomgren was told that Montana Merchandising would become financially involved with Intermountain after Thayer bought Hicks out.

In June, 1977, prior to the formal completion of the audit, Montana Merchandising advanced $140,000 to Intermountain to help fund its operations. In July, 1977, Bloomgren communicated his preliminary audit figures to Thayer, Black and Hicks. The preliminary figures showed that Intermountain was a going concern. Based on these figures, Montana Merchandising loaned Intermountain an additional $47,000.

Bloomgren completed the audit on August 15, 1977, giving a “clean” opinion on Intermountain’s balance sheet. This “clean” opinion endorsed the figures contained in the balance sheet without disclaimers or reservations.

The audit showed that' Intermountain had a positive shareholder equity of $112,608 and working capital of $393,141. The equity figures were higher than the Intermountain’s previous equity balance of $89,654, which had been claimed in Intermountain’s March, 1977, unaudited financial statements. The figures thus indicated that Intermountain was not only solvent, but profitable.

The audit figures were relied upon in going forward with the planned buy out of Intermountain. In exchange for his interest in the company, Hicks received both Reader’s World and a note from Thayer in the amount of $52,445. In January, 1978, Thayer transferred the stock to Montana Merchandising. Montana Merchandising assumed the $52,445 debt to Hicks.

The expansion plans proceeded and Montana Merchandising advanced additional funds to Intermountain. It also signed guarantees for loans Intermountain received from a local bank. These guarantees, which included money borrowed by Intermountain in previous years, totaled $765,000. Montana Merchandising’s total risk exposure on Intermountain’s behalf increased to $1,300,000.

In 1978, Montana Merchandising engaged Junkermier, Clark, Campanella, Stevens, P.C. to conduct a second audit of Intermountain. Gary Hill, the accountant who performed this second audit, found several material errors on the audit completed by Bloomgren. Among the errors discovered by Hill was an overstatement of the value and quantity of Intermountain’s inventory by an estimated $153,000, a failure to identify almost $14,000 in unrecorded liabilities, the improper identification of long-term and short-term debt and the failure to offset a $40,000 loss to subsidiaries. Hill testified that, once he corrected the errors, he found that Intermountain’s value was a negative amount. In other words, at the time of the Bloomgren audit, Intermountain was an insolvent corporation.

Upon receiving Hill’s audit report, Montana Merchandising acted to mitigate its damages. It ceased buying inventory and attempted to sell the remaining warehouse goods. Ultimately, it hired a professional to conduct a liquidation sale.

Through these efforts, Montana Merchandising reduced Inter-mountain’s bank debt from $765,000 to $338,000. At that point, the bank called the remainder of the loans due. Montana Merchandising honored its guarantees on the notes.

In 1979, Thayer and Montana Merchandising brought suit against Hicks and Bloomgren, alleging that the accountant was negligent in its audit of Intermountain. Montana Merchandising claimed that, had Bloomgren properly performed the audit, it would never have purchased the corporation’s stock, nor would it have advanced money directly to or guaranteed loans on behalf of Intermountain. Prior to trial, Hicks, Thayer and Montana Merchandising settled their claims between one another.

Trial proceeded between Montana Merchandising and Bloomgren. Following three weeks of testimony, the jury returned a verdict in favor of Montana Merchandising in the amount of $339,308. Bloomgren appealed to this Court.

I.

To what extent does an accountant owe a duty of care to third parties with whom he is not in privity?

While some jurisdictions adhere to the rule that an accountant may not be held liable in negligence to parties with whom he is not in privity of contract, e.g., Citizen’s Nat’l Bank of Wisner v. Kennedy and Coe, 232 Neb. 477, 441 N.W.2d 180 (1989); Robertson v. White, 633 F.Supp. 954 (W.D. Ark. 1986) (applying Arkansas law), the modern trend allows recovery to non-clients in certain instances. The question most courts grapple with today is not whether an accountant owes a duty of care to third parties but, rather, just how far the duty extends. In dealing with this issue, courts have employed three different approaches. The first approach limits the duty of care to those third parties who are actually known to the accountant, the second limits the duty to those who are actually foreseen and the third expands the duty to all those who are reasonably foreseeable.

Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), authored by Justice Cardozo, is the seminal case on accountant liability. Fearing that disastrous consequences would result if accountants were exposed to ‘ ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class,” Ultramares, 174 N.E. at 444, Cardozo limited an accountant’s duty of care to those in privity of contract with the accountant or to those whose ‘ ‘bond was so close as to approach that of privity .... ” Ultramares, 174 N.E. at 446.

The Court of Appeals of New York recently reaffirmed and clarified the concept of “near privity” enunciated in Ultramares. In Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 440, 483 N.E.2d 110, 115 (1985), the Court held that “a relationship ’so close as to approach that of privity’ [Ultramares] remains valid as the predicate for imposing liability upon accountants” for the negligent preparation of financial reports relied upon by noncontractual third parties. The Court delineated three factors to guide courts in determining whether a “near privity” bond exists.

“(1) [T]he accountants must have been aware that the financial reports were to be used for a particular purpose or purposes;
“(2) in the furtherance of which a known party or parties was intended to rely; and
“(3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance.”

Credit Alliance, 483 N.E.2d at 118. Before an accountant may be held liable to a non-client third party, all three factors must exist.

Some jurisdictions have adopted the near privity rule of Credit Alliance. e.g., Idaho Bank & Trust Co. v. First Bancorp of Idaho, 115 Idaho 1082, 772 P.2d 720 (1989); Toro Co. v. Krouse, Kern & Co., Inc., 827 F.2d 155 (7th Cir. 1987) (applying Indiana law). Others, however, have applied broader rules in determining the extent an accountant’s duty of care to non-clients. The majority follow the approach set out in the Restatement (Second) of Torts sec. 552 (1977). E.g., First Florida Bank, N.A. v. Max Mitchell & Co., 558 So.2d 9 (Fla. 1990); First Nat’l Bank of Bluefield v. Crawford, 386 S.E.2d 310 (W.Va. 1989); Raritan River Steel v. Cherry, Bekaert & Holland, 322 N.C. 200, 367 S.E.2d 609 (1988); Pahre v. Auditor of State, 422 N.W.2d 178 (Iowa 1988); Badische Corp. v. Caylor, 257 Ga. 131, 356 S.E.2d 198 (1987); Spherex, Inc. v. Alexander Grant & Co., 122 N.H. 898, 451 A.2d 1308 (1982); Haddon View Investment Co. v. Coopers & Lybrand, 70 Ohio St.2d 154, 436 N.E.2d 212 (1982); Bonhiver v. Graff, 311 Min. 111, 248 N.W.2d 291 (1976).

The Restatement expands the “known third party” rule of Credit Alliance. It provides in pertinent part:

“(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
“(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered
“(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
“(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. ” (Emphasis added.)

Restatement (Second) of Torts sec. 552 (1977).

Unlike the Credit Alliance approach, the Restatement does not require the accountant to actually know the identity of the specific third party and the particular transaction before liability will lie. The Restatement requires only that the accountant foresee and intend that members of a limited class will rely on his representations in determining whether to enter into a transaction with the audited entity. The transaction the parties enter into must be of a type actually foreseen by the accountant.

At least four jurisdictions have expanded an accountant’s duty to third parties beyond the “actually foreseen” class of the Restatement. These jurisdictions apply ordinary negligence rules when dealing with the question of the scope of liability, holding that an accountant owes a duty to all who might reasonably and foreseeably obtain and rely upon the accountant’s work product. Touche Ross & Co. v. Commercial Union Ins. Co., 514 So.2d 315 (Miss. 1987); International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal.App.3d 806, 223 Cal.Rptr. 218 (1986); Rosenblum v. Adler, 93 N.J. 324, 461 A.2d 138 (1983); Citizens State Bank v. Timm, Schmidt & Co., S.C., 113 Wis.2d 376, 335 N.W.2d 361 (1983).

Because the facts of the present case meet the strictest of the three formulations of an accountant’s duty of care to non-clients, we see no need to adopt a more liberal standard at this time. We therefore adopt a modified version of the Credit Alliance rule.

In Credit Alliance, the defendant accounting firm knew that the plaintiff was the audited entity’s principal lender and was fully aware that the plaintiff was relying on the financial statements and inventory valuations certified by the accounting firm to determine the amounts of money the plaintiff was willing to lend the audited entity, Furthermore, representatives of the plaintiffs and the accounting firm were in direct oral and written communication during the entire course of the lending relationship between the plaintiff and the audited entity. The Court determined that these facts added up to a near privity relationship, constituting a sufficient basis for the plaintiffs cause of action against the accounting firm.

In the present case, as in Credit Alliance, the accountant actually knew that a specific third party would obtain and rely upon the audit in question. On May 17, 1977, the accountant, Allen Bloomgren, met with Eugene Thayer, major stockholder and president of Montana Merchandising and 50-percent shareholder and vice-president of Intermountain; Robert Hicks, the other 50-percent shareholder and president of Intermountain; Gary Black, secretary-treasurer and controller of Montana Merchandising and secretary-treasurer of Intermountain; and L.D. Nybo, attorney for Thayer, Montana Merchandising and Intermountain. The meeting took place at the office of Montana Merchandising. With the exception of Bloomgren, all parties testified that Montana Merchandising was discussed at the meeting. Bloomgren’s own work papers, which noted that Intermountain’s fiscal year was to be aligned with Montana Merchandising’s, corroborated the testimony of the other individuals. Substantial credible evidence indicates that Bloomgren knew that Montana Merchandising would rely upon the audit.

In addition, Bloomgren knew that the audit was to be used for a particular purpose. Bloomgren testified that he knew that the end and aim of the audit was to aid in the buy out of Intermountain and that the reason for the buy out was that Intermountain needed more capital. From this testimony, the jury could reasonably have concluded that Bloomgren knew that the audit would be used in connection with all facets of the buy out, including direct loans to Intermountain and loan guarantees on behalf of Intermountain.

Finally, Bloomgren’s conduct links him to Montana Merchandising. In Credit Alliance, the defendant accounting firm communicated orally and in writing with the plaintiff for the purpose of discussing the audited entity’s financial condition. The Court held that these communications provided a sufficient nexus between the accountant and the noncontractual third party. Credit Alliance, 493 N.Y.S. 2d at 445, 483 N.E.2d at 120.

In this case, Bloomgren met with Montana Merchandising’s principle shareholder, controller and attorney prior to the audit to discuss the financial condition of Intermountain. The meeting took place in Montana Merchandising’s office. The accountant referred to Montana Merchandising in his notes. The other four parties present at the meeting testified that Montana Merchandising was discussed. In addition, during the audit, Bloomgren again met at Montana Merchandising’s office with the corporation’s principle shareholder and controller to discuss the preliminary audit figures. Substantial evidence links Bloomgren to Montana Merchandising.

While the facts of the case fit succinctly under the Credit Alliance formulation, a question arises regarding whether the jury instruction given on an accountant’s duty of care also falls under the Credit Alliance rule. The instruction at issue provided as follows:

“It is not necessary for Montana Merchandising to be a party to the contract of auditing services in order for it to recover against Mr. Bloomgren or his partnership. If you find Mr. Bloomgren had reason to know that Montana Merchandising would rely upon the audit or Mr. Bloomgren could reasonably foresee damage to Montana Merchandising if the audit was performed negligently, then Mr. Bloomgren and the partnership of Seman, Koontz, Jacobsen & Bloomgren are liable for any damages caused by their negligence in the performance of the. audit.”

The instruction is less than perfect. However, its defects are not so severe as to cause reversible error.

The instruction is not really any broader than the actually known third party rule. It requires the jury to determine whether the accountant knew that his work product would be relied upon by or that his negligence could cause damage to a specific party — Montana Merchandising — not a class of parties or any party that might foreseeably rely upon the audit. By restricting the language to Montana Merchandising, the instruction negated the potentially harmful effect of the phrase “reasonably foresee.”

Similarly, the instruction’s failure to require the jury to make findings regarding the type of transactions Montana Merchandising would enter into in reliance upon the audit is not grounds for reversal. Other instructions provided that damages may include loans and guarantees. Furthermore, Bloomgren admitted that he knew the audit was undertaken specifically for the buy out and that the buy out was undertaken because Intermountain needed an infusion of capital. Viewing this instruction in light of the evidence presented at trial and the other instructions given to the Jury, Bushnell v. Cook, 221 Mont. 296, 302, 718 P.2d 665, 669 (1986), we cannot say that the failure to list the particular transaction upon which the audit would be relied constitutes a fatal defect in the jury instruction.

Nor does the instruction’s failure to require a specific finding of conduct linking the accountant to Montana Merchandising render it fatal. While such conduct may be useful evidence for proving that the accountant actually knew of the reliance of a particular third party and the specific transaction for which the audit was to be used, we will not require the jury to be instructed that they must find such conduct before imposing liability.

In sum, an accountant may owe a duty of care to third parties with whom he is not in privity of contract. However, this duty exists only if the accountant actually knows that a specific third party intends to rely upon his work product and only if the reliance is in connection with a particular transaction or transactions of which the accountant is aware when he prepares the work product.

II.

Did the District Court err in instructing the jury that an accountant’s failure to comply with generally accepted auditing standards (GAAS) or generally accepted accounting principles (GAAP) constitutes negligence as a matter of law?

The District Court instructed the jury as follows:

“If you find that Mr. Bloomgren failed to comply with generally accepted auditing standards (GAAS) or generally accepted accounting principles (GAAP) in his audit of Intermountain Merchandising, Inc., the plaintiff has proved negligence on the part of Seman, Koontz, Jacobsen & Bloomgren as a matter of law. You should then determine whether that negligence was a legal cause of the Plaintiffs injury. ’ ’

Bloomgren first argues that the jury should not have been instructed on GAAS and GAAP because the Board of Public Accountants (Board), which was created by the Montana Legislature in 1969 and empowered and obligated to set the standards for accountants practicing in this state, did not adopt GAAS and GAAP until 1980, three years after Bloomgren completed the audit. Bloomgren maintains that the District Court’s instruction on GAAS and GAAP resulted in a retroactive application of the rules of the Board.

Under the particular facts of this case, whether the Board had yet adopted GAAS and GAAP at the time of the audit is irrelevant. The expert witnesses called on behalf of Montana Merchandising as well as the expert called by Bloomgren testified that GAAS and GAAP were national standards promulgated by the American Institute of Certified Public Accountants that were followed by members of the profession. More importantly, Bloomgren certified in the engagement letter that the audit would be “conducted in accordance with generally accepted auditing standards.. . . ” Again, in the letter accompanying the audited financial statements, he certified that the audit was completed “in accordance with generally accepted auditing standards....” He also warranted that Intermountain’s balance sheet fairly represented the financial condition of the company “in conformity with generally accepted accounting principles....”

The District Court did not retroactively apply rules of the Board when it instructed on GAAS and GAAP. Once Bloomgren certified that his work was completed in accordance with GAAS and GAAP he was required to follow those standards. We will not allow an accountant who represents that his work conforms to national standards to escape the consequences of that representation simply because an administrative body in Montana has not yet adopted those same standards.

Bloomgren next argues that, even if GAAS and GAAP were applicable in this case, the trial court erred by instructing the jury that an accountant’s failure to comply with those standards constituted negligence as a matter of law. Bloomgren maintains that the court should have instead instructed the jury that any failure to adhere to GAAS and GAAP was merely evidence of negligence. We agree.

A violation of a statute may constitute negligence as a matter of law, or, as it is often called, negligence per se. This Court has hesitated to extend the doctrine of negligence per se beyond the statutory framework. Thus, we have held that violations of administrative regulations that are not specifically incorporated by statute do not constitute negligence per se. Cash v. Otis Elevator Co., 210 Mont. 319, 326-27, 684 P.2d 1041, 1045, (1984) (violation of Montana safety code for elevators is evidence of negligence rather than negligence per se). See also Stepanek v. Kober Constr., 191 Mont. 430, 438, 625 P.2d 51, 56, (1981) (violation of OSHA regulations is evidence of negligence). We have also held that violations of rules contained in a maintenance manual for the Montana Department of Highways constitute only evidence of negligence. Townsend v. State, 227 Mont. 206, 209, 738 P.2d 1274, 1276 (1987). Most precisely on point, we have held that violations of the standards of practice for architects as described in a handbook published by the American Institute of Architects constitute only evidence of negligence, not negligence as a matter of law. Taylor, Thon, Thompson & Peterson v. Cannaday, 230 Mont. 151, 155, 749 P.2d 63, 65-66 (1988).

Accountants and auditors have a duty to exercise the same degree of care, skill and competence as that exercised by other reasonably competent members of the profession in the same or similar circumstances. Greenstein, Logan & Co. v. Burgess Marketing, Inc., 744 S.W.2d 170, 185 (Tex. Ct. App. 1987); In re Hawaii Corp., 567 F.Supp. 609, 617, (D. Haw. 1983). While it may be a matter of law for the trial court to determine the standard of care applicable to the case and to so instruct the jury, Aasheim v. Humberger, 215 Mont. 127, 129, 695 P.2d 824, 826 (1985), the jury must retain the ability to determine whether the professional exercised the proper degree of care, skill and diligence warranted under the circumstances. Evidence of national rules and codes followed by members of the profession may aid the jury in determining whether the proper degree of care was exercised, however, any deviation from the national guidelines, no matter how slight, does not automatically constitute negligence.

Even though the District Court erred in instructing the jury that the failure to comply with GAAS and GAAP was negligence as a matter of law, the error was harmless.

The testimony of both Montana Merchandising’s and Bloomgren’s experts established that Bloomgren failed to exercise due care in several ways. He failed to identify almost $14,000 in unrecorded liabilities. He erroneously labeled $12,000 of prepaid commissions as accounts receivable. He misclassified $291,000 of short-term debt as long-term debt. He improperly recorded income tax liability, showing no taxes due. He failed to consolidate Intermountain’s financial statements with those of its subsidiaries. Then, having failed to consolidate, he improperly used the equity method rather than the cost method of accounting, resulting in a $40,000 overstatement of Intermountain’s income.

In addition, Montana Merchandising’s experts testified that Bloomgren failed to maintain the degree of independence and skepticism required of an auditor. He failed to gather sufficient competent evidence to properly test the pricing of the inventory and to determine whether the inventory was obsolete or slow moving. He failed to adapt the accounting program to the type of corporation he was auditing.

An erroneous instruction is not prejudicial where it appears that, even without the instruction, the same verdict would have been reached. Britton v. Farmers Ins. Group, 221 Mont. 67, 88, 721 P.2d 303, 316 (1986); Wolfe v. Schulz Refrigeration, 188 Mont. 511, 519, 614 P.2d 1015, 1019 (1979). In view of the overwhelming evidence of Bloomgren’s failure to exercise due care, the jury would have reached the same verdict without the instruction in question. The instruction was, at most, harmless.

III.

Did the District Court err in instructing the jury that, in a negligent misrepresentation action, reliance on representations is presumed?

The District Court instructed the jury on the reliance element of negligent misrepresentation as follows:

“Where representations have been made in regard to a material matter and action has been taken, in the absence of evidence showing the contrary, it will be presumed that representations were relied upon. ’ ’

Bloomgren argues that this instruction impermissibly shifts the burden of proving reliance from the plaintiff to the defendant. We do not agree.

The instruction imposed the initial burden on Montana Merchandising to prove that representations were made, that they were material and that it had taken action upon them. Once Montana Merchandising introduced evidence of reliance, the burden shifted to Bloomgren to prove that Montana Merchandising did not act upon its representations. Only if Bloomgren failed to rebut Montana Merchandising’s evidence could the instruction’s presumption of reliance come into play. Thus, the instruction did not improperly shift the burden of proof.

Bloomgren also contends that it was prejudiced by the trial court’s refusal to let it delve into certain aspects of Montana Merchandising’s reliance. A review of the record, however, shows that the court gave Bloomgren wide latitude to question witnesses on the question of reliance. Only when Bloomgren inquired into the existence of corporate resolutions and minutes did the court limit its examination.

The District Court retains broad discretion to determine the admissibility of evidence. Massman v. City of Helena, [237 Mont. 234,] 773 P.2d 1206, 1210, 46 St.Rep. 764, 768 (Mont. 1989). As the District Court limited Bloomgren’s inquiry into the question of reliance only in the area of corporate resolutions and minutes, we cannot say that the court abused its discretion.

IV.

Did the District Court err in submitting the issue of causation to the jury?

At the close of Montana Merchandising’s case in chief, Bloomgren moved the trial court for a directed verdict on the ground that Montana Merchandising had failed to prove that Bloomgren had caused its damages. Bloomgren contends that the court erred in denying its motion.

When examining a denial of a motion for directed verdict, this Court utilizes the same standard of review as that used to review the propriety of a jury verdict. We will sustain the trial court’s refusal to enter a directed verdict if substantial evidence exists to support the jury verdict. In determining whether substantial evidence supports the verdict, we will review the evidence in the light most favorable to the prevailing party. We will not reweigh conflicting evidence, for the weight and credibility to be given each piece of proof lies within the province of the jury. Stewart v. Fisher, [235 Mont. 432,] 767 P.2d 1321, 1323, 46 St.Rep. 116, 119 (Mont. 1989).

Bloomgren first argues that Montana Merchandising failed to prove that Intermountain was insolvent at the time of the audit. According to Bloomgren, Intermountain’s insolvency arose after the audit was completed, therefore, the errors committed in the Bloomgren audit were not a cause in fact of Montana Merchandising’s damages.

Bloomgren maintains that Montana Merchandising failed to prove Intermountain’s insolvency because Gary Hill, the accountant who performed the audit subsequent to Bloomgren’s and who discovered Bloomgren’s auditing errors, only estimated the amount by which the Bloomgren audit had overstated the value of Intermountain’s inventory. Bloomgren contends that this estimate was only a guess, therefore it was not substantial evidence upon which the jury could reasonably have determined that Intermountain was insolvent at the time of the audit.

Relevant evidence is “evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” Rule 401, M.R.Evid. An expert’s opinion, even if based on an estimate, is relevant evidence if it has a tendency to make a fact in issue more probable. Vandalia Ranch, Inc. v. Farmer’s Union Oil & Supply Co. of Hinsdale, 221 Mont. 253, 258, 718 P.2d 647, 650 (1986). The imprecision of an expert opinion goes to the weight, not the sufficiency of the evidence. State v. Smith, 220 Mont. 364, 377, 715 P.2d 1301, 1308 (1986).

In the present case, Hill testified that Bloomgren had erroneously priced the Intermountain inventory and had failed to consider the amount of obsolete inventory on hand, resulting in an estimated $153,000 overstatement of the inventory’s value. Hill arrived at this figure through a statistical sampling of the inventory. He thoroughly explained, on both direct and cross-examination, the method used to conduct the sampling.

Montana Merchandising’s two other expert witnesses supported Hill’s testimony regarding the overvaluation of Intermountain’s inventory. Two warehousemen at Intermountain also supported the evidence by testifying that 30 to 40 percent of the inventory was obsolete.

Furthermore, the overstatement of inventory was only one error found on the Bloomgren audit. Testimony given by Hill, which was supported by expert witnesses for both sides, revealed that Bloomgren had committed other errors when auditing Intermountain. He neglected to identify almost $14,000 in unrecorded liabilities, he improperly credited Intermountain with $12,000 in prepaid commissions and he failed to offset a $40,000 loss to subsidiaries.

Montana Merchandising was not required to prove the exact amount of Bloomgren’s errors. It was only required to introduce substantial evidence tending to show that it was more probable than not that Intermountain was insolvent at the time of the audit. Indeed, part of the evidence relied upon by Montana Merchandising consisted of an estimated overstatement of inventory. However, it was within the province of the jury to determine the weight and credibility of this evidence. Viewed in the light most favorable to the prevailing party, substantial evidence supported a finding that Intermountain was insolvent at the time of the audit.

Bloomgren next contends that Montana Merchandising failed to prove that Bloomgren’s negligence proximately caused Montana Merchandising’s damages. Bloomgren argues that other factors may have contributed to the damages, such as the loss of two key employees after the audit was completed, unbridled competition from another business, the lack of a market and the leveraged condition of Intermountain.

Bloomgren relies on our opinion in Young v. Flathead County, 232 Mont. 274, 757 P.2d 772 (1988), for the proposition that Montana Merchandising was required to prove that the negligently performed audit was the sole cause of its damages. In Young, we stated:

“Where more than one possible cause of damage appears, the plaintiff must eliminate causes other than those for which the defendant is responsible.”

Young, 232 Mont, at 283, 757 P.2d at 111. This statement is a departure from Young's otherwise excellent analysis of tort causation. Contrary to the above statement, a plaintiff is not required to eliminate all possible causes of damage in order to prove causation. Indeed, if such were the case, a defendant would rarely be held liable in a negligence action, for, as one authority has noted, “The event without millions of causes is simply inconceivable; and the mere fact of causation, as distinguished from the nature and degree of the causal connection can provide no clue of any kind to singling out those which are held to be legally responsible.” Prosser and Keeton on Torts sec. 41 at 266 (5th ed. 1984).

Proximate cause is and should be discussed in terms of foreseeability. A defendant is hable for his wrongful conduct if it is reasonably foreseeable that plaintiffs injury may be the natural and probable consequence of that conduct. Kitchen Krafters, Inc. v. Eastside Bank of Montana, [242 Mont. 155,] 789 P.2d. 567, 575, 47 St.Rep. 602, 611 (1990).

In Young, 232 Mont, at 282, 757 P.2d at 777, we stated, “[P]roximate cause is one which in a natural and continuous sequence, unbroken by any new, independent cause, produces injury ...” This does not mean that any intervening event will cut off a defendant’s liability. Only if the intervening cause is reasonably unforeseeable will it be considered a supervening event that breaks the chain of causation. Kitchen Krafters, 789 P.2d at 575 576, 47 St.Rep. at 612-13. A defendant’s liability for his wrongful act will not be severed by an intervening cause if the intervening cause is one that the defendant might reasonably foresee as probable or one that the defendant might reasonably anticipate under the circumstances. Nehring v. LaCounte, 219 Mont. 462, 470, 712 P.2d 1329, 1334 (1986). Accord Heckaman v. Northern Pac. Ry. Co., 93 Mont. 363, 386, 20 P.2d 258, 265 (1933); Reino v. Montana Mineral Land Development Co., 38 Mont. 291, 295-96, 99 P. 853, 854-55 (1909).

The question of foreseeability is an issue of fact to be decided by the jury. Prosser and Keeton on Torts, sec. 45, at 321. Whether the factors cited by Bloomgren were so unforeseeable as to break the chain of causation was properly left for the jury to determine. Substantial credible evidence supports the jury verdict in favor of Montana Merchandising. Montana Merchandising invested in Intermountain believing the corporation was profitable when in fact it was insolvent. The subsequent events cited by Bloomgren as reasons for the corporation’s demise — the loss of employees, the competition from another business, the lack of a market and the leveraged condition of Intermountain — were of little consequence. They certainly cannot be considered unforeseeable, supervening events that broke the chain of causation.

V.

Did the District Court err in failing to reduce the jury verdict?

Following the Bloomgren audit, Thayer gave Hicks a note in the amount of $52,445 and Hicks transferred his stock in Intermountain to Thayer. Later, Thayer transferred the stock to Montana Merchandising and Montana Merchandising assumed the debt to Hicks.

When Hicks was named as a co-defendant in this lawsuit, he counterclaimed for the $52,445, the amount still due and owing on the note. Hicks, Thayer and Montana Merchandising reached a settlement prior to trial. As part of the settlement, the note was canceled.

Bloomgren contends that the judgment should be reduced by $52,445, the amount forgiven by the cancellation of the note. It argues that if the judgment is not reduced, Montana Merchandising will have recovered more than once on a single claim, resulting in an impermissible double recovery.

This Court will not disturb a jury verdict as long as the verdict, when viewed in the light most favorable to the prevailing party, is supported by substantial credible evidence. Weinberg v. Farmers State Bank of Worden, 231 Mont. 10, 14-15, 752 P.2d 719, 721-22 (1988). In the present case, Montana Merchandising itemized every item of damage it sought from Bloomgren and presented those damages to the jury. Nowhere on that itemized list is a reference to the canceled note. Nor can we find any point in the transcript where Montana Merchandising referred to the $52,445 canceled note as an element of damages.

Montana Merchandising’s itemized damages totaled approximately $494,000. They included funds directly loaned to Intermountain, monies paid on bank loans guaranteed on behalf of Intermountain, sums expended to liquidate Intermountain and expenses incurred by Intermountain and paid by Montana Merchandising. The jury returned a verdict of $339,308. The verdict is supported by substantial credible evidence and will not be reduced by this Court.

VI.

Did the District Court err in granting prejudgment interest to Montana Merchandising?

The District Court awarded Montana Merchandising prejudgment interest at the rate of 10 percent accruing from 30 days after March 6, 1986, the date Montana Merchandising presented a written statement of claim to Bloomgren. Bloomgren argues that this award was in error. We agree.

Two statutes govern prejudgment interest awards. Section 27-1-211, MCA, provides for an award of prejudgment interest if 1) a party’s damages are capable of being made certain by calculation; and 2) the right to recover damages vests on a particular day. Crystal Springs Trout Co. v. First State Bank of Froid, 225 Mont. 139, 140, 736 P.2d 95, 96 (1987). Montana Merchandising concedes that this section is not an appropriate statute for an award of prejudgment interest on the present case because its right to recover from Bloomgren did not vest on a particular day.

The other statute governing prejudgment interest is sec. 27-1 210, MCA, which allows an award of interest in certain tort actions. Because the legislature enacted sec. 27-1-210, MCA, in 1985, approximately eight years after Montana Merchandising’s claims against Bloomgren arose, an award of prejudgment interest under this statute in the present case would impermissibly give the statute retroactive effect.

A statute is retroactive if it “takes away or impairs vested rights acquired under existing laws or creates a new obligation, imposes a new duty or attaches a new disability in respect to transactions already past.” City of Harlem v. State Highway Commission, 149 Mont. 281, 284, 405 P.2d 718, 720 (1967). Section 27-1-210, MCA, creates a new obligation, the payment of prejudgment interest on certain tort claims when, prior to 1985, no such obligation existed. Therefore, an award of prejudgment interest for claims that arose prior to 1985 results in a retroactive application of the statute.

Unless expressly so declared by the legislature, a statute may not be applied retroactively. Section 1-2-109, MCA. We find no such declaration in either sec. 27-1-210, MCA, or in Chapter 523, sec. 1, 1985 Mont. Laws 1050. Consequently, the statute does not apply to any claim arising prior to the date of enactment, including the claim in the present case.

VII.

Did the District Court err in its award of costs to Montana Merchandising?

Following entry of judgment, Montana Merchandising submitted a bill of costs in the amount of $6,561. The bill was accompanied by an affidavit of Montana Merchandising’s attorney certifying that, to the best of his knowledge, the costs were correct and necessary disbursements allowable by law. Bloomgren objected and moved the court to tax costs. After a hearing, the District Court entered an order denying the motion to reduce costs.

Not all litigation expenses that may properly be billed to a client may necessarily be recovered from the opposing party. Only those costs delineated in sec. 25-10-201, MCA, may be charged to the opposing party unless the item of expense is taken out of sec. 25-10-201, MCA, by a more specialized statute, by stipulation of the parties or by rule of court. Luppold v. Lewis, 172 Mont. 280, 292, 563 P.2d 538, 545 (1977).

In the present case, neither party argues that the disputed costs are governed by either a special statute, stipulation of the parties or rule of court. Therefore, sec. 25-10-201, MCA, governs the issue. It reads as follows:

“A party to whom costs are awarded in an action is entitled to include in his bill of costs his necessary disbursements, as follows:
“(1) the legal fees paid of witnesses, including mileage, or referees and other officers;
“(2) the expenses of taking depositions;
“(3) the legal fees paid for publication when publication is directed;
“(4) the legal fees for filing and recording papers and certified copies thereof necessarily used in the action or on the trial;
“(5) the legal fees paid stenographers for per diem or for copies;
“(6) the reasonable expenses of printing papers for a hearing when required by a rule of court;
“(7) the reasonable expenses of making transcript for the supreme court;
“(8) the reasonable expenses for making a map or maps if required and necessary to be used on trial or hearing; and
“(9) such other reasonable and necessary expenses as are taxable according to the course and practice of the court or by express provision of law.”

Section 25-10-201, MCA.

“A verified memorandum of costs and disbursements is prima facie evidence that the items were necessarily expended and are properly taxable, unless, as a matter of law, they appear otherwise on the face.” Swenson v. Buffalo Bldg. Co., [_Mont._,] 635 P.2d 978, 985, 38 St.Rep. 1588, 1596 (Mont. 1981). Conversely, a verified memorandum is not prima facie evidence of costs that, on their face, do not fall within the itemized list of sec. 25-10-201, MCA. The prevailing party has the burden of proving that each disbursement that does not fall within the statutory list is within the purview of the statute.

Montana Merchandising initially concedes that, in accordance with Powers Mfg. Corp. v. Leon Jacobs Enters., 216 Mont. 407, 701 P.2d 1377 (1985) and Chilcott v. Rea, 52 Mont. 134, 155 P. 1114 (1916), airfares and hotel bills incurred by its expert witnesses are not allowable costs. Along this line we additionally note that a $54 charge for rental of a car for one of Montana Merchandising’s experts is also an inappropriate cost. Section 24-10-201(1), MCA, allows only mileage fees to be taxed as costs. See also sec. 26-2-501(l)(b), MCA. It does not allow car rental expenses.

Bloomgren contests the propriety of expenses incurred by Montana Merchandising in obtaining depositions of R. Hicks, E. Thayer, R. Butcher and R. Henry. While sec. 25-10-201(2), MCA, allows costs incurred in taking depositions, this subsection has been modified by case law. Only the costs of depositions used at trial are recoverable. Cash v. Otis Elevator Co., 210 Mont. 319, 333, 684 P.2d 1041, 1048. We must remand this question to the District Court for it to determine whether the depositions of Hicks, Thayer, Butcher and Henry were used at trial. Only the expenses incurred by Montana Merchandising in recording, transcribing and editing any deposition used at trial shall be charged to Bloomgren. The incidental expenses incurred in obtaining a deposition, including airfare, rental car costs and hotel charges, shall not be charged to Bloomgren.

At trial, Montana Merchandising presented the testimony of one of its witnesses, Tom Jenkins, by means of a video-taped deposition. While the jury viewed the tape, the court and the parties followed along with written transcripts of the video-taped deposition. On several occasions, the written transcripts were used by both parties, Bloomgren as well as Montana Merchandising, to object to upcoming portions of the video tape that were inadmissible under the Rules of Evidence. To determine how to rule, the court reviewed the portion of the written transcript to which the objection referred. If the court sustained the objection, it used the transcript to determine how much of the video-taped testimony should be kept from the jury.

In its bill of costs, Montana Merchandising sought to charge the expense of both videotaping and transcribing Jenkins’ deposition. Bloomgren claims that both charges are improper. We do not agree.

As we noted earlier, the costs of a deposition used at trial are properly taxable. Cash, 210 Mont, at 333, 684 P.2d at 1048. Furthermore, Rule 30(h)(5), M.R.Civ.P., provides, “The reasonable expense of recording, editing, and using an audio-visual or tape recorded deposition may be taxed as costs as provided by law.” This rule, however, remains subject to the limitation that the audio visual or tape recording must be used at trial before the expenses incurred in obtaining such a deposition may be charged to the opposing party. In this case, both the video tape and the written transcript of Jenkins’ deposition were used at trial, therefore, the expenses of both may be charged to Bloomgren.

Bloomgren also disputes costs claimed by Montana Merchandising for charges incurred for an expert’s review of work papers and a consultation with another law firm regarding jury instructions. We agree that such charges are not taxable costs within the meaning of the statute but are more in the nature of expert and attorney fees, the costs of which must be born by the party who incurred them.

Finally, Bloomgren challenges several miscellaneous costs charged by Montana Merchandising, including expenses for telephone calls, photocopies, supplies for exhibits and enlargements of exhibits. We have previously given the District Court broad discretion under sec. 25-10-201(9), MCA, to determine whether similar costs are “reasonable and necessary expenses as are taxable according to the course and practice of the court ...” See Cash, 210 Mont, at 333, 1041 P.2d at 1048 (allowing the taxing of costs for photographs used at trial); Swenson, 635 P.2d at 985, 38 St.Rep. at 1596, (allowing the taxing of costs for telephone calls, photographs, exhibits, supplies, photocopies and other miscellaneous charges). However, we believe that the discretion of the District Court should be limited to allowing only those costs incurred in constructing exhibits admitted at trial. On remand, the District Court shall determine whether the remaining expenses claimed by Montana Merchandising were incurred in such manner. Any expenses for photocopies, supplies and enlargements that were expended on exhibits admitted at trial may be charged to Bloomgren. Telephone charges, however, may not be taxed as costs under any circumstances.

To summarize the foregoing discussion, the following expenses are not taxable costs: telephone calls; airfares, hotel bills and rental car expenses incurred by Montana Merchandising’s expert witnesses; airfares, hotel bills, rental car expenses and other incidental costs incurred in obtaining depositions; charges for an expert’s review of workpapers; and expenses of consultation with another law firm. Both the video tape and the written transcript of Jenkins’ deposition are taxable. On remand, the District Court shall determine whether the depositions of Hicks, Thayer, Butcher and Henry were used at trial. If so, the expenses incurred in recording, transcribing and editing these deposition’s are taxable costs. The District Court on remand shall also determine whether photocopies, supplies and enlargements were used in exhibits admitted at trial. If so, these costs are taxable and may be charged to Bloomgren.

The judgment entered by the District Court on February 19, 1988 awarding Montana Merchandising $339,307.61 is affirmed.

The District Court’s award of prejudgment interest is reversed. Montana Merchandising is entitled to interest at the rate of 10 percent per annum on the judgment of $339,307.61 from date of entry of judgment on February 19, 1988.

The issue of costs is remanded for further proceedings in accordance with this Opinion. Interest on costs will commence on the date of entry of the District Court order on costs after the hearing on remand.

CHIEF JUSTICE TURNAGE and JUSTICES HARRISON, SHEEHY, BARZ, McDONOUGH and WEBER concur.

        FOOTNOTES

      1. This Court has recognized the tort of negligent misrepresentation as defined in the Restatement sec. 552. Kitchen Krafters, Inc. v. Eastside Bank of Montana, [242 Mont. 155,] 789 P.2d 567, 573, 47 St. Rep. 602, 609 (Mont. 1990); Bottrell v. American Bank, [237 Mont. 1,] 773 P.2d 694, 705-06, 46 St.Rep. 561, 574-75 (Mont. 1989); Brown v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 197 Mont. 1, 12, 640 P.2d 453, 458-59 (1982). In State Bank of Townsend v. Maryann’s, Inc., 204 Mont. 21, 32-33, 664 P.2d 295, 301-02 (1983), we approved oí Restatement sec. 552 comment a, which briefly speaks of the duty of a supplier of information to users of that information. Our approval of that comment was purely dicta and has no binding effect on the case at hand.


source: Caselaw Access Project

author: JUSTICE BARZ JUSTICE SHEEHY, JUSTICE HUNT,

license: Public Domain

text:
    STATE OF MONTANA, Plaintiff and Respondent, v. DAVID E. RAMSTEAD, Defendant and Appellant.
    No. 89-412.
    Submitted on Briefs March 22, 1990.
    Decided May 25, 1990.
    793 P.2d 802.

      Antonia P. Marra, Great Falls, for defendant-appellant.
    Marc Racicot, Atty. Gen., Elizabeth S. Baker, Asst. Atty. Gen., Helena, Patrick L. Paul, County Atty., and Steven M. Hudspeth, Deputy County Atty., Great Falls, for plaintiff-respondent.
   JUSTICE BARZ

delivered the Opinion of the Court.

David Everrett Ramstead, defendant, was charged on November 2, 1988, with one count of felony theft and one count of misdemeanor theft pursuant to sec. 45-6-301(l)(a), MCA. The case proceeded to trial on March 20, 1989. On March 21, 1989, the jury returned a guilty verdict for each offense charged. Defendant was sentenced to a term of three and one-half years’ imprisonment, with six months suspended on the condition that he pay restitution in the amount of $32.43 and that he undergo alcohol and drug counseling. Defendant appeals from his conviction and judgment. We affirm.

The following issues were raised on appeal.

1. Whether the District Court erred in denying defendant’s motion to dismiss, in which the defendant asserted that the information charging him with two counts of theft was not supported by probable cause.

2. Whether the District Court properly admitted evidence of defendant’s prior criminal conduct.

3. Whether defendant’s two theft convictions are supported by sufficient evidence.

4. Whether defendant’s felony conviction should be reversed on the ground that the State failed to prove that the sundial’s value exceeded $300.

On October 11, 1988, upon returning home from a trip to Wyoming, Charles Hill noticed that his sundial was missing from the front yard of his home in Great Falls, Montana. Hill’s daughter, who had been checking on the house while her parents were gone, testified that the sundial was in place in the yard on the evening of October 10, 1988. Hill reported the theft on October 12, 1988.

The sundial was subsequently recovered by a Great Falls city police officer at Carl Weissman and Sons’ recycling business in Great Falls. It was then discovered that defendant had sold the sundial to Weissman’s at approximately 2:00 p.m. on October 11, 1988. The sundial was constructed of aluminum and had been cast at the former Anaconda foundry in Great Falls in 1972. The sundial, originally designed by Hill, was calibrated and built for the longitude and latitude of Great Falls and kept accurate time. Hill, who had evaluated aluminum items during his employment with the Anaconda Company, estimated the value of the sundial to be $2,000 at the time it was built. He further testified that the sundial presently was worth over $1,000. Jim Rowe, an expert witness on behalf of the State, further testified that he would charge approximately $1,500 to reproduce the sundial today.

On the same day that defendant brought in the sundial to Weissman’s to sell — October 11, 1988 — defendant also brought in a piece of stainless steel and sold it at the same time as the sundial. After defendant had left, Weissman’s scrap yard manager discovered that the stainless steel item had belonged to Weissman’s and had previously been sitting within the fenced yard. Defendant had neither purchased nor been given permission' to take the scrap which he later sold back to Weissman’s for approximately $8.00.

Defendant was subsequently convicted by a jury of Count One, a felony charge arising out of theft of the sundial from Charles Hill, and of Count Two, a misdemeanor charge arising out of theft of the stainless steel item from Weissman and Sons. Defendant appeals, raising four issues on appeal.

The first issue raised on appeal is whether the District Court erred in denying defendant’s motion to dismiss, in which the defendant asserted that the information charging him with two counts of theft was not supported by probable cause.

Defendant filed a motion to dismiss on March 6, 1989, premised on the ground that the affidavit in support of the information failed to show probable cause that the defendant had committed the charged offenses of theft. Defense counsel asserted that the affidavit was deficient on both counts because it alleged only that defendant possessed the items, and that it did not demonstrate that defendant had taken either item from the owners.

Leave to file an information will be granted if it appears from the application that probable cause exists to indicate that an offense has been committed by the defendant. Section 46-11 201(1), MCA. In the affidavit, the State need only recite facts sufficient to indicate a probability that the named defendant committed an offense. Contrary to what defendant infers in his argument, the State does not need to demonstrate a prima facie case at this juncture. State v. Buckingham (Mont. 1989), [240 Mont. 252,] 783 P.2d 1331, 1334, 46 St.Rep. 2102, 2105; State v. Bradford (1984), 210 Mont. 130, 139, 683 P.2d 924, 928-29.

In reviewing an affidavit for a determination of probable cause, a district court may use common sense and draw permissible inferences. State v. Riley (1982), 199 Mont. 413, 423, 649 P.2d 1273, 1278. On appeal, this Court’s role is merely to determine whether a district court abused its discretion. Buckingham, 783 P.2d at 1334, 46 St.Rep. at 2105; Bradford, 210 Mont, at 139, 683 P.2d at 929.

The affidavit presented to the District Court in this case contained sufficient factual allegations to support a finding of probable cause as to each charge. With respect to Count One, the affidavit demonstrated that (1) a theft had occurred from the property of Charles Hill; (2) the property taken had a value exceeding $300; and (3) defendant had possession of the stolen property and sold it on the same day that the theft was discovered. With respect to Count Two, the affidavit described that (1) defendant possessed a stainless steel item and obtained money for its sale; (2) the item did not belong to defendant when he sold it; and (3) the item was owned by Carl Weissman and Sons and had been in Weissman’s own scrap yard prior to its possession by defendant. In light of the above, the District Court did not err in denying defendant’s motion to dismiss.

The second issue raised on appeal is whether the District Court properly admitted evidence of defendant’s prior criminal conduct.

On December 23, 1988, the State filed notice that they intended to introduce evidence during trial of a prior crime, a misdemeanor theft, in which defendant had pled guilty. Defendant filed a motion in limine on March 10, 1989 requesting that the prior misdemeanor theft not be allowed into evidence. After a hearing, the District Court denied defendant’s motion and allowed the State to introduce evidence of defendant’s prior crime of misdemeanor theft.

The evidence that the State introduced regarding the prior misdemeanor theft was that on February 13, 1988, defendant and Tony Lopez sold four aluminum gas tanks to Pacific Hide and Fur, a Great Falls recycling business. The tanks were identified later the same day as having been stolen from Vic Brewer’s yard. A subsequent investigation revealed that the tanks had been within the fenced yard area of Brewer’s property, and tennis shoe tracks were left in the mud showing that someone had climbed the fence to get to the tanks’ location. As a result of the investigation, Tony Lopez and defendant were arrested, and both admitted that they had gone over the fence to get to the tanks. Defendant was charged with felony theft and, pursuant to an agreement with the Cascade County Attorney’s office, entered a plea of guilty to a charge of misdemeanor theft. Defendant argues that the admission of the evidence outlined above was improper in light of State v. Just (1979), 184 Mont. 262, 602 P.2d 957.

Evidence that a defendant has committed other crimes is not admissible to prove character in order to show that a defendant acted in conformity therewith. Such evidence is admissible only if it is introduced “as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident.” Rule 404(b), M.R.Evid.

The four substantive factors that the State must demonstrate in order to introduce evidence of other crimes are that the other crimes are (1) similar in nature; (2) not remote in time; (3) tend to establish a common scheme, plan or system; and (4) that the probative value of the other crimes is not substantially outweighed by their prejudice to defendant. State v. Randall (Mont. 1989), [237 Mont. 271,] 772 P.2d 868, 869-70, 46 St.Rep. 794, 796; Just, 184 Mont. at 269, 602 P.2d at 961. After applying the four factors to the facts of this case, we hold that the District Court did not err in allowing the admission of the February 13, 1988 crime.

In satisfying the similarity of crimes factor, the prior crime does not need to be identical to the crime charged, so long as “sufficient similarity” exists in a defendant’s actions (on both occasions. Randall, 772 P.2d at 870, 46 St.Rep. at 797. In this case, defendant’s prior crime was strikingly similar to the crimes with which he was charged in the present case. Each involved the theft of recyclable metal products from private property; each resulted in the sale of stolen items by defendant to a Great Falls recycling business for scrap value; each was committed while defendant was in the company of Tony Lopez; and on each occasion defendant claimed that he had “found” the stolen property, although he entered a guilty plea as a result of the first incident. The prior crime introduced by the State in this case involved a very specific instance of theft which was nearly identical to the theft charged. In light of the facts in this case, the first factor, that the crimes must be similar in nature, is satisfied.

The second factor that a court must consider is whether the prior crime is remote in time. As a general rule, remoteness of the prior crime affects the credibility of the evidence and not its admissibility. State v. Eiler (Mont. 1988), [234 Mont. 38,] 762 P.2d 210, 217, 45 St.Rep. 1710, 1718; State v. Doll (1985), 214 Mont. 390, 396, 692 P.2d 473, 476. In the present case, approximately eight months elapsed from the time defendant committed the misdemeanor theft in February and the two thefts that occurred in October of the same year. In light of other cases before this Court, eight months between the crimes is not too remote in time. See State v. Hall (Mont. 1988), [234 Mont. 57,] 761 P.2d 1283, 1285, 45 St.Rep. 1726, 1729 (six months); State v. Stroud (1984), 210 Mont. 58, 71, 683 P.2d 459, 466 (three and one-half years); Eiler, 762 P.2d at 216-17, 45 St.Rep. at 1718 (five years).

The third factor that the State must demonstrate is that the prior crime has a “tendency” to establish a common scheme, plan or system. Eiler, 762 P.2d at 217, 45 St.Rep. at 1719. The prior crime introduced in the present case presented a strong showing of a common scheme, plan or system by defendant. In particular, both incidents were thefts; the items taken on both occasions were aluminum materials that were subsequently brought to a recycling business for their scrap value; and the participants in both incidents were identical. Defendant’s prior theft of aluminum materials tended to show a common scheme by defendant to procure items of recyclable value on his salvaging trips even if it required him to enter private property. The State successfully demonstrated the third factor.

The final factor the State must demonstrate before a court allows introduction of prior crimes into evidence is that the probative value of the evidence is not substantially outweighed by the prejudice flowing to the defendant. This Court has held that satisfaction of the first three Just factors, as outlined above, establishes the probative value of the prior crime evidence. State v. Keefe (Mont. 1988), [232 Mont. 258,] 759 P.2d 128, 135, 45 St.Rep. 1034, 1042. This Court in Just then also established three procedural requirements which, if satisfied, indicates that the prejudicial effect the evidence may present for the defendant is less likely to occur. Eiler, 762 P.2d at 218, 45 St.Rep. at 1720. Those requirements are:

“1. notice to the defendant prior to trial that evidence of other crimes, wrongs or acts will be introduced;
“2. an admonition by the judge to the jury when the evidence is introduced that it is admitted solely for one or more of the accepted purposes stated in Rule 404(b); and
“3. a cautionary jury instruction to the same effect, providing in unequivocal terms that the evidence is admitted for the purpose earlier stated and not to try and convict the defendant for prior wrongful conduct. ’ ’

Randall, 772 P.2d at 871, 46 St.Rep. at 789 (quoting Doll, 214 Mont. at 395, 692 P.2d at 475-76).

In accordance with these requirements, the State filed notice on December 23, 1988, nearly three months prior to trial, that it intended to offer evidence of the February 1988 theft and defendant’s subsequent plea of guilty. The District Court gave a cautionary instruction to the jury at least three times during trial — immediately prior to the introduction of any evidence regarding the February 13, 1988 theft, and at two other times during the course of the trial. At the end of the trial and in conjunction with the other jury instructions, the court gave the same cautionary instruction one last time. The jury was instructed as follows:

“The State has offered evidence that the defendant at another time engaged in other crimes. That evidence was not admitted to prove the character of the defendant in order to show he acted in conformity therewith. The only purpose of admitting that evidence was to show knowledge, identity, or absence of mistake or accident. You may not use that evidence for any other purpose.
‘ ‘The defendant is not being tried for that other crime. He may not be convicted for any other offense than that charged in this case. For the jury to convict the defendant of any other offense than that charged in this case may result in unjust double punishment of the defendant. ’ ’

This instruction unequivocally apprised the jury that the evidence was to be considered only for the purposes permitted by Rule 404(b).

In addition, the February 13, 1988 crime tended to show, contrary to defendant’s assertions, that he “actively and knowingly participated” in the crime with which he was charged. Defendant testified that he found the sundial and that he would not have gone onto private property to retrieve it. Thus, the critical element in dispute was defendant’s state of mind at the time he took the property. Evidence that he had entered private property on another occasion for the purpose of taking recyclable materials contradicted defendant’s testimony and tended to show that he acted purposely and knowingly when he took the sundial and that it was not by accident or as the result of a mistaken belief that the sundial was abandoned.

Given the rigid adherence to the Just procedures and the satisfaction of the first three Just factors in this case, we hold that the probative value of the February 13, 1988 crime was not substantially outweighed by its prejudicial effect. The admission of the evidence was a proper exercise of the District Court’s discretion.

The third issue raised on appeal is whether defendant’s two theft convictions are supported by sufficient evidence.

Defendant argues that his conviction on both counts should be reversed because insufficient evidence existed to support a guilty verdict. Defendant argues that the circumstantial evidence was inconsistent with the mental state required to commit the charged offenses.

The direct evidence at trial showed that defendant obtained the sundial from Hill’s property and that he sold it a short time later to Weissman’s. The sundial had been positioned in its customary location the evening before defendant obtained it. The evidence further showed that defendant obtained a stainless steel item which had earlier been in the scrap yard at Weissman’s, and sold that item back to Weissman’s at the time he sold the sundial. Both of the items were shown to have been taken from the owners without permission. In addition to this direct evidence, the circumstantial evidence, including defendant’s prior acts, tended to show that defendant acted with the requisite mental state when he took the items. In particular, defendant testified that he had “found” the sundial and the stainless steel item, as well as the gas tanks that belonged to Vic Brewer. The evidence, however, demonstrated that the gas tanks were stolen. Defendant himself had previously admitted climbing Brewer’s fence to get to the tanks. This evidence cast doubt on the credibility of defendant’s story as to the location of the sundial and the stainless steel item. When combining both the direct and circumstantial evidence, the evidence was sufficient far a trier of fact to find all elements of the charged offenses beyond a reasonable doubt.

This Court has recognized that “possession of stolen property, accompanied by other incriminating circumstances, and false or unreasonable explanation by the suspect is sufficient to sustain a conviction ...” State v. Cox (1987), 226 Mont. 111, 114, 733 P.2d 1307, 1309. Applying these standards to the present case, and in view of the evidence discussed above, we hold that sufficient evidence exists to support the conclusion that defendant had the purpose and knowledge to commit the two thefts with which he was charged.

The last issue raised on appeal is whether defendant’s felony conviction should be reversed on the ground that the State failed to prove that the sundial’s value exceeded $300.

When conflicting evidence of value is presented, it is “solely within the province of the jury to weigh these figures and consider the weight to be given to the testimony of each of the experts.” State v. Dess (1984), 207 Mont. 468, 473, 674 P.2d 501, 505. Accord State v. Milhoan (1986), 224 Mont. 505, 510, 730 P.2d 1170, 1173. Ample evidence was before the jury from which it could find that the value of the sundial exceeded $300. Hill, who had designed the plans for the sundial and had experience in valuing aluminum products, estimated the value of the sundial at $2,000 when made, and testified that the sundial presently was worth at least $1,000. His testimony was corroborated by Jim Rowe, an expert witness, who testified that the sundial was unique and that he would charge approximately $1,500 to produce it today, although it could be worth even more if sold on a retail basis. The bases for Rowe’s conclusion were fully explained to the jury, including the process for creating a similar sundial and the hours required for production. This testimony was contradicted only by defense witness Bill Rogne, who testified that the sundial was worth only $250. Rogne’s opinion was called into question during cross-examination, and it appeared that he refused to place a value on the sundial based upon what it would cost to replace it. In view of the evidence presented, it was within the juiy’s province to find that the value of the sundial exceeded $300.

This Court will not consider disputed questions of fact on appeal, nor will it weigh the credibility of the witnesses or their testimony. State v. Crumley (1986), 223 Mont. 224, 226, 725 P.2d 214, 216. Further, even if the evidence presented by defendant was consistent with innocent conduct, this Court has held that such factual discrepancies are matters properly resolved by the jury. State v. Cain (1986), 221 Mont. 318, 321, 718 P.2d 654, 657.

Affirmed.

CHIEF JUSTICE TURNAGE and JUSTICES HARRISON, WEBER and McDONOUGH concur.

JUSTICE SHEEHY,

dissenting:

I dissent on two grounds, 1) that the evidence of other crimes in this case was improper, and 2) the value of the alleged stolen items does not exceed the misdemeanor value of $300.

Defendant Ramstead apparently makes his living in Great Falls by going up and down alleys and other places of refuse to salvage articles which he later sells for junk or for recycling. He testified in his defense that he had found a birdbath a couple of feet from a garbage can in an alley and had picked it up, along with a piece of steel which he was also charged with taking. There is no direct evidence in the record that he went upon the property of Hill, the owner of the birdbath in order to take it into Ramstead’s unauthorized control.

Ramstead was charged with felony theft under sec. 45-6-301, MCA. By another statute, sec. 45-6-304, MCA, possession of stolen property is not in itself proof of the commission of the offense of theft. Such possession it places a burden on the possessor to remove the effect of that possession as a circumstance to be considered with all other evidence pointing to his guilt. Section 45-6-304, MCA.

The evidence the State presented in this case came from witnesses who testified that the last time they saw the birdbath it was in Hill’s yard. No direct evidence places Ramstead in the yard to take the birdbath, nor does any witness contravene Ramstead’s own testimony that he found the birdbath in the alley by the garbage can.

In that state of the record, the admission of evidence of another misdemeanor theft some eight months earlier was extremely prejudicial to Ramstead and its use outweighed any probative value of the other crimes evidence. It cannot be denied that the State used the other crimes evidence to have the jury infer that in this case Ramstead did in fact go into Hill’s yard to appropriate the birdbath. While other crimes evidence may be admitted under Rule 404(b), Montana Rules of Evidence, for the purpose of showing a common scheme, plan or system, it is strictly inadmissible for the purpose of showing consummation of the particular offense which has been charged and is the subject of the trial. State v. Randall (1989), 237 Mont. 271, 772 P.2d 868, 869; State v. Just (1979), 184 Mont. 262, 268, 602 P.2d 957, 960; and State v. Taylor (1973), 163 Mont. 106, 120, 515 P.2d 695, 704.

Counsel for the defendant, before the trial, moved in limine to reject the other crimes evidence, but the court denied the motion. During the argument on that motion, the State argued that it would show in the other crime, through a purported accomplice of the defendant and others, that Ramstead did go on to the other person’s property in order to take metal objects and sell them. However in the testimony during the trial, the purported accomplice testified that they did not go over the fence or onto another person’s property to retrieve objects. In effect no witnesses testified, either in the other crimes evidence or in the case at bar, that Ramstead had gone onto private property to steal something.

In this situation, the District Court should have excluded the other crimes evidence, because its prejudicial effect outweighed any probative effect.

“Evidence of other crimes, wrongs, or acts ‘may, however, be admissible where [it] is probative of any other fact that is of consequence to the determination of the [case], such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, modus operandi, or absence of mistake or accident.’ Haw. R.Evid. 404(b). But its acknowledged tendency to distract the trier of fact compels the trial court to weigh the evidence and to exclude it ‘if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence.’ ”

State v. Pinero (Haw. 1989), 778 P.2d 704, 710.

The other crimes evidence was the central focus of this case when it was tried in the District Court. The State spent more than half of its time in presenting the other crimes evidence. The proforma admission by the District Court of other crimes evidence without any real consideration of whether the requirements of Rule 404 were met has resulted in the exception of Rule 404 swallowing up what the Rule originally intended, that other crimes evidence is inadmissible.

My other objection to the conviction is that the value of the alleged stolen property is not sufficiently established in this case. The birdbath, along with a number of other items, were sold to a junk dealer for $44. Section 45-2-101(69)(a), MCA, provides that “value” means the market value of the property at the time and place of the crime, or if such cannot be satisfactorily ascertained, the cost of replacement of the property within a reasonable time after the crime. It seems utterly ridiculous that the replacement value of this aluminum birdbath was $1,500 or $2,200 as the case may be. From the record I find nothing more than a minor misdemeanor crime, if a theft was actually proved. For that misdemeanor, defendant has been sentenced to serve 3 1/2 years in the Montana State Penitentiary. It is a small wonder we have overcrowded jail conditions there.

I concur with JUSTICE HUNT’S dissent.

JUSTICE HUNT,

dissenting:

I specially concur in the foregoing dissent of Justice Sheehy and wish to add that, although the establishment of the three Just factors may indicate that the introduction of other crimes evidence may have some probative value, the use of that other crimes evidence must still be ultimately balanced against its prejudicial effect. The majority states that compliance with certain procedural activities alleviates any prejudicial effect that may result from the introduction of this other crimes evidence. It is with this analysis that I disagree.

Just evidence, or other crimes evidence, may be used to prove that the defendant had the intent to commit the crime charged. Rule 404(b), M.R.Evid. In other words, the Just evidence is used primarily to support the requisite “state of mind” element of the charged crime. In Just, the Court adopted a four-step analysis in determining whether evidence of other crimes was admissible. State v. Just, 184 Mont. 262, 602 P.2d 957 (1979). In addition to these four steps, the Court also adopted certain procedural safeguards to protect the defendant against the almost certain prejudice that would occur to the defendant at any time Just evidence is admitted. However, as the majority would believe, these safe guards did not replace the requirement of balancing the probative value of such evidence versus its prejudicial effect.

To determine the prejudicial effect that the introduction of Just evidence may have on a defendant’s case the Court must examine each individual set of facts. If, in reviewing each set of facts, the Court determines that “the jury might overestimate the probative value of the evidence and assume that merely because the defendant committed crimes before, he is likely to be guilty of the crime charged” the introduction of the Just evidence is overly prejudicial and must be excluded. State v. Hanson, 187 Mont. 91, 99, 608 P.2d 1083, 1088 (1980).

The facts of this case, as discussed in Justice Sheehy’s dissent, indicate that the only evidence used to prove the defendant’s “state of mind” in committing the charged offense was the Just evidence. Without additional evidence to support this necessary element, the prejudicial effect upon the defendant was significant and must be scrutinized beyond the procedural safeguards described by the majority. Although the jury was properly instructed regarding the significance of the Just evidence in their deliberations, it is obvious, in light of the lack of evidence existing in the record to support the defendant’s commission of the charged theft, that the jury chose to convict the defendant based upon the previous “bad act.” Such an occurrence totally contradicts the purpose of Just evidence. The conviction should be reversed because the jury overestimated the probative value of the evidence and concluded that, based upon the Just evidence, the defendant was likely to be guilty of the crime charged.


author: JUSTICE BARZ

text:
    In re the MARRIAGE OF LINDA L. COOPER, Petitioner and Respondent, and ROBERT T. COOPER, Respondent and Appellant.
    No. 90-030.
    Submitted on Briefs April 26, 1990.
    Decided May 25, 1990.
    793 P.2d 810.

      Brett C. Asselstine, Great Falls, for respondent and appellant.
    Kenneth R. Olson, Great Falls, for petitioner and respondent.
   JUSTICE BARZ

delivered the Opinion of the Court.

Robert Cooper appeals from the decree of the District Court of the Eighth Judicial District, Cascade County, dissolving his marriage to Linda Cooper and distributing marital assets. We affirm.

When the parties met in 1979, Robert was a Master Sergeant in the United States Army with a wife and three children living in Georgia. Robert had been in the service for approximately eighteen years at that time. Linda had two sons from a previous marriage. Robert and Linda resided together sporadically beginning in October of 1979. Upon his retirement from the military in November 1981, Robert returned to Georgia to attempt a reconciliation with his wife. This effort failed and Robert was divorced in June, 1983. Robert was ordered to pay his ex-wife child support of $200 per month per child until his oldest child attained majority and $200 per month alimony thereafter until her death or remarriage. Robert’s ex-wife relinquished all claims to his military pension and Veterans Administration disability benefits in exchange for the balance of the marital assets.

The District Court found that:

“[bjetween October of 1979 until... [Robert] retired in November of 1981 the parties lived together in... [Linda’s] residence. She was the homemaker and her income provided the husband with many of his necessities, including a down payment to purchase a car, house payments to [Robert’s] first wife in Georgia, direct payments of cash to him, car payments and payments on his VISA credit Card Account.. .During this time.. .[Robert] was completing his last two years for his eligibility for his military retirement pension. During this period... [Linda] made all the lease payments on the residence and paid all of the household expenses. [Robert’s] contribution consisted of the purchase of some groceries.”

The parties were married on December 30, 1983. No children were born of the marriage. The District Court determined the marital estate consisted of real and personal property with a value of $102,825.49. The District Court found Robert had dissipated a significant portion of the marital estate through gambling. At the time of trial, Linda’s monthly net take-home pay was approximately $1,232.72 and she received $300 per month child support. Linda’s monthly expenses were $1,519.44. Robert received his military pension of $800 per month and disability benefits of $133 per month in addition to his salary from K-Mart averaging approximately $20,000 per year. While the District Court made no specific finding regarding Robert’s monthly income, it appears to have been roughly $1,900 per month. Robert’s monthly expenses were $1,616.83. Robert will be entitled to pension benefits from K-Mart should he retire from his employment there.

The District Court awarded Linda assets with a value totaling $44,321.49 and debt totaling $42,002 for a net distribution of $2,319.49. Robert received assets with a value of $68,504 and indebtedness of $31,584 for a net distribution of $36,920. Linda received the family home and liability for the accompanying mortgage while Robert was required to retire the home improvement loan. Robert was also required to pay Linda $10,000 as part of the marital estate in lieu of maintenance or alimony. The value of Robert’s military pension and disability benefits were included as marital assets although neither was distributed to Linda.

Robert raises the following issues on appeal:

1. Was the District Court’s requirement that Robert pay the home improvement loan because he dissipated a portion of the marital estate an abuse of discretion?

2. Did the District Court err by failing to add Robert’s payment of the home improvement loan to Linda’s share of the marital assets?

3. Did the District Court properly include Robert’s military pension and disability benefits as assets of the marital estate?

4. Did the District Court abuse its discretion in ordering Robert to pay Linda $10,000 as part of the marital estate in lieu of maintenance or alimony?

We have reiterated the standard of review in dissolution cases many times: The district court has great latitude in distributing marital property and findings of fact and conclusions of law supported by substantial credible evidence will not be overturned on appeal unless they constitute an abuse of discretion. In re Marriage of Cannon (Mont. 1990), [242 Mont. 230,] 790 P.2d 479, 47 St.Rep. 752, 755.

Section 40-4-202(1), MCA, provides:

‘ ‘In a proceeding for dissolution of a marriage, legal separation, or division of property following a decree of dissolution of marriage or legal separation by a court which lacked personal jurisdiction over the absent spouse or lacked jurisdiction to divide the property, the court, without regard to marital misconduct, shall, and in a proceeding for legal separation may, finally equitably apportion between the parties the property and assets belonging to either or both, however and whenever acquired and whether the title thereto is in the name of the husband or wife or both. In making apportionment, the court shall consider the duration of the marriage and prior marriage of either party; the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, and needs of each of the parties; custodial provisions; whether the apportionment is in lieu of or in addition to maintenance; and the opportunity of each for future acquisition of capital assets and income. The court shall also consider the contribution or dissipation of value of the respective estates and the contribution of a spouse as a homemaker or to the family unit. In dividing property acquired prior to the marriage; property acquired by gift, bequest, devise, or descent; the increased value of property acquired prior to marriage; and property acquired by a spouse after a decree of legal separation, the court shall consider those contributions of the other spouse to the marriage, including:
“(a) the nonmonetary contribution of a homemaker;
“(b) the extent to which such contributions have facilitated the maintenance of this property; and
“(c) whether or not the property division serves as an alternative to maintenance arrangements.”

Following our review of the record we conclude the District Court had substantial credible evidence upon which to base its findings of fact. The first two issues concern the District Court’s distribution of the home improvement loan. While we find the District Court did not erroneously conclude Robert dissipated a portion of the marital estate, that finding was not crucial in justifying the court’s allocation of the home improvement debt to Robert. Linda’s net distribution was little over $2,000, Robert’s was in excess of $36,000. The District Court properly ordered Robert to assume this debt. Even if Robert’s assumption of this debt were included in Linda’s assets, her net distribution would still be far less than Robert’s. The District Court did not err in failing to add this assumption of debt into Linda’s net distribution.

Robert’s third citation of error concerns the inclusion of his military pension and disability benefits in the marital estate. It is well settled that military retirement benefits are a marital asset. In re the Marriage of Luisi (1988), 232 Mont. 243, 246, 756 P.2d 456, 458-59. As concerns the disability benefits, the District Court may properly include in the marital estate any property “however and whenever acquired.” Section 40-4-202(1), MCA. The District Court awarded no portion of either asset to Linda. Both the military pension and disability benefits were properly included in the marital estate.

Finally, Robert asserts the lower court erred in requiring that he pay Linda $10,000 as part of the marital estate in lieu of maintenance or alimony. Section 40-4-202(1), MCA, clearly anticipates an award of property in lieu of maintenance. We note once again the disparity between the parties’ respective net distributions. The District Court properly ordered the $10,000 payment.

Affirmed.

JUSTICES HARRISON, SHEEHY, HUNT and McDONOUGH concur.


text:
    In re the MARRIAGE OF GAYLE ANN STEWART, Petitioner and Respondent, and MICHAEL F. STEWART, Respondent and Appellant.
    No. 89-550.
    Submitted on Briefs April 19, 1990.
    Decided May 30, 1990.
    793 P.2d 813.

      J.C. Weingartner, Helena, for respondent and appellant.
    Bard Middleton, Billings, for petitioner and respondent.
   JUSTICE HUNT

delivered the Opinion of the Court.

The husband, Michael F. Stewart, appeals the judgment of the District Court of the First Judicial District, Lewis and Clark County, in which the District Court chose to disregard the husband’s previous business losses and depreciation losses in its modification of the husband’s child support obligations. We affirm.

The issues on appeal are:

1) Whether the District Court erred in failing to consider the husband’s 1985 and 1986 business losses in its calculation of the husband’s 1987 disposable income.

2) Whether the District Court erred in failing to consider the husband’s 1987 and 1988 depreciation losses in its calculation of the husband’s disposable income.

The husband is a self-employed log home builder who operates a sole proprietorship called Mike’s Mountain Homes in Lincoln, Montana. The wife, Gayle Ann Stewart, is an attorney. The parties were married in 1972. Two children were born of the marriage: Mandy and Melissa. At the time of the District Court’s findings, Mandy was 11 years old and Melissa was 9 years old. The wife filed for legal separation on February 18, 1981 and the parties signed a separation, custody, support and property settlement agreement on June 12, 1981. The agreement set the husband’s child support obligations at $50.00 per child per month for a total of $100.00 per month. This agreement was incorporated into a decree of legal separation on July 22, 1981, which was converted into a decree of dissolution on May 20, 1982.

On March 16, 1989, the wife filed a motion for modification of child support. The wife’s motion alleged that the husband’s disposable income had increased substantially since the decree of dissolution and, therefore, the current rate of child support should also be equitably raised.

On August 9, 1989, a hearing was held on the wife’s motion. On September 15, 1989, the court issued its findings of fact and conclusions of law and order. The husband was ordered to pay $1,200 retroactive child support. Further, these findings, conclusions, and order declared that there had been a substantial increase in the husband’s disposable income since the original decree of dissolution was entered. As a result, it was equitable to raise the husband’s monthly child support payments to $582.00, commencing one year after the date of entry of the order. In the interim, so that the husband could adjust his finances to meet this increase, child support was set at $300.00 per month. The court, in its determination of the husband’s disposable income, disregarded certain business and depreciation losses shown in the husband’s federal income tax returns. The husband appeals the court’s decision to disregard these losses.

A court may modify an existing decree of child support “upon a showing of changed circumstances so substantial and continuing as to make the terms unconscionable.” Section40-4-208(2)(a)(i), MCA. In this case, the District Court made such a determination based upon a comparison of the husband’s previous child support obligation and his disposable income for the years 1987 and 1988 as suggested by the Uniform District Court Rule on Child Support Guidelines. See Uniform District Court Rule on Child Support Guidelines, 227 Mont. 1, 44 St.Rep. 828 (1987), hereinafter referred to as Guidelines. The District Court’s findings resulting from this comparison will not be disturbed unless there is a showing that the District Court clearly abused its discretion. See In Re the Marriage of Gray, [242 Mont. 69,] 788 P.2d 909, 47 St.Rep. 552 (Mont. 1990), and cases cited therein.

The first issue on appeal is whether the District Court erred in failing to consider the husband’s 1985 and 1986 business losses in its calculation of the husband’s 1987 disposable income.

The findings of the District Court state that, based upon the husband’s 1987 tax returns, “Mike [the husband] netted some $40,612 on gross business sales of $143,419.” In its conclusions, the court refused to deduct from this net amount some $30,000 of business losses that accrued in 1985 and 1986. It is with this conclusion that the husband takes issue.

Under the Guidelines, the primary focus for determining available income for paying child support is based upon a parent’s disposable income rather than their taxable income. “[I]t is the disposable income of the parent, and not their income tax returns alone, which must be considered by the Court.” Gray, 788 P.2d at 912, 47 St.Rep. at 555, citing In Re the Marriage of Mitchell, 229 Mont. 242, 746 P.2d 598 (1987). As a result, only a minimum number of exclusions are allowed from a parent’s gross income. Guidelines, 227 Mont. at 7, 44 St.Rep. at 834. Included within this list of exclusions are legitimate business expenses. Guidelines, 227 Mont, at 7, 44 St.Rep. at 834. However, legitimate business expenses do not include those losses that exist primarily on paper and have little effect upon a parent’s disposable income. See generally Schelmeske v. Veit, 390 N.W.2d 309 (Minn. App. 1986); Vitalis v. Vitalis, 363 N.W.2d 57 (Minn. Ct. App. 1985).

In this case, it is evident that the husband’s claimed 1985 and 1986 business losses were merely paper losses. The record indicates that the husband’s gross income has greatly increased from the time of dissolution. The husband’s business generated gross sales of $143,419.00 in 1987 and $118,729.00 in 1988. His net profit for each of these years, before deductions, was $40,612.00 and $6,425.00 respectively. Additionally, the husband testified that his monthly expenses were about $2,900.00 per month but that he and his wife only earned approximately $845.00 per month which resulted in a difference of over $2,000.00 per month. Notwithstanding this shortfall, the husband testified that all debt payments were current. Such a situation indicates that the husband has more disposable income than appears from his tax returns. There is no indication that the District Court abused its discretion in not allowing the paper loss from previous years to be considered in the calculation of the husband’s 1987 disposable income.

The second issue on appeal is whether the District Court erred in failing to consider the husband’s 1987 and 1988 depreciation losses in its calculation of the husband’s disposable income.

This Court has previously decided that accelerated depreciation deductions are not an acceptable exclusion in the calculation of a parent’s disposable income. Mitchell, 229 Mont, at 247, 746 P.2d at 602. Our decision in Mitchell was based upon the Colorado child support statute upon which our own Guidelines are based. Mitchell, 229 Mont, at 247, 746 P.2d at 602. The Colorado statute specifically states that “ ‘ordinary and necessary expenses’ does not include amounts allowable by the internal revenue service for the accelerated component of depreciation expenses...” Mitchell, 229 Mont, at 247, 746 P.2d at 602, citing Section 14-10-115(7)(a)(H)(B), Colo. Rev. Stat.

In addition to the support found in the Colorado statute, an analysis of the purpose of depreciation further supports the premise that depreciation is not an acceptable exclusion in calculating disposable income. Two types of depreciation are generally allowed by the Internal Revenue Service in the calculation of taxable income. These two types are straight line depreciation and accelerated depreciation. See Title 26, Section 167(b),(1) (2) U.S.C.A. Both types of depreciation are permitted as a tax deduction to allow individuals to regain their business expenditures. “There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear.. .(1) of property used in trade or business, or, (2) of property held for the production of income.” Title 26, Section 167(a), U.S.C.A.

Since the purpose of depreciation is to assist a person in regaining their expenditures, it does not follow that depreciation is a business expense for the calculation of disposable income under the Guidelines. Therefore, we uphold our previous decision in Mitchell and, in this case, conclude that the District Court did not abuse its discretion in disregarding the 1987 and 1988 depreciation deductions claimed by the husband when calculating the husband’s disposable income.

Affirmed.

CHIEF JUSTICE TURNAGE and JUSTICES HARRISON, McDONOUGH and SHEEHY concur.