Prepare answers to the following chapter-end Critical Legal Thinking Cases from this week’s reading.

• Case 5.2: Negligence on page 101

5.2 Negligence Curtis R. Wilhelm owned beehives and kept the hives on property he owned. John Black, who operated a honeybee business, contracted to purchase some beehives from Wilhelm. Black employed Santos Flores, Sr. to help him pick up the beehives from Wilhelm. Black provided Flores with a protective suit to wear while picking up the beehives. Neither Wilhelm nor Black informed Flores of the danger of working with bees. After picking up beehives from Wilhelm’s home, Black and Flores drove to remote property owned by Wilhelm to pick up other beehives. Flores opened the veil on his protective suit. After loading one beehive onto the truck, Flores started staggering and yelling for help. Flores sustained several bee stings, suffered anaphylactic shock reaction, and died before an ambulance could reach him. Flores’s wife and children sued Wilhelm and Black for negligence for failing to warn Flores of the dangers of working with beehives and the possibility of dying of anaphylactic shock if stung by a bee. Did Wilhelm act negligently by failing to warn Flores of the dangers of working with beehives? Wilhelm v. Flores, 133 S.W.3d 726, Web 2003 Tex. App. Lexis 9335 (Court of Appeals of Texas)

• Case 6.1: Strict Liability on page 117

6.1 Strict Liability Senco Products, Inc. (Senco), manufactures and markets a variety of pneumatic nail guns, including the SN325 nail gun, which discharges 3.25-inch nails. The SN325 uses special nails designed and sold by Senco. The SN325 will discharge a nail only if two trigger mechanisms are activated; that is, the user must both squeeze the nail gun’s finger trigger and press the nail gun’s muzzle against a surface, activating the bottom trigger, or safety. The SN325 can fire up to nine nails per second if the trigger is continuously depressed and the gun is bounced along the work surface, constantly reactivating the muzzle safety/trigger.

The evidence disclosed that the SN325 double-fired once in every 15 firings. Senco rushed the SN325’s production in order to maintain its position in the market, modifying an existing nail gun model so that the SN325 could shoot longer nails, without engaging in additional testing to determine whether the use of longer nails in that model would increase the prevalence of double-fire.

John Lakin was using a Senco SN325 nail gun to help build a new home. When attempting to nail two-by-fours under the eaves of his garage, Lakin stood on tiptoe and raised a two-by-four over his head. As he held the board in position with his left hand and the nail gun in his right hand, he pressed the nose of the SN325 up against the board, depressed the safety, and pulled the finger trigger to fire the nail into the board. The gun fired the first nail and then double-fired, immediately discharging an unintended second nail that struck the first nail. The gun recoiled violently backward toward Lakin and, with Lakin’s finger still on the trigger, came into contact with his cheek. That contact activated the safety/trigger, causing the nail gun to fire a third nail. This third nail went through Lakin’s cheekbone and into his brain.

The nail penetrated the frontal lobe of the right hemisphere of Lakin’s brain, blocked a major artery, and caused extensive tissue damage. Lakin was unconscious for several days and ultimately underwent multiple surgeries. He suffers permanent brain damage and is unable to perceive information from the left hemisphere of the brain. He also suffers partial paralysis of the left side of his body. Lakin has undergone a radical personality change and is prone to violent outbursts. He is unable to obtain employment. Lakin’s previously warm and loving relationship with his wife and four children has been permanently altered. He can no longer live with his family and instead resides in a supervised group home for brain-injured persons. Lakin and his wife sued Senco for strict liability based on design defect. Is Senco liable to Lakin for strict liability based on a design defect in the SN325 that allowed it to double-fire? Lakin v. Senco Products, Inc., 144 Ore.App. 52, 925 P.2d 107, Web 1996 Ore. App. Lexis 1466 (Court of Appeals of Oregon)Your responses should be well-rounded and analytical, and should not just provide a conclusion or an opinion without explaining the reason for the choice.

For full credit, you need to use the material from the week’s lectures, text, and/or discussions when responding to the questions. It is important that you incorporate the question into your response (i.e., restate the question in your introduction) and explain the legal principle(s) or concept(s) from the text that underlies your judgment.

For each question, you should provide at least one reference in APA format (in-text citations and references as described in detail in the Syllabus). Each answer should be double-spaced in 12-point font, and your response to each question should be between 300 and 1,000 words in length.

Submit this assignment as a single Word document covering both cases.

Note: Please be sure you refer to the numbers that appear on the printed pages in your electronic readings, not the numbers that appear with the navigation icons.

Week 2 Lecture:

Dealing With Lawsuits

The threat of civil liability affects every business and every person responsible for making business decisions. As such, it is important for you, as a business student, to gain a deeper understanding of the core issues that come into play that can trigger legal action, whether you are on the plaintiff or defense side. The prospect of having to file a lawsuit against a customer who hasn’t paid, a supplier who hasn’t delivered, a competitor who is infringing on our rights, or anyone else, is not something that any businessperson wants. But, sometimes parties are unable to settle a dispute informally, and the aggrieved party must file a civil action in court. Learning what litigation entails is important for every businessperson, if for no other reason than to understand why litigation should be avoided whenever possible.

To understand the litigation process, we must first look at the state and federal court systems in the United States and the process for determining in what court a particular type of case may be filed, based on the subject matter of the dispute, the defendant’s residence, the place where the incident or transaction occurred, and other important, related issues. It is important from a business standpoint to understand the ramifications of where an action may be litigated, especially because laws vary from state to state. Thus, many business contracts, for example, contain provisions that specifically speak to the choice of forum in anticipation of where litigation may take place if it were to arise.

The Elements of Negligence

Every lawsuit involves a dispute, some alleged invasion of rights, and is often based on a tort, defined as a civil wrong other than a breach of contract. The most common tort claim made against businesses is for negligence, a failure to exercise reasonable care under the circumstances. Businesses, as well as individuals are liable (legally responsible) for their torts. The word originates from a French word meaning twisted, and it describes conduct that society views as twisted or wrongful. To manage risk in decision-making, a businessperson must be familiar with negligence law, and understand the standards by which conduct will be judged.

The concept of negligence evolved from common law, and is still largely based on common law principles in that, it was derived from decisions of state appeals courts. The four basic elements of negligence are recognized in every state: There must be a duty owed, the defendant must have been breachedthat duty, and the defendant’s breach of duty must be the cause of the plaintiff’sdamages.

The first element of negligence, duty, involves two separate inquiries.

1. What is my duty?
2. To whom do I owe that duty?

To answer the first inquiry, we must understand the standards of care. The idea is that the hypothetical reasonable person would exercise reasonable care under the circumstances. The standard of care required depends on the circumstances. As a way of illustrating the standard of care owed, consider an important subtopic of negligence law called premises liability, which deals with the duty that the owner of a premises owes to those who come onto the property. Traditionally, there were several classes of individuals who might come onto one’s property, and the duty owed depended on the person’s status.

An invitee is defined as someone invited onto the property, such as a business customer or employee. To invitees, landowners owe the duty of keeping the premises and approaches safe. Alicensee is defined as someone who is permitted onto the property, though not invited, such as someone who comes into a store to avoid a rainstorm or someone who is selling something, be it a newspaper subscription, Girl/Boy Scout cookies, or the latest business telecommunications system. To licensees, landowners owe the duty of warning of dangers or defects on the property that are not obvious.

A trespasser is someone who is neither invited nor permitted on the property. The duty owed to adult trespassers is minimal—the landowner may not set mantraps or pitfalls for him or her, what might be called the no booby trap rule. When the landowner resides in a neighborhood with young children and has conditions on his property that are likely to attract young children, who cannot appreciate the dangers posed, a higher standard of care is imposed, as we’ll explore in one of our discussions this week. As you can see from this brief description, this area of law that requires a firm’s understanding of who the parties are and how they are related before any substantive analysis can begin as to the application of the law.

Example

Sheila operates a pet store. During wintertime, an ice storm results in a sheet of ice just outside the front door. When Sheila arrives to open the store, she posts a sign Warning, ice on sidewalk just outside the door. Sheila has fulfilled her duty to someone like Mary, who stops by to ask if Sheila will contribute to a community fundraiser, because Mary is a licensee and the only duty owed to a licensee is to warn. Sheila has also done her duty regarding any trespasser who might stop by the store. But Sheila has not fulfilled her duty to her employees and customers because posting a sign does not make the premises safe. To make the premises safe, Sheila would have to put down rock salt or otherwise remove the ice.

Once you determine the duty owed (a matter of legal research), you need to answer the second duty inquiry: To whom is the duty owed? This question was answered in a famous case that is discussed in your text. The Palsgraf v. Long Island Railroad Co. case (1928) held that duty is owed only to a foreseeable plaintiff. A foreseeable plaintiff is someone within the zone of danger created by the defendant’s conduct. For example, when you drive your car, if you drive negligently, foreseeable plaintiffs include drivers and passengers in other cars along the roads you travel, pedestrians along the roads you travel, and property owners along the roads you travel. These are folks you could reasonably foresee that you might injure if you drive carelessly. But, if as a result of your careless driving, someone living two counties away from where you drove was injured in a freak incident, you would not be liable. The injured person was not a foreseeable plaintiff.

Example

Brian operates a restaurant. Three miles away from Brian’s restaurant, Neil runs a red light and strikes a telephone pole. Atop the telephone pole are electric lines. As a result of Neil’s negligent driving, electrical service is disrupted at Brian’s restaurant and meat in his storage freezer spoils. Brian learns about Neil’s traffic violation in the police blotter. Though Neil certainly breached a duty by driving negligently, his duty was owed to others along the roads he traveled. Neil did not owe a duty to Brian, a restaurant owner three miles away, nowhere near where he was driving. Brian will, therefore, not be able to recover from Neil for the spoiled meat in his freezer.

The second element of negligence is breach of the duty. This is an issue of fact for a jury to decide if a case goes to trial. However, there are certain presumptions of breach of duty established by the common law. One of the presumptions is called negligence per se. This translates as negligence in and of itself. This occurs when a person’s negligent conduct violates a safety standard that is on the books in a state or local law. For example, the rules of the road in each state establish certain do’s and don’ts for driving, such as not crossing the center line. If I cross the center line while driving and strike an oncoming vehicle, I’ve been negligent per se because I violated the safely standard established in the written law. In other words, a reasonable person wouldn’t have crossed the yellow line, because a reasonable person obeys the rules of the road. I didn’t obey the rules of the road, so my conduct is per se unreasonable. I have breached a duty that the law clearly established. Another presumption of breach of duty is the doctrine of res ipsa loquitur, which meansthe thing speaks for itself.

This doctrine applies in the following situations.

1. The incident that occurred would not have occurred unless someone was negligent.
2. The instrumentality that caused the injury was in the exclusive control of the defendant.

Example

Fredrica owns a shop that sells imported goods. She stacks boxes of merchandise on the top shelves of the store’s aisles. One of these isles has boxes of heavy merchandise stacked in an unstable manner on the top shelf. When a customer, Cara, is walking down the aisle, the unstable stacked merchandise falls on her, injuring her. Res ipsa loquitur creates a presumption that Fredrica’s conduct breached a duty owed to Cara by stacking merchandise on a top shelf in an unstable manner. Merchandise won’t fall if it is stacked properly. It fell because it was stacked in an unstable manner (assuming no earthquake or other natural event that could explain it). The merchandise was in Fredrica’s exclusive control. It was her shop and up to her (or her employees) to place it there. The customer, Cara, was helpless.

The third element of negligence is causation, and this involves a two-part inquiry. First, we need to determine if causation in fact exists. This requires a cause and effect relationship between the defendant’s breach of duty and the plaintiff’s negligence. In most cases, this isn’t difficult to determine. If the defendant’s conduct was a substantial factor in producing the plaintiff’s damages, causation in fact has been satisfied. If I have a spill on the floor of my business premises, and it’s been there long enough that a reasonable person should have known about it, but didn’t remove it, and a customer slipped and fell on it, injuring himself or herself, causation in fact is satisfied. My breach of duty (failing to clean up the spill) was the cause of the customer’s injury.

The second part of the causation inquiry is proximate cause, and this is a more difficult concept to understand. Proximate cause looks at whether the injury suffered by the plaintiff was the sort of injury that was reasonably foreseeable. Proximate cause is a question of law for the court (judge) to decide if a case goes to trial. If I don’t clean a spill on the floor of my business premises, it is foreseeable that a customer who is walking and looking straight ahead will not see the spill and will slip and fall on it. As long as the type of injuries the customer suffers are the type of injuries that are reasonably possible from a slip and fall, proximate cause is satisfied. It doesn’t matter that I couldn’t foresee whether the customer falls forward, and sprains his or her wrist trying to break his or her fall, or falls backward and suffers a concussion, or falls in any other direction. As long as the damages from the fall are damages that can result from a fall, they are considered foreseeable. However, if the customer who fell on the spill at my store claimed that the fall resulted in a loss of her psychic powers, proximate cause would not be satisfied. Even if the customer could present evidence of her loss of psychic powers, he or she cannot recover for their loss because a loss of psychic powers is not a reasonably foreseeable consequence of slipping and falling on a spill.

Example

Fox operates a delivery company. She fails to pick up a customer’s package as ordered. The package contains medications. As a result, a member of the night cleaning crew for the building takes home the package. The cleaning crew person decides the contents are not valuable and throws the package into a trash dumpster. A teenager finds the box in the trash dumpster and feeds the contents to her cat, who becomes violently ill. The teenager’s parent drives the cat to the vet’s office, but is struck by a drunk driver en route, and is seriously injured. Though the drunk driver is liable for the parent’s injuries (which were foreseeable from drunk driving), Fox’s delivery company is not liable because the risk created by someone failing to pick up a package is not that someone will be struck by a drunk driver.

Negligence and Accountants

When a licensed professional commits negligence, we call itmalpractice. An accountant is liable for professional malpractice when the elements of negligence are present: The accountant owed a duty to the person who is suing, breachedthat duty by not exercising the required degree of care, and thereby caused the damages the plaintiff suffered. Two significant issues arise when accountants and other professionals are sued for negligence.

1. How do we establish the duty owed?
2. Who is considered a foreseeable plaintiff?

Accountants must exercise reasonable care in the performance of their professional duties. The degree of care required takes into consideration the skill and training that an accountant has. The standard is therefore higher for a CPA (certified public accountant) than for an accountant who performs basic bookkeeping duties but is not a CPA. For a CPA, the reasonable person standard becomes the reasonable CPA standard. To determine what the reasonable CPA would do, we must apply professional standards and codes of conduct, as well as other laws regulating accountants. An accountant is expected to comply with generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS). These become part of the duty a professional accountant owes to others. Failure to comply with GAAP and GAAS creates a presumption ofbreach of duty, similar to the concept of negligence per se discussed above.

A significant issue in accountant malpractice cases arises when there has been an allegedly negligent audit. An auditor performs an audit as part of a contractual agreement with a client, the business being audited. However, if others rely on the accountant’s audit and suffer financial loss, they may attempt to sue the accounting firm over the negligent audit. This raises an issue as to whether someone other than the client is a foreseeable plaintiff to whom the auditor owed a duty. There are three different answers to this question, because different states have adopted different rules. The traditional rule, called the Ultramares rule, named for the 1931 New York case that created it, holds that an auditor’s duty is owed only to the client, with whom the accountant is inprivity of contract (a contractual relationship exists between the two), and to third parties with a significantly close connection with the accountant. The Ultramares rule is also known as the near privity rule, and applies in only a handful of states.

The majority of states now adopt the Restatement rule of auditor liability to third parties: This rule provides that accountants are liable for negligence not only to their clients but also to known users and foreseeable users of their reports or financial statements. The third rule, adopted in a few states, is the Reasonably Foreseeable User rule. This rule holds accountants liable to any user of the accountant’s statements or reports who was reasonably foreseeable. This rule expands accountant liability beyond the Restatement rule discussed above. The Reasonably Foreseeable User rule extends accountant liability to circumstances in which the accountant was unaware of the use to which his or her financial statements, reports, or opinions would be used. The only requirement of this rule is that the ultimate user is someone who the account should have foreseen as a possible plaintiff.

Example

Heather, a CPA, is hired by a client, Dashing Designs, to audit the client’s books. The President of Dashing Designs tells Heather that the audit is needed, in part, because the company wants to apply for a business loan with First Bank, which requires a current audit for loans of the size the company is seeking. The president does not inform Heather that he also intends to use her audit report to apply for a loan of credit with a supply company. Heather performs the audit, but does not follow GAAS standards, and her audit report fails to uncover financial problems at Dashing Designs. The audit report is later provided to First Bank and to the supply company, who each grant credit to Dashing Designs. As a result of its financial problems, Dashing Designs is unable to repay its debts to the bank and to the supply company. Both the bank and the supply company sue Heather for professional negligence. In a state that uses the Ultramares rule or the Restatement rule, Heather is liable to the bank, but not to the supply company. In a state that has adopted the Reasonably Foreseeable User rule, Heather is liable to both the bank and the supply company.

DISCUSSION QUESTIONS

1. Reviewing GM’s financial information in GM Exhibit 1 and its stock price in GM Exhibit 2 , when do you first see signs of GM’s impending financial distress?

2. In referencing professional standards, what factors should auditors consider in evaluating potential going- concern uncertainties?

3. Considering your response to questions 1 and 2, do you believe that the going- concern uncertainty was warranted? Do you believe that Deloitte & Touche should have issued a going- concern opinion prior to 2008?

4. What economic factors existing in the United States during 2008 might have accelerated Deloitte & Touche’s decision to issue an audit opinion modified to disclose going- concern uncertainties?

5. Do you believe that the events immediately following GM’s bankruptcy alleviated the concerns that led to the issuance of the going- concern uncertainty? What issues would auditors need to consider in evaluating the ability of General Motors Co. (the new GM) to continue as a going concern?

6. Many companies believe that a going- concern opinion is a self- fulfilling prophecy ( that is, when a company receives a going- concern opinion, customers will not purchase products with warranties, suppliers will not provide short- term credit, and investors and creditors will not invest or loan). Would GM’s going- concern opinion influence your decisions regarding either purchasing a car from GM or investing in GM’s stock? Is a going- concern a self- fulfilling prophecy?

Please cite the sources for references

On January 11, 2001, the New York Times wrote, “The company’s Chrysler division, which lost United States market share in 2000 to foreign competitors because of its aging products, is expected to post a loss of $1.25 billion in the fourth quarter after a third-quarter loss of $512 million.”

Source: New York Times

Based on your own research, how has each organization’s and each country’s cultural factors led to the low performance in the Chrysler division? How have their actions resulted in dissolution of the merger? How do you think Daimler’s HRL could have done a better job of conducting due diligence about the two companies’ cultural differences across Atlantic to make sure each division was successful?

Reference