Nycal Corp. v. KPMG Peat Marwick LLP

Supreme Judicial Court of Massachusetts · 1998 · Torts

TortsNegligent MisrepresentationAccountant Liabilityaccountant liabilitynonclient liabilitynegligent misrepresentationeconomic lossRestatement § 552

Facts

Gulf retained the defendant to audit its 1990 financial statements, and the completed auditors' report was included in Gulf's annual report, which became publicly available in February 1991. In March 1991, the plaintiff began discussions with Gulf, received the annual report, and later purchased about 35% of Gulf's stock, obtaining operating control. The defendant knew of earlier Kennedy and Aviva takeover-related activity involving Gulf, but did not know of the plaintiff's contemplated transaction until a few days before the July 1991 closing, after the stock purchase agreement had already been signed. The plaintiff later claimed the report materially misrepresented Gulf's financial condition and should have included a going-concern qualification.

Issue

What duty of care does an accountant owe to a nonclient who allegedly relies on an audit report and suffers only pecuniary loss? Specifically, can the plaintiff recover when the accountant did not know the plaintiff, any limited group including the plaintiff, or the particular transaction the report was supposed to influence at the time the report was issued?

Rule

Massachusetts adopts Restatement (Second) of Torts § 552 as the standard governing an accountant's liability to nonclients for negligent misrepresentation causing pecuniary loss. Under that standard, liability is limited to loss suffered by the person or a limited group of persons for whose benefit and guidance the accountant intends to supply the information, or knows the recipient intends to supply it, and only in a transaction the accountant intends the information to influence, or knows the recipient so intends, or in a substantially similar transaction. The better reading of § 552 requires actual knowledge by the accountant, at the time the audit report is published, of the limited group that will rely on the report and of the particular financial transaction the report is designed to influence; wilful ignorance does not excuse liability.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A Phoenix accounting firm completed its annual audit of Desert Ridge Mining, and the report was placed in the company's ordinary annual report for general circulation. Two months later, Lena Ortiz, an investor the firm had never heard of, used the annual report to decide to buy a 30% stake in the company. She later alleges the audit negligently misstated the company's liabilities and sues for her investment loss.

Is Lena most likely able to recover from the accounting firm for negligent misrepresentation?

Explanation. Under the majority rule, Massachusetts adopts Restatement § 552 rather than a broad foreseeability test or a strict near-privity rule. An accountant is liable only to a person or limited group for whose benefit and guidance the information is supplied, and only for a transaction the accountant intends to influence or knows the client intends to influence. An ordinary annual audit released publicly, with no actual knowledge at publication of the investor or the specific transaction, creates no duty to an unknown future investor.