White v. Guarente

New York Court of Appeals · Torts

TortsNegligent misrepresentationAccountant malpracticeDutyPrivityaccountant liabilitynegligencelimited partnership

Facts

A limited partnership retained Arthur Andersen to perform an audit and prepare the partnership's tax return, as required by the partnership agreement. The partnership had approximately 40 limited partners, all actual and identified members of the partnership, and the agreement required audited books and records to be available to partners. Plaintiff alleged Andersen knew or should have known that the general partners were making improper withdrawals and that Andersen issued inaccurate and misleading audit reports and financial statements that failed to disclose those withdrawals and other improprieties. Plaintiff's claim centered on Andersen's failure to disclose a major withdrawal by the general partners and its acceptance of valuations of restricted securities without adequate checking.

Issue

May accountants retained by a limited partnership to perform audit and tax return services be held liable in negligence to an identifiable group of limited partners who are not in direct privity with the accountants? More specifically, does the complaint state a cause of action where the limited partners were a fixed and contemplated class whose reliance on the audit and tax information was foreseeable?

Rule

An accountant is not liable in negligence to the indeterminate public at large, but may owe a duty of care to a known, fixed, definable, and contemplated group whose conduct the audit or tax information is intended to govern and whose reliance is necessarily foreseen by virtue of the relationship and the engagement. In such circumstances, the duty is imposed by law and need not be stated solely in terms of contract or strict privity.

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A Denver accounting firm was retained by Cedar Summit Energy Partners, a Colorado limited partnership, to prepare the partnership’s annual audit and tax schedules required by the partnership agreement. The agreement required the materials to be made available to the partnership’s 18 identified limited partners, and Nina Patel, one of those partners, alleges the firm negligently omitted major unauthorized transfers by the general partner and she relied on the schedules in filing her own return.

If the accounting firm moves to dismiss Nina’s negligence claim for lack of privity, how should the court most likely rule?

Explanation. The claim should survive. Under the majority rule, an accountant may owe a duty in negligence to a known, fixed, definable, and contemplated group whose conduct the audit or tax information is intended to govern. Identified limited partners who are expected to receive and use the materials, including for their own tax reporting, fall within that protected class even without strict privity. The duty is imposed by law because furnishing the information to them is one of the ends and aims of the engagement. (Derived from White v. Guarente (n.d.).)