Title: First Fla. Bank, NA v. Max Mitchell & Co.

State: florida

Issuer: Florida Supreme Court

Document:

558 So. 2d 9 (1990)
FIRST FLORIDA BANK, N.A., etc., Petitioner,
v.
MAX MITCHELL & COMPANY, et al., Respondents.
No. 74034.

Supreme Court of Florida.
March 8, 1990.
*10 Robert W. Clark of Macfarlane, Ferguson, Allison & Kelly, Tampa, for petitioner.
John N. Jenkins and Debra L. Hinners of Marlow, Shofi, Smith, Hennen, Smith & Jenkins, P.A., Tampa, for respondents.
Gerald F. Richman, Michael A. Hanzman and Sally R. Doerner of Floyd, Pearson, Richman, Greer, Weil, Zack & Brumbaugh, P.A., Miami, amici curiae for Vaughn Durham, et al.
Kenneth R. Hart and Steven P. Seymoe of Ausley, McMullen, McGehee, Carothers & Proctor, Tallahassee, amicus curiae for Florida Institute of Certified Public Accountants.
Alberto A. Macia and Allen P. Reed of Shea & Gould, Miami, amicus curiae for Pannell Kerr Forster.
GRIMES, Judge.
We review First Florida Bank v. Max Mitchell & Co., 541 So. 2d 155, 157 (Fla.2d DCA 1989), in which the court certified the following question as one of great public importance:
Our jurisdiction is based on article V, section 3(b)(4), of the Florida Constitution.
Max Mitchell is a certified public accountant and president of Max Mitchell and Company, P.A. In April of 1985, Mitchell went to First Florida Bank for the purpose of negotiating a loan on behalf of his client, C.M. Systems, Inc. Mitchell advised Stephen Hickman, the bank vice president, that he was a certified public accountant and delivered to Hickman audited financial statements of C.M. Systems for the fiscal years ending October 31, 1983, and October 31, 1984, which had been prepared by his firm. The October 1, 1984, audited statement indicated that C.M. Systems had total assets of $3,474,336 and total liabilities of $1,296,823. It did not indicate that C.M. Systems owed money to any bank, and in a later conference with Hickman, Mitchell stated that as of April 16, 1985, C.M. Systems was not indebted to any bank. At that time, Mitchell asked Hickman to consider a $500,000 line of credit for C.M. Systems.
Over the next several weeks, Mitchell had numerous discussions with Hickman concerning various line items in Mitchell's audit of C.M. Systems. Mitchell represented that he was thoroughly familiar with the financial condition of C.M. Systems. On May 23, 1985, Hickman asked Mitchell for interim financial statements for the period which ended on April 30, 1985. Mitchell advised that they would not be available for several more weeks. Hickman asked Mitchell if there had been any material *11 change in the company's financial condition since October 31, 1984, and Mitchell said that he was not aware of any material changes. On June 6, 1985, the bank approved the request for a $500,000 unsecured line of credit to C.M. Systems. Thereafter, C.M. Systems borrowed the entire amount of the $500,000 credit line which it has never repaid.
Subsequently, the bank discovered that the audit of C.M. Systems for the fiscal year ending October 31, 1984, had substantially overstated the assets, understated the liabilities, and overstated net income. Among other things, the audit failed to reflect that as of October 31, 1984, C.M. Systems owed at least $750,000 to several banks. In addition, several material changes had occurred in the company's balance sheet after the audit but prior to the approval of the line of credit.
The bank filed a three-count complaint against Mitchell and his firm. Because of the absence of privity between either Mitchell or his firm and the bank, the trial court granted Mitchell summary judgment on the negligence and gross negligence counts. The bank voluntarily dismissed the count based on fraud. Believing itself bound by prior decisional law of the state, the district court of appeal affirmed. Recognizing the public policy implications of the issue and the erosion of the privity doctrine in other areas of the law, the court posed the certified question for our consideration.
The seminal case on this subject is Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), authored by Justice Cardozo. In that case the court held that a lender which had relied upon inaccurate financial statements to its detriment had no cause of action against the public accounting firm which had prepared them because of the lack of privity between the parties. In declining to relax the requirement of privity, the court observed:
Id. at 179-80, 174 N.E.  at 444. The court distinguished its earlier decision of Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922), in which it had held that a public weigher was liable to the buyer of beans for the amount the buyer overpaid the seller in reliance on the weigher's erroneous certificate of weight. The court said that the use of the certificate was a consequence "which to the weigher's knowledge was the end and aim of the transaction," id. at 238-39, 135 N.E.  at 275, and reasoned that, unlike the case before it, the bond between the weigher and the buyer "was so close as to approach that of privity, if not completely one with it." Ultramares, 255 N.Y.  at 182-83, 174 N.E.  at 446.
In purporting to reach a decision within the parameters of Ultramares and Glanzer, the New York Court of Appeals in Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 551, 483 N.E.2d 110, 118, 493 N.Y.S.2d 435, 443 (1985), recently explained the circumstances under which recovery may be accomplished by persons in "near privity":
In the more than fifty years which have elapsed since Ultramares, the question of an accountant's liability for negligence where no privity exists has been addressed *12 by many courts. There are now essentially four lines of authority with respect to this issue.
(1) Except in cases of fraud, an accountant is only liable to one with whom he is in privity or near privity. E.g., Toro Co. v. Krouse, Kern & Co., 827 F.2d 155 (7th Cir.1987); Nortek, Inc. v. Alexander Grant & Co., 532 F.2d 1013 (5th Cir.1976); Stephens Industries, Inc. v. Haskins & Sells, 438 F.2d 357 (10th Cir.1971); Shofstall v. Allied Van Lines, Inc., 455 F. Supp. 351 (N.D.Ill. 1978); MacNerland v. Barnes, 129 Ga. App. 367, 199 S.E.2d 564 (1973); Credit Alliance Corp. v. Arthur Andersen & Co.
(2) An accountant is liable to third parties in the absence of privity under the circumstances described in section 552, Restatement (Second) of Torts (1976), which reads in pertinent part:
Courts which have adopted this position include Seedkem, Inc. v. Safranek, 466 F. Supp. 340 (D.Neb. 1979); Rusch Factors, Inc. v. Levin, 284 F. Supp. 85 (D.R.I. 1968); 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); Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408 (Tex. Ct. App. 1986).
(3) An accountant is liable to all persons who might reasonably be foreseen as relying upon his work product. E.g., International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806, 223 Cal. Rptr. 218 (1986); Touche Ross & Co. v. Commercial Union Ins. Co., 514 So. 2d 315 (Miss. 1987); H. Rosenblum, Inc. v. Adler, 93 N.J. 324, 461 A.2d 138 (1983); Citizens State Bank v. Timm, Schmidt & Co., 113 Wis.2d 376, 335 N.W.2d 361 (1983).
(4) An accountant's liability to third persons shall be determined by
Biakanja v. Irving, 49 Cal. 2d 647, 650, 320 P.2d 16, 19 (1958). See also Aluma Kraft Mfg. Co. v. Elmer Fox & Co., 493 S.W.2d 378 (Mo. Ct. App. 1973).
There are four prior Florida cases which have specifically addressed the issue before us. In Investment Corp. v. Buchman, 208 So. 2d 291 (Fla. 2d DCA), cert. dismissed, 216 So. 2d 748 (Fla. 1968), the plaintiff entered into a contract to buy corporate stock. Because the plaintiff had only seen an uncertified financial statement of the corporation, the contract included a provision under which the corporation would provide a certified financial statement. If it appeared from the certified financial statement that the corporation's financial position was substantially different from that shown on the uncertified statement, the plaintiff could rescind the purchase. The certified statement was subsequently delivered to the plaintiff and the plaintiff elected to stand by the transaction. Thereafter, the corporation failed financially, and *13 the plaintiff sued the accountant, asserting that the certified statement had grossly misstated the financial condition of the corporation and that it had relied on this information in electing not to rescind the purchase. The plaintiff asserted that the accountant knew that it intended to rely on the certified statement. In determining whether the absence of privity was fatal to the plaintiff's position, the Second District Court of Appeal referred to this Court's decision in Sickler v. Indian River Abstract & Guaranty Co., 142 Fla. 528, 195 So. 195 (1940), in which we held that an abstracter's liability for negligence was limited to persons with whom there was privity of contract. Following the rationale of Sickler, the court held that in the absence of privity an accountant owed no duty of care to known third parties. Several years later, the Third District Court of Appeal also held that an accountant was not liable to third parties for negligence where there was no privity of contract. Investors Tax Sheltered Real Estate, Ltd. v. Laventhal, Krekstein, Horwath & Horwath, 370 So. 2d 815 (Fla. 3d DCA 1979), cert. denied, 381 So. 2d 767 (Fla. 1980). The First District Court of Appeal followed suit in Gordon v. Etue, Wardlaw & Co., 511 So. 2d 384 (Fla. 1st DCA 1987).
On the other hand, the Fourth District Court of Appeal has recently rendered an opinion acknowledged to be in conflict with both Gordon v. Etue, Wardlaw & Co. and the opinion which we now review in the instant case. Durham v. Palm Court, Inc., 558 So. 2d 59 (Fla. 4th DCA 1990). In that case, it was alleged that a hotel corporation retained an accounting firm specializing in providing services to the hotel industry to prepare a "market demand report" and "a financial forecast and financial projection." The accounting firm knew that these documents would be used as exhibits to an offering memorandum which the hotel corporation intended to circulate to promote the sale of interests in the hotel. When the investment soured, parties who had relied upon the documents to purchase an interest in the hotel sued the accountants on theories of negligence, gross negligence, and breach of fiduciary duty. The trial court dismissed the complaint because of the absence of privity between the accountants and the purchasers. In reversing the order of dismissal, the appellate court made the following observations:
Id., at 61, 62.
The doctrine of privity has undergone substantial erosion in Florida. Indeed, in cases involving injuries caused by negligently manufactured products the requirement that there be privity between the plaintiff and the manufacturer has been abolished. See West v. Caterpillar Tractor Co., 336 So. 2d 80 (Fla. 1976). Further, this Court in A.R. Moyer, Inc. v. Graham, 285 So. 2d 397 (Fla. 1973), held that a general contractor could sue an architect or engineer for damages proximately caused by their negligence on a building project despite the absence of privity of contract between the parties. The liability of a lawyer in the absence of privity has been limited to cases where the legal service negligently performed was apparently initiated by the lawyer's client to benefit a third party, such as in the drafting of a will. Angel, Cohen & Rogovin v. Oberon Inv., 512 So. 2d 192 (Fla. 1987); McAbee v. Edwards, 340 So. 2d 1167 (Fla. 4th DCA 1976).
*14 Most significant, however, to the instant case is this Court's decision in First American Title Insurance Co. v. First Title Service Co., 457 So. 2d 467 (Fla. 1984), which modified the Sickler requirement of privity for abstracters' negligence which had been relied upon in Buchman. In First American Title Insurance, we said:
Id. at 473. The opinion in First American Title Insurance is also important for the arguments which this Court rejected. We declined to approve the principle that an abstracter is liable in negligence to all persons who might foreseeably use and rely on the abstract. We also found unpersuasive the asserted analogy to cases of products liability, and we distinguished A.R. Moyer, Inc. on its facts.
Some of the competing interests involved in selecting the proper standard for accountants' liability to third parties are set forth in Annotation, Liability of Public Accountant to Third Parties, 46 A.L.R.3d 979, 984 (1972):
Upon consideration, we have decided to adopt the rationale of section 552, Restatement (Second) of Torts (1976), as setting forth the circumstances under which accountants may be held liable in negligence to persons who are not in contractual privity. The rule shall also apply to allegations of gross negligence, but the absence of privity shall continue to be no bar to charges of fraud. That this rule is broader than the one which limits liability to those *15 in privity or near privity is explained by comment (h) directed to subsection (2) which reads in part:
Yet, illustration 10 under section 552 clearly forecloses the extension of liability to a reasonably foreseeable test:
Because of the heavy reliance upon audited financial statements in the contemporary financial world, we believe permitting recovery only from those in privity or near privity is unduly restrictive. On the other hand, we are persuaded by the wisdom of the rule which limits liability to those persons or classes of persons whom an accountant "knows" will rely on his opinion rather than those he "should have known" would do so because it takes into account the fact that an accountant controls neither his client's accounting records nor the distribution of his reports. As noted by the North Carolina Supreme Court when it adopted a similar position in Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200, 214-15, 367 S.E.2d 609, 617 (1988):
There remains the need to apply this rule to the facts at hand. At the time Mitchell prepared the audits for C.M. Systems, it was unknown that they would be used to induce the reliance of First Florida Bank to approve a line of credit for C.M. Systems. Therefore, except for the unusual facts of this case, Mitchell could not be held liable to the bank for any negligence in preparing the audit. However, Mitchell actually negotiated the loan on behalf of his client. He personally delivered the financial statements to the bank with the knowledge that it would rely upon them in considering whether or not to make the loan. Under this unique set of facts, we believe that Mitchell vouched for the integrity of the audits and that his conduct in dealing with the bank sufficed to meet the requirements of the rule which we have adopted in this opinion.
Accordingly, we answer the certified question in the affirmative. To the extent that they may conflict with this opinion, we disapprove the opinions in Buchman, Investors Tax, and Gordon. We quash the decision of the district court of appeal and remand the case for further proceedings.
It is so ordered.
EHRLICH, C.J., and OVERTON, McDONALD, SHAW, BARKETT and KOGAN, JJ., concur.