UNPUBLISHED

UNITED STATES COURT OF APPEALS 

FOR THE FOURTH CIRCUIT 

No. 07-1804

WATERSIDE CAPITAL CORPORATION; WESLACO HOLDING COMPANY, 

LLC, 

 Plaintiffs - Appellants, 

 and 

CAPITALSOUTH PARTNERS FUND I, L.P., 

 Plaintiff, 

 v. 

HALES, BRADFORD & ALLEN, LLP; SALINAS, ALLEN & SCHMITT, LLP, 

 Defendants – Appellees, 

 and 

HALES-BRADFORD, LLP; BILLY R. BRADFORD; DARRYL D. BAIRD, 

 Defendants. 

Appeal from the United States District Court for the Eastern 

District of Virginia, at Norfolk. Rebecca Beach Smith, District 

Judge. (2:05-cv-00727-RBS) 

Argued: January 26, 2009 Decided: March 25, 2009 

Before NIEMEYER, KING, and DUNCAN, Circuit Judges. 

Affirmed by unpublished opinion. Judge Niemeyer wrote the 

opinion, in which Judge King and Judge Duncan joined. 
ARGUED: Ann Burke Brogan, CROWLEY LIBERATORE & RYAN, P.C., 

Chesapeake, Virginia, for Appellants. Brian Nelson Casey, 

TAYLOR & WALKER, P.C., Norfolk, Virginia, for Appellees. ON 

BRIEF: Frank J. Santoro, Karen M. Crowley, MARCUS, SANTORO & 

KOZAK, P.C., Chesapeake, Virginia, for Appellants. John 

Franklin, III, TAYLOR & WALKER, P.C., Norfolk, Virginia, for 

Appellees. 

Unpublished opinions are not binding precedent in this circuit. 

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NIEMEYER, Circuit Judge: 

 Waterside Capital Corporation, a Virginia corporation, 

appeals the district court’s order dismissing, under Federal 

Rule of Civil Procedure 12(b)(6), its accounting malpractice 

complaint against Hales, Bradford & Allen, LLP (“HB&A”), a Texas 

accounting firm. Waterside claims that it loaned several 

million dollars to Caldwell/VSR, Inc. (“Caldwell”), a Texasbased manufacturer of window blinds and shutters, relying on 

audit reports that HB&A prepared for Caldwell. Later Caldwell 

filed a petition in bankruptcy, and Waterside discovered that 

HB&A’s audits failed to expose substantial accounting 

irregularities in Caldwell’s books. 

 In its complaint, Waterside asserted four causes of action 

and demanded $4 million in damages, plus late fees, costs, and 

attorneys’ fees. In Count I, it claimed that HB&A, in preparing 

the audit reports for Caldwell for fiscal years 2001, 2002, and 

2003, breached its accounting engagement contracts and that 

Waterside, as a lender relying on the reports, was a third-party 

beneficiary of the engagement contracts between Caldwell and 

HB&A, entitled to sue for the breaches. In Count II, Waterside 

alleged “professional malpractice” in that HB&A breached its 

“duty to observe professional standards in the conduct of its 

audit[s].” In Count III, Waterside alleged that HB&A was liable 

for “constructive fraud/negligent misrepresentation” when it 

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certified Caldwell’s financial statements in the audit reports. 

And in Count IV, Waterside alleged fraudulent misrepresentation. 

 The district court granted HB&A’s motion to dismiss as to 

Counts I, II, and III, and Waterside voluntarily dismissed Count 

IV. From the final judgment dismissing Counts I, II, and III, 

Waterside appeals. We affirm. 

Count I alleges that Waterside is a third-party beneficiary 

of the accounting engagement contracts entered into between 

Caldwell and HB&A. Because the engagement contracts were formed 

and performed in Texas, Texas law governs whether Count I states 

a claim upon which relief can be granted. Texas law is cautious 

in finding persons to be third-party beneficiaries and allows 

courts to look only within the contract’s “four corners” to 

determine whether the contracting parties intended to create a 

third-party beneficiary. See In re El Paso Refinery, LP, 302 

F.3d 343, 354 (5th Cir. 2002); MCI Telecomms. Corp. v. Texas 

Utils. Elec. Co., 995 S.W.2d 647, 650-52 (Tex. 1999). “The 

intention to contract or confer a direct benefit to a third 

party must be clearly and fully spelled out or enforcement by 

the third party must be denied.” MCI Telecomms., 995 S.W.2d at 

651. In this case, the accounting engagement contracts between 

HB&A and Caldwell, entered into annually, provide no indication 

that the parties to those contracts intended to “confer a direct 

benefit” on Waterside. Similarly, HB&A’s later letters, 

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transmitting copies of the audit reports and repeating what the 

reports certified, indicate no such undertaking. The engagement 

contracts were part of a routine annual practice of Caldwell and 

HB&A to have HB&A audit Caldwell’s books and prepare its tax 

returns. Moreover, nothing in the factual circumstances alleged 

in the complaint suggests that the audit engagements were 

undertaken for the direct benefit of Waterside or to induce 

Waterside to make a loan to Caldwell. Thus, when applying Texas 

law, we conclude that it is not “plausible” that Waterside could 

prove that it was a third-party beneficiary of the engagement 

contracts entitled to sue under them. See Bell Atlantic Corp. 

v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1974 (2007) (adopting 

a plausibility standard for deciding Rule 12(b)(6) motions). 

Count II alleges professional malpractice by HB&A in 

auditing Caldwell’s books. Regardless of whether this claim is 

governed by Virginia or Texas law, privity is a prerequisite for 

malpractice liability. See McCamish, Martin, Brown & Loeffler 

v. F.E. Appling Interests, 991 S.W.2d 787, 792 (Tex. 1999); 

Ervin v. Mann Frankfort Stein & Lipp CPAs, L.L.P., 234 S.W.3d 

172, 176-77 (Tex. App. 2007); Ward v. Ernst & Young, 246 Va. 

317, 323-24 (1993). Because it is undisputed that Waterside was 

not in privity with HB&A, Count II fails to state a claim upon 

which relief can be granted, regardless of which State’s law 

applies. 

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Finally, Count III alleges “constructive fraud/negligent 

misrepresentation,” claiming that HB&A constructively defrauded 

Waterside by reaffirming to it the audit reports of Caldwell’s 

financial condition. The parties agree that this count is a 

tort claim governed by Virginia law, inasmuch as Waterside is a 

Virginia corporation and sustained any injury in Virginia. 

Virginia law bars recovery for purely economic losses due to 

negligence, unless the parties are in privity, see Ward, 246 Va. 

at 323-24, and a claim for “constructive fraud/negligent 

misrepresentation” is covered by this rule. See Richmond Metro. 

Auth. v. McDevitt Street Bovis, Inc., 256 Va. 553, 559 (1998) 

(“The essence of constructive fraud is negligent 

misrepresentation”); Waytec Elecs. Corp. v. Rohm & Haas Elec. 

Materials, LLC, 459 F. Supp. 2d 480, 491-92 (W.D. Va. 2006) 

(finding a constructive fraud claim barred by Virginia’s 

economic loss rule). Because Count III alleges only economic 

losses and Waterside was not in privity with HB&A, Count III 

also fails to state a claim upon which relief can be granted. 

Accordingly we affirm the judgment of the district court. 

AFFIRMED