Case Name: Richard E. GORDON, Jr., et al., Appellants, v. ETUE, WARDLAW & CO., P.A., James E. Etue, and Stuart C. Wardlaw, Appellees
Court: Florida District Court of Appeal
Jurisdiction: Florida
Decision Date: 1987-07-23
Citations: 511 So. 2d 384
Docket Number: No. BO-216
Parties: Richard E. GORDON, Jr., et al., Appellants, v. ETUE, WARDLAW & CO., P.A., James E. Etue, and Stuart C. Wardlaw, Appellees.
Judges: FRANK, RICHARD H., Associate Judge, concurs.
Reporter: Southern Reporter, Second Series
Volume: 511
Pages: 384–393

Head Matter:
Richard E. GORDON, Jr., et al., Appellants, v. ETUE, WARDLAW & CO., P.A., James E. Etue, and Stuart C. Wardlaw, Appellees.
No. BO-216.
District Court of Appeal of Florida, First District.
July 23, 1987.
Jacqueline R. Griffin, of Peirsol, Boroughs, Grimm, Bennett & Griffin, P.A., Orlando, for appellants.
Pamela M. Burdick, of Russell L. Porkey, P.A., Ft. Lauderdale, for appellees.

Opinion:
WIGGINTON, Judge.
Before us is an appeal from an order dismissing with prejudice counts II, V, VI, VII, IX, and X, insofar as those counts purport to seek damages against Etue, Wardlaw & Company, P.A. (E.W. & Co.), James E. Etue, and Stuart C. Wardlaw, certified public accountants. Appellants sought relief on the basis of alleged violations of the Florida Securities Act, chapter 517, Florida Statutes, and Florida's RICO Act, chapter 895, Florida Statutes, as well as on theories of common law fraud and negligence. We affirm in part, and reverse in part.
In January 1985, appellants filed suit against Aqua-Solar Associates, A.T. Bliss & Company, Inc., corporation executives, appellees, and others. In April, before responsive pleadings were filed, appellants filed an amended complaint. Both complaints alleged, inter alia, violations of chapters 517 and 895. Thereafter, in May, motions to dismiss were filed by the defendants that had been served. A hearing was held during which the principle subject of discussion was the question of venue. The court granted the motions to dismiss the complaint on the venue issue with leave for appellants to amend the complaint to try adequately to plead a basis for venue in Alachua County. At the hearing, counsel for E.W. & Co. briefly argued appellees' position on the merits of the motion to dismiss, and the court instructed counsel for appellant to "take those in mind when you redraft the complaint and draft it the best way you can. Be aware that since you've heard those arguments, you may not have an opportunity to amend again, if we come back." Appellants' attorney asked whether that gave her leave to amend matters other than venue, and the court answered that it did.
Appellants thereafter filed their second amended complaint to which motions to dismiss were again filed. At the hearing, the venue issue was abandoned and the parties argued the merits of the motion to dismiss. The court entered its order denying the motion to dismiss of Aqua-Solar Associates, Bliss, and Bliss officers, but E.W. & Co.'s motion to dismiss on the merits was granted with leave for appellants to amend.
On November 19, 1985, the third amended complaint was served, and for the first time, common law fraud and negligence were alleged in counts IX and X, respectively. Again, in response, motions to dismiss by all defendants were filed. After hearing and submission of memoranda, the court entered three orders, one specifically granting E.W. & Co.'s motion to dismiss with prejudice. The motion to dismiss of Aqua-Solar, Bliss, and Bliss executives was denied except for the count alleging a cause of action under chapter 895 (civil RICO).
We first address the sufficiency of counts V, VI, and IX alleging statutory and common law fraud, and reiterate the settled rule that in order to allege fraud, the facts must be stated with such particularity as the circumstances may permit, and the allegations of the complaint should be clear, positive and specific. Fla.R.Civ.P. 1.120(b); Ocala Loan Company v. Smith, 155 So.2d 711 (Fla. 1st DCA 1963); cf. Decker v. Massey-Ferguson Ltd,., 681 F.2d 111 (2d Cir.1982). The purpose of pleading fraud with particularity is to enable the court to determine whether a prima facie showing has been made. Ocala Loan Company v. Smith. In the instant case, the facts as alleged relevant to those counts show that in the fall of 1982, a salesman contacted appellants to solicit their investment in a limited partnership known as Aqua-Solar Associates, one of several limited partnerships formed by a publicly held corporation, A.T. Bliss & Company, Inc. As part of the solicitation, appellants received through the mail various materials, including an offering memorandum containing financial statements for 1979, 1980, and 1981. Also contained therein was a certification of the financial statements by appellees Etue, Wardlaw & Company, P.A., stating that its examination was made in accordance with generally accepted auditing standards, and that the statements fairly presented the financial position of A.T. Bliss & Company, Inc., in conformity with generally accepted accounting principles.
Appellants formed a partnership to invest in the Aqua-Solar Limited Partnership, and purchased stock in Bliss. However, in February 1983, Barron's National Business and Financial Weekly published two articles critical of Bliss, particularly regarding the distortion of Bliss' cash earnings, as well as other serious distortions of its financial situation. Appellants thereafter contacted a Mr. Abrams, the Bliss "account executive" that had sold them the Aqua-Solar limited partnership, to inquire further as to the truth of the criticisms. They were assured that the criticisms were unjustified and were invited, to attend the annual meeting of Bliss and Company in June 1983, at which time each of the criticisms would be addressed.
Accordingly, appellants Richard Gordon, Katherine Gordon, and Rick Gordon attended the meeting. Present were a number of Bliss officers and directors as well as ap-pellee James Etue, one of the partners of E.W. & Co. Accounting issues were raised and those present affirmed that the financial statements of Bliss were prepared in accordance with generally accepted accounting principles. Additionally, Etue confirmed that the representations concerning the inventory were accurate and that he had personally counted all of the equipment. The stockholders were also told that E.W. & Co. had undergone a peer review by the State Board of Accounting which analyzed the auditing techniques utilized by the company in auditing Bliss' general financial statements, and that the review had concluded that appropriate auditing methods had been used.
Following this meeting, appellants purchased additional stock.
Eight months later, on January 30, 1984, the Securities and Exchange Commission announced that the District Court for the Southern District of Florida had entered consent decrees of permanent injunction against Bliss, two of Bliss' officers, E.W. & Co. and others. Upon receiving this information, appellants sold their stock and suffered a loss of $185,363. Thereafter, Bliss and its "successor" corporation asserted a claim against appellants for the balance due for the limited partnership interest in Aqua-Solar Associates.
Under count IX of their complaint, appellants attempt to allege facts constituting common law fraud. Pertinent to appel-lees are the following paragraphs set forth or referred to therein:
13. EW & Co., independent certified public accountants, audited the financial statements of ATB & Co. for the years 1979, 1980, and 1981. The audit reports on those financial statements were included in the Offering Memorandum. EW & Co. assisted in the preparation of the securities offering made pursuant to the Offering Memorandum.
15. [Plaintiffs' partnership] was supplied with false and misleading statements contained in the Offering Memorandum and other materials sent to them to induce them to invest in ASA. Plaintiffs exercised due diligence in investigating the limited partnership, but were misled and defrauded by the materials supplied to them by Defendants containing false statements and material omissions. Plaintiffs were justified in relying upon the information at their disposal due to the assurance of authenticity provided by experts, including certified public accountants and specialized lawyers.
102. This is an action against HEB & Co., ASA, Philip J. Abrams, Moran, EW & Co., Etue, Wardlaw and Roy. Defendants made false statements to Plaintiffs in order to induce Plaintiffs to purchase a limited partnership in ASA and ATB & Co. capital stock. The false statements made by Defendants are set forth with particularity in paragraphs . 38(a) . 39 . 41 . 70(k) and (m).
38(a). The Offering Memorandum contained financial statements of ATB & Co. that were materially false and misleading. They included material amounts of revenues which had not been collected and were calculated using methods not in accordance with generally accepted accounting principles. These actions resulted in reported earnings materially in excess of the actual earnings of the company and otherwise materially misrepresented its true financial condition.
39. EW & Co., James Etue, and Steward [sic] Wardlaw prepared the Financial Statements that were used in the Offering Memorandum and certified that the Statements were prepared in accordance with generally accepted accounting principles; however, the Statements were false, misleading and not prepared in accordance with generally accepted accounting principles and EW & Co., James Etue, and Steward [sic] Wardlaw knew that these statements were false and not prepared in accordance with generally accepted accounting principles.
41. As a direct result of the affirmative representations and material omissions of the Defendants, Plaintiffs entered into an agreement to purchase and did purchase one limited partnership unit in ASA.
70(k). The Offering Memorandum falsely stated that the balance sheets and financial statements for ATB & Co. for the years 1979, 1980 and 1981 were prepared in accordance with generally accepted accounting principles.
70(m). Defendants, EW & Co., Etue, and Wardlaw provided a written opinion that was included in the Offering Memorandum, which opinion certified that the balance sheets and financial statements of ATB & Co. were prepared in accordance with generally accepted accounting principles. EW & Co., Etue, and Ward-law, however, knew that the statements were not prepared in accordance with generally accepted accounting principles, and knew that the financial information certified by them was inaccurate, incomplete and failed to disclose material facts concerning the financial posture of ATB & Co. Defendants, EW & Co., Etue and Wardlaw, despite their knowledge of the falsity of the statements contained in the Offering Memorandum and omissions of material information that should have been disclosed therein, substantially assisted in the violation by providing the false certification of these records knowing that investors would rely on the financial statements in determining whether to purchase a limited partnership interest. In addition, Etue on behalf of EW & Co. and Wardlaw, attended a meeting on June 1, 1983, of the ATB & Co. shareholders, during which time Etue stated that he had personally verified equipment leases, personally counted the equipment, and made further independent verification of the information provided to him by ATB & Co.; however, these statements were false and misleading.
Further, in order to allege a violation by appellees of section 517.211, Florida Statutes, appellants in counts V and VI allege as to E.W. & Co.:
70(k) and 70(m), supra.
75. On June 1, 1983, Plaintiffs attended the ATB & Co. annual meeting. Present at the meeting were Mueller, Etue, Civit and Roy. At that meeting, Defendants refuted the Barron's article, falsely stating that the financial statements of ATB & Co. had been prepared in accordance with generally accepted accounting principles, that the accounting firm of EW & Co. had undergone an extensive peer review concerning the techniques that it had used in auditing ATB & Co.'s financial statement, and that the peer review concluded that the appropriate auditing methods had been used....
76. At that meeting, Etue also falsely stated that he had personally verified that certain inventory had been placed in service, and that equipment leases had been entered into.
78. All of the foregoing statements by Defendants were false, and Defendants knew that they were false when they were made. In reliance upon these fraudulent representations of Defendants, Plaintiffs purchased an additional 20,000 shares of ATB & Co.
After carefully reviewing the foregoing paragraphs, we agree with appellees that these counts, as set forth in the third amended complaint, do not allege with sufficient particularity facts constituting fraud, as required by the rule and case law. Instead, they merely set forth statements of ultimate fact, i.e., that false statements were made, which probably would have been sufficient had rule 1.110(b), Florida Rules of Criminal Procedure, been applicable. However, when a party alleges fraud, rule 1.120(b) applies, requiring the party to allege more than mere ultimate fact, but to include, in a sense, facts tending to show why the statements were false. Because of the damage to reputations and good will which may result from a charge of fraud, a complaint alleging common law fraud, and violations of section 517.211 must satisfy the particularity requirement of rule 1.120(b). But cf., Raymond, James & Associates v. Zumstorchen Investment, Ltd., 488 So.2d 843 (Fla. 2d DCA 1986) (short statements of ultimate fact were held sufficient to state a cause of action for violation of chapter 517, and common law fraud). Accordingly, we affirm the dismissal as to E.W. & Co. of counts V, VI, and IX.
Turning to the dismissal of count VII as it relates to appellees, we again affirm. Count VII alleges that appellees violated chapter 895, Florida's RICO Act. Appellants maintain that the conduct alleged in count VII establishes the "pattern of racketeering activity" requisite to a finding of a violation of section 895.03, comparing this cause to the circumstances in Banderas v. Banco Centro del Ecuador, 461 So.2d 265 (Fla. 3d DCA 1985). However, we must agree with appellees that the allegations in count VII at best establish as to appellees an isolated incident of an improper audit of financial statements. This is to be distinguished from the level of racketeering involved in Banderas characterized as "a well organized, ongoing, sys tematic, criminal scheme devised by appellants to defraud the government of Ecuador_" Id., at 270.
We must also affirm the dismissal of count X alleging negligence on the part of E.W. & Co. Although appellants have strenuously argued in favor of this Court's abandoning the privity requirement in the area of suits filed against certified public accountants, citing as persuasive authority an erudite opinion from a California appellate court in International Mortgage Company v. John P. Butler Accountancy Corporation, 177 Cal.App.3d 806, 223 Cal. Rptr. 218 (Cal.App. 4 Dist.1986), we decline to do so. Florida law denies relief for a breach of due care by an accountant to third parties who are not in privity with that accountant, even though reliance by the third parties is known or anticipated. See Investors Tax Sheltered Real Estate, Ltd. v. Laventhol, Krekstein, Horwath & Horwath, 370 So.2d 815 (Fla. 3d DCA 1979), cert. denied, 381 So.2d 767 (Fla. 1980); Investment Corporation of Florida v. Buchman, 208 So.2d 291 (Fla. 2d DCA), cert. dismissed, 216 So.2d 748 (Fla.1968); Nortek, Inc. v. Alexander Grant & Company, 532 F.2d 1013 (5th Cir.1976). The Supreme Court has modified the privity principle only slightly and only as to ab-stractors in First American Title Insurance Company, Inc. v. First Title Service Co., 457 So.2d 467 (Fla.1984), wherein it held that where an abstractor knows, or should know, that his customer wants the abstract for the use of a prospective purchaser, and the prospect purchases the land relying on the abstract, the abstractor's duty of care runs not only to his customer but to the purchaser as well. See also A.R. Moyer, Inc. v. Graham, 285 So.2d 397 (Fla.1973) (contractor may bring suit for negligence against architect although contractor not in privity with architect, supreme court applying products-liability tort principles to negligent provision of professional services). However, in First American Title, the supreme court was "highly" persuaded by Justice Cardozo's seminal decision in Ultramares Corporation v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), wherein he reasoned:
If liability [to third parties] for negligence exists, a thoughtless slip or blunder, the failure to detect a theft of forgery beneath the cover of deceptive entries, may expose accountants to liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkin-dle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences. [Citation omitted.]
First American Title, 457 So.2d at 472. Consequently, the supreme court declined "the petitioner's invitation to approve a completely open-ended kind of abstractor's liability based on a duty of care to any and all persons who might foreseeably use and rely on the abstract." Id., at 471.
In the instant case, taking as true, as we must, those facts alleged in count X, appellees knew that the financial statements and reports would be delivered and relied upon by those who were considering investing in A.T. Bliss & Company. Had appellees been abstractors, that allegation might have been sufficient to withstand a motion to dismiss on the basis of First American Title, but we deal here with accountants, and the specter of worldwide liability for that professional group compels us to adhere to the rule set forth in Investment Corp. of Florida v. Buchman, that an accountant is not liable to persons with whom there is no privity of contract. However, due to the public policy implications of this issue, we certify the following as a question of great public importance:
WHERE AN ACCOUNTANT NEGLIGENTLY FAILS TO EXERCISE REA SONABLE AND ORDINARY CARE IN AUDITING AND EXAMINING THE BOOKS AND RECORDS OF HIS CLIENT, AND THEREFORE, DOES NOT PREPARE ACCURATE STATEMENTS OF THE FINANCIAL CONDITIONS OF HIS CLIENT, AND WHERE THE ACCOUNTANT KNEW THAT THE FINANCIAL STATEMENTS AND REPORTS WOULD BE DELIVERED TO AND RELIED UPON, AND WERE RELIED UPON, BY THIRD PARTIES CONSIDERING INVESTING IN THE CLIENT, IS THE ACCOUNTANT LIABLE TO THOSE THIRD PARTIES FOR HIS NEGLIGENCE, DESPITE A LACK OF PRIVITY BETWEEN THE ACCOUNTANT AND THE THIRD PARTIES?
Finally, we affirm in part and reverse in part the trial court's refusal to grant appellants leave to further amend. It is apparent that since the motion to dismiss the amended complaint, appellants have known of the deficiencies in their allegations that appellees violated chapters 517 and 895. Moreover, because of our holding as to count X, appellants will be unable to state a cause of action as to negligence. Consequently, the trial court did not abuse its discretion in dismissing those counts with prejudice. However, count IX was not added by appellants until the third amended complaint presently under review. Accordingly, it was an abuse of discretion for the trial court to deny appellants at least one chance to amend that count. Dingess v. Florida Aircraft Sales and Leasing, Inc., 442 So.2d 431 (Fla. 5th DCA 1983); Townsend v. Ward, 429 So.2d 404 (Fla. 1st DCA 1983). Consequently, we reverse and remand for further proceedings.
AFFIRMED, in part, REVERSED, in part, and REMANDED for further proceedings.
FRANK, RICHARD H., Associate Judge, concurs.
ERVIN, J., concurs and dissents with written opinion.
. Apparently, appellants have abandoned any challenge to the dismissal of count II, as no point addresses the propriety of the dismissal of that count in their brief.
. In that regard, the drafting of paragraph 38(a) would be seen to have satisfied the pleading burden imposed by the rule, insofar as it sufficiently informs the defendant as to why the financial statements were materially false and misleading, viz, because they included amounts of revenues which had not been collected. (However, the whole of count IX cannot be supported by that sole paragraph.)
. Compare Dantzler Lumber & Export Co. v. Columbia Casualty Co., 115 Fla. 541, 156 So. 116 (1934), wherein the supreme court held that a bill of complaint contained sufficient allegations to show that the insurer had the right to be subrogated pro tanto to any right of action which the insured may have had against its accountant, whose alleged wrongful act or negligence caused the loss.
. We note that presently pending before the supreme court is the question of whether an attorney may be sued for negligence absent privity. See Oberon Investments, N.V. v. Angel, Cohen and Rogovin, 492 So.2d 1113 (Fla. 3d DCA 1986), review granted, Case No. 69,398 (Fla. Feb. 6, 1987).