Opinion ID: 2570772
Heading Depth: 2
Heading Rank: 3

Heading: Standing in Accountant Malpractice

Text: The Appellants' negligence claim against Thayer alleges that, because Thayer prepared the estate tax returns with the objective of benefitting the Appellants, he had a duty to exercise reasonable care in carrying out his services. The complaint further alleges that Thayer breached his duty when he negligently prepared the estate tax returns by failing to utilize the unified credit and federal disclaimers available to Joan Hughes. The Appellants' amended complaint advances the same allegations against Thayer but, alternatively, frames the action in terms of a third party beneficiary theory. The circuit court granted summary judgment [18] in favor of Thayer as to the Appellants' negligence claim for accountant malpractice, noting that the requirements of Restatement (Second) of Torts § 552, entitled negligent misrepresentation, had not been met as set forth in Kohala Agriculture v. Deloitte & Touche, 86 Hawai`i 301, 949 P.2d 141 (App.1997) (holding that negligent misrepresentation applied where an accounting firm negligently supplied information in business audits to non-client investors who relied upon the misinformation to grant loans to an overinflated business). The circuit court also granted summary judgment in favor of Thayer as to the Appellants' third party beneficiary claim because it found that the Appellants were incidental, not intended, beneficiaries of the implied contract between Joan Hughes and Thayer. We agree and therefore affirm the grant of summary judgment in favor of Thayer as to the third party beneficiary claim. We also agree with the circuit court's grant of summary judgment in favor of Thayer as to the negligence claim, but for the reasons set forth herein. We now address each seriatim.
The Appellants' third party beneficiary claim alleged only that Joan Hughes sought Thayer's services for the preparation of applicable tax returns, not estate planning advice. In Jewish Hospital v. Boatmen's National Bank, 261 Ill.App.3d 750, 199 Ill.Dec. 276, 633 N.E.2d 1267 (1994), appeal denied, 157 Ill.2d 503, 205 Ill.Dec. 165, 642 N.E.2d 1282 (1994), the Appellate Court of Illinois addressed whether an accountant could be held liable to trust beneficiaries for adverse tax consequences under a third party beneficiary theory. The court allowed the trust beneficiaries to sue an accountant and attorney for negligently failing to give competent advice as to how to avoid unnecessary estate taxes when preparing the testamentary documents during the settlor's lifetime. Id. 199 Ill.Dec. 276, 633 N.E.2d at 1279. However, the court distinguished an accountant's post-mortem services for the administration of the trust and denied the beneficiaries' claim based upon such services. Id. 199 Ill.Dec. 276, 633 N.E.2d at 1279-80. The court explained the difference in the outcome as follows: [C]onstruing the evidence most favorably for plaintiffs, it is clear that [accountant] provided professional accounting services to the estate by way of assisting [executrix] in the preparation of the Federal estate tax return. Contrary to plaintiffs' assertions, [accountant] was not hired primarily to benefit plaintiffs or to give tax advice to the beneficiaries, but instead was hired to assist the Bank as coexecutor in the proper administration of the estate. Administration of this estate has so far required only that the trusts to the life beneficiaries be administered. Only after the death of the testator's sister will the residuary trust be paid to plaintiffs. We cannot say that the facts regarding the administration of the estate, even when construed most favorably for plaintiffs, show that the services of [accountant] were engaged to primarily benefit these plaintiffs. Id. Thus, because an accountant's post-mortem services for the preparation of federal estate tax returns were not to benefit the beneficiaries, the court affirmed the summary judgment in favor of the accountants. Id. 199 Ill.Dec. 276, 633 N.E.2d at 1282. Here, viewing the pleadings and the exhibits submitted by the parties, we must conclude that there is no genuine issue of material fact concerning the purpose for which Joan Hughes consulted Thayer. Thayer was retained to prepare the necessary estate tax returns following the death of Lloyd Hughes; there is no evidence that Thayer was consulted for estate planning advice. We are aware that, if Thayer had used the federal disclaimers and unified credit, as the Appellants claim he should have, the benefit to the Appellants would have been an increased inheritance. However, that benefit would have been merely incidental to Thayer's agreement to prepare the tax returns. Therefore, the Appellants are incidental, not intended, beneficiaries of the agreement between Thayer and Joan Hughes. The Appellants attempt to distinguish Jewish Hospital based upon the existence of an Illinois statute that precludes accountant liability to persons with whom they are not in privity of contract [hereinafter, Illinois' accountant privity statute]. See Ill.Ann.Stat. ch. 225, para. 450/30.1 (Smith-Hurd 1998). However, Illinois' accountant privity statute does not preclude third party beneficiary and negligent misrepresentation claims by non-clients; rather, it merely adds the statutory requirement of a written notice. See Ill.Ann. Stat. ch. 225, para. 450/30.1(2) (providing that the statute does not apply if (1) the accountant was aware that a primary intent of his/her client was to benefit a particular person; and (2) the benefitted person notifies the parties in writing of his/her reliance upon the accountant's services). Under this exception, Illinois' accountant privity statute would not affect the persuasive reasoning of Jewish Hospital as applied to the present case. Thus, the Appellants' attempt to distinguish Jewish Hospital on the basis of Illinois' accountant privity statute fails. The Appellants also cite Kinney v. Shinholser, 663 So.2d 643 (Fla.Dist.Ct.App.1995), review denied, Moncrief v. Kinney, 671 So.2d 788 (Fla.1996), in support of their third party beneficiary claim. In Kinney, summary judgment was awarded against a trust beneficiary who brought a third party beneficiary claim against an accountant for failing to advise his mother of the adverse tax consequences associated with failing to exercise her power of appointment. Id. at 645. The Florida Court of Appeals reversed, holding that the third party beneficiary claim precluded summary judgment where the beneficiary's inheritance, as the sole residuary beneficiary of the trust and personal representative of the mother's will, were diminished as a result of the increased tax liability. Id. at 646-47 (citing Machata v. Seidman & Seidman, 644 So.2d 114 (Fla.4th DCA 1994), review denied, 654 So.2d 919 (Fla.1995) (recognizing Florida's adoption of Restatement Second of Torts § 552 and holding that accountant liability for negligence is expanded beyond persons in privity to include persons the accountant knows intend to rely on the accountant's audit for a specific purpose)). The holding in Kinney appears to have relied upon the general principle that an accountant may be liable to a third party, as announced by Florida precedent involving negligent misrepresentation based upon financial statements. See id. However, as previously discussed, the Appellants's are not intended beneficiaries of Thayer's services for the purposes of accountant malpractice. See Jewish Hospital, 199 Ill.Dec. 276, 633 N.E.2d at 1267-80. Thus, because we are unaware of the allegations made by the plaintiff in Kinney, and to the extent that Kinney conflicts with the reasoning in Jewish Hospital that a will/trust beneficiary is an incidental beneficiary of an accountant's post mortem services, we decline to adopt Kinney's interpretation. Accordingly, we hold that, because there were no genuine issues of material fact, the circuit court correctly granted summary judgment as to the third party beneficiary claim against Thayer.
The Appellants' complaint alternatively pled a negligence claim against Thayer. In the present case, the circuit court relied upon Kohala Agriculture to grant summary judgment in favor of Thayer; however, such reliance is misplaced. In Kohala Agriculture, the ICA addressed whether an accountant could be held liable to a third party investor for negligently preparing several business audits relied upon by third party investors. Kohala Agriculture, 86 Hawai`i at 322, 949 P.2d at 162. In its analysis, the ICA surveyed the various approaches of jurisdictions outside of Hawai`i that have addressed the liability of an accountant to a third party for the alleged negligent preparation of audits and held that an accountant may be held liable to third parties under [Restatement (Second)] section 552(2) for negligence in the preparation of an audit report that misrepresented the financial condition of several partnerships. Id. Accordingly, the ICA vacated the circuit court's grant of summary judgment against these particular plaintiffs because, when viewed in the light most favorable to them, there were sufficient facts, if proven, to establish their allegation of negligent misrepresentation. Id. at 328, 949 P.2d at 168. Here, the complaint did not allege negligent misrepresentation against Thayer, but rather alleged ordinary negligence. Negligent misrepresentation requires that: (1) false information be supplied as a result of the failure to exercise reasonable care or competence in communicating the information; (2) the person for whose benefit the information is supplied suffered the loss; and (3) the recipient relies upon the misrepresentation. See Kohala Agriculture, 86 Hawai`i at 323, 949 P.2d at 163; Restatement (Second) of Torts § 552. Although Kohala Agriculture stands for the proposition that an accountant may be held liable to a third party, we hold that the circuit court erred when it applied the analysis regarding negligent misrepresentation in the instant case because a claim of negligent misrepresentation had not been pled. Inasmuch as negligent misrepresentation was not pled and, therefore, inapplicable to the present case, we must determine whether the Appellants, who are non-clients, may bring a professional malpractice claim grounded in tort against Thayer for his alleged negligent failure to utilize federal disclaimers and the unified credit. In so doing, the analysis of Jewish Hospital is again relevant. Under a negligence claim, a duty is owed when, considering the policies favoring recovery against those limiting liability, the sum total of those policies leads the law to say that a particular plaintiff is entitled to protection. See Lee, 83 Hawai`i at 166, 925 P.2d at 336. Thus, a new duty will not be imposed upon members of society without a logical, sound, and compelling reason. Id. Similar to the reasons supporting a duty under legal malpractice, justification for holding accountants liable includes: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant's conduct and the injury; (5) the policy of preventing future harm; and (6) whether imposing liability imposed an undue burden upon the profession. Cf. Lucas, 15 Cal.Rptr. 821, 364 P.2d at 687-88. Here, based upon the pleadings and admissible evidence submitted by the parties, we conclude that there is no genuine issue of material fact as to whether Joan Hughes retained the services of Thayer for the preparation of estate tax returns, not estate tax advice. [19] The Appellants were not the intended beneficiaries of the relationship between Joan Hughes and Thayer. Because the Appellants were incidental, not intended, beneficiaries, the Appellants do not satisfy the first factor under Lucas. Therefore, as a matter of law, Thayer was entitled to summary judgment. Accordingly, we hold that the circuit court did not err when it granted summary judgment in Thayer's favor as to the third party beneficiary claim and, for the same reasons, affirm the grant of summary judgment in favor of Thayer as to the negligence claim.