Opinion ID: 2404736
Heading Depth: 1
Heading Rank: 5

Heading: A. The 1971 Audit

Text: Both the trial court and the Appellate Division ruled that the plaintiffs' claim based on negligent preparation of the 1971 audit could not be sustained because the accountants were not aware at the time the audit was prepared of the existence of the plaintiffs or of a limited class of which the plaintiffs were members. The defendant's audit had been completed on April 16, 1971 and Giant's merger discussions with the plaintiff did not begin until the following September. [15] Therefore the defendants had no knowledge of the Rosenblums or the prospective merger at the time of the preparation of the audit and there could be no liability under Ultramares or the Restatement. It may be contended under one view of the evidence that the defendants knowingly permitted and authorized plaintiffs' use of the 1971 audit. In doing so, they were aware that the plaintiffs would rely on that audit. Under these circumstances, the defendants implicitly represented to the plaintiffs, as they had represented in their certificate to Giant, that defendants had examined the 1971 statements of earnings and balance sheet in accordance with generally accepted auditing standards and that the financial statements present[ed] fairly Giant's financial position. There is evidence that the plaintiffs relied on these financial statements. It was also reasonably inferable that the audit had been made carelessly and negligently, resulting in false statements and in the plaintiffs' loss. Defendants' presence and participation in the merger proceedings were not gratuitous. Any representations were made by defendants on behalf of their client Giant. Liability would be sustainable under the traditional rationale of Glanzer v. Shepard, supra , and Economy B. & L. Ass'n v. West Jersey Title Co., supra . However, the facts supporting this position are somewhat attenuated. We are not unmindful that R. 4:46-2 provides that summary judgment shall be entered when there is no genuine issue as to any material fact challenged. Implicated is the policy consideration that protection is to be afforded against groundless claims to save the expenses of protracted litigation and reserve judicial manpower and facilities. Robbins v. Jersey City, 23 N.J. 229, 241 (1957); see also United Rental Equip. Co. v. Aetna Life & Cas. Ins. Co., 74 N.J. 92, 99 (1977). We therefore deem it appropriate to apply the somewhat broader principle enunciated above because the trial court may be faced with this issue at the trial. In adopting that position we are aware of the observation of Chief Justice Weintraub in Busik v. Levine, 63 N.J. 351, 363, appeal dismissed for want of substantial federal question, 414 U.S. 1106, 94 S.Ct. 831, 38 L.Ed. 2d 733 (1973), that [w]hether an issue will be dealt with narrowly or expansively calls for a judge's evaluation of many things, including the need for guidance for the bar or agencies of government or the general public. See also Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 502 (1974). When the defendants prepared the Giant audit, they knew or should have known that Giant would probably use the audited figures for many proper business purposes. They knew that it was to be incorporated in Giant's annual report, a report that would be transmitted to each Giant stockholder, and would be filed with the SEC in conjunction with Giant's proxy solicitation material for its annual stockholder meeting. [16] The defendants also knew or should have known that the audited financial statements would be available and useful for other proper business purposes, such as public offerings of securities, credit, and corporate acquisitions. These were clearly foreseeable potential uses of the audited financials at the time of their preparation. Giant and the defendant auditors knew that these financial statements would be used at least until the next financial statements had been audited and released. Defendants became aware of plaintiffs' existence and their intended use of these statements before the plaintiffs relied on the accuracy of these financials. The defendants knew that the merger agreement included a representation that the prospectus used for the public offering in December 1971 contained no untrue statement of a material fact and did not omit to state any material fact. The defendants knew that this prospectus included their opinion that the financials had been prepared in accordance with generally accepted accounting principles and fairly presented Giant's financial condition. The defendants' representations were of a continuing nature and their obligation was a continuing one. See Fischer v. Kletz, 266 F. Supp. 180 (S.D.N.Y. 1967) (accountants discovering inaccuracy after audit was released held under duty to disclose after-acquired information). Defendants' ignorance of the precise use to which the statements would be put does not eliminate their obligation. Applying the principle previously stated, we find first that it is necessary only that Giant, the entity for whom the audit was being made, used it for a proper business purpose. There was no limitation in the accountants' opinion. They could reasonably expect that their client would distribute the statements in furtherance of matters relating to its business. Having inserted the audit in that economic stream, the defendants should be responsible for their careless misrepresentations to parties who justifiably relied upon their expert opinions. On the motion for summary judgment the facts viewed favorably from the plaintiffs' perspective are that the defendants negligently prepared their audit of Giant's financial statements reflecting Giant's operations for the twelve months ending January 30, 1971 and its financial status on that date. These statements were subsequently delivered by Giant, in furtherance of its business, to the plaintiffs for their consideration in determining whether to sell their enterprises to Giant, whether to accept Giant stock and how much stock to seek. Indeed, the defendants became aware of the fact that these financials had been delivered to the plaintiffs in connection with the proposed merger. The plaintiffs, allegedly relying upon the defendants' express representations, entered into the merger agreement which was subsequently consummated. As a result, plaintiffs claim to have suffered damages. Under these circumstances, the courts below erred in striking the cause of action predicated on the negligent auditing of the financial data for the year ending January 30, 1971.