Opinion ID: 199543
Heading Depth: 2
Heading Rank: 3

Heading: Defining Substantially Similar Transactions.

Text: 26 Although substantially similar transactions can serve as a basis for an accountant's liability to a third party under the Restatement rule, the dimensions of that doctrine remain in doubt. 5 Our interest, of course, is in how the Massachusetts courts would define the term - but neither the SJC nor the Massachusetts Appeals Court has addressed this issue. 27 The Restatement does not attempt to define the phrase substantially similar transactions. Nevertheless, the commentary offers some insight into what is meant by the term. Thus, when a corporation seeking a bank loan asks an accountant to audit the books and prepare a report for the prospective lender, liability for negligence will attach even though the corporation delays for a month in obtaining the loan. See Restatement (Second) of Torts §§ 552 cmt. j. The transaction, though later in time, remains substantially similar because its essential character - the amount and terms of the credit - has not changed. Id. So too if the amount of the anticipated loan varies slightly, the ensuing transaction nonetheless will remain substantially similar; slight variances do not affect a transaction's essential character. Id. If, however, after the accountant's report is delivered the corporation seeks and receives a much larger loan, the transactions will no longer be substantially similar and the accountant will not be liable to the bank for a careless misstatement. Id. 28 In the last analysis, [t]he question [is] one of the extent of the departure that the maker of the representation understands is to be expected. Id. Minor deviations are to be anticipated in complex business transactions, and such deviations ordinarily do not allow the misinformer to escape liability to a known third party. If the departure is major, however, a different result obtains; the transaction actually consummated cannot then be regarded as essentially the same as the transaction originally contemplated (and, therefore, cannot be regarded as substantially similar). 29 Quite plainly, this definition is fact-sensitive and requires case-by-case development. We think that, under it, an accountant's liability for substantially similar transactions must be determined in two steps. First, the rule implicitly recognizes that the risk perceived by the accountant at the time of the engagement cabins the extent of the duty that he owes to known third parties. Cf. Rusch Factors, Inc. v. Levin, 284 F. Supp. 85, 91 (D.R.I. 1968) (advocating this proposition prior to promulgation of the final version of the Restatement rule); Ryan v. Kanne, 170 N.W.2d 395, 401-02 (Iowa 1969) (same; citing draft version of the Restatement). Thus, an inquiring court initially must consider, from the preparer's standpoint, what risks he reasonably perceived he was undertaking when he delivered the challenged report or financial statement. 30 Second, the court must undertake an objective comparison between the transaction of which the accountant had actual knowledge and the transaction that in fact occurred. This comparison cannot be hyper technical, but, rather, must be conducted in light of [t]he ordinary practices and attitudes of the business world. Restatement (Second) of Torts §§ 552 cmt. j. The goal of this inquiry is to determine whether the two transactions share essentially the same character. If so, the actual transaction is substantially similar to the contemplated transaction (and, therefore, liability-inducing). Elsewise, the third party has no recourse against the accountant for negligent misrepresentation. 31