Court Opinion

ID: 1028341
Source: CourtListenerOpinion
Date Created: 2013-07-05 07:38:59.405478+00
Date Added: 2024-06-11T12:31:44.708320
License: Public Domain

UNPUBLISHED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Affirmed by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.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    Texas-

based 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

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