The opinion of the court was delivered by: GOETTEL
This is a diversity action by Aeronca, Inc. (Aeronca) against three officers of the Frigitemp Corporation (Frigitemp),
a New York Corporation that is now in bankruptcy,
and several partners of Arthur Andersen & Co. (the Andersen defendants),
a public accounting firm that, from 1973 until 1979, was the independent public accountant for Frigitemp.
Before this Court is the Andersen defendants' motion to dismiss the amended complaint.
This lawsuit arises from Frigitemp's failure to make payments under a contract with Aeronca entered into in June 1973. Simply stated, Aeronca agreed, inter alia, to manufacture panels for installation by Frigitemp on naval vessels pursuant to a contract with Litton-Ingalls,
and Frigitemp agreed, inter alia, to make periodic progress payments to Aeronca. Soon after work began, however, Aeronca encountered difficulty in collecting the progress payments from Frigitemp; of the twenty-one invoices submitted to Frigitemp between January 1974 and October 1975, eighteen were paid from nine to ninety-six days after their due dates, and four were never paid.
Frigitemp's failure to meet its obligations under the contract finally prompted Aeronca, in 1976, to bring suit against Frigitemp to collect on the unpaid invoices and to recover the costs incurred by delays allegedly caused by Frigitemp.
Aeronca's claims were never resolved, however, because, in 1978, the action was stayed as a result of Frigitemp's petition for an arrangement pursuant to Chapter XI of the Bankruptcy Act. See supra note 2.
This action, which was commenced in 1980, is another attempt to recoup the losses Aeronca suffered as a result of its dealings with Frigitemp. Aeronca contends that, when it encountered difficulties in collecting the progress payments, it grew concerned about Frigitemp's financial condition and, therefore, requested copies of Frigitemp's financial statements audited and certified by Arthur Andersen & Co. for the years 1973-1976. It further alleges that it decided to continue work under the contract and to extend credit to Frigitemp for the amount of the unpaid invoices because the statements portrayed Frigitemp as a financially healthy company
-- a false and misleading picture.
According to Aeronca, the Andersen defendants' conduct in preparing and certifying these statements subjects them to liability for common law fraud, aiding and abetting a common law fraud, and negligence.
The Andersen defendants filed the present motion to dismiss in 1982. They contend that the complaint does not state a claim for fraud, that there is no tort of aiding and abetting a common law fraud, that the negligence claim fails because Aeronca was not in privity with the Andersen defendants, and that the negligence claims are barred by the statute of limitations. For the reasons stated below, this motion is granted in part and denied in part.
Turning first to the fraud claim, the Court notes that, to prevail on a claim for common law fraud, the plaintiff must prove that the defendant made a false representation of fact, that the defendant made the representation with scienter, that the defendant intended the plaintiff to act or to refrain from acting in reliance on the misrepresentation, that the plaintiff justifiably relied upon the misrepresentation in taking, or refraining from, action, and that the plaintiff sustained pecuniary loss as a result of this reliance. W. Prosser, Handbook of the Law of Torts § 105, at 685-86 (4th ed. 1971); see Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119, 250 N.E.2d 214, 217, 302 N.Y.S.2d 799, 803 (1969). In this case, the only issue is whether the allegations of the complaint could support a finding of scienter. The Andersen defendants contend that the allegations of the complaint amount only to negligence and that, therefore, Aeronca's claim of fraud must be dismissed. This Court disagrees.
A false statement is made with scienter if it is made with knowledge that the statement is false. W. Prosser, supra, § 107, at 699-702. Additionally, recklessness can take the place of actual knowledge under New York law. As the New York Court of Appeals noted,
[a] representation certified as true to the knowledge of the accountants when knowledge there is none, a reckless misstatement, or an opinion based on grounds so flimsy as to lead to the conclusion that there was no genuine belief in its truth, are all sufficient upon which to base liability. A refusal to see the obvious, a failure to investigate the doubtful, if sufficiently gross, may furnish evidence leading to an inference of fraud so as to impose liability for losses suffered by those who rely on the balance sheet.
State Street Co. v. Ernst, 278 N.Y. 104, 112, 15 N.E.2d 416, 419 (1938); accord, Ultramares Corp. v. Touche, 255 N.Y. 170, 179, 174 N.E. 441, 444 (1931) ("Fraud includes the pretense of knowledge when knowledge there is none.").
In this instance, Aeronca alleges that the Andersen defendants knew that the information contained in the financial statements was materially false and misleading and that the statements would be relied upon by Aeronca and other creditors in extending credit to Frigitemp. Amended Complaint para. 16(a).
If Aeronca proves this allegation at trial, it will have satisfied the scienter requirement for common law fraud.
Thus, it has alleged scienter sufficiently to state a claim against the Andersen defendants for common law fraud,
and it would be improvident to conclude at this juncture that there is no set of facts that would entitle Aeronca to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
In reaching this conclusion, the Court is mindful of Dworman v. Lee, 83 A.D.2d 507, 441 N.Y.S.2d 90 (1st Dep't 1981), aff'd, 56 N.Y.2d 816, 438 N.E.2d 103, 452 N.Y.S.2d 570 (1982), a case heavily relied upon by the Andersen defendants. In Dworman, a case in which the plaintiffs sued Arthur Andersen & Co. for fraud and negligence in connection with the firm's preparation of Frigitemp's financial statements for the years 1973-1976, the Appellate Division held that a complaint similar to Aeronca's amended complaint did not state a cause of action for fraud.
It noted that
notwithstanding the nomenclature of the first and second causes sounding in fraud and the language in the third cause of action that defendants "knew or should have known the falsity of their representations," we find that the first, second and third causes essentially plead negligence. These causes are not transformed ...