United States District Court, Southern District of New York
June 4, 1991
THE UNITED BANK OF KUWAIT, PLC, PLAINTIFF,
JAMES M. BRIDGES, LTD. AND JAMES M. BRIDGES, DEFENDANTS.
The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.
This an action for malpractice against a Virginia accountant
and his accounting firm. Defendants move pursuant to Rule
12(b)(2) of the Federal Rules of Civil Procedure to dismiss the
action for lack of personal jurisdiction. For the reasons set
forth below, defendants' motion is granted.
The facts underlying this motion are not in dispute.
Defendant James M. Bridges ("Bridges") is a certified public
accountant who resides in the state of Virginia and is the
general partner of James M. Bridges, Ltd., a five-person
accounting firm with its only office in Dale City, Virginia.
On June 29, 1988 Bridges signed a letter of engagement with
Southern Atlantic Mortgage, Inc. ("Southern Atlantic"), a
Virginia mortgage broker, under which Bridges was to conduct an
audit of Southern Atlantic for the fiscal years ending June 30,
1987 and June 30, 1988. Bridges Aff., Exh. A. The letter of
engagement, entered into in Virginia, does not mention the
purpose of the audit but Bridges testified that the audit was
completed to show compliance with Housing and Urban Development
("HUD") regulations and for internal management purposes.
Id.¶ 18; Defendants' Memorandum of Law and Supporting Exhibits
(hereinafter "Def. Mem. of Law"), Exh. 2 at 123. Bridges
performed all work necessary to complete the audit in the state
of Virginia and on August 30, 1988 sent the certified financial
statements to Southern Atlantic in Woodbridge, Virginia.
Bridges Aff. ¶ 17; Def. Mem. of Law., Exh. 5.
Plaintiff United Bank of Kuwait, PLC ("UBK") is a British
bank having offices in New York City. In October 1987, Southern
Atlantic and UBK had entered into a Mortgage Warehousing Loan
and Security Agreement ("the Security Agreement") under which
UBK was to extend a $10 million revolving line of credit to
Southern Atlantic to allow Southern Atlantic to finance and
resell residential mortgage loans. Berrio Aff., Exh. A. The
Security Agreement required Southern Atlantic to provide UBK
within 120 days of the end of each fiscal year annual financial
statements certified without qualification.
In September 1988, UBK began reviewing financial statements
provided by its borrower Southern Atlantic for the years
ending June 30, 1987 and June 30, 1988 to determine whether to
renew the line of credit which was to expire in October 1988.
Marlene Berrio ("Berrio"), a UBK officer, claims she detected
arithmetic errors in the statements Southern Atlantic had
provided. Berrio Aff. ¶ 8. She telephoned Bridges, the auditor
listed on the statements, to inquire about the errors and was
referred to Sebastian Palack ("Palack"), a staff accountant at
Bridges who had been in charge of the audit. Palack and Berrio
ascertained that the statements certified by Bridges contained
different figures than those Berrio stated were in the
documents she possessed. Berrio apparently sent Palack those
documents and in response in November 1988 Palack forwarded
true copies of the statements with a handwritten cover note
PLEASE USE THIS COPY FOR ALL YOUR PURPOSES.
THE STATEMENTS YOU SENT US WERE NOT WHAT WE HAD
ISSUED TO SOUTHERN ATLANTIC.
ANY QUESTIONS, CALL US.
JAMES M. BRIDGES, LTD.
Berrio Aff., Exh. C.
UBK renewed its Security Agreement with Southern Atlantic.
However, on June 30, 1989, UBK declared Southern Atlantic in
default under the Security Agreement and demanded immediate
repayment. Southern Atlantic failed to repay its indebtedness
resulting in a loss to UBK in excess of $2 million. Berrio Aff.
The financial statements prepared by Bridges reflect that UBK
was Southern Atlantic's largest lender. During the course of
the audit, Bridges sent UBK a "Standard Bank Confirmation
Inquiry" dated July 1, 1988 requesting information about
Southern Atlantic's indebtedness under the line of credit.
Berrio Aff., Exh. B. UBK returned the signed statement to
Bridges on July 6, 1988. Bridges acknowledged at his deposition
that he or his firm "may have reviewed" the Security Agreement
during its audit of Southern Atlantic. Nimetz Aff., Exh. 6 at
Bridges testified at his deposition that the firm's gross
revenues were $308,617 in 1988 and $399,032 in 1989. Nimetz
Aff., Exh. 13.*fn1 Documents produced in discovery show that
Bridges derived revenues of $34,587 and $41,345 in 1988 and
1989, respectively, from sources outside Virginia.
UBK commenced this action for accountants malpractice in
Supreme Court for the State of New York, County of New York. On
June 11, 1990 defendants removed the action to federal court.
On June 18, 1990 defendants filed a motion to dismiss the
complaint under Rules 12(b)(2) and 12(b)(6). At oral argument
on September 27, 1990 the Court denied the motion without
prejudice to renew after limited discovery on the issue of
personal jurisdiction. On February 22, 1991 defendants filed
the instant motion to dismiss for lack of personal
In order to defeat a motion to dismiss for lack of personal
jurisdiction brought after discovery, plaintiff must make a
prima facie showing of facts, which if credited by the trier of
fact, would suffice to establish jurisdiction over the
defendant. See Ball v. Metallurgie Hoboken-Overpelt, S.A.,
902 F.2d 194, 197 (2d Cir.), cert. denied, ___ U.S. ___, 111 S.Ct.
150, 112 L.Ed.2d 116 (1990). Bare allegations of jurisdiction
will not suffice where, as in this case, discovery has taken
UBK relies N.Y. C.P.L.R. § 302(a)(3)(ii) (McKinney 1990)
which provides for long-arm jurisdiction over any
non-domiciliary defendant who:
3. commits a tortious act without the state
causing injury to person or property within the
state . . ., if he
(ii) expects or should reasonably expect the act
to have consequences in the state and derives
substantial revenue from interstate or
international commerce; . . . .
Defendants concede that the tort alleged to have been
committed, the negligent preparation and certification of
financial statements, took place "without the state," namely,
in Virginia. The issue presented is whether UBK has made a
sufficient showing as to the remaining elements of jurisdiction
under § 302(a)(3)(ii).
1. Causing Injury Within the State
UBK claims that jurisdiction is proper in New York because
Bridges' negligent preparation and certification of financial
statements in Virginia caused injury to UBK in New York in the
form of losses suffered by UBK upon Southern Atlantic's
New York courts uniformly hold that the situs of a
nonphysical, commercial injury is "where the critical events
associated with the dispute took place." American Eutectic
Welding Alloys Sales Co. v. Dytron Alloys Corp., 439 F.2d 428,
433 (2d Cir. 1971) (quoting Spectacular Promotions, Inc. v.
Radio Station WING, 272 F. Supp. 734, 737 (E.D.N.Y. 1967)). The
occurrence of financial consequences in New York due to the
fortuitous location of plaintiffs in New York is not a
sufficient basis for jurisdiction under § 302(a)(3) where the
underlying events took place outside New York. See Pocahontas
Supreme Coal Co. v. National Mines Corp., 90 F.R.D. 67, 73
(S.D.N.Y. 1981). See, e.g., Mije Assocs. v. Halliburton Servs.,
552 F. Supp. 418 (S.D.N.Y. 1982) (financial loss to New York
partnership insufficient where acts of professional malpractice
occurred exclusively in Kentucky); Weiss v. Greenberg, Traurig,
Askew, Hoffman, Lipoff, Quentel & Wolff, P.A., 85 A.D.2d 861,
446 N.Y.S.2d 447 (App. Div. 1981) (diminution in value of
plaintiff's second mortgage and note located in New York not a
sufficient injury where acts of legal malpractice causing such
diminution took place in Florida); Chemical Bank v. World
Hockey Ass'n, 403 F. Supp. 1374, 1380 (S.D.N.Y. 1975) (injury
resulting from tort of conversion deemed to occur in Maryland
or New Jersey where defendants' acts respecting the property
were committed, even though plaintiff alleged injury to
security interest located in New York).
Assuming plaintiff's allegations to be true, the real injury
in this case alleging accountant malpractice is the loss of
services suffered by Southern Atlantic under its auditing
contract with Bridges. There is no claim that there was an
existing relationship between Bridges and UBK. Accordingly, the
injury UBK claims it suffered is not direct but "remote and
consequential," see Lehigh Valley Indus., Inc. v. Birenbaum,
527 F.2d 87, 94 (2d Cir. 1975), in relation to events which
transpired exclusively in Virginia.*fn2
2. Expects or Should Reasonably Expect to Have Consequences in
Bridges maintains that UBK cannot demonstrate that Bridges
expected or reasonably should have expected its acts in
preparing the financial statements to have consequences in New
The test of whether the defendant knew or reasonably should
have known that his acts would have consequences in the forum
state is an objective rather than subjective one. See Allen v.
Auto Specialties Mfg. Co., 45 A.D.2d 331, 357 N.Y.S.2d 547
(App. Div. 1974). The requirements for accountants liability in
New York suggest the appropriate contours of an objective
test. In general, before an accountant may be held liable in
negligence to noncontractual parties who rely to their
detriment on inaccurate financial reports, the accountant must
have been aware the reports were to be used for a particular
purpose, in furtherance of which a known party was intended to
rely, and there must have been some conduct on the part of the
accountant which evinces the accountant's understanding of that
party's reliance. See Credit Alliance Corp. v. Arthur Andersen
& Co., 65 N.Y.2d 536, 483 N.E.2d 110, 118, 493 N.Y.S.2d 435,
Where, as here, the accountant is unaware of the purpose of
the audit because the client does not inform him of the purpose
in the letter of engagement, there is no basis for a reasonably
prudent accountant to expect to be haled into any particular
forum. To hold that simply because UBK was one of the Southern
Atlantic's creditors, Bridges knew or reasonably should have
known that any errors in the audit would have consequences to
UBK in New York would render an accountant subject to personal
jurisdiction in any forum in which creditors of his clients are
located. Such a result seems manifestly unreasonable.
UBK also relies on communications between a Bridges staff
accountant and Marlene Berrio at UBK, including the
transmission to UBK in November 1988 of a copy of the financial
statements Bridges had prepared. These events transpired
several months after the audit was completed and the alleged
negligent acts occurred and arose out of an unsolicited request
by UBK. The phrase, "Please use this for all your purposes,"
appears under the circumstances to be idiomatic rather than
imperative.*fn3 These facts make it far from clear that at the
time Bridges prepared the financial statements in Virginia for
its Virginia client, defendants knew or reasonably should have
known that their acts would have consequences to UBK in New
York or would have been relied upon by UBK to extend credit.
3. Derives Substantial Revenue from Interstate Commerce
The record shows that in 1988 Bridges derived no more than
10% of its revenues from clients outside Virginia in each of
the years 1988 and 1989. Bridges' receipts reveal that many of
the firm's out-of-state clients are located in the adjoining
states of Maryland and the District of Columbia. Revenues
derived from these local clients cannot credibly be deemed
revenues from "interstate" commerce in any but the most literal
sense. See Markham v. Gray, 393 F. Supp. 163, 166 (W.D.N Y
1975) ("interstate commerce under Section 302(a)(3)(ii) should
be construed to . . . exclude a local physician who treats his
patients in two bordering states"), aff'd, 531 F.2d 634 (2d
Excluding local clients in the surrounding states, the record
shows that Bridges derived no more than 1% (approximately
$2000) of his revenues in 1988 from bona fide interstate
commerce and no more than 8% (approximately $22,600) in
1989.*fn4 These figures are insubstantial in both relative and
absolute terms in relation to a firm with annual revenues of
over $300,000. See Ronar, Inc. v. Wallace, 649 F. Supp. 310
(S.D.N.Y. 1986) ($6500 in consulting fees constituting 20% of
defendant's annual revenues not substantial revenue from
interstate commerce); Vecchio v. S & T Mfg. Co., 601 F. Supp. 55
(E.D.N.Y. 1984) ($7400 or 1% of total revenues not prima facie
evidence of substantial interstate revenues).*fn5 The
requirement that the
defendant derive substantial revenue from interstate commerce
was meant to exclude businesses whose operations are local in
nature. See Markham, 393 F. Supp. at 166, aff'd, 531 F.2d 634
(2d Cir. 1976).
In sum, plaintiff has failed to make a prima facie showing of
facts, which if credited by the trier of fact, would suffice to
establish jurisdiction over the defendant under C.P.L.R. §
4. Due Process
Due process requires that a non-domiciliary defendant have
sufficient minimal contacts with the forum state such that the
exercise of long-arm jurisdiction over him does not offend
"traditional notions of fair play and substantial justice."
International Shoe Co. v. State of Washington, 326 U.S. 310,
316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945). Due process is
satisfied as long as there is purposeful activity by the
defendant in the forum giving rise to a reasonable anticipation
of being haled into court there. See Burger King Corp. v.
Rudzewicz, 471 U.S. 462, 472-474, 105 S.Ct. 2174, 2181-2183, 85
L.Ed.2d 528 (1985). Purposeful activity is found where the
defendant has deliberately engaged in significant activities
within the state or has created continuing obligations between
himself and the residents of the forum state. Id. at 475-76,
105 S.Ct. at 2183-84. The exercise of long-arm jurisdiction
over Bridges in this action would violate the due process
clause because Bridges has engaged in no activity, purposeful
or otherwise, in New York.
Accordingly, defendants' motion to dismiss the complaint is
granted. This case is ordered closed.
IT IS SO ORDERED.