defendant made a negligent misrepresentation directly to the plaintiff. The court was focusing solely, if loosely, on whether plaintiff's injury was foreseeable and therefore proximately caused by the misrepresentation, not on whether defendant owed a duty to a third party.
Contrary to plaintiffs' contention, these cases do not suggest that Texas courts have or would find that accountants owe a duty of care to a "limited class" of future major investors seeking to acquire control, through open-market purchases, of a publicly-traded company. The Cook and Blue Bell courts both carefully cabined an accountant's duty within a "limited class" of ascertainable third persons. In both cases, the plaintiffs received the very documents prepared by defendants. Only the Hermann Hospital court seemingly untied a professional's duty of care from its "limited class" mooring. But that was not a case in which liability to a third party was even raised.
By focusing solely on the reference in section 552(2)(a) to a "limited group," plaintiffs have ignored section 552(2)(b). The Texas Supreme Court is unlikely to do likewise.
Section 552(2)(b) further limits liability to loss suffered "in a transaction that [the professional] intends the information to influence or knows that the recipient so intends or in a substantially similar transaction." The language seemingly limits accountant liability to private transactions, such as when an accountant's audit and opinion are relied upon in a privately-negotiated merger. See, e.g., H. Rosenblum, Inc. v. Adler, 93 N.J. 324, 461 A.2d 138 (1983).
While courts outside of Texas have disagreed as to whether an accountant must know or must merely foresee that a third party might rely on his or her audits, reports, or appraisals, virtually every court has limited an accountant's duty of care to third persons involved in private transactions. See, e.g., Sahlen & Assocs., Inc. Sec. Litig., 773 F. Supp. 342, 374 (D. Fla. 1991); Dowling v. Narragansett Capital Corp., 735 F. Supp. 1105, 1124-25 (D.R.I. 1990); Touche Ross & Co. v. Commercial Union Ins. Co., 514 So.2d 315 (Miss. 1987); Int'l Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806, 223 Cal. Rptr. 218 (Cal. Ct. App. 1986). See also Bethlehem Steel Corp. v. Ernst & Whinney, 822 S.W.2d 592 (Tenn. 1991) (surveying case law); Romualdo P. Eclavea, Liability of Independent Accountant to Investors or Shareholders, 35 A.L.R.4th 225.
Only lower courts applying California law have held that accountants have a duty to prospective shareholders when preparing Registration Statements and other documents in connection with a public offering of securities. See, e.g., Gaillard v. Arthur Young, No. 85-2373, 1989 WL 106834 (N.D. Cal. July 10, 1985). But these courts have declined to extend that duty when the negligence occurred, as here, in the making of subsequent "after market" disclosures. See, e.g., Moskowitz v. Vitalink Communications Corp., 751 F. Supp. 155, 160 (N.D. Cal. 1990). As the Moskowitz court noted, "such expansive liability is unwarranted in light of the broad protections afforded plaintiffs under federal and state securities law." Id.
Plaintiffs have not cited, and the court cannot find, a single decision by any court extending an accountant's duty of care to as-yet unidentified future open-market buyers of publicly-traded securities, even when that duty is limited to the rarified class of buyers with sufficient resources to acquire control of entire companies. Cf. Brug v. The Enstar Group, Inc., 755 F. Supp. 1247, 1258 (D. Del. 1991) ("If any member of the public who might choose to invest in the [corporations's] common stock were to qualify as part of the protected class, then the 'limited group' requirement would be meaningless").
This court believes that the Texas Supreme Court is unlikely to adopt a rule so universally avoided by sister states.
Moreover, this court finds no analogy in federal securities legislation or case law that might lead the Texas Supreme Court to impose a duty of care here.
Disclosures, such as the 1987 Crazy Eddie financial statement, are subject to review under section 10(b) of the 1934 Act. In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976), the Supreme Court held that a private action against accountants would not lie under section 10(b) in the absence of an allegation of "'scienter' intent to deceive, manipulate, or defraud." Id. at 193. While most Courts of Appeal have decided that reckless conduct can satisfy the scienter requirement, see, e.g., Sirota v. Solitron Devices, Inc., 673 F.2d 566, 575 (2d Cir.), cert. denied, 459 U.S. 838, 74 L. Ed. 2d 80, 103 S. Ct. 86 (1982), none has held that negligence satisfies the requirement.
The court concludes that the Texas Supreme Court would not disturb the balance struck by the federal securities regulatory scheme which conforms the level of liability to the degree of culpability.
The court holds that the Texas Supreme Court would find that under Texas law Peat Marwick owed no duty of care to major open-market purchasers of Crazy Eddie securities, even though Peat Marwick could foresee that such "players" would rely on its audits and opinions.
Peat Marwick's motion for partial summary judgment on the negligence and negligent misrepresentation claim is granted.
The court decides the pending motions as follows:
(i) The EMI/Zinn Complaint. The EMI/Zinn plaintiffs' motion to amend the complaint is granted. The court strikes the RICO and fraud claims against Sam M. Antar without prejudice. The EMI/Zinn plaintiffs shall have twenty days from the date of this order to apply for leave to amend the RICO, securities fraud, and common law fraud claims against the individual defendants.
(ii) The Class Complaint. The motion to amend the Class Complaint to add a RICO claim against Peat Marwick is undecided, pending further briefing by the parties on whether class plaintiffs have standing under section 1964(c).
(iii) The Negligence Claims. Peat Marwick's motion for summary judgment with respect to the negligence and negligent misrepresentation claim in the EMI/Zinn Complaint is granted.
Dated: Brooklyn, New York
January 20, 1993
Eugene H. Nickerson, U.S.D.J.
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