communication with the third party, a specific agreement to prepare a report for the third party's use or according to its requirements, or even a mere awareness that "a primary, if not the exclusive, end and aim of auditing its client was to provide [the lender] with the financial information it required." 597 N.E.2d at 1085-87, 79 N.Y.2d at 705-07, 586 N.Y.S.2d at 92-93; European Am. Bank & Trust Co. v. Strauhs & Kaye, 483 N.E.2d 110, 120, 65 N.Y.2d 536, 554, 493 N.Y.S.2d 435, 445 (1985). In any event, conduct by the accountant is a critical prerequisite.
In Security Pacific, there was only one instance of direct contact -- a phone call -- between the accountants and the plaintiff. Security Pacific, 597 N.E.2d at 1085, 79 N.Y.2d at 705, 586 N.Y.S.2d at 92. And that call was initiated by the plaintiff, negating its value as "indispensable linking conduct . . . attributable to [the accountant]." 597 N.E.2d at 1085, 79 N.Y.2d at 705, 586 N.Y.S.2d at 92. Further, the financial report itself was prepared in the ordinary course of year-end accounting. 597 N.E.2d at 1086, 79 N.Y.2d at 706, 586 N.Y.S.2d at 93. The accountant's work was not for the particular benefit of the plaintiff, but "for the benefit of [the accountant's] client . . . as a 'convenient instrumentality for use in the development of [the client's] business, and only incidentally or collaterally for the use of those to whom [the client] might exhibit it thereafter.'" 597 N.E.2d at 1087, 79 N.Y.2d at 708, 586 N.Y.S.2d at 94.
The Security Pacific court distinguished the facts before it from those of European American, where there was a "direct nexus" consisting of the parties' "direct communications and personal meetings," 483 N.E.2d at 114, 120, 65 N.Y.2d at 545, 554, 493 N.Y.S.2d at 439, 445, and where those communications and meetings were for "the very purpose of discussing [the plaintiff's] financial condition and [the lender's] need for [the accountant's] evaluation." 483 N.E.2d at 120, 65 N.Y.2d at 554, 493 N.Y.S.2d at 445.
The facts of this case differ in no substantial respect from those in Security Pacific. No direct contact whatsoever is alleged between plaintiffs and Touche. Plaintiffs allege that Guild's president "contacted Touche and notified it" that plaintiffs would be relying on the financial report, but this indirect contact is even further removed from "sufficiently approaching privity" than the direct contact between plaintiffs and accountants in Security Pacific. Plaintiffs do not allege that the financial reports were prepared for their particular benefit. Indeed, they do not object to Magistrate Judge Buchwald's specific finding that "the 1988 Report was an end of the year audit report filed in compliance with the securities laws." R&R at 22. D&T is not answerable for plaintiffs' incidental and collateral use of that report.
The policy considerations outlined in Security Pacific are applicable here as well. "'The small price of a phone call'" should not give a lender "'additional loan protection [by] placing the auditor in the role of an insurer or guarantor of loans extended to its clients.'" 597 N.E.2d at 1086, 79 N.Y.2d at 705, 586 N.Y.S.2d at 93 (quoting lower court opinion). The borrower rather than the lender placed the call in this case, but that cannot make a difference or the policy would be a facade easily skirted. Surely an accountant's client would appreciate the value of assuring a prospective lender that a properly placed telephone call had backed up the pending transaction with "deep pocket surety coverage." Id..
Plaintiffs recognized at the time of filing their objections that the Security Pacific decision might clarify New York's law in this area. Pl's Obj. at 15 n.*, 20 n.*. The decision did clarify matters, although not in the way plaintiffs hoped. D&T's motion to dismiss plaintiffs' state law negligence claim is granted.
D&T's motion to dismiss plaintiff's § 10(b) claim is denied.
D&T's motion to dismiss plaintiff's state law negligence claim is granted.
It Is So Ordered.
Mary Johnson Lowe
United States District Judge