Badische Corp. v. Caylor

• Decision Date: 04 June 1987
• Docket Number: No. 44231,44231
• Citation: 257 Ga. 131,356 S.E.2d 198
• Parties: BADISCHE CORPORATION, et al. v. CAYLOR, et al
• Court: Georgia Supreme Court

Page 198

356 S.E.2d 198

257 Ga. 131

BADISCHE CORPORATION, et al. v. CAYLOR, et al.

No. 44231.

Supreme Court of Georgia

June 4, 1987.

A.O. Bracey III, Michael J. King, Somers & Altenbach, Atlanta, for Badische Corp. et al.

John P. Neal III, Minor, Bell & Neal, P.C., Dalton, Hugh C. Griffin, J. Robert Persons, Harvey R. Spiegel, Lord, Bissell & Brook, Atlanta, for Arnold L. Caylor, et al.

Kutak, Rock & Campbell, Frank A. Lightmas, Jr., Smith, Gambrell & Russell, James H. Bratton, Jr., John L. Lathom, amici curiae.

HUNT, Justice.

This case comes before this court on a certified question from the United States Court of Appeals for the Eleventh Circuit, 806 F.2d 231. The facts as set out by that court, and the question, follow:

"Color-Dyne was a partnership formed by two corporations to utilize a "carpet printer" process. Plaintiffs Badische Corporation and Akzona Incorporated provided materials to Color-Dyne on credit. In late 1980, Color-Dyne showed its most recent financial statements to the plaintiffs. These financial statements were prepared for Color-Dyne by defendant David Siegel, a certified public accountant, on behalf of defendant Arnold L. Caylor & Co., a public accounting firm. These statements showed that Color-Dyne owned $2 million in inventory. The audit failed to reveal, however, that various banks had secured interests in this inventory. Plaintiffs have testified that they relied on the certified financial statements prepared by defendants in extending and increasing Color-Dyne's line of credit. Shortly thereafter, Color-Dyne was forced into bankruptcy. The outstanding debts owed to plaintiffs totaled over $850,000.

"Plaintiffs brought this action alleging that they were injured as a result of defendants' negligence in preparing Color-Dyne's financial statements. Plaintiffs have presented evidence that the financial statements were not audited pursuant to generally accepted accounting practices. Despite this evidence of accounting malpractice, the district court granted the defendants' motions for summary judgment. The district court held that, under Georgia law, the duty of care of accountants did not extend to these plaintiffs since the accountants did not have 'actual notice' of who would be given the financial statements."

In footnote 2 of its opinion, the court noted that the district court, recognizing that the defendants could reasonably foresee creditors' reliance on the audit, "made an implicit distinction between this type of general knowledge and specific knowledge of who would receive the financial statements. There is no evidence that defendants were ever informed that Color-Dyne intended to give the financial statements to plaintiffs or any other creditors. Absent 'actual notice' that the audit would be shown to creditors, the district court held that an accountant had no duty of care to third parties."

Following a discussion of the district court's holding, and the contentions of the plaintiffs, the court then certified the following question to this court: "Can third parties recover against an accountant under Georgia law for the accountant's negligence in preparing audited financial statements where it was foreseeable that the third parties would rely upon the financial statements?"

The answer to the certified question is controlled by our holding in Robert & Co. v. Rhodes-Haverty Partnership, 250 Ga. 680, 300 S.E.2d 503 (1983). In that case we addressed the scope of professional liability in the context of an engineer who had issued a report on the condition of a building, and adopted the rule enunciated in the Restatement of Torts 2d, Section 552 (1977), ¹ whereby "one who supplied information during the course of his business, profession, employment, or in any transaction in which he has a pecuniary interest has a duty of reasonable care and competence to parties who rely upon the information in circumstances in which the maker was manifestly aware of the use to which the information was to be put and intended that it be so used. This liabilty is limited to a foreseeable person or limited class of persons for whom the information was intended, either directly or indirectly. In making a determination of whether the reliance by the third party is justifiable, we will look to the purpose for which the report or representation was made. If it can be shown that the representation was made for the purpose of inducing third parties to rely and act upon the reliance, then liability to the third party can attach. If such cannot be shown there will be no liability in the absence of privity, wilfulness or physical harm or property damage. The additional duty that this rule imposes may be, of course, limited by appropriate disclaimers which would alert those not in privity with the supplier of...