Bank of New Orleans and Trust Co. v. Monco Agency

• Decision Date: 21 July 1989
• Docket Number: Civ. A. No. 82-2758,83-2926.
• Parties: The BANK OF NEW ORLEANS AND TRUST COMPANY v. MONCO AGENCY INCORPORATED, et al.
• Court: U.S. District Court — Eastern District of Louisiana

719 F. Supp. 1328

The BANK OF NEW ORLEANS AND TRUST COMPANY v. MONCO AGENCY INCORPORATED, et al.

Civ. A. Nos. 82-2758, 83-2926.

United States District Court, E.D. Louisiana.

July 21, 1989.

Curtis Boisfontaine and Sally Shushan, Sessions, Fishman, Rosenson, Boisfontaine & Nathan, New Orleans, La., for plaintiff.

Frank Peragine, Christopher Guidroz and Judith Perhay, Simon, Peragine, Smith & Redfern, New Orleans, La., for defendants.

MEMORANDUM OPINION

MENTZ, District Judge.

Before the Court is the motion of defendant, Arthur Young & Company (AYC), for reconsideration of the Court's Order of September 30, 1988, denying AYC's motion for summary judgment. The Court, after reviewing the motion, the memoranda and arguments of counsel, the record, and the law, grants AYC's motion for the reasons set forth below.

This is an action for negligent misrepresentation under Louisiana law. AYC, a firm of independent public accountants, was retained by defendant, Monco Agency, Inc. (Monco), to conduct an audit of Monco's financial statements for 1980. The 1980 audit report was issued on May 14, 1981. AYC had conducted such an audit for Monco each year since 1977. AYC was aware that Monco provided a copy of these audit reports to the First National Bank of Commerce (FNBC), Monco's sole major creditor, with whom Monco enjoyed a long term banking relationship. In 1977, Monco had borrowed from FNBC in excess of two million dollars on a five year note payable with interest at prime plus 1½ percent which required the personal guarantee of Mr. Oliver Stephen Montagnet, Jr., the president and chief operating officer of Monco. Mr. Montagnet, in an effort to obtain a loan which would not require his personal guarantee and which had a lower interest rate than the FNBC loan, began negotiations with plaintiff, The Bank of New Orleans and Trust Company (BNO), in early September, 1981. In conjunction with these loan negotiations, Monco provided BNO with a copy of its 1980 audit report prepared by AYC. In late 1981 and early 1982, BNO extended over $2,100,000.00 in credit to Monco. BNO did not require a personal guarantee on either note. Monco never made a payment on the BNO loans. By March of 1982, the Texas Department of Insurance had placed Monco into conservatorship.

BNO filed the instant action to recover its loss on the Monco loans. BNO alleges that it loaned the funds to Monco in reliance upon AYC's 1980 audit report of Monco which misrepresented the financial condition of the company. BNO's claim against AYC alleges negligent misrepresentation under Louisiana law, which has adopted the standards set forth in section 552 of the Restatement (Second) of Torts for this cause of action. On a prior date, AYC moved for summary judgment on the ground that it did not know that the 1980 audit report of Monco would be provided to BNO or any bank other than FNBC and, hence, is not liable to BNO under Louisiana law. By way of Order and Reasons dated September 30, 1988, the Court denied AYC's motion for summary judgment on the ground that "there is a genuine dispute of material fact regarding AYC's knowledge of the intended use of the 1980 audit report...." The Court believed that a jury could infer, based on the totality of the evidence, that AYC knew that Monco would distribute the 1980 audit report to banks other than FNBC. On reconsideration, the Court questioned whether section 552 of the Restatement (Second) of Torts: (1) requires that AYC have actual as opposed to constructive knowledge of the persons who would receive the 1980 audit report and the nature of the proposed transaction, and (2) whether this knowledge may be proven by circumstantial as opposed to direct evidence.

Pursuant to the Court's directive, the parties filed memoranda on these issues. AYC contends that section 552 of the Restatement (Second) of Torts expressly articulates an actual, as opposed to a constructive knowledge standard, by limiting the maker of the information's liability to loss suffered:

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and

(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.

Restatement (Second) of Torts, section 552 (emphasis added). AYC further argues that the actual knowledge standard set forth in the Restatement was applied in Hot Boudin Co. v. Harrison Price Co., 842 F.2d 328 (5th Cir.1988), wherein the court stated: "The Restatement limits the class of persons entitled to recover from the negligent supplier of misinformation to persons the supplier knows will rely on the information. While this duty may extend to an unnamed group, it is not enough that the supplier `merely knows of the ever-present possibility' that the information will be repeated to others who will rely on it." Id. at 6 842 F.2d 328 (table) (quoting Restatement (Second) of Torts, § 552 (1977). Accordingly, the Hot Boudin court refused to hold Harrison Price, the maker of a projection study for the World's Fair, liable to concessionaires who relied on the attendance projections in the report:

Harrison Price completed its projection studies in November and December 1980, long before the appellants became concessionaires at the World's Fair. While it is possible that Harrison Price had reason to expect that lenders, creditors, concessionaires, and other parties could potentially rely on the projection study, imposing liability to such an undefined, unlimited class of potential users would radically expand exposure for negligent misrepresentation and seriously discourage exchange of information.

Id. at 7 842 F.2d 328 (table). Based on the foregoing, AYC claims that this Court must determine whether AYC had actual knowledge of the persons or class of persons to whom Monco intended to distribute the 1980 audit at the time AYC issued the report. AYC believes that the "should have known" phraseology is merely another way of stating the constructive knowledge standard which is rejected by section 552 of the Restatement.

Additionally, AYC argues that section 552 requires that the maker's knowledge of the intended use of the information be manifest and actual. The Restatement explains that it imposes liability "only in circumstances in which the maker was manifestly aware of the use to which the information was to be put and intended to supply it for that purpose." Restatement Second of Torts, section 552, comment a.

Regarding the issue of direct versus circumstantial evidence, AYC concedes that inference or circumstantial proof may be used to determine the persons for whose benefit and guidance the information is supplied. However, AYC believes that "knowledge of the unidentified third party (and a concomitant duty of care) may be inferred ... only ... from the supplier's actual knowledge of the transaction intended by the recipient and of the recipient's intention to use the supplier's information to induce or consummate the transaction with a limited group of persons." See AYC's Supplemental Memorandum in Support of Motion for Summary Judgment, at 11.

In contrast, BNO argues that it may use direct and circumstantial evidence to prove that AYC had actual or constructive knowledge of the persons who would receive the 1980 audit and the transaction in which the audit report would be used. The only case BNO cites in support of its position is Hot Boudin,¹ which BNO argues "does not provide a narrow interpretation of section 552 requiring that there be `manifest actual knowledge of the proposed transaction.' Hot Boudin implicitly recognized that liability may be based on constructive knowledge as it found that a supplier's duty may extend to an `unnamed group.'" See BNO's Reply Memorandum to AYC's Supplemental Memorandum in Support of its Motion for Summary Judgment, at 4. (quoting Hot Boudin, supra at 6 842 F.2d 328 (table)). To require actual knowlege of the intended use and recipient of an audit report, BNO claims, would have to come from a "confession."²

The Court recognizes that the standards set forth in section 552 of the Restatement (Second) of Torts represents a middle ground between the restrictive Ultramares³ approach, which requires privity of contract as a condition for recovery in tort against an accountant for negligence, and the expansive "reasonably foreseeable" approach, which extends accountants' liability to all reasonably foreseeable uses of the information. The Restatement takes the position that an accountant may be liable to a third party with whom the accountant is not in privity for negligence in the preparation of a financial statement if the accountant knows and intends the third party to rely on the information or knows the client intends the third party to so rely. Courts have not been uniform in defining the scope of accountants' liability to non-clients under the Restatement. See generally R. Gormley, The Actually Foreseen, The Foreseeable, and Beyond—Accountants' Liability to Non-clients, 14 Seton Hall L.Rev. 528 (1984).

This Court, after carefully reviewing the arguments of the parties and the applicable law, finds as follows:

1. Section 552(a) requires that the maker of the information have actual knowledge, at the time it issued the allegedly negligent information, of the person or limited group of persons to whom the recipient intends to supply the information. This ruling is compelled by Hot Boudin and the plain language of the Restatement, both of which require that the maker "know" of the person or group of persons who are the intended users of the information. Therefore, the Court rejects the "reason to know" or "should know" standards advanced by BNO. The Court's finding that actual knowledge is required by the Restatement is buttressed by the fact that the definition section...