Barger v. McCoy Hillard & Parks

• Decision Date: 24 July 1997
• Docket Number: No. 262PA96,262PA96
• Citation: 488 S.E.2d 215,346 N.C. 650
• Court: North Carolina Supreme Court
• Parties: Jerry H. BARGER, H. Wayne Kennerly, and Harry G. Young, Jr. v. McCOY HILLARD & PARKS, A North Carolina General Partnership, David R. McCoy, Michael W. Hillard, Brent H. Parks and Sheila Lee.

Page 215

488 S.E.2d 215

346 N.C. 650

Jerry H. BARGER, H. Wayne Kennerly, and Harry G. Young, Jr. v. McCOY HILLARD & PARKS, A North Carolina General Partnership, David R. McCoy, Michael W. Hillard, Brent H. Parks and Sheila Lee.

No. 262PA96.

Supreme Court of North Carolina.

July 24, 1997.

Caudle & Spears, P.A. by Jeffrey L. Helms and Thad A. Throneburg, Charlotte, for plaintiffs-appellees.

Hedrick, Eatman, Gardner & Kincheloe, L.L.P. by Hatcher Kincheloe, L. Kristin King, and Jennifer Ingram Mitchell, Charlotte, for defendants-appellants.

Smith Helms Mulliss & Moore, L.L.P. by James G. Exum, Jr., Alan W. Duncan, and Larissa Erkman, Greensboro, on behalf of the North Carolina Association of Defense Attorneys, amicus curiae.

Robinson, Bradshaw & Hinson, P.A. by Robert W. Fuller, David C. Wright, III, and Julian H. Wright, Jr., Charlotte, on behalf of the North Carolina Association of Certified Public Accountants, amicus curiae.

WHICHARD, Justice.

Plaintiffs are the sole shareholders and directors of The Furniture House, Inc. (TFH). Defendants are the accountants retained by TFH to perform bookkeeping services. Plaintiffs filed suit alleging that defendants breached several contracts with plaintiffs and made negligent and constructively fraudulent misrepresentations about the financial condition of TFH, with the result that plaintiffs were forced to liquidate TFH in bankruptcy and to pay personally guaranteed corporate debts out of private funds. Plaintiffs sought compensatory and punitive damages.

Plaintiffs' evidence tends to show that TFH was a North Carolina corporation engaged in the catalog and retail sale of furniture and accessories. Plaintiffs, as sole shareholders and directors of TFH, usually carried out corporate action in an informal manner, often at breakfast meetings. In 1987 or 1988, plaintiffs employed defendant accounting firm to provide accounting services and financial advice. Among other things, the parties agreed that the firm would prepare and issue statements showing TFH's financial status.

Plaintiffs allege that defendant McCoy and an independent contractor worked together to create a computer program in late 1987. The purpose of the program was to take data from TFH computers and formulate it into a report from which defendants could produce financial statements. Defendants subsequently began producing statements based on information from the computer report. According to plaintiffs, defendants misapplied data from the report in one of the financial statements. This resulted in a series of erroneous financial statements that overstated TFH's sales, understated its liabilities, and concealed the fact that TFH was insolvent. The error was not discovered until plaintiffs attempted to sell TFH.

Defendant McCoy met periodically with plaintiffs to explain the financial statements and to advise them on financial matters. In early 1988 plaintiffs were considering an expansion of TFH. At a breakfast meeting with defendant McCoy, plaintiffs asked whether TFH could amortize the debt the expansion would entail. Plaintiffs allegedly informed McCoy that the debt for the expansion would have to be guaranteed by plaintiffs personally. McCoy told plaintiffs that the debt could be amortized if projected sales targets were reached. The error in the financial statements hid the fact that the debt could not be so amortized. TFH then took out loans to expand its operations. Plaintiffs signed personal guarantees to repay the loans in the event of default.

After the expansion TFH's sales actually exceeded defendant McCoy's projected requirements for amortization of the debt. TFH nevertheless experienced a serious cash flow shortage. McCoy advised plaintiffs that the shortage was due to cash being tied up in inventory and accounts receivable and was temporary. The shortage continued, however, and plaintiffs again asked McCoy for an explanation and for advice about whether to take out loans to cover the shortage. McCoy again stated that the cash flow shortage was temporary. Plaintiffs then obtained and personally guaranteed a line of credit to sustain the company during the shortage.

In late 1989 a prospective buyer approached plaintiffs about purchasing TFH. At an informal meeting at plaintiff Barger's home, plaintiffs asked defendant McCoy for an estimate of the value of TFH. McCoy valued plaintiffs' shares at $800,000. Plaintiffs subsequently signed a letter of intent to sell TFH for $504,000 and the assumption of plaintiffs' personal guarantees of the company's debts.

An independent audit of TFH was undertaken on behalf of the potential buyer. The audit revealed the accounting errors and showed that TFH's liabilities greatly exceeded its assets, so that plaintiffs' shares were actually worthless. Consequently, the potential buyer chose not to pursue the purchase of TFH. In 1990 TFH entered Chapter 7 bankruptcy.

Defendants' evidence indicates that, under a compilation agreement between defendants and TFH beginning in 1987, defendants agreed to issue monthly financial statements based on information supplied by TFH. Defendants stated, however, that they would not audit or review such statements, nor would they express an opinion or other form of assurance on them. Defendants' evidence also tends to show that McCoy did not assist in creating the computer report but merely relied on the data in it. Defendants contend that their financial statements misstated TFH's financial condition solely because of the erroneous data provided by plaintiffs and that the errors could not have been discovered until the independent audit.

Defendant McCoy acknowledges that he did occasionally encounter plaintiffs at the local hotel where they all often ate breakfast and that he discussed business at TFH with plaintiffs on those occasions. He acknowledges having discussions with plaintiffs about whether TFH could afford to expand and about what would cause TFH to experience a cash flow shortage. Defendants contend, however, that they never contracted to provide this information to plaintiffs individually or for plaintiffs' direct benefit. Rather, defendant McCoy understood that plaintiffs were meeting as the board of TFH, and the accounting advice was solely for the benefit of the corporation. Defendant McCoy asserts that he did not know plaintiffs were going to personally guarantee the loans made to TFH.

Plaintiffs filed suit on 31 July 1992. Their complaint included claims for breach of contract (based on the theory that plaintiffs were third-party beneficiaries of several alleged contracts between defendants and TFH), negligent misrepresentation, and constructive fraud. They sought recovery for (1) the loss of the value of their stock in TFH, and (2) their personal obligations to lenders on individually guaranteed debts of TFH. Defendants filed a motion for summary judgment. On 5 May 1994 the trial court entered an order granting defendants' motion for summary judgment and dismissing plaintiffs' claims.

The Court of Appeals in its first opinion affirmed the trial court except as to plaintiffs' claim for constructive fraud, which it remanded. The Court of Appeals held first that plaintiffs could not maintain individual causes of action against defendants for injuries that resulted in the depreciation or destruction of the value of their stock. It held that plaintiffs' claims for breach of contract were properly dismissed, as plaintiffs were not intended third-party beneficiaries of the alleged contracts between defendants and TFH. It held further that to the extent that plaintiffs sought recovery for the lost value of their stock through their claims of negligent or fraudulent misrepresentations, those claims were actionable only by or on behalf of the corporation itself and could not be brought personally by plaintiffs.

The Court of Appeals next held that plaintiffs could maintain personal causes of action against defendants for personal damages they suffered when they were required to pay the personally guaranteed corporate debt after TFH was dissolved in bankruptcy. The Court of Appeals held that the breach of contract claims were nevertheless properly dismissed, as the alleged contracts were entered into solely for the benefit of the corporation. It held further that the negligent misrepresentation claim was essentially a claim for accounting malpractice, and the trial court's grant of summary judgment on this issue was proper because the statute of limitations had expired. Finally, it held that there was a question of fact as to whether the fiduciary relationship required for a constructive fraudulent misrepresentation claim existed; therefore, summary judgment on that claim was improper.

Upon plaintiffs' petition for rehearing, the same panel revisited the negligent misrepresentation claim. It concluded that it had erred in characterizing that claim as an accounting malpractice claim barred by the three-year statute of limitations. It then reversed summary judgment as to that claim and remanded the case for trial. Two claims therefore remained to be tried after the Court of Appeals' rehearing and remand: constructive fraud and negligent misrepresentation.

We granted defendants' petition for discretionary review on 5 September 1996. For the reasons that follow, we affirm in part and reverse in part the decision of the Court of Appeals. We hold that plaintiffs may proceed, in their individual capacities as personal guarantors of TFH's debt, with their claim for negligent misrepresentation, and we remand the case for trial on that claim only.

I.

The central issue is whether plaintiffs may proceed with this lawsuit, which they brought in their individual capacities as shareholders of TFH and personal guarantors of TFH's debt, or whether such a suit may be pursued only by the corporation. If plaintiffs are permitted to proceed, then the parties raise additional questions regarding which claims may...