Colonial Bank of Alabama v. Ridley & Schweigert

• Decision Date: 22 September 1989
• Citation: 551 So.2d 390
• Court: Alabama Supreme Court
• Parties: The COLONIAL BANK OF ALABAMA v. RIDLEY & SCHWEIGERT, et al. JAMISON, MONEY, FARMER & COMPANY v. The COLONIAL BANK OF ALABAMA. 88-928, 88-970.

Page 390

551 So.2d 390

The COLONIAL BANK OF ALABAMA v. RIDLEY & SCHWEIGERT, et al.

JAMISON, MONEY, FARMER & COMPANY v. The COLONIAL BANK OF ALABAMA.

88-928, 88-970.

Supreme Court of Alabama.

Sept. 22, 1989.

Thomas Troy Zieman, Jr. and Joseph R. Sullivan of Miller, Hamilton, Snider & Odom, Mobile, and George M. Van Tassell, Jr. of Sadler, Sullivan, Herring & Sharp, Birmingham, for appellant/cross-appellee.

Henry E. Simpson of Lange, Simpson, Robinson & Somerville, Birmingham, for appellee Ridley & Schweigert.

Robert M. Girardeau of Huie, Fernambucq & Stewart, Birmingham, for appellee/cross-appellant Jamison, Money, Farmer & Co.

HOUSTON, Justice.

The accounting firm of Ridley & Schweigert ("Ridley"), was employed by Leedy Mortgage Company, Inc. ("Leedy"), to audit financial statements for its fiscal years ending April 30, 1979, 1980, and 1981. In 1982, the accounting firm of Jamison, Money, Farmer & Company ("Jamison"), replaced Ridley and audited financial statements for Leedy for the fiscal years ending April 30, 1982 and 1983. The annual financial statements were audited by Ridley and Jamison at Leedy's request only, and, although Leedy was provided with multiple copies of each year's audit, neither Ridley nor Jamison was requested to, or did, provide copies of the audits to anyone other than Leedy. In the course of auditing the financial statements for Leedy, Ridley and Jamison requested that Colonial Bank of Alabama ("Colonial"), one of a number of Leedy's creditors listed on the financial statements, complete certain standard bank confirmation inquiries, as part of Ridley's and Jamison's normal procedures in performing audits. Leedy furnished Colonial with a copy of each of the annual audits. Between 1979 and 1983, Colonial made substantial loans to Leedy. Leedy eventually defaulted on those loans and filed a petition in bankruptcy court. Colonial suffered a loss of approximately $2,500,000.

Colonial sued Ridley and Jamison, under theories of negligence, wantonness, breach of contract (claiming to be a third-party beneficiary), and fraud, ¹ in the examination of the financial statements for Leedy. Jamison filed a counterclaim, alleging negligence, fraud, and conspiracy to defraud on Colonial's part. The trial court entered a summary judgment for Ridley and Jamison and dismissed Jamison's counterclaim. Colonial and Jamison appealed. We affirm.

The trial court stated in its judgment that Colonial had not produced any evidence tending to show that Ridley and Jamison were aware, at the time they audited the financial statements, that the audits were to be used by Leedy to influence Colonial. Therefore, the trial court concluded, because Colonial was not in privity of contract with Ridley and Jamison, that Ridley and Jamison owed no duty to Colonial with respect to the manner in which the financial statements were audited and, consequently, that they could not, as a matter of law, be liable to Colonial under theories of negligence or wantonness.

Colonial contends that it was reasonably foreseeable to Ridley and Jamison that Leedy would use the audits to influence Colonial. Therefore, it argues, Ridley and Jamison owed a duty to Colonial to exercise the appropriate degree of care in their examination of the financial statements.

On the other hand, Ridley and Jamison maintain that the trial court correctly concluded that, in the absence of a contractual relationship, they could not be liable to Colonial, as a matter of law, unless they were aware at the time the financial statements were audited that the information contained in the audits was to be used by Leedy specifically to influence Colonial. Ridley and Jamison argue that there is no evidence tending to show that they were aware that the audits were to be used by Leedy for that particular purpose.

Colonial's Appeal

1. Negligence and Wantonness

This case presents an issue of first impression in the appellate courts of Alabama as to the scope of an accountant's duty to third parties. Blumberg v. Touche Ross & Co., 514 So.2d 922, 927 (Ala.1987), also presented an issue of first impression in determining a client's remedies for an accountant's negligent performance of an accounting services contract. In the case at issue, as in Blumberg, we have examined treatises, law review articles and other secondary sources: Restatement (Second) of Torts § 552 (1977); J. Siliciano, Negligent Accounting and the Limits of Instrumental Tort Reform, 86 Mich.L.Rev. 1929 (1988); T. Gossman, The Fallacy of Expanding Accountants' Liability, 1988 Colum.Bus.L.Rev. 213; T. Gossman, IMC v. Butler: A Case for Expanded Professional Liability For Negligent Misrepresentation? 26 Am.Bus.L.J. 99 (1988); V. Goldberg, Accountable Accountants: Is Third Party Liability Necessary?, 17 J.Legal Stud. 295 (1988); Note, The Role and Responsibility of Accountants in Today's Society, 13 J. of Corp.L. 863 (Spring 1988); D. Causey, Accountants' Liability In An Indeterminate Amount For An Indeterminate Time To An Indeterminate Class: An Analysis of Touche Ross & Co. v. Commercial Union Ins. Co. [514 So.2d 315 (Miss.1987) ], 57 Miss.L.J. 379 (1987); Comments, Auditors' Third Party Liability: An Ill-Considered Extension of the Law, 46 Wash.L.Rev. 675 (1970-71); Note, H. Rosenblum, Inc. v. Adler: A Foreseeably Unreasonable Extension of an Auditor's Legal Duty, 48 Alb.L.Rev. 876 (1984); Broad, The Progress of Auditing, 100 Journal of Accountancy, November 1955; Annot., Liability of Public Accountant To Third Parties, 46 A.L.R.3d 979 (1979); and cases of other jurisdictions that have adopted various standards.

California (International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal.App.3d 806, 223 Cal.Rptr. 218 (1986)) Mississippi (Touche Ross & Co. v. Commercial Union Insurance Co., 514 So.2d 315 (Miss.1987)); New Jersey (H. Rosenblum, Inc. v. Adler, 93 N.J. 324, 461 A.2d 138 (1983)); and Wisconsin (Citizens' State Bank v. Timm, Schmidt & Co. S.C., 113 Wis.2d 376, 335 N.W.2d 361 (1983)), have adopted the foreseeability standard that Colonial urges us to adopt. The Supreme Court of New Jersey in H. Rosenblum, supra, stated this standard in these words:

"When the independent auditor furnishes an opinion with no limitation in the certificate as [to those] to whom the company may disseminate the financial statements, he has a duty to all those whom that auditor should reasonably foresee as recipients from the company of the statements for its proper business purposes, provided that the recipients rely on the statements pursuant to those business purposes."

461 A.2d at 153.

Alaska (Selden v. Burnett, 754 P.2d 256 (Alaska 1988)); Georgia (Badische Corp. v. Caylor, 257 Ga. 131, 356 S.E.2d 198 (1987)); Hawaii (Chun v. Park, 51 Haw. 462, 462 P.2d 905 (1969)); Iowa (Pahre v. Auditor of the State of Iowa, 422 N.W.2d 178 (Iowa 1988)); Kentucky (Ingram Industries, Inc. v. Nowicki, 527 F.Supp. 683 (E.D.Ky.1981)); Michigan (Law Offices of Lawrence J. Stockler, P.C. v. Rose, 174 Mich.App. 14, 436 N.W.2d 70 (1989)); Minnesota (Bonhiver v. Graff, 311 Minn. 111, 248 N.W.2d 291 (1976)); Missouri (Mark Twain Plaza Bank v. Lowell H. Listrom & Co., 714 S.W.2d 859 (Mo.App.1986)); New Hampshire (Spherex, Inc. v. Alexander Grant & Co., 122 N.H. 898, 451 A.2d 1308 (1982)); North Carolina (Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200, 367 S.E.2d 609 (1988)); Ohio (Haddon View Investment Co. v. Coopers & Lybrand, 70 Ohio St.2d 154, 436 N.E.2d 212 (1982)); Pennsylvania (Coleco Industries, Inc. v. Berman, 423 F.Supp. 275 (E.D.Pa.1976), affirmed in part, remanded in part, 567 F.2d 569 (3d Cir.1977), cert. denied, 439 U.S. 830, 99 S.Ct. 106, 58 L.Ed.2d 124 (1978)); Rhode Island (Rusch Factors, Inc. v. Levin, 284 F.Supp. 85 (D.R.I.1968)); Texas ( Shatterproof Glass Corp. v. James, 466 S.W.2d 873 (Tex.Civ.App.1971)); Utah ( Christenson v. Commonwealth Land Title Insurance Co., 666 P.2d 302 (Utah 1983)); Virginia ( Semida v. Rice, 863 F.2d 1156 (4th Cir.1988)); and Washington ( TransAmerica Title Insurance Co. v. Johnson, 103 Wash.2d 409, 693 P.2d 697 (1985)), have adopted Restatement (Second) of Torts § 552. Under this test, an accountant will be liable to third parties where two criteria are satisfied: First, the loss must be suffered "by the person or one of a limited group of persons for whose benefit and guidance [the accountant] intends to supply the information or knows that the recipient intends to supply it"; and second, the loss must be suffered "through reliance upon it in a transaction that [the accountant] intends the information to influence or knows that the recipient so intends or in a substantially similar transaction." Under this test, the accountant and the client agree between themselves as to who will be permitted to rely on the financial statements.

The United States Court of Appeals for the Eleventh Circuit certified the following question to the Georgia Supreme 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?"

257 Ga. at 132, 356 S.E.2d at 199.

In response, the Georgia Supreme Court in Badische Corp. v. Caylor, supra, wrote:

"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.... [P]rofessional liability for negligence, including the liability of accountants, extends to those persons, or the limited class of persons who the professional is actually aware will rely upon...