First Florida Bank, N.A. v. Max Mitchell & Co.

• Court: Florida Supreme Court
• Writing for the Court: GRIMES; EHRLICH
• Citation: First Florida Bank, N.A. v. Max Mitchell & Co., 558 So.2d 9 (Fla. 1990)
• Decision Date: 08 March 1990
• Docket Number: No. 74034,74034
• Parties: , 15 Fla. L. Weekly S125 FIRST FLORIDA BANK, N.A., etc., Petitioner, v. MAX MITCHELL & COMPANY, et al., Respondents.

Page 9

558 So.2d 9

58 USLW 2541, 15 Fla. L. Weekly S125

FIRST FLORIDA BANK, N.A., etc., Petitioner, v. MAX MITCHELL & COMPANY, et al., Respondents.

No. 74034.

Supreme Court of Florida.

March 8, 1990.

Robert W. Clark of Macfarlane, Ferguson, Allison & Kelly, Tampa, for petitioner.

John N. Jenkins and Debra L. Hinners of Marlow, Shofi, Smith, Hennen, Smith & Jenkins, P.A., Tampa, for respondents.

Gerald F. Richman, Michael A. Hanzman and Sally R. Doerner of Floyd, Pearson, Richman, Greer, Weil, Zack & Brumbaugh, P.A., Miami, amici curiae for Vaughn Durham, et al.

Kenneth R. Hart and Steven P. Seymoe of Ausley, McMullen, McGehee, Carothers & Proctor, Tallahassee, amicus curiae for Florida Institute of Certified Public Accountants.

Alberto A. Macia and Allen P. Reed of Shea & Gould, Miami, amicus curiae for Pannell Kerr Forster.

GRIMES, Judge.

We review First Florida Bank v. Max Mitchell & Co., 541 So.2d 155, 157 (Fla. 2d DCA 1989), in which the court certified the following question as one of great public importance:

WHEN AN ACCOUNTANT FAILS TO EXERCISE REASONABLE AND ORDINARY CARE IN PREPARING THE FINANCIAL STATEMENTS OF HIS CLIENT AND WHERE THAT ACCOUNTANT PERSONALLY DELIVERS AND PRESENTS THE STATEMENTS TO A THIRD PARTY TO INDUCE THAT THIRD PARTY TO LOAN TO OR INVEST IN THE CLIENT, KNOWING THAT THE STATEMENTS WILL BE RELIED UPON BY THE THIRD PARTY IN LOANING TO OR INVESTING IN THE CLIENT, IS THE ACCOUNTANT LIABLE TO THE THIRD PARTY IN NEGLIGENCE FOR THE DAMAGES THE THIRD PARTY SUFFERS AS A RESULT OF THE ACCOUNTANT'S FAILURE TO USE REASONABLE AND ORDINARY CARE IN PREPARING THE FINANCIAL STATEMENTS, DESPITE A LACK OF PRIVITY BETWEEN THE ACCOUNTANT AND THE THIRD PARTY?

Our jurisdiction is based on article V, section 3(b)(4), of the Florida Constitution.

Max Mitchell is a certified public accountant and president of Max Mitchell and Company, P.A. In April of 1985, Mitchell went to First Florida Bank for the purpose of negotiating a loan on behalf of his client, C.M. Systems, Inc. Mitchell advised Stephen Hickman, the bank vice president, that he was a certified public accountant and delivered to Hickman audited financial statements of C.M. Systems for the fiscal years ending October 31, 1983, and October 31, 1984, which had been prepared by his firm. The October 1, 1984, audited statement indicated that C.M. Systems had total assets of $3,474,336 and total liabilities of $1,296,823. It did not indicate that C.M. Systems owed money to any bank, and in a later conference with Hickman, Mitchell stated that as of April 16, 1985, C.M. Systems was not indebted to any bank. At that time, Mitchell asked Hickman to consider a $500,000 line of credit for C.M. Systems.

Over the next several weeks, Mitchell had numerous discussions with Hickman concerning various line items in Mitchell's audit of C.M. Systems. Mitchell represented that he was thoroughly familiar with the financial condition of C.M. Systems. On May 23, 1985, Hickman asked Mitchell for interim financial statements for the period which ended on April 30, 1985. Mitchell advised that they would not be available for several more weeks. Hickman asked Mitchell if there had been any material change in the company's financial condition since October 31, 1984, and Mitchell said that he was not aware of any material changes. On June 6, 1985, the bank approved the request for a $500,000 unsecured line of credit to C.M. Systems. Thereafter, C.M. Systems borrowed the entire amount of the $500,000 credit line which it has never repaid.

Subsequently, the bank discovered that the audit of C.M. Systems for the fiscal year ending October 31, 1984, had substantially overstated the assets, understated the liabilities, and overstated net income. Among other things, the audit failed to reflect that as of October 31, 1984, C.M. Systems owed at least $750,000 to several banks. In addition, several material changes had occurred in the company's balance sheet after the audit but prior to the approval of the line of credit.

The bank filed a three-count complaint against Mitchell and his firm. Because of the absence of privity between either Mitchell or his firm and the bank, the trial court granted Mitchell summary judgment on the negligence and gross negligence counts. The bank voluntarily dismissed the count based on fraud. Believing itself bound by prior decisional law of the state, the district court of appeal affirmed. Recognizing the public policy implications of the issue and the erosion of the privity doctrine in other areas of the law, the court posed the certified question for our consideration.

The seminal case on this subject is Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), authored by Justice Cardozo. In that case the court held that a lender which had relied upon inaccurate financial statements to its detriment had no cause of action against the public accounting firm which had prepared them because of the lack of privity between the parties. In declining to relax the requirement of privity, the court observed:

If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminant [sic] amount for an indeterminant [sic] time to an indeterminant [sic] class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.

Id. at 179-80, 174 N.E. at 444. The court distinguished its earlier decision of Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922), in which it had held that a public weigher was liable to the buyer of beans for the amount the buyer overpaid the seller in reliance on the weigher's erroneous certificate of weight. The court said that the use of the certificate was a consequence "which to the weigher's knowledge was the end and aim of the transaction," id. at 238-39, 135 N.E. at 275, and reasoned that, unlike the case before it, the bond between the weigher and the buyer "was so close as to approach that of privity, if not completely one with it." Ultramares, 255 N.Y. at 182-83, 174 N.E. at 446.

In purporting to reach a decision within the parameters of Ultramares and Glanzer, the New York Court of Appeals in Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 551, 483 N.E.2d 110, 118, 493 N.Y.S.2d 435, 443 (1985), recently explained the circumstances under which recovery may be accomplished by persons in "near privity":

Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance.

In the more than fifty years which have elapsed since Ultramares, the question of an accountant's liability for negligence where no privity exists has been addressed by many courts. There are now essentially four lines of authority with respect to this issue.

(1) Except in cases of fraud, an accountant is only liable to one with whom he is in privity or near privity. E.g., Toro Co. v. Krouse, Kern & Co., 827 F.2d 155 (7th Cir.1987); Nortek, Inc. v. Alexander Grant & Co., 532 F.2d 1013 (5th Cir.1976); Stephens Industries, Inc. v. Haskins & Sells, 438 F.2d 357 (10th Cir.1971); Shofstall v. Allied Van Lines, Inc., 455 F.Supp. 351 (N.D.Ill.1978); MacNerland v. Barnes, 129 Ga.App. 367, 199 S.E.2d 564 (1973); Credit Alliance Corp. v. Arthur Andersen & Co.

(2) An accountant is liable to third parties in the absence of privity under the circumstances described in section 552, Restatement (Second) of Torts (1976), which reads in pertinent part:

§ 552. Information Negligently Supplied for the Guidance of Others

(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance on the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited 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.

Courts which have adopted this position include Seedkem, Inc. v. Safranek, 466 F.Supp. 340 (D.Neb.1979); Rusch Factors, Inc. v. Levin, 284 F.Supp. 85 (D.R.I.1968); Badische Corp. v. Caylor, 257 Ga. 131, 356 S.E.2d 198 (1987); Spherex, Inc. v. Alexander Grant & Co., 122 N.H. 898, 451 A.2d 1308 (1982); Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408 (Tex.Ct.App.1986).

(3) An accountant is liable to all persons who might reasonably be foreseen as relying upon his work product. E.g., International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal.App.3d 806, 223 Cal.Rptr. 218 (1986); Touche Ross & Co. v. Commercial Union Ins. Co., 514 So.2d 315 (Miss.1987); H. Rosenblum, Inc. v. Adler, 93 N.J. 324, 461 A.2d 138 (1983); Citizens State Bank v. Timm, Schmidt & Co., 113 Wis.2d 376, 335 N.W.2d 361 (1983).

(4) An accountant's liability to third persons shall be determined by

the...