First Nat. Bank of Commerce v. Monco Agency Inc., 89-3734

• Decision Date: 14 September 1990
• Docket Number: No. 89-3734,89-3734
• Parties: FIRST NATIONAL BANK OF COMMERCE (formerly the Bank of New Orleans & Trust Company), Plaintiff-Appellant, v. MONCO AGENCY INCORPORATED, Defendant, Arthur Young & Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1053

911 F.2d 1053

59 USLW 2210

FIRST NATIONAL BANK OF COMMERCE (formerly the Bank of New Orleans & Trust Company), Plaintiff-Appellant, v. MONCO AGENCY INCORPORATED, Defendant Arthur Young & Company, Defendant-Appellee.

No. 89-3734.

United States Court of Appeals Fifth Circuit.

Sept. 14, 1990.

Curtis R. Boisfontaine, Sally A. Shushan, John W. Hite, III, Sessions, Fishman, Boisfontaine, Nathan, Winn, Butler and Barkley, New Orleans, La., for plaintiff-appellant.

John J. Gill, Gen. Counsel, Michael F. Crotty, Depty. Gen. Counsel, Washington, D.C., for amicus-Am. Bankers Assoc.

Mary E. Arceneaux, Baton Rouge, La., for amicus-LA. Bankers.

Christopher Guidroz, Frank Peragine, Simon, Peragine, Smith & Redfern, New Orleans, La., for defendant-appellee.

Robert J. Conrad, Jr., Adams & Reese, New Orleans, La., for amicus-Soc. of La. CPAs.

Louis A. Craco, Willkie Farr & Gallagher, Deborah E. Cooper, New York City, Diana B. Simon, Washington, D.C., for amicus-Am. Inst. CPA.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before THORNBERRY, GEE, and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

A bank maintains that an accounting firm negligently misrepresented the financial resources of a client of the firm in a 1980 audit report, upon which the bank relied to its detriment in extending a $2.1 million commercial loan. The client defaulted on the note immediately and remains insolvent, thus shifting the focus of this litigation from the defunct debtor to the accountants. Specifically, the bank seeks to recover on the bad debt from the firm that unqualifiedly attested to the accuracy of the financial statements.

We conclude that Louisiana law does not protect every reasonably foreseeable consumer of inaccurate auditing information. Indeed, accountants do not insure the unfortunate commercial decisions of nonclients where, as here, the auditors never actually knew that their work product--an annual audit--would be relied upon by the bank in assessing the creditworthiness of its client. Since no legal duty has been breached under the facts of this case, we affirm the summary judgment.

I.

In 1977, Monco Agency, Inc. (Monco), applied for a commercial loan from the First National Bank of Commerce ( FNBC ) to acquire Cotton Belt Insurance Company (CBIC). FNBC agreed to extend credit in excess of $2 million for purposes of the commercial acquisition, provided Monco would supply professionally audited financial statements annually to FNBC. To comply with this requirement, Monco retained Arthur Young & Company (Arthur Young), a firm of certified public accountants, to conduct annual audits of Monco and CBIC.

The 1977 Monco-FNBC loan was secured by a five-year note personally guaranteed by several individuals, including Monco's president and chief executive officer, Oliver Montagnet. The 1977 loan was subsequently modified, with FNBC agreeing to reduce the interest rate on the note and the number of personal loan guarantors. However, FNBC expressly declined to release Montagnet as a guarantor.

During 1977-81, FNBC remained Monco's principal creditor. It is undisputed that Arthur Young conducted four annual audits, with the knowledge that FNBC would use the audited financial statements in deciding whether to grant and modify the Monco-FNBC loan. However, in September 1981, over three months after Arthur Young issued its 1980 Monco audit, Montagnet entered private negotiations with the Bank of New Orleans & Trust Company (BNO) in an effort to secure a loan more favorable than that available from FNBC and, in particular, a loan that would release Montagnet as guarantor of his company's debt. Monco accordingly supplied BNO with the 1980 audit report, but Arthur Young was unaware of the negotiations between Monco and BNO to secure refinancing, and it did not know that its 1980 audit would be used for purposes of credit assessment by BNO.

In November 1981, Monco's creditworthiness was established to BNO's satisfaction. BNO thus extended a $1.6 million loan that, two months later, increased to $2.1 million. Monco liquidated FNBC's note and substituted BNO as the principal creditor on a loan that earned interest at a rate materially lower than that called for in the FNBC loan. Significantly, the BNO-Monco loan was structured so that Montagnet was not a guarantor.

Monco never made payment on the BNO note, defaulting immediately. In March 1982, ten months after Arthur Young issued its 1980 audit report, state insurance regulators declared CBIC insolvent and placed it into receivership. Monco subsequently ceased business operations and has failed to pay any portion of the outstanding $2.1 million loan or any interest thereon.

This action to recover on the debt then commenced against Monco and Montagnet. ¹ In 1983, over a year after Monco's loan default, FNBC merged with BNO for reasons irrelevant to this action. Thus, as a consequence of restructuring, FNBC now stands as the plaintiff in this action seeking recovery on the very loan that its own credit department declined to extend to Monco years earlier.

The bank joined Arthur Young in this action in 1984 pursuant to a third amended complaint, and discovery has been extensive. Arthur Young moved for summary judgment in June 1988 on the ground that it did not know that the 1980 Monco audit would be provided to BNO--or any bank other than FNBC--and that Louisiana law requires such knowledge. That motion was denied because, as the court reasoned, material factual issues remained concerning Arthur Young's knowledge of the future dissemination and intended use of its 1980 audit.

On Arthur Young's motion to reconsider summary judgment, the scope of Restatement (Second) of Torts Sec. 552 (1977) became more evident to the court, which concluded that section 552 is the informational tort model applied by Louisiana courts in negligent misrepresentation actions. BNO v. Monco, 719 F.Supp. 1328, 1331-32 (E.D.La.1989). The court then reversed itself, holding that to be liable, accountants must have actual knowledge of the identity of nonclients that will rely upon the audit and actual knowledge of the nature of the transaction that the accountants' work product will influence.

The facts alleged by BNO, the court maintained, failed to raise a genuine issue regarding Arthur Young's actual knowledge when the 1980 audit was issued on May 14, 1981. Further, the district court concluded that the FNBC-Monco and BNO-Monco loans were not "substantially similar transactions," as required by the Restatement to hold auditors liable for pecuniary damages sustained by nonclients.

On appeal, FNBC maintains that its acquiree, BNO, would not have made the $2.1 million loan to Monco but for the accountants' unqualified 1980 fiscal report, which allegedly misrepresented the company's financial strength. It insists that under Louisiana's negligent misrepresentation law, accountants need to have only constructive knowledge that their inaccurate audits will be relied upon to the detriment of potential lenders, as well as constructive knowledge of the nature of the transaction to follow.

The bank places great significance upon the fact that fifty copies of the 1980 audit were requested by Monco, as compared with thirty-five copies of the 1979 audit. The additional reports, we are told, evinces Monco's design to distribute the audit to assorted potential lenders. The bank further suggests that Arthur Young knew that the preceding year's 1979 audit was supplied to at least two banks other than FNBC and that Arthur Young should have known that Monco was seeking replacement financing by using the following year's audit.

Arthur Young argues, and the district court agreed, that Louisiana's jurisprudence adheres to section 552 for negligent misrepresentation in the commercial context. That being so, the Restatement requires that the misrepresenter have actual knowledge of the intended consumers of the audited financial statements, which become a fixed group the moment the information is publicly disseminated. Further, the accountants must actually know that the auditing information will be supplied by their client to a particular group of nonclients for purposes of undertaking a transaction known in advance by them.

Arthur Young admits that it actually knew that its 1980 audit would be supplied to FNBC, the United States Treasury Department, shareholders, directors, and officers of Monco, and insurance commissions in each of the thirty-six states where Monco or CBIC operated. However, it disavows any knowledge that BNO, or any bank other than FNBC, would rely upon the audit. Further, it maintains that it never knew of the business agreement between Monco and BNO to replace the FNBC loan until after the transaction was completed, which occurred after the issuance of the 1980 audit.

Four amici curiae have filed briefs in this case, two of which represent banking associations and two of which represent professional accounting associations. ² The amicus briefs, in the case of the banking associations, emphasize the public policy considerations weighing in favor of extending accountants' liability to the "reasonably foreseeable" limits adopted by some states. Predictably, the professional accounting associations emphasize the advantages of determinate liability for accountants, as recognized by the Restatement. ³

II.

A.

In reviewing a summary judgment on appeal, we apply the same standard as the district court. Waltman v. International Paper Co., 875 F.2d 468, 474 (5th Cir.1989). Specifically, if the pleadings, depositions, admissions, answers to interrogatories, and affidavits demonstrate that no genuine issue of material fact remains, the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986).

Neither party disputes that the substantive law of Louisiana...