Haddon View Inv. Co. v. Coopers & Lybrand

• Decision Date: 16 June 1982
• Docket Number: No. 81-964,81-964
• Citation: 24 O.O.3d 268,70 Ohio St.2d 154,436 N.E.2d 212
• Parties: , 24 O.O.3d 268 HADDON VIEW INVESTMENT CO. et al., Appellants and Cross-Appellants, v. COOPERS & LYBRAND, Appellee and Cross-Appellant.
• Court: Ohio Supreme Court

Page 154

70 Ohio St.2d 154

436 N.E.2d 212, 24 O.O.3d 268

HADDON VIEW INVESTMENT CO. et al., Appellants and Cross-Appellants, v. COOPERS & LYBRAND, Appellee and Cross-Appellant.

No. 81-964.

Supreme Court of Ohio.

June 16, 1982.

Syllabus by the Court

An accountant may be held liable by a third party for professional negligence when that third party is a member of a limited class whose reliance on the accountant's representation is specifically foreseen.

Plaintiffs Mary Jane Hutchins, Jane D. O'Neill, Henry M. O'Neill, Jr., and Patricia K. O'Neill are general partners in plaintiff Haddon View Investment Company, through which they were limited partners in two business enterprises, Car Wash Investments # 1, Ltd. and Car Wash Investments # 2, Ltd. The general partner in both Car Wash # 1 and # 2 was Minit Man Development Company. Defendant Coopers & Lybrand performed general accounting work for Minit Man and the Car Wash partnerships from 1972 through 1977.

Between April 1975 and April 1977, Minit Man and both Car Wash partnerships collapsed. Plaintiffs lost their $52,000 investment as limited partners, and plaintiff Hutchins paid on two defaulted $100,000 notes which she had personally guaranteed. The notes were drawn by the Car Wash partnerships and loaned to Minit Man.

On May 24, 1979, plaintiffs filed the instant action against defendant Coopers & Lybrand alleging professional malpractice, breach of contract, concealment, and fraud and deceit in the performance of accounting services for the limited partnerships, and demanded a judgment of $252,000, representing plaintiffs' total investment in the firms and the payment on the defaulted notes. On August 16, 1979, defendant filed a motion for a more definite statement under Civ.R. 12(E), which the trial court granted. On February 25, 1980, plaintiff filed an amended complaint, which was answered with a motion to dismiss, under both Civ.R. 12(B) and 9(B). On May 19, 1980, the trial court granted the motion to dismiss, (1) holding plaintiffs lacked standing to assert breach of contract or professional malpractice, because they were not the real parties in interest to the contract, and (2) finding plaintiffs failed to state the circumstances constituting fraud with sufficient particularity.

On appeal, the Court of Appeals affirmed the trial court determination on standing, but reversed the finding as to the fraud claim. Plaintiffs appealed the finding on standing to raise the negligence claim, and defendant appealed the disposition of the fraud claim.

The cause is now before this court pursuant to the allowance of a motion and cross-motion to certify the record.

Manley, Jordan & Fischer, Robert E. Manley and Joseph R. Jordan, Cincinnati, for appellants and cross-appellees.

Vorys, Sater, Seymour & Pease and David S. Cupps, Columbus, for appellee and cross-appellant.

CLIFFORD F. BROWN, Justice.

The issue raised by plaintiffs-appellants is whether an accountant retained by a limited partnership to perform auditing and other services may be held responsible to an identifiable group of limited partners in such partnership for negligence in execution of those professional services.

This court has never determined whether an accountant can be held liable to the limited partners in a partnership for which accounting services are performed. The leading case on common law liability is Ultramares Corp. v. Touche, Niven & Co. (1931), 255 N.Y. 170, 174 N.E. 441, authored by Judge Benjamin Cardozo. In a carefully worded opinion, the New York Court of Appeals refused to impose liability on accountants "in an indeterminate amount for an indeterminate time to an indeterminate class. Ultramares, supra, at 179, 174 N.E. 441. Subsequent cases interpreted this decision to mean that only those in privity with accountants could ever hold them liable for professional negligence. O'Connor v. Ludlam (C.A. 2, 1937), 92 F.2d 50, 53, certiorari denied, 302 U.S. 758, 58 S.Ct. 364, 82 L.Ed. 586 (applying New York case law).

More recently, however, a growing number of courts have declined to employ a strict privity rule to bar third parties from recovery for accountants' professional negligence. These cases, emphasizing the language in Ultramares quoted above, allow recovery by a foreseen plaintiff, or one who is a member of a limited class whose reliance on the accountant's representation is specifically foreseen. See, e.g., Bonhiver v. Graff (1976), 311 Minn. 111, 128, 248 N.W.2d 291; Hochfelder v. Ernst & Ernst (C.A. 7, 1974), 503 F.2d 1100, 1107, reversed on other grounds, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668. Significantly, the strict interpretation of Ultramares has now been rejected by the court which formulated the rule, in White v. Guarente (1977), 43 N.Y.2d 356, 401 N.Y.S.2d 474, 372 N.E.2d 315. That case holds, at pages 361-362, 401 N.Y.S.2d 474, 372 N.E.2d 315, in relevant part:

"(T)he import of Ultramares is its holding that an accountant need not respond in negligence to those in the extensive and indeterminable investing public-at-large.

"Here, the services of the accountant were not extended to a faceless or unresolved class of persons, but rather to a known group possessed of vested rights, marked by a definable limit and made up of certain components * * *. In such circumstances, assumption of the task of auditing and preparing the returns was the assumption of a duty to audit and prepare carefully for the benefit of those in the fixed, definable and contemplated group whose conduct was to be governed since, given the contract and the relation, the duty is imposed by law and it is not necessary to state the duty in terms of contract or privity * * *."

We find the interpretation of Ultramares set forth in White v. Guarente to accord with reason and justice. Moreover, the Restatement of Torts 2d ¹ and various commentators have come to the same conclusion. See, e.g., Mess, Accountants and the Common Law: Liability to Third Parties, 52 Notre Dame Lawyer 838, 857. We reject an application of Ultramares that bars recovery to the innocent third party who foreseeably relies on an accountant's reports. To require a plaintiff in such a situation to be in privity with the defendant-accountant ignores the modern verity that accountants make reports on which people other than their clients foreseeably rely in the ordinary course of business. This being the case, the accountant's duty to prepare reports using generally accepted accounting principles extends to any third person to whom they understand the reports will be shown for business purposes. "An accountant should be liable in negligence for careless financial misrepresentations relied upon by actually foreseen and limited classes of persons." Rusch Factors, Inc., v. Levin (D.R.I., 1968), 284 F.Supp. 85, 93.

Accordingly, we hold that an accountant may be held liable by a third party for professional negligence when that third party is a member of a limited class whose reliance on the accountant's representation is specifically foreseen.

Applying this rule to the facts of the instant case, we conclude that the limited partners in the Car Wash partnerships constitute a limited class of investors whose reliance on the accountant's certified audits for purposes of investment strategy was specifically foreseen by defendant. Therefore, plaintiffs were proper parties to bring suit against defendant for professional negligence in the performance of its accounting function. The appellate court erred in affirming the trial court's dismissal of the complaint for failure to state a claim on which relief could be granted.

In reaching this conclusion, we find inapplicable Ohio's statute rendering a limited partner not a proper party to an action against a partnership. R.C. 1781.26. ² That statute addresses only the situation in which a limited partner is named as a party in a suit against or one brought by the partnership. Here, however, the limited partners bring the suit in their own names not against the partnership, but against one in a contractual relationship with the partnership. Given the partnership's failure to press its claim, if any, against defendant, and the financial loss suffered by plaintiffs, it is reasonable to permit that claim to be pursued by the innocent third parties who suffered a loss by their foreseeable reliance on the allegedly negligent acts of defendant. R.C. 1781.26 does not prevent such a just result.

The issue raised on cross-appeal by defendant Coopers & Lybrand is whether plaintiffs failed to state in their amended complaint the circumstances constituting fraud with sufficient particularity. As a preliminary matter, there is no question that privity is not required to assert a claim of common law fraud, out of a concern that an innocent party should not suffer at the hands of an intentional wrongdoer. Ultramares, supra. Nor is any intention to induce reliance required, a standard more lenient than that we adopt today for professional negligence claims. See 3 Restatement of Torts 2d 66, Section 531.

However, under Civ.R. 9(B), "the circumstances constituting fraud * * * shall be stated with particularity" in a claim of fraud. We recognize the importance of stating with particularity such claims against accountants, as did the District Court for the Southern District of New York in Rich v. Touche, Ross & Co. (1975), 68 F.R.D. 243, at page 245:

"The requirement that allegations of fraud be pleaded with particularity stems from, among other sources, a concern that potential defendants be shielded from lightly made public claims or accusations charging the commission of acts or neglect of duty which may be said to involve moral turpitude. * * * The need for this protection is most acute where the potential defendants are professionals whose reputations in their field of expertise are most sensitive to slander." (citation omitted.)

An examination of the allegations of fraud...