Lincoln Alameda Creek v. Cooper Industries, Inc.

• Decision Date: 29 September 1992
• Docket Number: No. C-91-0272 MHP.,C-91-0272 MHP.
• Court: U.S. District Court — Northern District of California
• Parties: LINCOLN ALAMEDA CREEK, et al., Plaintiffs, v. COOPER INDUSTRIES, INC., et al., Defendants. And Related Counterclaims.

829 F. Supp. 325

LINCOLN ALAMEDA CREEK, et al., Plaintiffs, v. COOPER INDUSTRIES, INC., et al., Defendants And Related Counterclaims.

No. C-91-0272 MHP.

United States District Court, N.D. California.

September 29, 1992.

Arthur D. Levy, Ewell & Levy, San Francisco, CA, for Lincoln Alameda Creek, Patrician Assoc. Inc.

Joseph J. Armao, Cynthia L. Koehler, Heller Ehrman White & McAuliffe, San Francisco, CA, for Cooper Industries Inc., McGraw-Edison Co.

Edward E. Martins, Hayward, CA, for Campbell Realty of California, Mary Orsetti.

William J. Monahan, Burriss Monahan & Riley, PC, Mountain View, CA, for Beta Associates, Ferma Corp.

MEMORANDUM AND ORDER

PATEL, District Judge.

This action involves a third-party complaint brought by defendant, and now third-party plaintiff, Mary Orsetti ("Orsetti"), against third-party defendant, Beta Associates ("Beta"). Orsetti is seeking indemnification or contribution from Beta for alleged negligence, breach of warranty, and misrepresentation in their preparation of a ground contaminants investigation. This matter is now before the court on Beta's motion to dismiss the complaint and for summary judgment pursuant to Federal Rule of Civil Procedure 56. After careful consideration of the parties' submissions and arguments, the court GRANTS Beta's motion for summary judgment.

BACKGROUND

The facts underlying this third-party complaint are not in dispute. Mary Orsetti entered into an agreement with the plaintiff, Lincoln Alameda Creek ("Lincoln"), for the sale of a piece of property located at 29990 Union City Boulevard, Union City, California. According to the agreement, Lincoln's purchase was conditioned upon its approval of the condition of the soils, sub-soils and groundwater of the property. In October, 1986, Lincoln hired Beta, an environmental consultant, to perform a subsurface soil and groundwater contaminants investigation of the property in order to assist Lincoln in deciding whether to purchase it. This contract between Beta and Lincoln was an oral contract.

Beta was not given a copy of the purchase contract between Lincoln and Mary Orsetti during its investigation of the property, and Lincoln did not discuss its terms with Beta. Beta obtained some information regarding the property from Orsetti's real estate agent, but was not able to get in contact with Mary Orsetti. Beta placed several calls to Orsetti in order to get additional historic information, but these calls were not returned.

The report was completed on November 21, 1986 and was given to Lincoln. Lincoln did not discuss with Beta their intention that the report would be for the benefit of anyone other than Lincoln. Beta was also not informed that Mary Orsetti would review or rely on the report. Beta did not have a contract with Orsetti, and did not give Orsetti any express warranty.

The report stated that Beta's analysis of the land did not reveal any of the "constituents of concern" and therefore they felt the property was clear of contamination. The sale of the land was subsequently completed. Lincoln is presently involved in litigation with Orsetti for the alleged contamination of the property. Orsetti brought this third-party complaint against Beta for its alleged negligence, breach of warranty, and misrepresentation in the preparation of the ground contamination report. Orsetti is seeking indemnification and compensatory damages from Beta.

Beta's motion for summary judgment turns on the following issues: (1) whether Beta owed Orsetti any duty of care in the preparation of the report, (2) whether Orsetti was a third-party beneficiary of the contract between Lincoln and Beta and (3) whether Beta committed any fraud or misrepresentation to the damage of Orsetti.

DISCUSSION

I. Legal Standard

Under Federal Rule of Civil Procedure 56, summary judgment shall be granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial ... since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). See also T.W. Elec. Serv. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.1987) (the nonmoving party may not rely on the pleadings but must present significant probative evidence supporting the claim); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (a dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.").

The court's function, however, is not to make credibility determinations. Anderson, 477 U.S. at 249, 106 S.Ct. at 2510. The inferences to be drawn from the facts must be viewed in a light most favorable to the party opposing the motion. T.W. Elec. Serv., 809 F.2d at 631.

II. Negligence Argument

An essential element of any negligence claim is a legal duty of care. All persons have a duty "to use ordinary care to prevent others being injured as the result of their conduct...." Rowland v. Christian, 69 Cal.2d 108, 112, 70 Cal.Rptr. 97, 443 P.2d 561 (1968). But liability is not automatically imposed on someone for injuries sustained by another person. Rather, a defendant is liable only for those injuries which were reasonably foreseeable to the defendant at the time of the act. Dillon v. Legg, 68 Cal.2d 728, 739, 69 Cal.Rptr. 72, 441 P.2d 912 (1968). Whether a duty will be imposed depends on a number of factors, including: (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of the injury suffered, (3) the degree of certainty the plaintiff was injured, (4) the connection between the defendant's conduct and the injury, (5) the moral blame attached to the conduct, and (6) the policy of preventing future harm. Biakanja v. Irving, 49 Cal.2d 647, 650, 320 P.2d 16 (1958).

Orsetti argues that Beta owes a duty to both Lincoln and herself. As the seller of the property, she was a foreseeable user of the report. Beta knew its findings would affect her decision of whether to sell the property and upon what conditions the sale would be made. Therefore, it was likely that any negligence in the performance of the testing would result in harm to her.

A. Accountant Liability Theory

Orsetti relies on the California decisions which have held accountants liable to foreseeable plaintiffs who rely on negligently prepared financial statements. See International Mortgage Co. (IMC) v. John P. Butler Accountancy Corp., 177 Cal.App.3d 806, 223 Cal.Rptr. 218 (1986); Bily v. Arthur Young & Co., 7 Cal.App.4th 1636, 271 Cal.Rptr. 470 (1990). In IMC the court reversed a long line of decisions requiring privity in negligence suits against accountants, and held that tort liability should be delimited only by foreseeability. IMC, 177 Cal.App.3d at 820, 223 Cal.Rptr. 218. Therefore, because innocent plaintiffs foreseeably rely on financial statements prepared by independent auditors, the auditors are liable for any negligently prepared statements even though they have no contractual relationship with the plaintiffs. Id.

Orsetti likens the position of Beta to that of an accountant, arguing that in both cases, a negligently prepared report will result in harm to foreseeable users. The California Supreme Court, however, recently overruled these appellate court decisions and held that an auditor owes no general duty of care regarding the conduct of an audit to persons other than the client. Bily v. Arthur Young & Company, 3 Cal.4th 370, 11 Cal.Rptr.2d 51, 73, 834 P.2d 745, 767 (1992). In applying the Biakanja factors set forth above, the Biley court stated that the foreseeability rule would result in a large number of expensive lawsuits of questionable merit. Id. 11 Cal. Rptr.2d at 72-73, 834 P.2d at 767-68. Therefore, the court opted for a more circumscribed approach to protect investors and returned to the rule of privity. Id. at 72-73, 834 P.2d at 767-68. The only exception to the reinstated rule of privity regards that group of specifically intended beneficiaries of the report who are known to the auditor and for whose benefit the report is made. Id. at 73, 834 P.2d at 768. This group may recover on a theory of negligent misrepresentation.

Therefore, in order for Orsetti to recover under a general negligence theory, she must prove that Beta owed her a legal duty. But Orsetti has not alleged that she was in privity with Beta. Instead she has relied on the "foreseeability rule" laid out by the accountant cases. This "rule", however, is no longer available.

Orsetti's later attempt to distinguish Beta's contamination report from financial statements prepared by independent auditors is not persuasive. The Bily court acknowledged that other groups of professionals, such as engineers, supply information and evaluations for others to use. In order to achieve consistency in the law of negligent misrepresentation, the same approach must be used in suits by third persons claiming reliance on the information and opinions. Therefore, for all groups of information-supplying professionals, liability is limited to those persons the information is intended to benefit. See Bily, 11 Cal.Rptr.2d at 75, 834 P.2d at 769.

In addition, Orsetti presents no authority for the notion that the suppliers of contamination reports are liable to both parties in an agreement to sell a piece of property, regardless of privity. The facts underlying this case are not unique. The preparation of a professional's report — such as a contamination report or an engineer's report — is frequently a condition of sale. Therefore, if both parties to the transaction are ordinarily beneficiaries of such reports, it is quite remarkable that there are no cases on this issue. And the...