NATIONSBANK, NA v. KPMG PEAT MARWICK LLP

• Decision Date: 20 February 2002
• Docket Number: No. 4D00-3509.,4D00-3509.
• Citation: 813 So.2d 964
• Parties: NATIONSBANK, N.A.; Bankboston, N.A.; and Southtrust Bank, N.A., Appellants, v. KPMG PEAT MARWICK LLP, Appellee.
• Court: Florida District Court of Appeals

813 So.2d 964

NATIONSBANK, N.A.; Bankboston, N.A.; and Southtrust Bank, N.A., Appellants, v. KPMG PEAT MARWICK LLP, Appellee.

No. 4D00-3509.

District Court of Appeal of Florida, Fourth District.

February 20, 2002.

Rehearing Denied May 13, 2002.

Marc Cooper and Maureen E. Lefebvre of Colson, Hicks, Eidson, Coral Gables, and Kozyak Tropin & Throckmorton, P.A., Miami, for appellants.

Edward A. Marod of Edward A. Marod, P.A., West Palm Beach, and Elizabeth V. Tanis, Amelia Toy Rudolph and Deena R. Bernstein of Sutherland Asbill & Brennan, LLP, Atlanta, Georgia, for appellee.

FARMER, J.

In this business tort case a jury returned a mixed verdict, and after trial the court adjusted the jury's award with setoffs. In this opinion we address only the issues of whether a party not in privity can sue the maker of negligent misrepresentations and whether the trial court erred in granting the setoffs, affirming on all other issues.

Although the trial took ten weeks, the following facts suffice for our discussion. NationsBank, Bank Boston, and South Trust Bank, ("Banks") entered into a line of credit agreement with a Boca Raton marketer of brand name fragrances ("Borrower"). The loan was secured by all of Borrower's assets. Under the line of credit, Borrower could borrow funds for operating capital according to a specified percentage of certain inventory and accounts receivable. Over the years, the balance owing on the line of credit increased from an initial maximum of $12 million in 1990 to $55 million by the end of 1994.

In order to determine Borrower's true financial condition, as well as its inventory and receivables in any fiscal year, Borrower was required to furnish Banks with an annual audited financial statement. In turn Banks relied on Borrower's audited financial statements to decide whether to renew, increase or call the amount of the line of credit, based on the financial condition of Borrower reflected in the annual statement. KPMG had been Borrower's outside independent auditor since well before the Banks opened the line of credit and was thereafter responsible for preparing Borrower's audited financial statements during the existence of the line of credit. KPMG's engagement partner supervising the account testified that "early on" he read the line of credit agreement and understood the necessity and the requirement for the annual financial statements.

Thereafter KPMG performed audits of Borrower for the fiscal years 1991 through 1994. During these years, Borrower was profitable and grew rapidly, with its growth partially aided by funds lent by Banks. In November 1994, however, Borrower asked Banks to consider increasing the line of credit under the lending agreement to $65 million. Banks conditioned an increase on a review of Borrower's 1994 audited financial statement. Upon a review of the audited financial statements of Borrower prepared by KPMG, Banks decided against lending Borrower any more money. After sales in the fragrance market turned rancid, marked by an especially dismal Christmas season, Borrower reported a $20 million loss for 1995. Consequently Borrower sought relief in the Bankruptcy Court under chapter 11.

Banks filed proofs of claim showing that Borrower was indebted under the line of credit for $42 million, that Borrower was in default, and that the debt was secured by Borrower's inventory and receivables. As a result of sale of collateral, Banks' claim in the Bankruptcy case ultimately shrank. Banks' unsecured $19 million claim was ultimately allowed by the Bankruptcy Court.

Borrower proposed a plan of reorganization under the Bankruptcy Code. The plan called for a liquidating trust agreement between Banks, Borrower, the unsecured creditors and an outside trustee. Borrower assigned all of its remaining assets to the trustee, and the trustee proceeded to liquidate assets to pay unsecured claims. Among the assets in the hands of the trustee was a disputed claim of the Borrower against its auditors, KPMG. The trust agreement provided that any recoveries by the trustee were to be allocated between the other unsecured creditors and Banks on the basis of their respective percentages of allowed unsecured claims. The Bankruptcy Court confirmed the plan, including the liquidating trust agreement.

Banks and the trustee joined together in filing an action in state court against KPMG. Banks claimed that the KPMG audited financial statements for certain years were inaccurate and failed to correctly reflect Borrower's "precarious financial condition," and that Banks had relied on the statements in question. For its claim, the trustee alleged that KPMG negligently performed the annual audits for the years 1991-1994, to the Borrower's detriment. The case proceeded to trial. At appropriate times, KPMG moved for a directed verdict on Banks' claim of negligent misrepresentation. KPMG argued that Banks failed to present evidence establishing that when it performed the audits in question, KPMG knew that Banks intended to rely on KPMG's audits, and that KPMG intended such reliance. KPMG argued that such a showing was required in a negligent misrepresentation case against an accountant by a non-client. The trial court denied KPMG's motions.

The jury returned a verdict finding no liability on the trustee's claim of negligent performance of the audits. As to Banks' claim for negligent misrepresentation, however, the jury found liability and apportioned comparative fault between KPMG and Banks. Specifically, the jury found that the auditors were 26% liable and that the total loss was $19 million. Accordingly the actual damages awarded to Banks after reduction for comparative fault was $4.9 million.

After trial KPMG moved for a setoff against Banks' verdict, claiming that the judgment should be reduced as a result of settlements received by the trustee in connection with certain claims brought by the trustee on behalf of the estate. The motion specifically identified the following settlements: (1) $1 million from Borrower's president, chairman and majority shareholder; (2) $999,000 from certain directors and officers of Borrower; (3) $2.1 million from General Perfumes; (4) $450,000 from Fragrance Plus of Texas and others; (5) $1,500,000 from French Fragrance; (6) $149,000 from Cosmetics Plus; and (7) $40,000 from General Perfume of California. After a hearing, the trial granted setoffs in the amount of $4,549,000, thereby reducing Banks' overall recovery to $391.000.¹ With this essential background, we turn to a discussion of the issues we deem notable.

Turning first to the issue of the motion for directed verdict, we address the necessary ingredients for a third party claim of negligent misrepresentation against an accounting firm. Banks' claim against their borrower's auditor falls squarely under the Supreme Court's decision in First Florida Bank, N.A. v. Max Mitchell & Co., 558 So.2d 9 (Fla.1990). There the court determined that claims against accounting firms for negligent misrepresentation are within the ambit of section 552 of the Restatement (Second) of Torts.² As relied on in Max Mitchell, section 552 provides in relevant part:

"(1) One who, in the course of his business...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) ... [T]he 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... knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he... knows that the recipient so intends or in a substantially similar transaction."

558 So.2d at 12. In explaining its adoption of section 552, the court said:

"liability should extend not only to those with whom the accountant is in privity or near privity, but also to those persons, or classes of persons... whom he knows his client intends will so rely. On the other hand, as the commentary makes clear, [section 552] prevents extension of liability in situations where the accountant `merely knows of the ever-present possibility of repetition to anyone, and the possibility of action in reliance upon [the audited financial statements], on the part of anyone to whom it may be repeated.' Restatement (Second) of Torts § 552, Comment h. As such it balances, more so than the other standards, the need to hold accountants to a standard that accounts for their contemporary role in the financial world with the need to protect them from liability that unreasonably exceeds the bounds of their real undertaking." [e.s.]

558 So.2d at 15-16. Comment h, cited by the court in the above quotation, says in part that the negligent maker of a misrepresentation is liable if he "knows that his recipient intends to transmit the information to a similar person, persons or group." Thus section 552 does not always require a maker of a negligent misrepresentation himself to intend reliance by the third person; it is sufficient if the maker knows that his client will give the information to another who will rely on it in making a business decision.

As we indicated earlier, the evidence at trial showed that the KPMG executive who was responsible for Borrower's account with the accounting firm had read the line of credit agreement and had taken specific note of the requirement that Borrower furnish Banks with annual audited financial statements. These annual statements could only have come from an outside auditor, such as KPMG. Thus the jury could have determined from the evidence that the account executive, and therefore KPMG itself, knew from their annual audits of Borrower's records the importance of the line of credit to Borrower's business, and that Banks would rely on the audited...