North American Specialty Insurance Co. v. LaPalme

• Decision Date: 08 May 2001
• Docket Number: No. 00-2408,00-2408
• Citation: 258 F.3d 35
• Parties: (1st Cir. 2001) NORTH AMERICAN SPECIALTY INSURANCE COMPANY, PLAINTIFF, APPELLANT, v. DAVID LAPALME ET AL., DEFENDANTS, APPELLEES. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 35

258 F.3d 35 (1st Cir. 2001)

NORTH AMERICAN SPECIALTY INSURANCE COMPANY, PLAINTIFF, APPELLANT, v. DAVID LAPALME ET AL., DEFENDANTS, APPELLEES.

No. 00-2408

United States Court of Appeals For the First Circuit

Heard May 8, 2001

Decided August 2, 2001

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Joseph L. Tauro, U.S. District Judge] Peter B. McGlynn, with whom Bruce D. Levin and Bernkopf, Goodman & Baseman LP were on brief, for appellant.

Warren D. Hutchison, with whom Nancy M. Reimer and Donovan Hatem LP were on brief, for appellees.

Before Boudin, Chief Judge, Selya, Circuit Judge, and Schwarzer,^* Senior District Judge.

Selya, Circuit Judge.

Audit reports and financial statements are staples of the accounting profession. Accuracy is a paramount concern, for much can turn on a relatively minor bevue. But mistakes occur, and courts have grappled with the extent of an accountant's liability to third parties (i.e., non-clients) for such errors. This appeal requires us to enter the fray.

The case at hand involves ostensible misstatements attributed to the carelessness of the defendants (an accounting firm and one of its principals). The court below, ruling on a motion for summary judgment, concluded that even if the financial statement prepared by the defendants for their client corporation contained negligent misrepresentations, the defendants were not liable to the plaintiff (a third party) for those misrepresentations. Although our appraisal of the governing law differs in one salient respect from that of the lower court, we reach the same conclusion. Accordingly, we affirm.

I. BACKGROUND

A brief recitation of the facts suffices to put the pivotal legal issue into perspective. Following the conventional summary judgment praxis, we recount the facts in the light most favorable to the non-movant (here, the plaintiff). Houlton Citizens' Coalition v. Town of Houlton, 175 F.3d 178, 184 (1st Cir. 1999).

In the 1980s, Jeffrey Canty formed Canty Roofing and Sheetmetal, Inc. (CRS). As the name implies, CRS's principal business was the installation and repair of roofs. For much of CRS's existence, the firm of Dias & Lapalme (D&L) rendered accounting services to it. The partner in charge was David Lapalme. For the most part, the work was mundane, involving, inter alia, the preparation of annual financial statements and tax returns.

Over the years, CRS installed and repaired roofs on a variety of public and private buildings. Contractors working on public construction projects in Massachusetts are required by statute to post payment and performance bonds on a project-by-project basis. See Mass. Gen. Laws ch. 149, §§ 29. CRS routinely bid on public works jobs and, thus, from time to time required bonds.

In 1994, Martin Donovan, an insurance broker, introduced CRS to plaintiff-appellant North American Specialty Insurance Co. (NASI). At Donovan's instance, NASI inspected CRS's financial records and Canty's personal finances. Apparently satisfied with the results of its review, NASI entered into a bonding relationship with CRS. Once this relationship commenced, NASI told Canty that CRS would be required to provide updated financial statements, prepared by an independent certified public accountant, for each succeeding calendar year.

In late 1995, Canty agreed to sell CRS to a group composed of three businessmen, namely, Robert Cote, Paul Flynn, and David Beasley. The transfer of ownership, structured as a sale of stock, occurred on December 29, 1995. Shortly thereafter, D&L prepared an independent, review-level financial statement for CRS with respect to calendar year 1995. This statement, issued by D&L on March 25, 1996, lacked specific information anent the change in ownership. To make matters worse, the notes to the financial statement contained three arguably misleading comments that implied Canty's continuing participation as CRS's sole shareholder (or so NASI now contends). We summarize these comments in the margin. ¹

CRS thereafter obtained new contracts for work on public buildings. To facilitate these engagements, NASI wrote bonds (relying, it claims, on the 1995 financial statement) totaling $847,630 on June 14, 1996, and bonds totaling $874,500 on August 21, 1996. But CRS foundered under the stewardship of its new owners and eventually defaulted on these bonds. This calamity forced NASI, qua surety, to step into the breach. Doing so cost it nearly $2,000,000.

Invoking diversity jurisdiction, 28 U.S.C. §§ 1332(a), NASI sued D&L and Lapalme in the United States District Court for the District of Massachusetts. It charged the accountants with negligent misrepresentation and deceptive trade practices. NASI grounded its complaint on the assertion that, but for the accountants' omission of accurate ownership information in the 1995 financial statement, it would not have continued furnishing bonds for CRS (and, therefore, would have avoided the ensuing losses). After allowing an extended period for pretrial discovery, the district court granted summary judgment in the defendants' favor.

This timely appeal ensued. In it, NASI challenges the district court's interpretation and application of the legal regime governing an accountant's liability to third persons and maintains that, under a proper formulation of the law, the existence of genuine issues of material fact would preclude the entry of summary judgment.

II. SOME THRESHOLD PRINCIPLES

We preface our discussion of the central issue with a reminder as to certain threshold principles that inform our analysis. Summary judgment is appropriate only when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). In reviewing an order granting summary judgment, we construe the record and all reasonable inferences from it in favor of the summary judgment loser. Grant's Dairy-Me., LLC v. Comm'r of Me. Dep't of Agric., Food & Rural Res., 232 F.3d 8, 14 (1st Cir. 2000); Houlton Citizens' Coalition, 175 F.3d at 184. Our review is plenary, so that we may, "if the occasion arises, reject the rationale employed by the lower court and still uphold its order for summary judgment." Perez v. Volvo Car Corp., 247 F.3d 303, 310 (1st Cir. 2001) (citation and internal quotation marks omitted).

In this diversity case, we look to state law (here, the law of Massachusetts) for the substantive rules of decision. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Fithian v. Reed, 204 F.3d 306, 308 (1st Cir. 2000). In such matters, we are bound by the teachings of the state's highest court. Blinzler v. Marriott Int'l, Inc., 81 F.3d 1148, 1151 (1st Cir. 1996). "In the absence of a definitive ruling by the highest state court, a federal court may consider analogous decisions, considered dicta, scholarly works, and any other reliable data tending convincingly to show how the highest court in the state would decide the issue at hand . . . ." Gibson v. City of Cranston, 37 F.3d 731, 736 (1st Cir. 1994) (citation and internal quotation marks omitted). Our duty is to make an informed prophecy - to "discern the rule the state's highest court would be most likely to follow under these circumstances, even if our independent judgment might differ." Ambrose v. New Engl. Ass'n of Schs. & Colls., 252 F.3d 488, 497-98 (1st Cir. 2001).

III. NEGLIGENT MISREPRESENTATION

Against this backdrop, we turn to the law pertaining to accountants' liability to third parties for negligent misrepresentation and, in particular, the watershed opinion of the Massachusetts Supreme Judicial Court (SJC) in Nycal Corp. v. KPMG Peat Marwick LLP, 688 N.E.2d 1368 (Mass. 1998). We next examine the decision below and discuss an area of disagreement. We then offer our views on the meaning, under Massachusetts law, of the phrase "substantially similar transactions" as that phrase relates to an accountant's liability to third parties for negligent misrepresentations. Finally, we apply the discerned law to the gleaned facts to complete our canvass.

A. The Watershed Case.

Nycal v. KPMG Peat Marwick LLP is the SJC's most comprehensive effort to plot the borders of an accountant's liability to third parties for negligent misrepresentations. In that case, the plaintiffs - purchasers of stock - alleged that they had relied to their determent on financial statements prepared for the acquired company by the defendant (a well-known accounting firm). Nycal, 688 N.E.2d at 1369. After studying the available options, ² the SJC adopted the Restatement rule anent the scope of an accountant's liability to a third party for negligent misrepresentations. Id. at 1370-71 (citing with approval Restatement (Second) of Torts §§ 552 (1977)). The SJC's description of the rule follows:

Section 552 describes the tort of negligent misrepresentation committed in the process of supplying information for the guidance of others as follows: (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 upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

That liability is [(2)] 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.

Id. at 1371-72 (internal...