Raritan River Steel Co. v. Cherry, Bekaert & Holland

• Decision Date: 18 December 1990
• Docket Number: No. 9026SC170,9026SC170
• Citation: 398 S.E.2d 889,101 N.C.App. 1
• Court: North Carolina Court of Appeals
• Parties: RARITAN RIVER STEEL CO. v. CHERRY, BEKAERT & HOLLAND, et al.

Page 889

398 S.E.2d 889

101 N.C.App. 1

RARITAN RIVER STEEL CO. v. CHERRY, BEKAERT & HOLLAND, et al.

No. 9026SC170.

Court of Appeals of North Carolina.

Dec. 18, 1990.

Grier and Grier, P.A. by Joseph W. Grier, III and J. Cameron Furr, Jr., Charlotte, for plaintiff-appellant.

Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan by James G. Billings, Mark A. Ash and Michael D. Hill, Raleigh, for defendants-appellees.

GREENE, Judge.

Plaintiff appeals the trial court's order filed 9 November 1989 allowing the defendants' motion for summary judgment.

Raritan River Steel Company (plaintiff) is a company engaged in selling raw steel. Cherry, Bekaert & Holland (defendants) is a North Carolina firm of certified public accountants. Before its bankruptcy, Intercontinental Metals Corporation (IMC) purchased the plaintiff's raw steel. In June, 1981, IMC entered into a contract with the defendants under which the defendants agreed to audit IMC's financial statements for the years ending 30 September 1980 and 30 September 1981. Pursuant to the contract, the defendants were to conduct the audit "in accordance with generally accepted auditing standards" and then were to express an "opinion on the fairness of the presentation of these financial statements in conformity with generally accepted accounting principles applied on a consistent basis."

In January, 1982, defendants issued a qualified opinion concerning IMC's financial statements, stating that IMC's net worth as of 30 September 1981 was $6,964,475.00. Plaintiff never examined the actual audited financial statements. However the plaintiff reviewed a summary of the audited statements which was published in Dun & Bradstreet reports in April and May of 1982. The summary read in part:

[P]repared from statement(s) by Accountant: Cherry, Bekaert & Holland, CPA. ACCOUNTANTS OPINION: 'Accountants indicate that the figures of Sep 30 1981 present fairly the financial position of the company in conformity with accepted accounting principles subject to the following qualifications or exceptions: the ultimate outcome of a dispute with a foreign supplier is not presently determinable.'

The summary also showed IMC's net worth to be $6,964,475.00. The plaintiff argues that because the defendants did not conduct its audit according to generally accepted auditing or accounting principles, the defendants overstated IMC's actual net worth by twenty million dollars, the actual net worth being negative 14.6 million dollars. The plaintiff contends that based upon the Dun & Bradstreet summary it decided to sell steel to IMC on open credit terms. By December, 1982, with plaintiff's IMC account at an outstanding balance of $2,247,844.61, IMC went involuntarily into bankruptcy. From IMC's bankruptcy estate, the plaintiff received only $511,143.60.

On 13 February 1985, the plaintiff filed suit against the defendants in the Superior Court of Mecklenburg County for the losses it sustained on account of the defendants' alleged erroneously audited financial statements. Plaintiff sued on two theories, one based upon defendants' negligent preparation of the statements, the other based upon principles governing third party beneficiary contracts. On 9 May 1985, the trial court granted the defendants' motion to dismiss both claims for failure to state a claim upon which relief could be granted. This Court reversed the trial court. Raritan River Steel Co. v. Cherry, Bekaert & Holland, 79 N.C.App. 81, 339 S.E.2d 62 (1986). Our Supreme Court affirmed in part and reversed in part this Court's decision, declining to review this Court's decision with regard to the plaintiff's third party beneficiary claim, yet holding that the plaintiff had not stated a claim upon which relief could be granted with regard to defendants' alleged negligence. Raritan River Steel Co. v. Cherry, Bekaert & Holland, 322 N.C. 200, 367 S.E.2d 609 (1988). Thereafter, the plaintiff pursued its breach of contract claim. On 30 December 1988, the defendants moved for summary judgment which the trial court allowed on 8 November 1989, nunc pro tunc, 27 October 1989.

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The issue is whether there is a genuine issue of material fact that the contract and surrounding circumstances evidence an intent that the plaintiff was an intended beneficiary of the defendants' contract with IMC.

Summary judgment is proper where there is no genuine issue of any material fact and the movant is entitled to judgment as a matter of law. N.C.G.S. § 1A-1, Rule 56(c). "[A]n issue is genuine if it can be maintained by substantial evidence.... A fact is material if it would establish any material element of a claim or defense." Martin v. Ray Lackey Enter., 100 N.C.App. 349, 353, 396 S.E.2d 327, 330 (1990) (citations omitted). "Substantial evidence is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Commissioner of Ins. v. North Carolina Fire Ins. Rating Bureau, 292 N.C. 70, 80, 231 S.E.2d 882, 888 (1977). "In ruling on a motion for summary judgment the evidence is viewed in the light most favorable to the non-moving party." Hinson v. Hinson, 80 N.C.App. 561, 563, 343 S.E.2d 266, 268 (1986). The movant "has the burden of showing at least one of the three grounds justifying summary judgment in his favor: (1) 'an essential element of plaintiff's claim is nonexistent ... plaintiff cannot produce evidence to support an essential element of his claim, or ... plaintiff cannot surmount an affirmative defense which would bar the claim.' " Clark v. Brown, 99 N.C.App. 255, 260, 393 S.E.2d 134, 136-37 (1990) (citations omitted). See also Edwards v. Akion, 52 N.C.App. 688, 690, 279 S.E.2d 894, 896, aff'd, 304 N.C. 585, 284 S.E.2d 518 (1981) (movant must clearly establish that no triable issue of fact exists and that movant "is entitled to judgment as a matter of law"). "Once the moving party meets this burden, the burden is then on the opposing party to show that a genuine issue of material fact exists.... If the opponent fails to forecast such evidence, then the trial court's entry of summary judgment is proper." White v. Hunsinger, 88 N.C.App. 382, 383, 363 S.E.2d 203, 204 (1988) (citation omitted).

The plaintiff's claim is based on the theory that it was the third party intended beneficiary of a contract entered into between IMC (promisee) and the defendants (promisor). See Restatement (Second) of Contracts § 2(1)-(3) (1979) (defining "promisee" as the person to whom a manifestation of intention to act in a specified way is addressed, and defining "promisor" as the person manifesting such intention).

In North Carolina " '[t]he rule is well established ... that a third person may sue to enforce a binding contract or promise made for his [direct] benefit even though he is a stranger both to the contract and to the consideration.' " American Trust Co. v. Catawba Sales & Processing Co., 242 N.C. 370, 379, 88 S.E.2d 233, 239 (1955) (citation omitted). "If a class of persons is clearly designated as beneficiaries, an individual of that class can maintain suit though not specifically named." 4 Corbin, Corbin on Contracts § 781 (1951). See also 4 Corbin § 786 (third party need not be sole party benefited). However, the precise test for determining whether a contract has been made for a person's direct benefit, and therefore whether that person is a third party beneficiary of the contract, is unclear. Compare Vogel v. Reed Supply Co., 277 N.C. 119, 127-28, 177 S.E.2d 273, 278 (1970) with Snyder v. Freeman, 300 N.C. 204, 221, 266 S.E.2d 593, 604 (1980).

In Vogel, our Supreme Court expressly adopted the Restatement of Contracts § 133(1)(a) (1932) which determines third party donee beneficiary status by focusing on the intent and purpose of the promisee to the contract. Vogel, 277 N.C. at 127-28, 177 S.E.2d at 278. At the same time, Vogel also stressed the importance of looking at the intent of both the promisor and the promisee. Id. at 128, 177 S.E.2d at 279. In Snyder, our Supreme Court adopted the tentative draft of the Restatement (Second) of Contracts § 133 (1973), now cited as Restatement (Second) of Contracts § 302 (1979). Synder, 300 N.C. at 220-21, 266 S.E.2d at 604 (1973 version is identical to the 1979 version). Restatement (Second) of Contracts § 302 provides:

§ 302. Intended and Incidental Beneficiaries

(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either

(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.

Id. (emphases added). Although § 302 of the Restatement (Second) eliminates the earlier "donee" and "creditor" beneficiary categories used in the first Restatement in favor of the comprehensive category of "intended beneficiary," the comments to the Restatement (Second) explain that "[t]he type of beneficiary covered by Subsection (1)(a) is often referred to as a 'creditor beneficiary,' " and the type of beneficiary covered by Subsection (1)(b) is often referred to as a "donee beneficiary." Restatement (Second) of Contracts § 302 comments b-c (1979). See also Snyder, 300 N.C. at 221, 266 S.E.2d at 604 (citing comment b).

There is thus a two-part test under the Restatement (Second) for determining whether one is an intended third party beneficiary: (1) the recognition of the beneficiary's right must be "appropriate to effectuate the intention of the parties," and (2) the performance must "satisfy an obligation of the promisee to pay money to the beneficiary" or "the circumstances indicate that the promisee intends to give the beneficiary the...