Seedkem, Inc. v. Safranek

• Decision Date: 01 March 1979
• Docket Number: Civ. No. 78-0-477.
• Citation: 466 F. Supp. 340
• Parties: SEEDKEM, INC., an Indiana Corporation, Plaintiff, v. Paul J. SAFRANEK, Defendant.
• Court: U.S. District Court — District of Nebraska

466 F. Supp. 340

SEEDKEM, INC., an Indiana Corporation, Plaintiff, v. Paul J. SAFRANEK, Defendant.

Civ. No. 78-0-477.

United States District Court, D. Nebraska.

March 1, 1979.

Lyman Larsen, Omaha, Neb., for plaintiff.

Gareth G. Morris and Maureen E. McGrath, Omaha, Neb., for defendant.

MEMORANDUM

DENNEY, District Judge.

This matter comes before the Court upon the defendant's motion to dismiss for failure to state a claim upon which relief can be granted Filing # 7.

This is a diversity action, pursuant to 28 U.S.C. § 1332, brought by the plaintiff, an Indiana corporation, against the defendant, a resident of Nebraska and a Certified Public Accountant, duly authorized to practice in Nebraska.

The plaintiff contends that the defendant was retained by Agri-Products, Inc. for the purpose of maintaining their books and preparing their regular financial statements; that defendant was aware that the financial statements prepared by him were for distribution to the general public, particularly the plaintiff; and that defendant knew, or should have known, that the financial statements which he prepared would be issued by Agri-Products to businesses extending credit to Agri-Products, including plaintiff, and that the financial statements would be relied upon by businesses such as plaintiff.

Beginning in November of 1975, the plaintiff contends that in reliance on the statements and papers prepared by the defendant it advanced credit to Agri-Products in sums in excess of $700,000.00. Subsequently, plaintiff became aware that the financial statements were inaccurate due to the defendant's alleged negligence and that defendant allegedly knew that the financial statements with which he became associated did not conform to generally accepted accounting practices.

Plaintiff's second cause of action realleges the above allegations and states that the documents were "recklessly and wantonly" prepared by the defendant; that defendant knew that the financial statements did not conform to generally accepted accounting principles and that, in spite of this knowledge, defendant "recklessly and wantonly" allowed his name to become associated with the financial statements.

Applicable Law

In diversity cases, this Court will apply Nebraska's substantive laws, including its choice of laws principles. Erie R. R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed.2d 1188 (1939); Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

Initially, it would seem necessary to undertake a consideration of Nebraska's choice of laws principles to determine whether to apply the substantive law of Nebraska (where the defendant resided and worked) or the substantive law of Indiana (the place of plaintiff's alleged reliance). However, neither of these states' highest courts has passed directly on the issues here raised. Therefore, the Court decides that both of these jurisdictions would look to the entire body of Anglo-American law, in making a determination of the issues in the instant case. See Cudahy Co. v. American Labs. Inc., 313 F.Supp. 1339, 1342 (D.Neb. 1970).

Discussion

Any analysis of the law regarding an accountant's liability to third parties must essentially begin with an examination of Justice Cardozo's opinions in Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922) and Ultramares Corp. v. Touche & Co., 255 N.Y. 170, 174 N.E. 441 (1931). In Glanzer, Cardozo held public weighers liable to a buyer of beans for breach of a duty to weigh the beans carefully. Reversing the New York appellate court, Cardozo wrote:

We think the law imposes a duty toward buyer as well as seller in the situation here disclosed. The plaintiffs' use of the certificates was not an indirect or collateral consequence of the action of the weighers. It was a consequence which, to the weighers' knowledge, was the end and aim of the transaction . . . assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed. We do not need to state the duty in terms of contract or of privity. Growing out of a contract, it has none the less an origin not exclusively contractual. Given the contract and the relation, the duty is imposed by law.

Glanzer v. Shepard, supra, 233 N.Y. at 238-39, 135 N.E. at 275.

Subsequently, in Ultramares, Cardozo refused to hold accountants liable to the plaintiff corporation which loaned money to another corporation in reliance on an inaccurate balance sheet certified by the accountants. The accountants did not know the exact persons to whom the financial statements would be shown, nor did they know that the statements would be submitted to the plaintiff. Cardozo, in questioning the wisdom of a duty owed to all who might foreseeably rely on financial statements which were negligently audited, noted:

If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.

Ultramares v. Touche & Co., supra, 255 N.Y. at 179, 174 N.E. at 444.

He also distinguished Glanzer on the basis that in Glanzer:

. . . the transmission of the certificate to another was not merely one possibility among many, but the "end and aim of the transaction," as certain and immediate and deliberately willed as if a husband were to order a gown to be delivered to his wife . . .. The bond was so close as to approach that of privity, if not completely one with it. Not so in the case at hand. No one would be likely to urge that there was a contractual relation, or even one approaching it, at the root of any duty that was owing from the defendants now before us to the indeterminate class of persons who, presently or in the future, might deal with the Stern Company in reliance on the audit. In a word, the service rendered by the defendant in Glanzer v. Shepard was primarily for the information of a third person, in effect, if not in name, a party to the contract, and only incidentally for that of the formal promisee.

Ultramares v. Touche & Co., supra, 255 N.Y. at 182-83, 174 N.E. at 445-446.

Since the decisions in Glanzer and Ultramares, the courts have wrestled with the difficult task of reconciling the two opinions. Some courts have refused to apply the reasoning in Glanzer to accountants, viewing Ultramares as holding that accountants owe no duty to those persons not in privity of contract.¹ See, e. g., Stephens Industries, Inc. v. Haskins and Sells, 438 F.2d 357 (10th Cir. 1971); O'Connor v. Ludlum, 92 F.2d 50 (2d Cir. 1937); Investment Corp. of Fla. v. Buchman, 208 So.2d 291 (Fla.App.1968); State Street Trust Co. v. Ernst, 278 N.Y. 104, 15 N.E.2d 416 (1938); see also 46 A.L.R.3d 978, 991-94 (1972).

However, in recent years, significant inroads have been made on the reach of the Ultramares decision and the rule of Ultramares has been weakened.²See, e. g., Rhode Island Hosp. Trust Nat'l Bank v. Swartz, Bresenoff, Yavner & Jacobs, 455 F.2d 847 (4th Cir. 1972); Rusch Factors, Inc. v. Levin, 284 F.Supp. 85 (D.R.I.1968); Ryan v. Kanne, 170 N.W.2d 395 (Iowa 1969); Bonhiver v. Graff, Minn., 248 N.W. 2d 291 (1976); Shatterproof Glass Corp. v. James, 466 S.W.2d 873 (Tex.Civ.App.1971); see also Restatement (Second) of Torts § 552 (1977); 46 A.L.R.3d 979, 989-91 (1972). Those counts which have diminished the impact of Ultramares have extended "the accountant's liability for negligence to those who, although not themselves foreseen, are members of a limited class whose reliance on the representation is specifically foreseen." Bonhiver v. Graff, supra, 248 N.W.2d at 301-302; see also Hochfelder v. Ernst & Ernst, supra, 503 F.2d at 1107. The reasoning underlying the "modern trend" away from Ultramares is explained by the court in Rusch Factors, Inc. v. Levin, supra, 284 F.Supp. at 91, as follows:

Why should an innocent reliant party be forced to carry the weighty burden of an accountant's professional malpractice? Isn't the risk of loss more easily distributed and fairly spread by imposing it on the accounting profession, which can pass the cost of insuring against the risk onto its customers, who can in turn pass the cost onto the entire consuming public? Finally, wouldn't a rule of foreseeability elevate the cautionary techniques of the accounting profession? For these reasons it appears to this Court that the decision in Ultramares constitutes an unwarranted inroad upon the principle that "the risk reasonably to be perceived defines the duty to be obeyed." Palsgraf v. Long Island R. R., 248 N.Y. 339, 344, 162 N.E. 99, 100, 59 A.L.R. 1253.

Accord, Ryan v. Kanne, supra, 170 N.W.2d at 401-02.

In light of the above discussion, the positions of the parties become apparent. The defendant's approach is two-fold. He would have this Court dismiss the complaint by either rigidly applying the no-privity, no-duty reasoning of Ultramares, or ask that the Court recognize that since this case involves both "unaudited" reports and no direct representations, it falls outside of those cases which have found accountants liable based on the "foreseeable plaintiff" theory. On the other hand, the plaintiff, of course, would ask the Court to reject the reasoning of Ultramares and embrace the "modern trend" of authority.

It must be remembered that as a diversity case, this Court is sitting as an "alter-ego" of the states of Indiana and Nebraska without any direct statement from those states' highest courts on the issue in question. Therefore, this Court must apply the rule which it believes the state court would, in all probability follow. Luster v. Retail Credit, 575 F.2d 609, 613 (8th Cir. 1978). In this...