Selden v. Burnett, S-2194

• Decision Date: 22 April 1988
• Docket Number: No. S-2194,S-2194
• Citation: 754 P.2d 256
• Parties: Wayne and Arlene SELDEN, Appellants, v. William BURNETT, and W.M. Burnett and Associates, Appellees.
• Court: Alaska Supreme Court

Page 256

754 P.2d 256

56 USLW 2706

Wayne and Arlene SELDEN, Appellants, v. William BURNETT, and W.M. Burnett and Associates, Appellees.

No. S-2194.

Supreme Court of Alaska.

April 22, 1988.

Joe P. Josephson, of counsel, Robert A. Breeze & Assoc., P.C., Anchorage, for appellants.

Sigurd E. Murphy and Joseph R.D. Loescher, Hughes, Thorsness, Gantz, Powell & Brundin, Anchorage, for appellees.

Before MATTHEWS, C.J., and RABINOWITZ, COMPTON and MOORE, JJ.

OPINION

MOORE, Justice.

Wayne and Arlene Selden unwittingly invested in a scam. The company that offered the investment and perpetrated the scam is now bankrupt. Consequently, the Seldens sought to recover from William Burnett, an accountant. Burnett had recommended the investment to several of his clients, who evidently communicated his recommendation to the Seldens. The Seldens were not Burnett's clients.

The superior court granted summary judgment to Burnett on the ground that he had no relationship with the Seldens. The Seldens appeal, arguing that they did have a relationship with Burnett such that Burnett owed them a duty of care and conceivably could be liable for negligent advice.

We are presented with two issues: (1) What relationship is necessary between an accountant and a non-client, for the accountant to be liable for negligent advice obtained indirectly by the non-client? (2) Did Burnett lack such a relationship with the Seldens?

I.

A. Facts

Mr. Heppner, the president of Competition Aircraft, came to Alaska in 1981 to attract investors into an aircraft sale-and-leaseback tax shelter. He would arrange for interested investors to purchase planes, which he would take care of leasing to aviation companies in Seattle. The purchase of a plane could result in a large investment tax credit, lowering the investor's taxes. It appears that Competition Aircraft originally sold bona fide aircraft, but at some point began selling non-existent ones. ¹

Burnett, a Kenai accountant, first found out about Competition Aircraft in 1982 from a former tax client, Kenai police officer Kalar. While Kalar strongly encouraged Burnett to invest, Burnett was not interested initially. Later in the year, at Kalar's insistence, Burnett agreed to a meeting with Heppner. Burnett subsequently inquired about Competition Aircraft with the Seattle Better Business Bureau, Dun & Bradstreet, the IRS, and the manufacturer of the type of aircraft sold by Competition. Finally, in November of 1982, Burnett personally bought a plane through Competition Aircraft. He also visited Competition Aircraft's facility at Boeing Field to view their operation.

Shortly thereafter, Burnett recommended to some of his tax clients that they invest in Competition Aircraft's sale-and-leaseback program. A few of those clients were Alaska State Troopers, as was Mr. Selden. A number of the troopers, both clients and non-clients of Burnett, had frequent conversations about Burnett's advice and about the Competition Aircraft scheme. The precise manner in which Burnett's advice was passed to Selden is spelled out in the affidavits of troopers Kallus, Kirkpatrick, and Selden himself, summarized as follows:

Kallus was a tax client of Burnett. Burnett recommended the Competition Aircraft program to him. Kallus believed Burnett recognized that troopers shared common tax problems. Burnett told Kallus that he had recommended the Competition Aircraft program to other law enforcement personnel. Kallus spoke to Selden about "the tax advantages alleged to be associated with the program, and about Mr. Burnett's enthusiasm for the program."

Kirkpatrick was not a regular tax client of Burnett. He got Burnett's name from Heppner, the president of Competition Aircraft. Kirkpatrick said that he also got Burnett's name from Selden. Kirkpatrick had a meeting with Burnett, at which he told Burnett that "Mr. Selden was a fellow trooper who was interested in the Competition Aircraft, Inc., tax shelter program and who had talked with Mr. Heppner, as I had done, and that Mr. Selden understood Mr. Burnett was familiar with the program and its tax benefits." After reviewing Kirkpatrick's tax records, Burnett recommended the program to him. The following day, Kirkpatrick spoke to Selden about the program, and about the advice given by Burnett.

Kirkpatrick did not invest. Both the Kalluses and Seldens did. Unfortunately, it appears that they purchased non-existent planes.

A meeting of 40 or 50 disgruntled investors was held in the spring of 1985, perhaps two years after the Seldens purchased the non-existent aircraft. Burnett stated in his affidavit that he "did not provide any tax advice at that meeting to the Seldens or anyone else." However, Kallus and Selden recall that Burnett reassured the group that the "tax gig" was basically sound, and cautioned against overreacting. The evidence does not show in what capacity Burnett attended the meeting, or whether he made a formal presentation as opposed to off-the-cuff remarks.

B. Proceedings

The Seldens, along with Mr. and Mrs. Kallus, are the plaintiffs in this action. Both couples allege that Burnett negligently gave them tax advice.

Burnett moved for summary judgment against the Seldens. In his memorandum in support of the motion, Burnett stressed that the Seldens never sought or received tax advice from him. He also pointed out that tax advice is "individually tailored to each client's needs, [and that he] does not expect his clients to pass on his recommendations to other individuals."

Judge Karen Hunt granted Burnett's motion for summary judgment, stating in part:

[B]efore there can be liability for negligent misrepresentation, there must be a relationship between the parties that provides a basis for the plaintiff to rely upon the defendant for information, and which imposes upon the defendant a duty to give the information with care. Howarth v. Pfeifer, 443 P.2d 39, 43 (Alaska 1968).... The facts of this case illustrate that there was no relationship between the Seldens and the defendants.... [T]his Court concludes that defendants did not owe a duty to the Seldens as a matter of law.

II.

A negligence action can exist only if the defendant owed the plaintiff a duty of care. Stephens v. State, Dep't of Revenue, 746 P.2d 908, 910 (Alaska 1987). "Duty" has been defined as the "expression of the sum total of those considerations of policy which lead the law to say that the particular plaintiff is entitled to protection." W. Prosser, The Law of Torts § 53 at 325-26 (4th ed. 1971), quoted in Stephens, 746 P.2d at 910.

In Howarth v. Pfeifer, 443 P.2d 39, 43 (Alaska 1968) (footnote omitted), ² we stated that before there can be liability for negligent misrepresentation,

there must be a relationship between the parties, whether growing out of contract or otherwise, such that in morals and good conscience the plaintiff has the right to rely upon the defendant for information, and the latter owes a duty to give the information with care.

We now address what kind of relationship is necessary to subject an accountant to a duty of care toward a non-client who received the accountant's advice secondhand as a tip.

The Seldens' attorneys discuss many cases supporting an expansive duty of care on the part of accountants. ³ However, those cases all involve the public role of accountants in preparing and certifying financial statements. A single set of financial statements may routinely be relied upon in a variety of transactions by lenders, trade creditors, shareholders, investors, market analysts, and governmental agencies. See Restatement (Second) of Torts § 552 comment h, illustration 10 (1977). It is in that context that courts have broadly extended accountants' duty of care to include unknown plaintiffs. We do not find those cases helpful here. When an accountant gives personal tax advice, he acts in a private capacity. We believe that a more limited duty of care in the context of this case is not at all inconsistent with expansive liability for accountants acting in their public capacity.

We hold that when an accountant in the course of giving personal tax advice verbally recommends a particular investment to a client, the accountant owes a duty of care to third parties only if the accountant specifically intends the third parties to invest relying on his advice, and only if he makes his intent known. Thus, if an accountant were to give investment advice to the representative of a group of investors, explicitly intending the information to be for the benefit and guidance of each member of the group, the accountant would owe a duty of care to each member. ⁴ However, the accountant would owe no duty to non-members to whom the information might subsequently be relayed. ⁵ Under this rule, a non-client who obtains personal investment advice secondhand will rarely be entitled to damages from the accountant who provided the advice. ⁶ Our reasons for the rule are as follows:

First, an accountant reaps no benefit when his advice is passed to a non-client who invests in reliance on it. A more expansive rule of liability would put accountants in the no-win position of being responsible for advice for which they receive no compensation by non-clients, and upon which they never intend the non-clients to rely. Nor is such third-party investment a necessary or inevitable incident of the business, requiring, for the sake of fairness, the accountant to internalize all ensuing harm. Thus, this situation is quite different from products liability. A manufacturer's duty of care is broad, because products necessarily and inevitably get transmitted from manufacturer to retailer to consumer. Furthermore, product consumers are often powerless to protect themselves from injury. ⁷

Second, although malpractice insurance might cover the accountant's liability, to allow a non-client to recover would be to spread the loss to the wrong group--namely, the group of fee-paying clients on whom the burden...