Shatterproof Glass Corp. v. James

• Decision Date: 23 April 1971
• Docket Number: No. 17148,17148
• Citation: 46 A.L.R.3d 968,466 S.W.2d 873
• Parties: SHATTERPROOF GLASS CORPORATION, Appellant, v. Ned JAMES et al., Appellees.
• Court: Texas Court of Appeals

Page 873

466 S.W.2d 873

46 A.L.R.3d 968

SHATTERPROOF GLASS CORPORATION, Appellant, v. Ned JAMES et al., Appellees.

No. 17148.

Court of Civil Appeals of Texas Fort Worth.

April 23, 1971.

Rehearing Denied May 21, 1971.

Lyne, Klein & French, and Erich F. Klein, Jr., Dallas, for appellant.

Walker, Bishop & Larimore, Brown, Crowley, Simon & Peebles, and M. Hendricks Brown, Fort Worth, for appellee.

OPINION

LANGDON, Justice.

The plaintiff, Shatterproof Glass Corporation, appellant herein, instituted suit against defendants, James, Guinn and Head, a Certified Public Accounting partnership, and its individual partners, the appellees herein, alleging that such accounting firm had prepared Certified Audit Reports for four corporations and that Shatterproof had relied upon such audit reports in lending money and extending credit to such corporations. Shatterproof further alleged that the defendants were negligent in the preparations of such audit reports and that as a proximate result of such negligence, Shatterproof sustained damages in excess of $400,000.00. At the conclusion of the plaintiff's evidence, the trial court withdrew the case from the jury and rendered judgment in favor of the defendants that plaintiff take nothing.

We reverse and remand.

Appellant, Shatterproof Glass Corporation, manufactures, distributes and sells automobile glass. In the summer of 1963, its president, W. B. Chase, contacted Buddy Paschal of Fort Worth, Texas, with respect to the latter acting as distributor for appellant in the Dallas-Fort Worth area through various corporations owned or controlled by Paschal. These corporations were Windshield Glass and Mirror Company, Auto Glass Company, Inc., Kool-King, Inc., and Buddy's Glass and Mirror, Inc. (hereinafter collectively referred to as the Paschal Enterprises).

In the summer of 1963, Paschal had requested the appellees to prepare Certified Audits on the Paschal Enterprises in order that he might obtain credit from the First National Bank. After being contacted by Chase, Paschal directly authorized appellees to release information to appellant. On September 13, 1963, Chase contacted appellee James with respect to the financial condition of the Paschal Enterprises. Certain information was furnished to appellant on September 14, 1963, and appellees knew that appellant was to be furnished a copy of the completed Certified Audit Reports on Paschal Enterprises. When Chase contacted appellee James with respect to the net worth of the Paschal Enterprises, he advised James that he was considering making the Paschal Enterprises a distributor of appellant and advised him that appellant acted as 'bankers' for its distributors. Subsequently, appellee James' partner, Mr. Guinn, learned that Paschal planned to furnish a copy of the Certified Audit Reports to appellant.

Prior to the time Chase contacted appellee James, the latter had been advised by Paschal that Chase would want to know the financial position of the Paschal Enterprises and James worked 'Just about everybody' in his organization all night long on September 13th to obtain an estimate of the Paschal Enterprises' financial position for appellant. The appellees made a separate and additional charge to Paschal Enterprises for professional services rendered by the appellees in supplying the financial information to appellant.

Appellees, according to their testimony, utilized the standards and procedures of the Committee on Auditing Procedures of the American Institute of Certified Public Accountants in the preparation of the audits in question, and admitted that, while it is recognized that the general rules may be subject to exceptions, the burden of justifying departures from the American Institute of Accountants' recommendations must be assumed by those who adopted other practices.

Appellee Guinn, the partner who did most of the work on the audit reports in question, testified that he was familiar with the publication 'Auditing Standards and Procedures' published by the Committee on Auditing Procedures of the American Institute of Certified Public Accountants and that such publication was recognized as an authoritative source with respect to auditing. Appellant introduced in evidence the Rules of Professional Conduct promulgated by the Texas State Board of Public Accountancy pursuant to the Public Accountancy Act of 1945. An accountant violates these rules if he expresses an opinion on representations in financial statements which he has examined and (a) fails to disclose a material fact known to him, (b) fails to report any material misstatement known to him to appear in the financial statements, (c) fails to acquire sufficient information to warrant expression of an opinion, or (d) fails to direct attention to any material departure from generally accepted accounting principles, or to disclose any material omission of generally accepted auditing procedures.

The evidence offered by the appellant on the trial of this cause raised fact issues as to whether the appellees violated in a number of ways the above quoted rules and the Auditing Standards and Procedures of the American Institute of Certified Public Accountants in the preparation and publication of the unqualified audit reports concerning the financial condition of the Paschal Enterprises.

Among other matters the evidence presented issues of fact as to whether appellees violated accounting standards by failing to disclose a material fact known to them which was not disclosed in the financial statements to wit: that Buddy Paschal denied owing any part of the $31,000 receivable shown by the Audit Reports to be owed by him to Auto Glass. Second, appellees knew that the financial statement of Auto Glass contained a representation that Buddy Paschal owed Auto Glass $31,000 and Buddy Paschal, President of Auto Glass, denied any such debt. Third, the corporate books and financial records of the Paschal Enterprises were in such a condition that it was impossible for the appellees to acquire sufficient information to warrant expression of an opinion but in spite of such fact, appellees gave an unqualified opinion as to the financial conditions of such companies. Fourth, the appellees wholly failed to make any written evaluation of internal control and relied upon a number of facts which were not contained in their work papers.

The appellees in the audit prepared by them failed to direct attention to alleged material departures from generally accepted accounting principles.

Evidence in this cause further established or raised issues of fact as to the following matters:

(1) The appellees in the preparation of the audits in question committed many acts which are denounced by the Rules of Professional Conduct of the Texas State Board of Public Accountancy.

(2) The appellees knew (a) that appellant was planning to lend money and extend credit to the Paschal Enterprises and (b) that the appellant would be furnished copies of, and rely upon, the Audit Reports prepared by them.

(3) The appellees charged an additional fee for obtaining and furnishing information to appellant with respect to the Paschal Enterprises.

(4) Appellant relied on the audits in question and but for such audits would not have loaned the Paschal Enterprises $425,000.

(5) The Audit Reports represented that the Paschal Enterprises had a net worth of approximately $173,000 whereas in reality the liabilities of such companies exceeded their assets by approximately $150,000.

(6) Because of such deficit net worth, the Paschal Enterprises could not repay the $425,000 loaned to them by appellant and the appellant suffered damages as a result thereof in at least such amount.

The appellant's first ten points attack the action of the court in preemptorily withdrawing the case from the jury and rendering the take nothing judgment against it because it had introduced evidence presenting the fact issues above enumerated and many others. The appellant by such points urge that it is entitled to have such fact issues determined by the jury. We are in agreement with this position and sustain the points.

In essence the principal question to be resolved on this appeal is whether the appellees were under a duty to exercise due care to protect the appellant from injury and were liable for damages caused the appellant by their negligence even though they were not in privity of contract. In sustaining the appellant's points one through ten, both inclusive, we hold that the appellees were under a duty to exercise due care. Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275, 23 A.L.R. 1425 (N.Y.Ct. of App., 1922).

In the case at bar the trial court based its action upon the strict application of the fraud theory which was first spelled out in Ultramares Corporation v. Touche, 255 N.Y. 170, 174 N.E. 441 (N.Y .Ct. of App., 1931). In Ultramares the accountants escaped liability to third parties where the proof would have supported a finding of negligence in a suit between the accountant and his client.

In American Indemnity Co. v. Ernst & Ernst, 106 S.W.2d 763 (Waco, Tex.Civ.App., 1937, error ref.), the plaintiff, a surety company, sued an accounting firm alleging that as a result of the accountants' failure to ascertain that an employee of the Mexia School District had been embezzling funds, the surety company had sustained a loss on a fidelity bond. On appeal the issue before the court was whether plaintiffs' cause of action was in contract and therefore under the four year statute or in tort and barred by the two year statute. The court in holding that such cause of action was in tort said:

'However, it has been held that where a party makes a false representation to another with the intent or knowledge that it should be exhibited or repeated to a third party for the purpose of deceiving him, the third party, if so deceived to his injury can maintain an action in tort against the party making the false statement for the...