Travelers Indem. Co. v. A.M. Pullen & Co., 62856

Citation161 Ga.App. 784,289 S.E.2d 792
Decision Date17 March 1982
Docket NumberNo. 62856,62856
CourtUnited States Court of Appeals (Georgia)

Edward E. Dorsey, G. William Speer, Frank M. Hull, Atlanta, for appellant.

Richard R. Cheatham, Atlanta, for appellees.


Summary Judgment. This mountainous case involves a most convoluted series of arguments. The facts giving rise to this controversy show that in 1966 Yaksh Builders, Inc., the parent company of Ranger Construction Company, entered into a contractual agreement with Travelers Indemnity Company, whereby Travelers would issue performance bonds in behalf of Ranger to secure the faithful performance of numerous large construction projects. In order to protect itself and to learn as much as feasible about the financial condition of Yaksh-Ranger, Travelers required Ranger to obtain a Financial Statement for each operating year as well as Supplementary Financial Information from an independent audit firm. Ranger obtained the services of A. M. Pullen & Company, a firm of certified public accountants. Pullen prepared financial reports on Ranger's financial condition from 1966 through 1974, which were furnished to Travelers. Travelers issued performance bonds on behalf of Ranger (Yaksh) during the period from 1966 [161 Ga.App. 785] through 1973 amounting to a sum of approximately $200,000,000. During the years 1971, 1972 and 1973, Ranger became more and more pressed financially and ultimately defaulted on some of its contractual obligations to various owners and builders, requiring Travelers to make payments on some performance bonds commencing in November, 1974. Travelers claims ultimately it had to pay an amount on the defaulted contracts amounting to $50,000,000. Travelers brought suit against Pullen in January, 1977, asserting that Pullen had either negligently or fraudulently performed its auditing services, portraying Ranger (Yaksh) as a solvent, net revenue-producing concern during the years 1971-1973 when in fact Ranger (Yaksh) was in an increasingly difficult situation and ultimately Yaksh (the parent company) was forced into bankruptcy. (Ranger, rather than following its parent company into bankruptcy, merged with another solvent construction company (Ballenger) and continued to meet its contractual obligations. In order to protect itself, Travelers exchanged the debt obligation owed by Ranger for an equity position in the new corporation (Ranger-Ballenger), taking $2,000,000 in cash and $10,000,000 in shares in the new corporation and agreeing to advance additional capital as required. In exchange therefore, Travelers relinquished the indebtedness owed by Ranger. After extensive discovery (consisting of 40,000 pages of record), Pullen moved for summary judgment. The trial court in a very brief, non-illuminative order, granted summary judgment to Pullen. Travelers brings this appeal enumerating as error the grant of summary judgment. Held :

1. In presenting its motion for summary judgment, Pullen premised its motion on substantially eight separate bases. Inasmuch as the trial court did not indicate upon what ground it granted the motion (nor was the trial court required so to do), Travelers has presented its arguments and refutations in its briefs upon all eight potential grounds. This has resulted in multiple briefs and appendices being presented to this court with approximately 1,400 pages of facts, arguments, and discussion. Inasmuch as we too cannot determine with certainty upon which ground the trial court acted, we will consider each of the arguments made by the parties to the appeal.

2. In one of its primary contentions, Travelers contended in its pleadings that Pullen was grossly negligent in conducting its audits. Travelers presented evidence that Pullen's audits showed Ranger earning net income each year of 1971, 1972 and 1973 of approximately a quarter of a million dollars. Each year, its net worth increased by nearly an equivalent amount, as did asset inventory. Travelers offered evidence that upon such glowing reports (which showed business performance opposite to most construction company trends in the same time frame) its continued issuance of performance bonds was consistent with good business practices. After Yaksh went into bankruptcy, Travelers retained its own audit expert who determined that each year during the period 1971-1973, Ranger's records actually disclosed a net loss with a highly visible difference in income of well in excess of a million dollars less than portrayed in the financial statements prepared by Pullen. Travelers argues that had Pullen performed even routine examination of cash flow and expense documents dealing with Ranger's operations, Pullen would not have furnished such glowing financial statements. In addition to Travelers allegations of negligence on the part of Pullen, Travelers contends that Pullen also was guilty of fraudulent misrepresentation by its certification that the examinations were made in accordance with generally accepted auditing standards and that such statements fairly represented the financial position of Yaksh, Inc. (Ranger), when Pullen knew such certification misrepresented the scope and thoroughness of Pullen's audit. Thus, Travelers sought damages for the tortious injury resulting from Pullen's submission of grossly inaccurate financial statements.

Pullen resisted these counts and as the basis of its motion for summary judgment relating to the issues of negligence and fraud contended that there was a lack of privity between Pullen and Travelers. Pullen relies mainly on the cases of MacNerland v. Barnes, 129 Ga.App. 367, 199 S.E.2d 564; Howard v. Dun & Bradstreet, 136 Ga.App. 221, 220 S.E.2d 702; Dworman v. Lee, 83 A.D.2d 507, 441 N.Y.S.2d 90; and Ultramares v. Touche, 255 N.Y. 170, 174 N.E. 441, for the general principle that third parties may not recover from an accountant in the absence of privity. Quite aside from the fact that we distinctly held otherwise in Georgia-Carolina Brick &c. Co. v. Brown, 153 Ga.App. 747, 748, 266 S.E.2d 531 and Sawyer v. Allison, 151 Ga.App. 334, 259 S.E.2d 721; (see also Hines v. Wilson, 164 Ga. 888, 889, 139 S.E. 802; Young v. Hall, 4 Ga. 95(4), 100), we do not read those cases cited by Pullen with such a limited rationale. As we view the reasoning of those decisions (MacNerland, supra; Howard, supra), a third party is entitled to recover from an accountant, despite the absence of privity, where the third party is in a limited class of persons known to be relying upon representations of accountants. What those cases do seem to hold is that if the third party is included only as a member of the general public who relies upon the representations of the accountant, there is too tenuous a relationship to warrant a legal liability being imposed upon an accountant whose negligence or fraud might have worked an injury. Travelers presented evidence, which if believed, would have warranted a conclusion that Pullen was informed by Yaksh that Travelers required financial statements and would rely upon those statements in deciding the propriety of issuing new performance bonds. Travelers presented a clear question of fact whether Pullen was aware of Travelers' interest in the financial statements, and thus whether Travelers would rely upon or be directly injured by its representations. See Bodin v. Gill, 216 Ga. 467, 117 S.E.2d 325; and Georgia-Carolina Brick, supra. Georgia courts have held that persons performing professional and skilled services are required to exercise ordinary care in the performance of those services and that duty may extend to persons with whom the professional is not in privity. These cases have allowed recovery by such third persons for damages attributable to the negligent performance of those professional services. Bodin v. Gill, supra; Chastain v. Atlanta Gas Light Co., 122 Ga.App. 90, 176 S.E.2d 487. At the very least, we conclude Travelers has created a question of fact as to the intent and purpose of Pullen and Ranger in the preparation of the financial statements in relation to Travelers. It follows that the trial court could not have based the grant of summary judgment upon the lack of privity.

3. Another basis for the motion for summary judgment was that the financial statements prepared by Pullen related to estimated income for each year and not to established income. Estimates made in good faith cannot form the basis of fraud and form a poor basis for an argument of negligence. On the other hand, Travelers presented expert evidence that Pullen's annual reports related to year-end financial condition and while certain estimates may have been included, Pullen was certifying that the report reflected Ranger's actual year-end financial position. We must concede that at least a question of fact remains as to what Pullen actually represented. Where a question of fact remains, the trial court may not rest a grant of summary judgment on such an unresolved issue. Lewis v. C&S Bank, 139 Ga.App. 855, 860, 229 S.E.2d 765. We conclude therefore that the trial court did not base its grant of summary judgment upon this ground.

4. Another ground for summary judgment advanced by Pullen was that there was no evidence showing the extent or amount of credit it (Pullen) certified to Travelers as being safely issuable on behalf of Ranger based on Pullen's annual financial audits of Ranger. Pullen's argument continues that because there could be no limitation of its liability resulting from its representations, then Travelers should not be allowed to proceed on a theory of fraud. This argument sounds in contract theory. Pullen in effect argues that if it is going to be liable for its acts, then it should have been able to have an understanding that either Travelers or Ranger would pay a higher fee for the risk to which Pullen might expose itself. We find this argument to be without merit. We have already...

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