Walpert v. Katz

• Decision Date: 21 November 2000
• Docket Number: No. 50,50
• Citation: 361 Md. 645,762 A.2d 582
• Parties: WALPERT, SMULLIAN & BLUMENTHAL, P.A. v. George KATZ, et al.
• Court: Maryland Court of Appeals

762 A.2d 582

361 Md. 645

WALPERT, SMULLIAN & BLUMENTHAL, P.A. v. George KATZ, et al.

No. 50, Sept. Term, 1998.

Court of Appeals of Maryland.

November 21, 2000.

Kathleen A. Birrane, James P. Ulwick, (Kramon & Graham, P.A., on the brief), Baltimore, for petitioner.

Ronald E. D'Anna (Steven G. Schwartz, Mattlin & McClosky, on the brief), Boca Raton, FL, for respondents.

Argued before BELL, C.J., and ELDRIDGE, RODOWSKY,¹ CHASANOW,² RAKER, WILNER and CATHELL, JJ.

BELL, Chief Judge.

This case presents the issue of under what circumstances, if any, absent a contractual relationship, an accountant is liable for the economic losses of a party who relied on a financial report which the accountant prepared. The Circuit Court for Baltimore City concluded that, under the circumstances of this case—where there is no privity between the accountant and plaintiff and the plaintiff is not the intended beneficiary of the accountant's contract—no duty is owed. Although agreeing with the trial court that the plaintiffs were not the intended beneficiaries, the Court of Special Appeals nevertheless reversed the judgment of the Circuit Court. It held, in an unreported opinion, that there was sufficient evidence from which a trier of fact could find that, under the circumstances, a duty was owed to the plaintiffs. This Court granted the petitioner's Petition for Writ of Certiorari in order to review this matter of first impression. We agree with the intermediate appellate court and, accordingly, affirm.

I.

The respondents, George and Shirley Katz (the "Katzses"), filed suit in the Circuit Court for Baltimore City against Walpert, Smullian & Blumenthal, P.A. ("WS & B"), the petitioner accountants, seeking damages for negligence, gross negligence, negligent misrepresentation and breach of contract, as a consequence of loans they made to Magnetics, Inc., George Katz's former company and the petitioner's client. The complaint alleged that George Katz was the owner and president of Magnetics, a printing supplies and press repair business, until 1987 when, as a result of failing health, he retired as both owner and operator. At that time, George Katz relinquished both his ownership interest in the company to his wife, Shirley, and their two sons, giving each a one third interest, and passed control of the company to his son, Philip. Although he continued to be listed on the books as president, George Katz neither attended meetings of the board of directors nor participated in the day-to-day management of the company. In 1989, George Katz's health further deteriorated.

The Katzses remained financially interested in, and involved with, Magnetics after George Katz's retirement. George Katz received an annual salary of $5,000 and Mrs. Katz, now a one third owner, received $20,000 annually as a consulting fee. In addition, the Katzses received $120,000 a year as rental for the building out of which the business was operated.

Subsequent to George Katz's relinquishment of control of Magnetics, Philip Katz retained WS & B as Magnetics' accounting firm. WS & B's dual undertaking through its contract was to perform annual audits of Magnetics' financial statements as well as prepare unaudited reports for the company every six months. In the course of the engagement, it prepared unaudited compilations of Magnetics' financial statements for the periods ending: (1) April 30, 1989; (2) April 30, 1990; (3) April 30, 1991; and (4) April 30, 1992. Moreover, for those same years, WS & B audited Magnetics' annual year-end financial statements. Additionally, as part of the contractual services provided to Magnetics, WS & B prepared personal income tax returns for the Katzses from 1988 through 1992, and prepared an estate plan in 1990.

Also subsequent to his retirement, George Katz and his wife entered into four financial transactions with Magnetics. In 1990, they loaned Magnetics $425,000 and then in 1992, they pledged $150,000 to Magnetics, executed a limited payment guarantee of $1,000,000 to Magnetics and also signed an indemnity deed of trust and security agreement securing a debt previously incurred by Magnetics.

After a June, 1993 independent audit found that reported inventory and accounts receivable had been inflated by Magnetics, the Bank of Baltimore, Magnetics' principal lender, called its $2 million loan. As a result, Magnetics was forced to cease operations, and the Bank of Baltimore took possession of the company's premises and liquidated its assets.

The Katzses thereafter sued WS & B for the losses they suffered as a result of the accounting error that caused Magnetics' collapse.³ WS & B moved for summary judgment,⁴ arguing that the respondents could not establish that WS & B owed them a duty, that any act of negligence on WS & B's part caused injury to them, or that the respondents changed their position to their detriment in reliance on financial statements prepared by WS & B. Central to its argument was WS & B's assertion that no duty ran to the respondents from its contract with Magnetics for the performance and preparation of audits and reports. In support of its summary judgment motion, WS & B submitted the affidavit of Patrick M. Tracy, which stated that WS & B was not asked to express an opinion on the advisability of the respondents or anyone else lending money to Magnetics, nor did it express an opinion as to whether the respondents should secure Magnetics' debt. Furthermore, WS & B argued that the respondents were not, and could not show that they were, third party beneficiaries to the contract between Magnetics and WS & B.

In response, the respondents proffered, via the affidavit of George Katz, the relationship between the respondents and WS & B, emphasizing the meetings they had prior to the respondents' making the loans to, and securing the debt for, Magnetics. Their opposition essentially stressed that George Katz had several meetings with WS & B personnel to look over the audits and reports of Magnetics prior to making loans to, or securing loans for, Magnetics, and that WS & B personnel knew that the Katzses had relied on information supplied by WS & B in deciding to lend monies to, or to secure loans for, Magnetics. As summarized by the Court of Special Appeals, the affidavit, relating to the $425,000 loan, set forth the following:

"According to Mr. Katz, `[i]n connection with the $425,000.00 loan, sometime between November 1, 1989 and February 1, 1990, Phillip Katz, Mr. Tracey and I met face to face in Mr. Tracey's office at Walpert, Smullian & Blumenthal for the express purpose of discussing the abovementioned loan.' Mr. Katz continued:

'The purpose in meeting with Mr. Tracey was for me to determine if it was advisable to make that [$425,000] loan to Magnetics based upon the then-existing financial condition as that related to its ability to repay the loan in accordance with the loan terms....

`During that meeting, Mr. Tracey had presented Magnetics, Inc. a cash flow analysis and a projected profit and loss statement for the coming year based on the anticipated cash flow and sales.'" "Mr. Katz further stated, `[i]n connection with my loan analysis, Mr. Tracey provided me with a copy of the October 31, 19[89] Magnetics, Inc. audit....' Mr Katz swore that, at the meeting with Mr. Tracey, `I made the WS & B representatives aware that I would consider lending money to Magnetics, [but the loan] was dependent on Magnetics' financial condition and the information which WS & B provided him, which included WS & B financial reports prepared for Magnetics.'"

That knowledge, argued the respondents, was enough to trigger a duty of care to them from WS & B.

At the hearing on the motion for summary judgment, the respondents' counsel summarized:

"[The relationship between the parties is important,] based upon the meetings that George Katz had with Mr. Tracy and Julie Simermeyer [the accountant who performed much of the Magnetics audit work] prior to making the $450,000 loan and prior to making the $150,000 loan, and his review of the financial information that WS & B sent him [Mr. Katz] directly which included the mid-year reviews and the year-end audits, and his agreeing to further secure credit extensions based upon what in his view appeared to be a company whose financial posture had changed drastically since the time he controlled the company."

Agreeing with WS & B that "Maryland law requires strict privity or its equivalent[,] which is a direct relationship," and that the respondents were not the intended beneficiaries of the contract between Magnetics and WS & B, the trial court granted summary judgment in favor of WS & B. It concluded that there was no duty flowing from WS & B to the respondents:

"[W]e do not see the existence of a relationship that Maryland law recognizes between the accounting firm and [the respondents]. We do not see it in actuality, and we do not see any equivalent to it such that would allow [the respondents] to recover directly against this accounting firm for the demise of this business and the resultant losses experienced by [the respondents]."

The respondents timely noted an appeal to the Court of Special Appeals. That Court, as we have seen, in an unreported opinion, reversed the judgment of the trial court. While the intermediate appellate court concluded that the trial court appropriately applied the rules pertaining to summary judgment and correctly determined that the respondents were not third party beneficiaries to the contract between Magnetics and WS & B, it held that there were sufficient facts alleged by the respondents to generate a genuine dispute of material fact, namely, whether, under Maryland tort law, WS & B owed the respondents a duty of care.

II.

The petitioner argues that the judgment of the Court of Special Appeals should be reversed and that of the Circuit Court affirmed. It submits that, while the intermediate appellate court correctly held that privity or...