White v. Guarente
| Decision Date | 21 December 1977 |
| Court | New York Court of Appeals Court of Appeals |
| Parties | , 372 N.E.2d 315 Shelby WHITE, Appellant, v. William E. GUARENTE et al., Defendants, and Arthur Andersen & Co., Respondent. |
Bennett Frankel, P. C., New York City, for appellant.
James D. Zirin, Edward J. Ross, George F. Vary, New York City, and Charles W. Boand, Chicago, Ill., for respondent.
The issue posed is whether accountants retained by a limited partnership to perform auditing and tax return services may be held responsible to an identifiable group of limited partners for negligence in the execution of those professional services. We hold that, at least on the facts here, an accountant's liability may be so imposed.
Plaintiff is a limited partner in Guarente-Harrington Associat (Associates), a limited partnership formed in early 1968 for the stated purpose of serving "as a hedge fund through which the funds of its Partners may be utilized in investing and trading in marketable securities and rights and options relating thereto." The general partners are defendants William E. Guarente and George F. Harrington. In September, 1968, Associates retained defendant Arthur Andersen & Co. (Andersen), a partnership engaged in the general practice of public accountancy, to perform an audit and prepare the tax return of Associates. Such an audit was required by the partnership agreement.
Among the partnership agreement stipulations were provisions: that the initial capital contribution of each limited partner shall not be less than $250,000; that no partner may withdraw any part of his interest in the partnership, except at the end of any fiscal year upon giving written notice of such intention not less than 30 days prior to the end of such year; that the books and records of the partnership shall be audited as of the end of each fiscal year by a certified public accountant designated by the general partners; and that proper and complete books of account shall be kept and shall be open to inspection by any of the partners or his or her accredited representative.
The complaint purports to embrace five causes of action, four against the two general partners individually, and the fifth against Andersen, the accounting firm. It is this last cause, the gravamen of which is for professional malpractice, with which we are here concerned. It is alleged that there are approximately 40 limited partners. Plaintiff moved for leave to serve an amended and supplemental complaint and defendant Andersen moved for dismissal of the cause of action asserted against it pursuant to CPLR 3211 (subd. (a), par. 7) on the ground that the pleading fails to state a cause of action, or, alternatively, for a severance of said cause from those asserted against the general partners. The motions were consolidated for disposition and Special Term dismissed the complaint as to Andersen for failure to state a cause of action and directed that judgment be entered dismissing the complaint against Andersen on the merits, as well as ordering a severance of the cause against Andersen, denying the motion to dismiss the causes against the general partners and granting leave to plaintiff to serve an amended and supplemental complaint only on defendant general partners, individually. Plaintiff appealed from so much of Special Term's order as dismissed the complaint against Andersen for failure to state a cause of action and the Appellate Division affirmed. *
The cause of action directed against Andersen alleges, inter alia, that between September 1, 1969 and March 31, 1970 Andersen knew or should have known that Guarente and Harrington were engaging in withdrawal of funds from their capital accounts in violation of the partnership agreement, that on March 31, 1970 Andersen issued its auditor's report with financial statements of Associates for the fiscal year ending October 31, 1969, and that Andersen violated its professional duties and was guilty of professional misconduct: in that it failed to notify all partners that Guarente and Harrington made withdrawals of funds without proper notice, that the general partners had neglected to prepare and distribute the annual schedule required by the partnership agreement, and that withdrawals were made between November 1, 1969 and March 20, 1970 but were calculated and reported as being retroactive as of October 31, 1969; and in that the audit reports and financial statements were inaccurate and misleading in failing to state that disbursements for various management expenses other than salaries were made in violation of the partnership agreement and in carrying forward without critical comment misrepresentations as to the value of restricted securities held by Associates. From the evidentiary material submitted to Special Term by plaintiff (see Guggenheimer v. Ginsburg, 43 N.Y.2d 268, --- N.Y.S.2d ---, --- N.E.2d ---- (decided herewith)), the thrust of plaintiff's claim of malpractice against Andersen centers on the accounting firm's alleged failure to comment on the withdrawal by the general partners of $2,000,000 of their $2,600,000 capital investment based on back-dated oral notices, avoiding six months of losses prior to actual withdrawal, and the lumping together of the $2,000,000 withdrawals with $49,144 in withdrawals by limited partners so that a reader of the financial statement would not be likely to realize that the two general partners had withdrawn a major portion of all their investments. Emphasis is also placed on the acceptance of the valuations of the general partners of restricted securities without adequate checking.
Citing Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441, and contendi that plaintiff does not stand in privity with it, defendant Andersen maintains that plaintiff lacks capacity to sue and may not recover for these alleged acts of negligence (see Siegel, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 7B, CPLR 3211.13, pp. 19-20). Ultramares, however, presented a noticeably different picture than that here, since there involved was an "indeterminate class of persons who, presently or in the future, might deal with the (debtor-promisee) in reliance on the audit" (p. 183, 174 N.E. p. 446). There it was stated at pages 180-181, 174 N.E. at page 445: ...
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