Williams Controls v. Parente, Randolph, Orlando

• Decision Date: 15 March 1999
• Docket Number: No. 3:CV-96-1474.,3:CV-96-1474.
• Citation: 39 F.Supp.2d 517
• Parties: WILLIAMS CONTROLS, INC., a Delaware Corporation, Plaintiff, v. PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES, a Central Partnership, Defendant.
• Court: U.S. District Court — Middle District of Pennsylvania

Page 517

39 F.Supp.2d 517

WILLIAMS CONTROLS, INC., a Delaware Corporation, Plaintiff, v. PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES, a Central Partnership, Defendant.

No. 3:CV-96-1474.

United States District Court, M.D. Pennsylvania.

March 15, 1999.

Peter J. Weidman, Philadelphia, PA, for plaintiff.

Robert D. Schaub, Wilkes — Barre, PA, for defendant.

MEMORANDUM

VANASKIE, District Judge.

On August 8, 1996, plaintiff Williams Controls, Inc. (Williams) instituted this diversity action against defendant Parente, Randolph, Orlando, Carey & Associates (Parente), alleging claims for negligence, negligent misrepresentation, and third party beneficiary breach of contract in connection with Parente's preparation of certain financial information that Williams allegedly relied upon in the purchase of the Kenco Division (Kenco) of Sparkomatic Corporation (Sparkomatic). (Dkt. Entry 1). On May 1, 1997, Parente filed a motion for summary judgment, asserting, inter alia, that Williams lacked privity with Parente such that it could not maintain its claims of negligence and negligent misrepresentation, and that Williams was not a beneficiary of Parente's contractual undertakings relative to Kenco. (Dkt. Entry 24.) For the reasons that follow, Parente's motion will be granted as to the negligence claim, but denied as to the negligent misrepresentation and third party beneficiary claims.

I. BACKGROUND

A. Material Facts¹

Sparkomatic and Parente had a business relationship for nearly twenty years prior to the events surrounding this action. (Dion Dep. (Dkt. Entry 27) at 17.) For several years prior to its agreement with Williams, Sparkomatic had been attempting to sell its Kenco division. (Id. at 4.) Although Parente had prepared audited financial statements for Sparkomatic for 1990 through 1992, Parente had never created a separate audited financial statement for the Kenco Division only. (Id. at 18-19.)

On June 14, 1993, Sparkomatic and Williams entered into a Memorandum of Intent for the purchase of "certain assets of the Kenco Division." (Appendix (Dkt. Entry 30), Tab A, Ex. 4.) In this Memorandum of Intent, "audited book value" is defined as follows:

The term "audited book value" ... refers to certified statements of data which are agreed to by both [Sparkomatic's] certified public accountant and [Williams'] certified public accountant. Such information and data would be prepared by [Sparkomatic's] certified public accountant at the cost of [Sparkomatic] and be reviewed by [Williams'] certified public accountant.

(Id. at 7.) Sparkomatic's representative, Ronald Dion (Dion), testified that he believed that the Memorandum of Intent provided that Parente would audit a June 30, 1993 balance sheet that had been prepared by Sparkomatic and presented to Williams. (Dion Dep. (Dkt. Entry 27) at 15, 38; Pl's SMF (Dkt. Entry 33) ¶ 9.) Parente, however, did not audit, nor had any involvement with, the June 30, 1993 balance sheet. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 8.)²

In late June or early July 1993, Parente became aware of the proposed sale of Kenco Division by Sparkomatic to Williams. (Pelesh Dep. (Dkt. Entry 28) at 16-17.) On July 27, 1993, Sparkomatic formally engaged Parente to perform certain accounting work with respect the Kenco Division, namely, to audit Kenco Division financial statements for December 31, 1992, December 31, 1991, and December 31, 1990. (Def's SMF (Dkt. Entry 24) Ex. A, ¶¶ 4-5.) Moreover, Parente was also engaged to certify an "interim balance sheet" which would be prepared by Sparkomatic management and presented as part of the closing documents. This interim balance sheet was to be dated July 31, 1993 and certified by September 13, 1993. (Id. ¶ 5; Pelesh Dep. (Dkt. Entry 28) at 13.) Williams was not mentioned in this engagement letter. (Id. ¶ 6.)

On July 27, 1993, Parente prepared a planning memorandum which provided:

We have been engaged to audit Kenco Engineering, a division of Sparkomatic Corporation, for the years ended December 31, 1992, 1991 and 1990. Kenco is in the process of being sold, and as part of the sale agreement, audited financials are necessary.

(Appendix (Dkt. Entry 30) Tab A, Ex. 11.)³ Williams is not mentioned in this planning memorandum.

On August 1, 1993, Sparkomatic and Williams executed an Asset Purchase Agreement concerning the purchase of Kenco Division. (Def's SMF (Dkt. Entry 23) Ex. A, ¶ 9.) The Asset Purchase Agreement provided that the June 30, 1993 balance sheet was unaudited and that it had not been prepared by Parente, but rather had been certified by a Sparkomatic financial officer. (Appendix (Dkt. Entry 30) Tab A, Ex. 5, ¶ 1.6.) The Asset Purchase Agreement provided that Sparkomatic would provide Williams with the following documentation within thirty days of the closing date:

(a) True and complete copies of the Balance Sheet, related statements of income and retained earnings and related statements of cash flows of the Business as of and for the years ended December 31, 1992, 1991 and 1990 and the period from January 1, 1993 up to and through the Closing Date prepared in accordance with GAAP and audited by Sparkomatic's independent public accountants; and

(b) A true and complete copy of the Interim Balance Sheet; and

(c) A true and complete copy of the Closing Balance Sheet.

(Id. ¶ 2.4) Thus, as of August 1, 1993, Williams was aware that the June 30, 1993 balance sheet had not been prepared by Parente and that it would not be certified or audited by Parente.⁴

In relation to the audited financial statements, the Asset Purchase Agreement provided that Williams or its independent public accountant would have access to Sparkomatic's records and work papers as well as Sparkomatic's independent public accountant's records and work papers for review. (Id. ¶ 1.6) After the closing balance sheet was submitted to Williams, the Asset Purchase Agreement afforded Williams "the right, at its own expense to observe the taking of inventory on behalf of the Seller in connection with the preparation of the Closing Balance Sheet and to submit such Closing Balance Sheet to its own internal accounting and auditing staff or independent public accountants (at Purchaser's expense) for verification, such verification to be concluded no later than 30 days after the Purchaser's receipt." (Id.)

The Asset Purchase Agreement extended additional safeguards to Williams:

5.6 Examination and Investigations. Prior to the Closing Date, the Purchaser shall be entitled, through its employees and representatives, including, without limitation, Brenman Raskin & Friebold, P.C., and its lenders, appraisers and accountants, to make such investigation of the assets, properties, business and operations of the Business, and such examination of the books, records and financial condition of the Business as the Purchaser wishes. Any such investigation and examination shall be conducted at reasonable times and under reasonable circumstances and the Seller shall cooperate fully. The Seller shall furnish the representatives of the Purchaser with all information and copies of documents concerning the affairs of the Business as representatives of the Purchaser may reasonably request and shall cause the Seller's officers, employees, consultants, agents, accountants and attorneys to cooperate fully with the Purchaser's representatives in connection with such review, examination and investigation. If, through the Purchaser's examination and investigation, the Purchaser discovers discrepancies in the books and records of the Division or any other matter unacceptable to the Purchaser, the Purchaser shall give prompt written notice to the Seller in accordance with Section 11.7 and the Seller shall have ten days thereafter to resolve the matter(s) to the satisfaction of the Purchaser or the Purchaser shall have the right to terminate this Agreement under Section 10.1. If the Seller is unable to resolve the matter within the prescribed period and the Purchaser does not elect to terminate the Agreement in accordance with Section 11.7 and the Closing occurs, as of the Closing Date the Purchaser shall be deemed to have automatically waived its right to demand that the matter be resolved following the Closing. No review, examination or investigation by the Purchaser, shall diminish or obviate any of the representations, warranties, covenants or agreements of the Seller under this Agreement.

(Id. (emphasis added).)

Aside from a reference to Sparkomatic's independent public accountants, Parente was not identified, directly or indirectly, in the Asset Purchase Agreement. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 10.) Parente admitted, however, that it reviewed the Asset Purchase Agreement with Sparkomatic prior to closing. (Pelesh Dep. (Dkt. Entry 28) at 14-17.)

On August 14, 1993, the closing was held. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 16.) At the time of the closing, Williams had not yet received any audited material from Parente in relation to the Kenco Division. A month after the closing, on September 15, 1993, Kenco Division financial statements for the years ending December 31, 1992, 1991, and 1990, which were prepared by Sparkomatic and audited by Parente according to the terms of the engagement letter, were transmitted to Sparkomatic. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 17 .) On September 17, 1993, the closing balance sheet, prepared by Sparkomatic and audited by Parente in accordance with the terms of the engagement letter, was transmitted to Sparkomatic. (Id. ¶ 18.) At some point thereafter, Sparkomatic provided these audited reports and balance sheet to Williams.⁵

The Asset Purchase Agreement provided that the final purchase price could be adjusted either upward or downward "by an amount equal to the difference in the net book value on the Closing Balance Sheet as compared to the Interim Balance Sheet." (Appendix (Dkt. Entry 30) Ex. A, ¶ 1.6.) It is undisputed that Parente audited the financial...