Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co.

Court of Appeals of Texas, Dallas
715 S.W.2d 408 (1986)

ELI5:

Rule of Law:

An accountant may be liable for negligent misrepresentation to a non-client third party if the accountant knows or should know that their financial reports will be supplied to and relied upon by a limited class of persons for a specific type of business transaction.

Facts:

Starting in 1972, Blue Bell, Inc., a clothing manufacturer, established an account and extended credit to Myers Department Stores, Inc. (Myers (Texas)).
In 1980, a new Delaware corporation, Myers Department Stores, Inc. (Myers (Delaware)), acquired Myers (Texas) and an affiliated store.
Myers (Delaware) engaged the accounting firm Peat, Marwick, Mitchell, & Co. (PMM) to audit the financial records of its subsidiary corporations.
PMM prepared audited combined financial statements for the subsidiaries and a consolidated balance sheet for the parent and its subsidiaries.
At the client's request, PMM provided seventy copies of the revised combined financial statements for the subsidiaries.
Myers furnished the combined financial statements and PMM's accompanying accountants' report to Blue Bell.
Blue Bell allegedly relied on these PMM-prepared documents to continue extending substantial amounts of credit to Myers (Texas).
On November 4, 1982, Myers filed for bankruptcy, and Blue Bell was unable to recover a significant portion of the money owed to it.

Procedural Posture:

Blue Bell, Inc. sued Peat, Marwick, Mitchell, & Co. (PMM) in a Texas trial court for negligent misrepresentation, fraud, breach of warranty, and breach of fiduciary duty.
PMM filed a motion for summary judgment on all causes of action.
The trial court granted PMM's motion for summary judgment, dismissing all of Blue Bell's claims.
Blue Bell (appellant) appealed the summary judgment to the Texas Court of Appeals, with PMM as the appellee.

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Does an accountant owe a legal duty of care to a third party creditor, not in privity of contract, who relies on an audit report, if the accountant knew or should have known that a limited class of persons, including that creditor, would rely on the report?

Opinions:

Majority - Akin, Justice.

Yes. An accountant owes a duty of care to a non-client third party if that party is a member of a limited class of persons whom the accountant knows or should know will receive and rely upon the accountant's work. The court rejected PMM's argument that it owed no duty to Blue Bell due to a lack of privity of contract, instead adopting the standard from Restatement (Second) of Torts § 552. The court interpreted § 552's 'limited group of persons' language broadly, holding that liability does not require that the accountant actually and specifically know the third party. Instead, the test is whether the accountant knew or should have known that such statements would be relied upon by a limited class of persons. The court found that Blue Bell, as a current trade creditor, was a member of such a limited class and that PMM's act of providing 70 copies of the report indicated its knowledge that the statements would be shared with third parties. Therefore, a genuine issue of material fact existed as to PMM's duty, and summary judgment on the negligent misrepresentation claim was improper. The court affirmed summary judgment on the fraud, breach of warranty, and breach of fiduciary duty claims, finding no evidence of the requisite intent for fraud and declining to extend warranty or fiduciary principles to this relationship.

Analysis:

This decision significantly broadened the scope of accountant liability for negligent misrepresentation in Texas by moving away from a strict privity requirement. By adopting a 'knew or should have known' standard for a 'limited class' of third parties, the court made it possible for foreseeable users like creditors to sue accountants, even if they were not specifically identified to the accountant. This ruling aligns Texas with the modern trend embodied in the Restatement (Second) of Torts § 552, increasing the legal risk for accounting professionals. It establishes that an accountant's duty can extend beyond the client to a defined group of non-clients whose reliance on the financial statements is reasonably anticipated as a matter of business practice.

Gunnerbot

AI-powered case assistant

Loaded: Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co. (1986)

Try: "What was the holding?" or "Explain the dissent"

Premium Feature