Cast Art Industries, LLC v. KPMG LLP
36 A.3d 1049, 209 N.J. 208 (2012)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under the New Jersey Accountant Liability Act, N.J.S.A. 2A:53A-25, an accountant is not liable to a non-client third party for negligence unless the accountant knew of the specific claimant and the specified transaction 'at the time of the engagement by the client,' meaning at the outset of the engagement, or subsequently agreed with the client to extend their service to that third party.
Facts:
- In the spring of 2000, Cast Art Industries (Cast Art) became interested in merging with Papel Giftware (Papel).
- To fund the merger, Cast Art needed a $22 million loan from PNC Bank, which required audited financial statements of Papel as a condition of the loan.
- KPMG had served as Papel's auditor since 1997 and, in November 1999, had entered into an engagement with Papel to audit its 1998 and 1999 financial statements.
- In September 2000, KPMG delivered the completed audits to Papel. Cast Art obtained copies and provided them to PNC Bank.
- Cast Art and Papel merged in December 2000.
- Shortly after the merger, Cast Art discovered that Papel had engaged in significant accounting irregularities, including improperly accelerating revenue and recording fraudulent sales, which KPMG's audit had not uncovered.
- The newly merged corporation was unable to generate sufficient revenue to service its debt and ultimately failed, leading to its liquidation.
Procedural Posture:
- Cast Art Industries, LLC and its shareholders sued KPMG LLP in a New Jersey trial court for accounting malpractice.
- KPMG's pre-trial motion for summary judgment, arguing the claim was barred by the Accountant Liability Act, was denied.
- Following a trial, a jury returned a verdict in favor of Cast Art, awarding damages.
- The trial court entered an amended final judgment against KPMG.
- KPMG appealed to the Appellate Division of the Superior Court of New Jersey, and Cast Art cross-appealed.
- The Appellate Division affirmed the liability verdict but vacated the damage award and remanded for a new trial on damages only.
- KPMG petitioned for certification to the Supreme Court of New Jersey, and Cast Art filed a cross-petition; the Court granted both.
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 the New Jersey Accountant Liability Act, N.J.S.A. 2A:53A-25, bar a negligence claim by a non-client third party who relied on an audit if the accountant did not know of that specific party or transaction at the time the audit engagement began?
Opinions:
Majority - Judge Wefing
Yes. The Accountant Liability Act bars a claim under these circumstances because the statute's preconditions for non-client liability were not met. The court interprets the statutory phrase 'at the time of the engagement by the client' to mean at the outset of the engagement, not at any time during the professional relationship. The legislature's clear intent in passing the Act was to reverse the broad foreseeability standard from Rosenblum v. Adler and restore a concept of privity, thereby limiting the scope of an accountant's liability. Because KPMG did not know about Cast Art or the proposed merger when it was engaged by Papel in November 1999, the first statutory condition for liability was not satisfied. Furthermore, a subsequent conference call where KPMG was made aware of Cast Art's need for the audit does not constitute an 'agreement' under the statute to assume a duty to Cast Art.
Analysis:
This decision significantly narrows the scope of accountant liability to third parties in New Jersey by strictly construing the Accountant Liability Act. It establishes that an accountant's knowledge of a third party's reliance must exist at the very beginning of the engagement, not merely develop during the course of the work. This holding provides greater certainty for accounting firms by defining the scope of their risk at the outset of an engagement, protecting them from liability to an 'indeterminate class' of unforeseen plaintiffs. The ruling solidifies the legislative reversal of the prior, more expansive 'foreseeability' standard, making it much more difficult for non-clients to bring successful negligence claims against accountants.
