Citizens State Bank v. Timm, Schmidt & Co.
335 N.W.2d 361 (1983)
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Rule of Law:
An accountant may be held liable for negligence to a third party who is not in privity of contract if it was foreseeable that the third party would be harmed by the accountant's negligent acts, unless public policy considerations limit liability.
Facts:
- Timm, Schmidt & Company (Timm), an accounting firm, prepared annual financial statements for Clintonville Fire Apparatus, Inc. (CFA) for the years 1973-1976.
- For several of these years, Timm issued an opinion letter stating that the financial statements fairly presented CFA's financial condition in accordance with generally accepted accounting principles.
- In November 1975, Citizens State Bank (Citizens) loaned CFA $300,000 after reviewing the financial statements Timm had prepared.
- Citizens made additional loans to CFA in 1976, bringing the total outstanding debt to approximately $380,000.
- In early 1977, Timm discovered that the 1974 and 1975 financial statements it prepared for CFA contained material errors totaling over $400,000.
- After being informed of the errors by Timm, Citizens called all of its loans to CFA due.
- As a result of the loans being called, CFA went into receivership and was liquidated, leaving an outstanding loan balance of $152,214.44 owed to Citizens.
Procedural Posture:
- Citizens State Bank filed a negligence action against Timm, Schmidt & Company and its insurer in the Circuit Court for Portage County (trial court).
- Timm filed a motion for summary judgment, arguing it owed no duty of care to Citizens, a third party with whom it was not in privity.
- The trial court granted Timm's motion for summary judgment, dismissing the negligence cause of action.
- Citizens' subsequent motion for reconsideration was denied by the trial court.
- Citizens, as appellant, appealed the summary judgment to the Wisconsin Court of Appeals.
- The court of appeals affirmed the trial court's judgment in favor of Timm, the appellee.
- The Supreme Court of Wisconsin granted review of the court of appeals' decision.
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Issue:
May an accountant be held liable for the negligent preparation of an audit report to a third party not in privity who relies on the report?
Opinions:
Majority - Day, J.
Yes, an accountant may be held liable to a third party not in privity for the negligent preparation of an audit report under the principles of Wisconsin negligence law. The court rejects the traditional rule requiring privity of contract, established in Ultramares v. Touche, finding it outdated. The court also declines to adopt the more moderate Restatement (Second) of Torts § 552, which limits liability to a known and intended group of users, deeming it too restrictive. Instead, the court applies Wisconsin's fundamental principle of negligence: a tortfeasor is liable for all foreseeable consequences of their acts, unless liability is precluded by public policy. Policy reasons supporting liability in this context include deterring negligence and protecting relying third parties. The determination of whether public policy factors preclude liability should be made after a full factual resolution at trial, not at the summary judgment stage.
Analysis:
This decision significantly broadens the scope of accountant liability in Wisconsin by rejecting both the strict privity requirement of Ultramares and the more limited 'foreseen user' standard of the Restatement. By applying general tort principles of foreseeability, the court exposes accountants to potential liability from a much larger class of plaintiffs, such as lenders and investors, who were not their clients. The precedent shifts the legal analysis from the accountant's knowledge of a specific user to the general foreseeability of harm, with public policy serving as the primary check on potentially unlimited liability. This places Wisconsin among the most liberal jurisdictions regarding professional liability to third parties.
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