Ellis v. Grant Thornton LLP
530 F.3d 280, 2008 WL 2514182, 2008 U.S. App. LEXIS 13379 (2008)
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Rule of Law:
Under West Virginia law, which follows the Restatement (Second) of Torts § 552, an accountant is liable for negligent misrepresentation to a non-client third party only if the accountant knew the third party would receive and rely on the financial report for a specific transaction the accountant intended to influence.
Facts:
- In response to an investigation by the Office of the Comptroller of the Currency (OCC), First National Bank of Keystone was required to hire a nationally recognized accounting firm for an audit.
- In August 1998, Keystone retained Grant Thornton LLP to audit its 1998 consolidated financial statements.
- In March 1999, Keystone's chairman invited Gary Ellis, a successful banker, to consider becoming president of Keystone.
- Ellis attended Keystone's board and shareholder meetings, where Stan Quay, a Grant Thornton partner, stated that Keystone would receive an unqualified or 'clean' audit opinion for 1998.
- At Keystone's request, Ellis was permitted to discuss the bank's financial condition with Quay, who reiterated in private conversations that the bank would receive a clean audit opinion.
- On April 19, 1999, Grant Thornton issued its final audit report to Keystone's board, which gave a clean opinion but included a disclaimer stating it was intended only for the board, management, and regulatory agencies and 'should not be used by third parties for any other purpose.'
- Ellis reviewed the final audit report and, relying on it and Quay's prior statements, accepted the position as president of Keystone, resigning from his former job on April 20, 1999.
- In reality, Grant Thornton's audit had negligently failed to uncover that Keystone had overstated its assets by over $515 million and was insolvent; the bank was closed on September 1, 1999.
Procedural Posture:
- Gary Ellis was named as a defendant in a separate securities class action lawsuit.
- Within that lawsuit, Ellis filed a cross-claim in federal district court against Grant Thornton LLP for negligent misrepresentation under West Virginia law.
- The district court consolidated Ellis's claim with a separate case brought by the FDIC against Grant Thornton for trial.
- Following a bench trial, the district court found in favor of Ellis and awarded him $2,419,233 in damages.
- The district court entered a final judgment for Ellis.
- Grant Thornton LLP, as the appellant, filed a timely appeal to the U.S. Court of Appeals for the Fourth Circuit against Gary Ellis, the appellee.
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Issue:
Under West Virginia law, does an accounting firm owe a duty of care for negligent misrepresentation to a potential employee of its client, when the potential employee relies on the firm's audit report and related oral statements in deciding to accept employment?
Opinions:
Majority - Hamilton, Senior Circuit Judge
No. An accounting firm does not owe a duty of care to a prospective employee of its client under these circumstances. The court, predicting how the West Virginia Supreme Court of Appeals would rule, applied the Restatement (Second) of Torts § 552. Liability for negligent misrepresentation is limited to a person or a limited group of persons for whose benefit and guidance the accountant intends to supply the information or knows the client intends to supply it. Here, the audit was prepared for Keystone and its regulators (the OCC), not for prospective employees. The report's explicit disclaimer further clarified it was not intended for third parties like Ellis. Grant Thornton was not aware of the potential employment transaction between Ellis and Keystone until after it had already concluded it would issue a clean opinion. Therefore, Ellis was not a person for whose benefit the audit was intended, the employment transaction was not one Grant Thornton intended to influence, and his reliance on the statements and report was not justifiable.
Analysis:
This decision significantly clarifies the scope of third-party liability for accountants under West Virginia law, narrowly construing the Restatement (Second) of Torts § 552. It establishes that an accountant's duty does not extend to all foreseeable users of a financial statement, but only to those specific individuals or classes of individuals the accountant actually knows will be relying on the work for a particular transaction. The ruling protects accounting firms from potentially limitless liability to a wide range of third parties, such as investors, creditors, or potential employees, unless there is clear evidence the audit was intended for their benefit. It reinforces the importance of engagement letters and disclaimers in limiting the scope of an auditor's duty.
