Nycal Corp. v. KPMG Peat Marwick LLP
426 Mass. 491, 688 N.E.2d 1368, 1998 Mass. LEXIS 22 (1998)
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Rule of Law:
An accountant's liability for negligent misrepresentation to a non-client is limited to situations where the accountant knows, at the time the report is published, that the plaintiff (or a limited group of which the plaintiff is a member) is intended to rely on the report for a particular transaction.
Facts:
- Gulf Resources & Chemical Corporation (Gulf) retained the defendant, KPMG Peat Marwick LLP, to audit its 1990 financial statements.
- While preparing the audit, the defendant was aware that Gulf was a publicly-traded company and was taking defensive measures against potential hostile takeovers by other companies.
- The defendant's completed auditors' report was included in Gulf's 1990 annual report, which became publicly available on February 22, 1991.
- In March 1991, the plaintiff, Nycal Corporation, began discussions with Gulf about purchasing a large block of its shares.
- During these discussions, Gulf provided the plaintiff with a copy of its 1990 annual report containing the defendant's audit.
- Allegedly relying on the report, the plaintiff entered into a stock purchase agreement on May 24, 1991, and completed the acquisition of operating control of Gulf on July 12, 1991.
- The defendant first learned of the transaction between the plaintiff and Gulf only a few days before the July 12, 1991, closing.
- In October 1993, Gulf filed for bankruptcy, rendering the plaintiff's investment worthless.
Procedural Posture:
- Nycal Corporation filed a civil complaint against KPMG Peat Marwick LLP in the Superior Court.
- The defendant's initial motion to dismiss was denied by the trial court judge.
- After a period of discovery, the defendant filed a motion for summary judgment.
- The Superior Court judge granted summary judgment for the defendant, KPMG.
- Both parties' applications for direct appellate review to the Massachusetts Supreme Judicial Court were granted.
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Issue:
Does an accountant owe a duty of care to a third-party investor, with whom the accountant is not in privity, for alleged negligent misrepresentations in an audit report when the accountant did not know of the third party's existence or the specific transaction for which the report would be used at the time the report was prepared?
Opinions:
Majority - Greaney, J.
No. An accountant does not owe a duty of care to a third party when the accountant did not have actual knowledge of that party or the specific transaction at the time the audit report was issued. The court rejects both the broad 'foreseeability' test, which would expose accountants to limitless liability, and the restrictive 'near-privity' test. Instead, the court adopts the standard from the Restatement (Second) of Torts § 552, which limits liability to a person or a 'limited group of persons' for whose benefit and guidance the accountant intends to supply the information or knows that the client intends to supply it. This liability extends only to a transaction that the accountant intends the information to influence or knows the client so intends. In this case, the defendant's audit was prepared for the general purpose of inclusion in Gulf's annual report. The defendant was unaware of the plaintiff or its specific stock purchase transaction when it issued the report. The defendant's knowledge of prior, unrelated hostile takeover attempts did not constitute knowledge that Gulf's shareholders intended to use the report to solicit a buyer; in fact, their actions were defensive. Therefore, the plaintiff was not within the limited group of persons to whom the defendant owed a duty.
Analysis:
This decision formally adopts the Restatement (Second) of Torts § 552 as the standard for accountant liability to third parties in Massachusetts, positioning the state with the majority of jurisdictions. By rejecting both the expansive foreseeability standard and the rigid near-privity rule, the court establishes a balanced precedent. This ruling provides a clearer framework for future professional negligence cases, emphasizing that liability hinges on the professional's actual knowledge of the intended user and the specific transaction at the time the professional service is rendered, not on what might be abstractly foreseeable. It protects professionals from indeterminate liability while still holding them accountable in situations where they are manifestly aware of the intended use of their work.
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