Court: Appellate Division of the Supreme Court of the State of New York; June 13, 1995; New York; State Appellate Court
An appeal in a negligence and fraud case was brought by the plaintiffs against an accounting firm, focusing on whether the trial court should have renewed the defendant's previously denied motion to dismiss the complaint based on new evidence and a relevant Court of Appeals decision. The court affirmed the denial of the defendant's motion. The plaintiffs, principals of Cherry Enterprises, Inc., sold assets from Protogs, Inc. (a New York corporation) to Protogs, Inc. (a Delaware corporation) for $3 million in 1984. A crucial condition of the sale was the establishment of a factoring relationship with Walter B. Heller, Inc., which was necessary for Protogs Delaware to operate and meet payment obligations. Heller required a financial statement and CPA opinion confirming Protogs Delaware's solvency, which the defendant firm was retained to provide. The plaintiffs alleged that the firm gave verbal assurances and issued written documents confirming the solvency of Protogs Delaware, which Heller relied upon to enter a factoring arrangement. The asset sale closed on October 1, 1984, but the plaintiffs later received only $500,000 of the purchase price, and Protogs Delaware filed for bankruptcy in 1986. The plaintiffs asserted claims of negligence and fraud against the defendant for allegedly false statements regarding Protogs Delaware's solvency and the firm's failure in its audit duties. The defendant subsequently sought summary judgment to dismiss the complaint.
On July 28, 1991, the Supreme Court, under Justice Carmen Beauchamp Ciparick, denied the defendant's motion to dismiss the negligence claim but granted dismissal of the fraud claim, allowing plaintiffs to file an amended complaint. The court upheld the negligence claim based on plaintiffs' allegations and supporting affidavit, which met the criteria from *Credit Alliance Corp. v Andersen, Co.* for establishing a negligence cause of action against the defendant. The fraud claim was dismissed due to insufficient specificity as required by CPLR 3016.
Subsequently, on April 30, 1993, the defendant sought to renew its dismissal motion based on "new information" from plaintiffs’ interrogatory responses and the Court of Appeals decision in *Security Pac. Bus. Credit v Peat Marwick Main, Co.*, contending it represented a legal change. However, the trial court opted to address the case on its merits. It determined that *Security Pac.* did not alter the principles established in *Credit Alliance*, reaffirming that accountants can be liable to third parties in the absence of a direct contractual relationship only if certain conditions are met: awareness of the financial reports' intended purpose, knowledge of the parties relying on those reports, and conduct indicating an understanding of that reliance.
The court clarified that the relationship required between accountants and third-party claimants must approach "sufficiently close to privity," and emphasized that *Security Pac.* does not raise the standard for this relationship. Ultimately, it reiterated that the defendant accounting firm was not liable to a noncontracting party that relied on an erroneous audit report.
In Credit Alliance Corp. v. Andersen, Co., the court emphasized that Andersen, Co. was not retained to induce Credit Alliance into extending credit and that there were no direct dealings between Andersen and Credit Alliance. The court noted a lack of allegations connecting Andersen to Credit Alliance, contrasting this with European American Bank, Trust Co. v. Strauhs, Kaye, where a direct connection between the parties was established through multiple communications. In Security Pacific, the court applied the principles from Credit Alliance, finding that the plaintiff's reliance on a single telephone call was insufficient to demonstrate the necessary link, unlike the established connections in European American Bank.
The current case involves a denial of a motion to renew the trial court's dismissal of the defendant's CPLR 3211(a)(7) motion, which required the court to determine whether the plaintiffs' complaint stated valid causes of action, accepting the allegations as true. The trial court found that the plaintiffs sufficiently alleged a nexus between the parties based on personal meetings and direct communications about the certification of Protogs Delaware’s solvency prior to closing.
The defendant's claim of newly discovered evidence, based on the plaintiffs’ acknowledgment of not receiving a solvency letter until after the closing, was rejected. The trial court noted that testimonial evidence existed to support the plaintiffs’ position regarding oral assurances prior to closing. Even if evaluated under a summary judgment standard, this evidence would merely create a triable issue.
Additionally, the trial court exercised its discretion correctly when denying the defendant's motion under CPLR 3126, as both parties appeared to have failed to comply with a court order. The order from the Supreme Court, New York County, which denied the defendant's motions, was affirmed without costs.
