X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:ESS College of Business Inc. was a for-profit business college directed by Jan V. Friedheim. Most of the students received financial aid through federal programs which were administered by the Department of Education. ESS hired Farmer, Fuqua & Huff PC as an independent auditor. Farmer audited ESS at fiscal year end in 1998, 1999 and 2000, in compliance with DOE requirements. The college informed Farmer that copies of the audit would be sent to Chase Bank of Texas as required by their line of credit. On Nov. 5, 1998, ESS had incurred the maximum credit line of $950,000 from Chase Bank of Texas, whose predecessor was Texas Commerce Bank (Chase). In March 1999, Abrams Centre National Bank (Abrams) replaced Chase as the lender for the 1998 debt. Following an open audit by the DOE in July 2000 indicating a high default rate on Perkins loans, ESS was placed on provisional certification, meaning that the DOE could take action without allowing for due process. ESS never notified Abrams of its provisional certification. As a consequence, the school suffered an adverse affect on its cash flow. ESS sought additional funds from Abrams and it agreed to a two-month short-term loan of $250,000 in January 2001. On March 27, 2001, the DOE revoked the school’s provisional certification to participate in Title IV programs. ESS ceased operations, defaulted on all three loans to Abrams and filed for bankruptcy. Abrams obtained a judgment against ESS and Friedheim for $1.6 million. The judgment went unsatisfied, and Abrams then filed suit against Farmer, the accounting firm, for negligent misrepresentation, claiming Abrams had relied on the financial status of the school as reflected in the audits when it loaned money to ESS. Farmer moved for summary judgment, contending that Abrams failed to establish that the firm knew Abrams would receive and use the audits in deciding whether to make the loans. Farmer relied upon the Restatement (Second) of Torts, contending that Texas follows �552 without reservation. Abrams responded that there was genuine issue of material fact as to whether the firm should have known its reports would be relied upon by Abrams. The trial court granted summary judgment with regard to the January 2001 loan because the evidence established as a matter of law that Abrams had not justifiably relied on the audit report. In denying summary judgment as to March 1999 and September 2000 loans, the trial court determined that the restatement was inconsistent with Blue Bell Inc. v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408 (Tex. App. – Dallas 1986, writ ref’d n.r.e.). HOLDING:Affirmed. The court states that the issue on appeal is whether Blue Bell remains viable or whether it has been implicitly overruled. In its first and second points of error, Abrams contends the trial court erred in granting summary judgment because Blue Bell was not expressly overruled by McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999), and, based on Blue Bell, an accountant can be held liable for negligent misrepresentation only to those nonclients he knew or should have known would receive the information. The parties agree that �552 applies. Abrams argues that Texas imposes a forseeablility standard in determining accountant liability to nonclients. Farmer counters that Texas has adopted an actual knowledge standard. The court states that the restatement requires knowledge and intent by the provider of the information because the provider needs to assess the risk of loss that may be attributed to the receiver if the information is incorrect. The court reviews the rulings in Blue Bell and McCamish. The court notes that the court in McCamish found that under �552(1), liability is limited by �552(2) to “situations in which the attorney who provides the information is aware of the non-client and intends that the non-client rely on the information. In other words, a �552 cause of action is available only when information is transferred by an attorney to a known party for a known purpose.” The court holds that, by this language, the McCamish court wholly adopted �552, and applied it to other professionals, including accountants. The court concludes that because McCamish wholly adopted �552, it implicitly overruled Blue Bell. The court determines that this is true for two reasons: 1. the language of the restatement is contrary to Blue Bell’s holding, and 2. the duty articulated in �552 requires that a defendant have actual knowledge of a third party’s reliance upon the information in issue. However, Abrams still contends a fact issue exists as to whether it fell within a class of known recipients. Abrams argues Farmer knew the audit was being formulated for the general purpose of obtaining a bank loan. It fell within the class of lenders Farmer knew ESS intended to supply with the audits. Farmer also knew that ESS had to provide its audited information to Chase Bank as a requirement of the credit line and that once ESS changed lenders, the new lender would be receiving and relying upon the audited reports. But the court concludes that, while Farmer undoubtedly owed a duty to Chase, it owed no duty to Abrams. And the court notes that the summary judgment evidence conclusively established there was no genuine issue of material fact as to whether Abrams fell within the two recognized classes of plaintiffs. OPINION:McClure, J.; Barajas, C.J., McClure, and Chew, JJ.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 1 article* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.