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Click here for the full text of this decision FACTS:In 1976, Richard Powers and Robert Guillerman founded South Texas Wholesale Records and Tapes Inc. South Texas was engaged in two lines of business: 1. the “exclusive distribution” business that sold music of independent artists who recorded exclusively for South Texas; and 2. the “one-stop” business that acted as a wholesaler selling music from major record labels to retail outlets. When the business began, Powers was the majority shareholder and president of South Texas. He oversaw general operations of South Texas in San Antonio. Guillerman, a 15 percent shareholder and vice-president of the corporation, ran the “exclusive distribution business,” operated from Houston. In 2000, Powers allegedly began exploiting the return policy offered by suppliers. Certain suppliers suspended the company’s right to return merchandise and imposed other penalties. One major supplier ultimately refused to allow South Texas to return merchandise until Powers left the company. Given these circumstances, Guillerman decided to purchase South Texas, began looking for investors and approached his cousin Gary Ervin. Gary consulted with Robert and Timothy Ervin, his brothers and business partners, and they began to consider participating in a buy-out transaction. In conducting due diligence prior to the buy out, Guillerman and the Ervins engaged an investment banking firm, which was led by Cary Grossman. Grossman recommended they engage a particular law firm and management consulting firm. Those firms were hired. Jay Bowman, a former colleague of Grossman, was in charge of the project for the management consulting firm. Grossman also recommended Mann Frankfort Stein & Lipp CPAs LLP (MFSL) to perform certain accounting services. An engagement letter dated July 19, 2001, and drafted by MFSL confirmed MFSL’s retention. When Guillerman signed the letter, his signature appeared on a line above the printed words “Robert Guillerman” and “Shareholder.” The letter provided MFSL was to perform: 1. an audit of South Texas’ balance sheet as of Aug. 31, 2001; and 2. certain “agreed upon procedures” and issue a report relating thereto. A second engagement letter, dated Aug. 8, 2001, clarified this second undertaking. The second letter was also addressed to Guillerman as “Shareholder” and was signed by him noting his approval and agreement to the terms stated therein. This letter, however, did not indicate the capacity in which Guillerman was acting when he signed the document. In November 2001, the sale of South Texas was accomplished through a recapitalization agreement. Guillerman became the majority shareholder, and the Ervins and some of the investment bankers became minority shareholders. After the sale, the new South Texas unexpectedly began to expend large sums of cash. According to the Ervins, this cash consumption was the result of an undisclosed $5 million liability in the independent artist division. The Ervins contended that MFSL failed to discover this alleged impropriety and report it to the investors, resulting in the loss of the Ervins’ $3.6 million investment. According to the Ervins, the problems at South Texas were structural and permanent, causing a continued cash drain that could not be solved despite their $3.6 million investment. The continued cash drain prompted Bowman to independently investigate the company’s financial records and discover the hidden $5 million account payable. The Ervins asserted that the undisclosed account payable ultimately resulted in the demise of South Texas. After the business failed, the Ervins brought suit against numerous people and entities including MFSL. As to MFSL, the Ervins alleged negligent misrepresentation and professional negligence. MFSL filed a motion for summary judgment, which the trial court granted. The Ervins appealed. HOLDING:Reversed and remanded. First, the Ervins contended that the trial court erred in granting MFSL’s motion for summary judgment on the claim of negligent misrepresentation based upon an alleged lack of standing. The Ervins argued that they were entitled to pursue a negligent misrepresentation claim against MFSL based on �552 of the Restatement (Second) of Torts. A negligent misrepresentation claim, the court stated, is not the equivalent of a professional malpractice or negligence claim. Liability in such a claim, the court stated, is based on the professional’s “manifest awareness” of the nonclient’s reliance and the professional’s intention that the nonclient rely on the professional’s representations. Under �552, the court stated, standing for a negligent misrepresentation tort exists when the professional has knowledge of the identity of the party to whom the information is provided and actual knowledge of the purpose for which the information is being supplied. Direct communication by the professional to the user is not required to establish standing, the court stated. In addition, the potential plaintiff does not have to be specifically identified or even known to the defendant when the information is supplied. Rather, the court stated, it is sufficient if “the maker supplies the information for repetition to a certain group or class of persons and that the plaintiff proves to be one of them.” In its motion for summary judgment, MFSL alleged it was unaware of the Ervins and therefore could not have intended to provide any information for their reliance. The Ervins argued that they had standing, because they were part of a limited group of persons for whose benefit the information was supplied or MFSL knew the actual recipient intended to supply the information to the Ervins. The court agreed that some evidence supported the Ervins’ position. Thus, it held that the Ervins had standing to sue MFSL. Next, the Ervins contended that summary judgment was improper, because the summary judgment evidence raised a genuine issue of fact as to reliance. The parties agreed that for the Ervins to recover on negligent misrepresentation claims, they had to prove their reliance was justified. Justifiable reliance, the court stated, is composed of two sub-elements: actual reliance and reasonable reliance. MFSL argued that the Ervins could not have relied upon any representations in the audit report in making their investment decisions, because MFSL issued the audit report after the recapitalization transaction closed in November 2001. The court found, however, that the summary judgment evidence produced by the Ervins showed they loaned an additional $1.6 million to South Texas after MFSL issued the audit report. In addition, Gary Ervin signed a guaranty for an additional $1 million after MFSL issued the report. The reasonable inference from this evidence, the court stated, is that the Ervins continued to commit money to South Texas, because the audit report suggested that the company was healthy. Given this evidence, the court found that “reasonable and fair-minded people could at least differ in concluding whether the Ervins actually relied on MFSL’s representations and work product in deciding whether to participate in the Recapitalization Transaction or continue capitalizing the business after the purchase of South Texas was completed.” Thus, the court found a fact issue concerning the implied creation of a professional relationship between MFSL and the Ervins that precluded summary judgment. OPINION:Hilbig, J.; Stone, Angelini and Hilbig, JJ.

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