79 N.Y.2d 695 (1992)

r
r

An accountant may be held liable to a third party for negligence in preparing financial reports only if there is a relationship approaching privity, demonstrated by awareness of the report’s use for a specific purpose, reliance by a known party, and conduct by the accountant linking them to that party.

r
r

Summary

r

Security Pacific Business Credit, Inc. (SPBC) sued Peat Marwick Main & Co., alleging reliance on a negligently prepared audit report of Top Brass Enterprises, Inc. SPBC claimed losses from loans made to Top Brass based on the audit. The New York Court of Appeals held that SPBC failed to establish a relationship with Peat Marwick’s predecessor, Main Hurdman, that sufficiently approached privity. The court emphasized that a single phone call between SPBC and Main Hurdman, after audit fieldwork, did not constitute sufficient linking conduct to establish liability. SPBC’s claim was dismissed because it did not demonstrate the required level of connection with the accounting firm.

r
r

Facts

r

Top Brass retained Main Hurdman to audit its financial statements for several years. In 1984, Top Brass sought a $50 million line of credit from SPBC. SPBC conducted its own review of Top Brass’s books. SPBC advised Top Brass that final loan approval was contingent on Main Hurdman’s 1984 audit opinion. SPBC’s vice-president, Seiden, called Main Hurdman’s audit partner, Freeman, to discuss the audit report. Seiden claims Freeman made assurances about the audit’s findings. SPBC approved the loan based partly on these assurances. Top Brass later filed for bankruptcy, and SPBC sued Peat Marwick (successor to Main Hurdman), alleging negligence in the audit report.

r
r

Procedural History

r

The Supreme Court granted Peat Marwick’s motion for summary judgment, dismissing the complaint. The Appellate Division reversed, denying summary judgment. The Court of Appeals reversed the Appellate Division, granting summary judgment to Peat Marwick and dismissing SPBC’s complaint.

r
r

Issue(s)

r

Whether an accounting firm can be held liable for negligence to a third party lender who relied on the firm’s audit report, absent a relationship sufficiently approaching privity as defined by direct conduct linking the accountant to the lender?

r
r

Holding

r

No, because SPBC failed to demonstrate a relationship with Main Hurdman