Westpac Banking Corp. v. Seidman & Seidman, 67 N.Y.2d 62 (1986)

Accountants are not liable to non-contractual parties for negligently prepared financial reports unless the accountants were aware that the reports were to be used for a particular purpose, a known party was intended to rely on the reports for that purpose, and there was conduct by the accountants linking them to that party evincing the accountants’ understanding of that party’s reliance.

Summary

Westpac Banking Corp. sued Seidman & Seidman, alleging negligence in the preparation of financial statements for Turnkey Equipment Leasing, Inc. (TEL). Westpac claimed it relied on these statements when providing a bridge loan to TEL. The New York Court of Appeals held that Seidman was not liable to Westpac because Westpac was merely a potential lender, not a known party, and there was insufficient evidence linking Seidman directly to Westpac’s reliance. The court emphasized the need for near-privity between the accountant and the relying party to establish liability in the absence of a direct contractual relationship. The potential for liability under federal securities laws did not expand the accountant’s common-law duty.

Facts

Turnkey, seeking a public offering, retained Seidman to audit its financial statements. Westpac extended a $2 million line of credit to Turnkey. Turnkey also sought a bridge loan to be repaid from the proceeds of the public offering. Westpac reviewed the certified financial statements prepared by Seidman and agreed to provide a $2 million bridge loan. Seidman later withdrew its certification when Turnkey’s fraud surfaced, and the public offering was abandoned. Westpac sought to recover its losses from Seidman, alleging negligence in the audit and report.

Procedural History

The trial court dismissed Westpac’s negligence claim but the appellate division reversed, reinstating the claim. The Court of Appeals then reversed the appellate division’s order, dismissing the negligence claim, citing its recent decision in Credit Alliance Corp. v. Andersen & Co.

Issue(s)

Whether an accountant owes a duty of care to a specific lender, where the accountant knew the financial statements would be used to obtain a bridge loan but did not know the identity of the specific lender.

Holding

No, because the allegations failed to demonstrate a relationship between the parties sufficiently approaching privity; Westpac was merely one of a class of “potential bridge lenders,” not a specifically known party relying on Seidman’s work.

Court’s Reasoning

The court applied the three-prong test established in Credit Alliance Corp. v. Andersen & Co., requiring (1) awareness that the financial reports were to be used for a particular purpose; (2) a known party was intended to rely on the reports; and (3) conduct by the accountants linking them to that party. The court found that while Seidman may have known that the statements were to be used to obtain a bridge loan, Westpac was merely one of a class of potential lenders. There was no evidence that Seidman knew Turnkey was showing the reports to Westpac. The court emphasized that knowledge of a class of potential lenders is not equivalent to knowledge of “the identity of the specific nonprivy party who would be relying upon the audit reports.” The court also noted the absence of any direct dealings between Seidman and Westpac that would create the necessary link between them. The court rejected Westpac’s argument that potential liability under federal securities laws expanded the accountant’s common-law duty, stating that such laws address different policy concerns.