New York Law Review

Tag: Credit Alliance Test

  • Sykes v. RFD Third Avenue 1 Associates, LLC, 17 N.Y.3d 36 (2011): Negligent Misrepresentation Requires Knowledge of Reliance by a Specific Party

    Sykes v. RFD Third Avenue 1 Associates, LLC, 17 N.Y.3d 36 (2011)

    A claim for negligent misrepresentation requires the plaintiff to demonstrate that the defendant knew the specific party or parties would rely on the misrepresentation; general knowledge that a class of people might rely is insufficient.

    Summary

    Plaintiffs, apartment purchasers, sued Cosentini Associates, the engineering firm that designed the building’s HVAC system, for negligent misrepresentation based on statements in the offering plan. The New York Court of Appeals held that the plaintiffs’ claim failed because they did not adequately allege that Cosentini knew that they, as specific individuals, would rely on the offering plan when purchasing their apartment. The court reaffirmed the Credit Alliance test, emphasizing the requirement of knowledge of reliance by a “known party or parties,” not just a general class of potential purchasers. This decision clarifies the scope of liability for negligent misrepresentation in the context of offering plans and similar documents.

    Facts

    Cosentini Associates, an engineering firm, designed the HVAC systems for a condominium in Manhattan. The offering plan for the condominium contained descriptions of the HVAC systems, including their capacity to maintain certain temperatures. The plaintiffs purchased an apartment in the building and claimed that the HVAC system was negligently designed, resulting in temperature control issues within their unit. The plaintiffs based their claim for negligent misrepresentation on statements made in the offering plan.

    Procedural History

    The Supreme Court initially denied Cosentini’s motion to dismiss the claim. The Appellate Division reversed, holding that the plaintiffs failed to adequately allege the necessary relationship between themselves and Cosentini. The plaintiffs appealed to the New York Court of Appeals as of right.

    Issue(s)

    Whether a claim for negligent misrepresentation can be sustained when the plaintiff has not alleged that the defendant knew the specific party or parties who would rely on the misrepresentation.

    Holding

    No, because a claim for negligent misrepresentation requires a showing that the defendant was aware that the specific party or parties were intended to rely on the misrepresentation, a general awareness that potential purchasers might rely on the offering plan is insufficient.

    Court’s Reasoning

    The Court of Appeals relied on the precedent set in Credit Alliance Corp. v Arthur Andersen & Co., which established prerequisites for finding a relationship sufficient to sustain a negligent misrepresentation claim. The court stated that the accountants (or in this case, the engineers) must have been aware that the financial reports were to be used for a particular purpose, in furtherance of which a known party or parties was intended to rely. The court emphasized that the plaintiffs failed to satisfy the second prong of the Credit Alliance test, as they did not sufficiently allege that they were a “known party or parties.” The court noted that while Cosentini knew prospective purchasers would generally rely on the offering plan, there was no indication they knew these specific plaintiffs would be among them, or even that Cosentini knew of their existence when making the statements. The court directly quoted Westpac Banking Corp. v Deschamps: “This is not, however, the equivalent of knowledge of ‘the identity of the specific nonprivy party who would be relying upon the audit reports’”. The court distinguished the case from instances where the defendant had knowledge of the specific entity relying on the information. This case clarifies that a general awareness that a class of people might rely on a statement is insufficient to establish the necessary relationship for a negligent misrepresentation claim; the defendant must know the identity of the specific nonprivy party relying on the statement.

  • William Iselin & Co. v. Mann Judd Landau, 71 N.Y.2d 420 (1988): Accountant Liability to Non-Contractual Parties

    71 N.Y.2d 420 (1988)

    An accountant may be held liable to a non-contractual party for negligence in preparing financial reports only if the accountant was aware the reports were to be used for a specific purpose, a known party was intended to rely on them, and there was conduct linking the accountant to that party demonstrating the accountant’s understanding of their reliance.

    Summary

    William Iselin & Co., a factoring company, sued Mann Judd Landau, an accounting firm, for negligence in preparing review reports for Suits Galore, a clothing manufacturer. Iselin claimed it relied on these reports in extending credit to Suits, which later went bankrupt. The New York Court of Appeals affirmed the dismissal of Iselin’s claim, holding that Iselin failed to demonstrate a relationship with Mann that sufficiently approached privity, as required by Credit Alliance Corp. v. Andersen & Co., to impose liability for negligent misrepresentation to a third party. The court emphasized that a review report is different from a certified audit and that Iselin did not provide sufficient evidence to show that Mann knew Iselin specifically intended to rely on the reports.

    Facts

    William Iselin & Co. acted as a factor for Suits Galore, providing secured loans and purchasing accounts receivable. Iselin also extended unsecured “overadvances” to Suits, which were typically repaid within the same year. Mann Judd Landau was engaged by Suits to review and report on its financial statements. Iselin came into possession of Mann’s Review Report for the fiscal year ending May 31, 1982, and subsequently increased Suits’ overadvance line. By June 1983, the overadvances reached $3.4 million. Mann issued its Review Report for the fiscal year ending May 31, 1983. After receiving the report, Iselin demanded that Suits reduce the overadvance level. In December 1983, Suits filed for bankruptcy, leaving much of its debt to Iselin unpaid.

    Procedural History

    Iselin sued Mann for negligence, gross negligence, and fraud. The Supreme Court dismissed the gross negligence and fraud claims but denied summary judgment on the negligence claim. The Appellate Division reversed, granting summary judgment to Mann, finding that Iselin failed to satisfy the privity test from Credit Alliance Corp. v. Andersen & Co. The New York Court of Appeals granted leave to appeal and affirmed the Appellate Division’s decision.

    Issue(s)

    Whether Mann Judd Landau, an accounting firm, could be held liable to William Iselin & Co., a non-contractual third party, for negligence in the preparation of review reports, absent a relationship sufficiently approaching privity.

    Holding

    No, because Iselin failed to demonstrate a relationship with Mann that sufficiently approached privity. Iselin did not provide sufficient evidence showing that Mann was aware that the review reports were specifically prepared for the purpose of inducing Iselin to extend credit to Suits or that Mann understood Iselin’s reliance on the reports.

    Court’s Reasoning

    The court relied on the precedent set in Credit Alliance Corp. v. Andersen & Co., which established a three-part test for accountant liability to non-contractual parties: (1) the accountants must have been aware 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) there must have been conduct linking the accountants to that party, demonstrating the accountants’ understanding of that party’s reliance. The court found that Iselin failed to provide sufficient evidence to satisfy this test. The engagement letter between Mann and Suits, while mentioning credit inquiries, did not establish that the review reports were specifically prepared for Iselin’s benefit or that Mann knew Iselin would rely on them. The court emphasized the importance of a nexus between the parties, stating, “[T]he noncontractual party must demonstrate a relationship with the accountants ‘sufficiently approaching privity’”. The court also noted that a review report offers limited assurance compared to a certified audit. Iselin’s submission lacked admissible evidence showing a link between the parties demonstrating Mann’s understanding of Iselin’s reliance. A conclusory assertion by Iselin’s president was deemed insufficient, and even if a review report was sent to Iselin at Suits’ request, it would not satisfy the requirement of demonstrating Mann’s understanding of Iselin’s reliance. The court concluded that no material issue of fact requiring a trial was presented.