New York Law Review

Tag: Negligent Misrepresentation

  • Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011): Pleading Requirements for Fraud, Misrepresentation, and Unjust Enrichment

    Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011)

    To sufficiently plead claims for fraud, negligent misrepresentation, breach of contract, and unjust enrichment, a plaintiff must allege facts demonstrating a relationship between the parties that would give rise to a duty of care or reliance.

    Summary

    Mandarin Trading Ltd. sued Guy Wildenstein for fraud, negligent misrepresentation, breach of contract, and unjust enrichment related to the purchase of a Gauguin painting. Mandarin claimed Wildenstein provided a misleading appraisal. The New York Court of Appeals affirmed the dismissal of Mandarin’s complaint, holding that Mandarin failed to adequately plead a relationship with Wildenstein that would support the alleged causes of action. The Court emphasized the lack of direct contact or a fiduciary duty between Mandarin and Wildenstein, finding the connection too attenuated to establish liability.

    Facts

    J. Amir Cohen solicited Mandarin Trading to purchase a Gauguin painting for investment. Cohen arranged for Wildenstein, an art expert, to appraise the painting. Wildenstein provided a written appraisal valuing the painting at $15-17 million, addressed to Michel Reymondin. The appraisal mentioned the painting’s previous ownership but not any current ownership interest of Wildenstein. Mandarin purchased the painting for $11.3 million. Christie’s auction house estimated a sale price of $12-16 million. The painting failed to sell at auction, with the highest bid below the reserve price.

    Procedural History

    The Supreme Court dismissed Mandarin’s complaint under CPLR 3211(a)(1) and (7) for failure to state a cause of action. The Appellate Division affirmed the dismissal. Mandarin appealed to the New York Court of Appeals based on a two-Justice dissent in the Appellate Division.

    Issue(s)

    1. Whether the complaint sufficiently pleads a cause of action for fraudulent misrepresentation based on Wildenstein’s appraisal of the painting.

    2. Whether the complaint sufficiently pleads a cause of action for negligent misrepresentation based on Wildenstein’s appraisal.

    3. Whether the complaint sufficiently pleads a cause of action for breach of contract, arguing Mandarin was a third-party beneficiary to an appraisal contract.

    4. Whether the complaint sufficiently pleads a cause of action for unjust enrichment based on Wildenstein’s actions.

    Holding

    1. No, because the complaint did not allege that Wildenstein owed a fiduciary duty to Mandarin, nor did it allege specific intent to defraud Mandarin.

    2. No, because the complaint failed to demonstrate a special or privity-like relationship between Mandarin and Wildenstein.

    3. No, because the complaint failed to plead the pertinent terms of a valid and binding contract indicating that it was intended for Mandarin’s immediate benefit.

    4. No, because the connection between the parties was too attenuated to support a claim that Wildenstein was unjustly enriched at Mandarin’s expense.

    Court’s Reasoning

    The Court reasoned that for a fraud claim, Mandarin needed to show a misrepresentation of fact known to be false, made to induce reliance, justifiable reliance, and injury. The Court found Wildenstein’s appraisal was a nonactionable opinion. Further, absent a fiduciary duty, there was no requirement for Wildenstein to disclose his ownership interest. The court emphasized that CPLR 3016(b) requires that the circumstances constituting the wrong shall be stated in detail.

    For negligent misrepresentation, the Court reiterated that a special or privity-like relationship is required. The Court distinguished Kimmell v. Schaefer, where direct communication and expertise created such a relationship. The lack of any direct contact or known purpose of the appraisal to benefit Mandarin was fatal to the claim. The Court cited Parrott v. Coopers & Lybrand, rejecting recovery by any “foreseeable” plaintiff.

    Regarding breach of contract, the Court stated that a third-party beneficiary must show a valid contract intended for their benefit. The Court found that the complaint only offered conclusory allegations without pleading the pertinent terms of the purported agreement.

    Finally, for unjust enrichment, the Court acknowledged that while privity is not required, the connection between the parties cannot be too attenuated. The Court found no indicia of unjust enrichment due to the lack of a relationship creating reliance or inducement. As the court stated, “The essential inquiry in any action for unjust enrichment … is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered.”

  • 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.

  • J.A.O. Acquisition Corp. v. First Union National Bank, 12 N.Y.3d 148 (2009): Reliance Required for Negligent Misrepresentation

    J.A.O. Acquisition Corp. v. First Union National Bank, 12 N.Y.3d 148 (2009)

    A party asserting a claim for negligent misrepresentation or fraud must demonstrate reasonable or justifiable reliance on the alleged misrepresentation to recover damages.

    Summary

    J.A.O. Acquisition Corp. sued First Union National Bank (now CoreStates) for negligent misrepresentation and fraud, alleging that CoreStates misrepresented the liabilities of D.B. Brown, Inc., a company J.A.O. was acquiring. The alleged misrepresentation was the omission of a $1.3 million deficiency in D.B. Brown’s operating account from a payoff letter provided by CoreStates. The New York Court of Appeals held that J.A.O. failed to raise a triable issue of fact regarding reliance on the payoff letter because J.A.O.’s decision to purchase D.B. Brown’s stock resulted from its own investigation, not reliance on the letter.

    Facts

    J.A.O. agreed to purchase D.B. Brown’s stock, with the agreement listing D.B. Brown’s net worth at $2.2 million. Chase Manhattan Bank financed the deal, requiring J.A.O. to demonstrate excess borrowing availability of $2 million. J.A.O.’s due diligence revealed D.B. Brown was worth less than represented, leading to an amended agreement. On the closing date, CoreStates sent a payoff letter stating D.B. Brown’s liabilities were $26,564,628.29. Checks presented that day created a $1.3 million deficiency in D.B. Brown’s account, which wasn’t included in the payoff letter. To meet Chase’s borrowing requirement, D.B. Brown invoiced questionable foreign receivables. Chase financed the deal, and CoreStates requested payment of the $1.3 million the next day, which Chase paid.

    Procedural History

    J.A.O. sued CoreStates for negligent misrepresentation and fraud in New York State Supreme Court. The Supreme Court granted CoreStates’ motion for summary judgment, dismissing the complaint. The Appellate Division affirmed the Supreme Court’s decision. The New York Court of Appeals granted J.A.O. leave to appeal.

    Issue(s)

    Whether J.A.O. demonstrated sufficient reliance on CoreStates’ payoff letter to sustain claims for negligent misrepresentation and fraud, given J.A.O.’s independent due diligence and actions taken to close the deal despite awareness of D.B. Brown’s financial condition.

    Holding

    No, because J.A.O.’s decision to purchase D.B. Brown’s stock resulted from its own investigation of D.B. Brown’s financial condition and its strong desire to complete the transaction, not from reliance on the information contained in the payoff letter.

    Court’s Reasoning

    The court stated that a claim for negligent misrepresentation requires: “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.” Even assuming the first two elements were met, J.A.O. failed to prove reliance. J.A.O. conducted its own due diligence, determined D.B. Brown was worth less than initially represented, and amended the purchase agreement accordingly. J.A.O.’s chief financial officer testified that the payoff letter amount had no effect on J.A.O.’s desire to purchase D.B. Brown’s stock. Furthermore, the court noted that it was Chase, the financier, who would have relied on the payoff letter for purposes of the borrowing availability requirement, not J.A.O. The court concluded that because J.A.O. demonstrated a strong desire to complete the transaction regardless and undertook independent investigation, justifiable reliance, an element of both negligent misrepresentation and fraud, was absent.

  • Securities Investor Protection Corp. v. BDO Seidman, 95 N.Y.2d 702 (2000): Accountant Liability to Non-Privy Third Parties

    Securities Investor Protection Corp. v. BDO Seidman, 95 N.Y.2d 702 (2000)

    An accountant’s liability for negligent misrepresentation to a non-privy third party requires a relationship approaching privity, established by awareness of a specific purpose for the reports, knowledge of intended reliance by a known party, and linking conduct demonstrating understanding of that reliance.

    Summary

    The Securities Investor Protection Corporation (SIPC) sued BDO Seidman (BDO), an accounting firm, alleging negligent and fraudulent misrepresentation regarding audits of A.R. Baron & Co., a brokerage firm. SIPC claimed BDO’s misrepresentations led to delayed intervention, increasing liquidation costs. The New York Court of Appeals held that SIPC could not recover against BDO for either fraudulent or negligent misrepresentation because SIPC did not directly rely on BDO’s statements, and there was no relationship approaching privity between SIPC and BDO. The regulatory framework, including the NASD’s intermediary role, broke the causal chain.

    Facts

    A.R. Baron & Co., a brokerage firm, hired BDO to audit its financial statements, as required by SEC rules. BDO issued annual audit reports to the NASD, the designated self-regulatory organization. Baron’s management engaged in fraudulent activities, concealing debt and manipulating stock values. BDO’s audit reports initially showed a healthy debt-to-capital ratio for Baron. SIPC alleges that BDO’s failure to properly audit Baron delayed SIPC’s intervention, leading to increased costs for settling customer claims after Baron’s bankruptcy.

    Procedural History

    SIPC and the trustee for Baron’s liquidation sued BDO in the United States District Court for the Southern District of New York. The District Court dismissed SIPC’s claims. The Second Circuit Court of Appeals affirmed the dismissal of claims on behalf of Baron’s customers but allowed SIPC to sue on its own behalf. The Second Circuit certified two questions of New York law to the New York Court of Appeals regarding accountant liability to third parties.

    Issue(s)

    1. May a plaintiff recover against an accountant for fraudulent misrepresentations made to a third party where the third party did not communicate those misrepresentations to the plaintiff, but where defendant knew that the third party was required to communicate any negative information to the plaintiff and the plaintiff relied to his detriment on the absence of any such communication?
    2. May a plaintiff recover against an accountant for negligent misrepresentation where the plaintiff had only minimal direct contact with the accountant, but where the transmittal to the plaintiff of any negative information the accountant reported was the “end and aim” of the accountant’s performance?

    Holding

    1. No, because the plaintiff cannot claim reliance on misrepresentations of which it was unaware, even by implication.
    2. No, because there was no “linking conduct” that put SIPC and BDO in a relationship approaching privity.

    Court’s Reasoning

    The Court reasoned that for fraudulent misrepresentation, the misrepresentation must form the basis of the plaintiff’s reliance. SIPC relied on the NASD’s silence, not BDO’s representations. The court distinguished this case from Tindle v. Birkett, where the plaintiff received a positive credit report. Here, SIPC was unaware of any of BDO’s alleged misrepresentations. The court emphasized the NASD’s evaluative role, stating that the absence of communication from the NASD to SIPC could mean various things, not just a clean bill of health. The court stated, “The regulatory framework involved in this case thus creates an insurmountable disconnect between EDO’s representations and SIPC’s purported reliance on those representations.”

    For negligent misrepresentation, the Court applied the Credit Alliance test, requiring awareness of a specific purpose, knowledge of intended reliance by a known party, and linking conduct demonstrating understanding of that reliance. Here, there was no “linking conduct” creating a relationship approaching privity between SIPC and BDO. BDO’s audits were not prepared for SIPC’s specific benefit and were not sent to or read by SIPC. The Court reaffirmed the necessity of demonstrating a relationship approaching privity, clarifying that “end and aim” is not the sole determinant. The absence of direct contact and a clear link between BDO’s actions and SIPC’s reliance precluded a finding of negligent misrepresentation.

  • Parrott v. Coopers & Lybrand, 95 N.Y.2d 479 (2000): Accountant Liability to Third Parties Absent Privity

    95 N.Y.2d 479 (2000)

    Before a party can recover in tort for pecuniary loss from negligent misrepresentation, there must be either actual privity of contract or a relationship so close as to approach privity, requiring awareness of use for a particular purpose, reliance by a known party, and conduct linking the maker of the statement to the relying party.

    Summary

    Harold Parrott, a former employee of Pasadena Capital Corporation, sued Coopers & Lybrand (C&L) for professional negligence and negligent misrepresentation after C&L’s valuation of Pasadena’s stock, used to repurchase Parrott’s shares upon termination, was significantly lower than an independent valuation determined in arbitration. The New York Court of Appeals affirmed the dismissal of Parrott’s claim, holding that Parrott failed to establish a relationship with C&L approaching privity. The court emphasized that C&L was unaware its valuation would be used specifically for Parrott’s stock repurchase agreement and there was insufficient evidence of direct contact or reliance to create a near-privity relationship.

    Facts

    Harold Parrott purchased shares of Pasadena Capital Corporation stock per a 1992 agreement stating that upon termination, Pasadena would repurchase the stock at fair market value determined by a third-party appraisal for its ESOP. C&L provided biannual valuation reports for Pasadena’s ESOP. Parrott was terminated in May 1996. In September 1996, Pasadena, relying on C&L’s June 30, 1996 valuation of $78.21 per share, exercised its right to repurchase Parrott’s stock. Parrott challenged this valuation, and an arbitrator later determined the value to be $122.50 per share. Parrott then sued C&L.

    Procedural History

    Parrott sued C&L in Supreme Court, which denied C&L’s motion for summary judgment. The Appellate Division reversed, granting summary judgment to C&L and dismissing the complaint. The New York Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether Parrott established a relationship with C&L so close as to approach privity, such that C&L owed him a duty of care in preparing its valuation report.

    Holding

    No, because Parrott failed to demonstrate that C&L was aware that its valuation reports would be used for the specific purpose of determining the repurchase price of Parrott’s stock under his individual stock purchase agreement, and because there was no direct contact or conduct linking C&L to Parrott demonstrating C&L’s understanding of his reliance.

    Court’s Reasoning

    The court reiterated the Credit Alliance tripartite test for establishing a relationship equivalent to privity in negligent misrepresentation cases: (1) awareness by the maker of the statement that it is to be used for a particular purpose; (2) reliance by a known party on the statement in furtherance of that purpose; and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that reliance. The court found that Parrott failed to satisfy these criteria. C&L’s awareness was limited to providing biannual valuations for Pasadena’s ESOPs generally, with no indication that C&L knew the reports would be used in connection with Parrott’s stock purchase agreement. Parrott also did not rely on the reports, as he never read them and immediately challenged the valuation. Finally, the court found no conduct directly linking Parrott and C&L demonstrating C&L’s understanding of any reliance on Parrott’s part. The court quoted Prudential Ins. Co. v Dewey, Ballantine, Bushby, Palmer & Wood, 80 NY2d 377, 382, stating the need to provide “fair and manageable bounds to what otherwise could prove to be limitless liability”. The court distinguished White v. Guarente, 43 NY2d 356, where the accountant’s services were specifically obtained to benefit the members of a limited partnership. The court also rejected a rule permitting recovery by any ‘foreseeable’ plaintiff, quoting Ossining Union Free School Dist. v Anderson LaRocca Anderson, 73 NY2d 417, 425, that such a rule would be overly broad.

  • Kimmell v. Schaefer, 89 N.Y.2d 257 (1996): Establishes Duty of Care for Negligent Misrepresentation in Commercial Contexts

    Kimmell v. Schaefer, 89 N.Y.2d 257 (1996)

    In a commercial context, a duty to speak with care and avoid negligent misrepresentation arises when a special relationship exists between the parties, justifying reliance on the speaker’s words due to unique expertise, a relationship of trust, or knowledge of the information’s intended use.

    Summary

    Plaintiffs sued Defendant, CESI’s CFO, for negligent misrepresentation regarding an investment in a failing co-generation project. Defendant solicited Plaintiffs’ investment, providing overly optimistic projections despite an impending utility rate change that would render the project unprofitable. The New York Court of Appeals held that Defendant owed Plaintiffs a duty of care because his position at CESI, combined with his direct solicitation of Plaintiffs’ investment, created a special relationship that justified their reliance on his representations. This case clarifies the standard for establishing a duty of care in negligent misrepresentation claims in commercial settings.

    Facts

    Defendant, the CFO and chairman of CESI, sought investors for a co-generation project. He recruited Plaintiffs through his accountant, providing them with financial projections that were based on outdated utility rates. Defendant met with Plaintiffs, personally vouching for the investment’s soundness and encouraging them to rely on the projections. Critically, a new utility rate, effective January 1, 1988, eliminated the project’s profitability, a fact not reflected in the projections provided to Plaintiffs. Plaintiffs invested $320,000 each in the project, relying on Defendant’s representations and the projections. The project failed, and CESI went bankrupt.

    Procedural History

    Plaintiffs sued Defendant for damages arising from their failed investment. The Supreme Court found Defendant liable for negligent misrepresentation, holding that a special relationship existed between Defendant and Plaintiffs. The Appellate Division affirmed. The New York Court of Appeals granted Defendant leave to appeal.

    Issue(s)

    Whether Defendant, as CFO and chairman of CESI, owed a duty of care to Plaintiffs, thereby making him liable for negligent misrepresentation regarding the investment’s potential.

    Holding

    Yes, because Defendant’s unique position within CESI, his active solicitation of Plaintiffs’ investment, and his knowledge of their reliance on his representations created a special relationship sufficient to establish a duty of care.

    Court’s Reasoning

    The Court of Appeals stated that liability for negligent misrepresentation requires a duty between the tortfeasor and the injured party. In commercial contexts, this duty arises when “the relationship of the parties, arising out of contract or otherwise, [is] such that in morals and good conscience the one has the right to rely upon the other for information.” (quoting International Prods. Co. v Erie R. R. Co., 244 NY 331, 338). The Court emphasized that not all representations create such a duty, but it can be imposed on those with “unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.” The Court noted that Defendant, as CESI’s CFO and chairman, had unique access to information about the project’s viability. He actively solicited Plaintiffs’ investment and encouraged their reliance on the projections. He even provided updated projections that failed to account for the recent change in utility rates. The court stated, “Defendant further urged plaintiffs to review and rely on the projections. Indeed, defendant informed Kimmell that he could provide ‘hot comfort’ should plaintiff entertain any reservations about investing.” These actions, the Court reasoned, established a special relationship creating a duty of care. The Court also rejected the defendant’s argument that he was protected by Business Corporation Law §§ 715 and 717, because he failed to adequately assess the competence of the employees who prepared the projections, especially given the widespread publicity surrounding the utility rate changes. Ultimately, the court affirmed the lower court’s ruling because the record supported the existence of a special relationship which under the circumstances here required defendant to speak with care.

  • Ossining Union Free School Dist. v. Thune Assoc., 73 N.Y.2d 417 (1989): Negligent Misrepresentation Requires Near-Privity

    Ossining Union Free School Dist. v. Thune Assoc., 73 N.Y.2d 417 (1989)

    In cases of negligent misrepresentation causing only economic injury, a plaintiff must demonstrate either contractual privity with the defendant or a relationship so close as to be the functional equivalent of privity to maintain a cause of action.

    Summary

    Ossining Union Free School District sued engineering consultants Thune & Geiger for negligent misrepresentation after relying on their reports about structural weaknesses in a school annex, which led to its unnecessary closure. The school district had a contract with an architectural firm, Anderson LaRocca Anderson, who then retained Thune and Geiger as consultants. The New York Court of Appeals held that while contractual privity is not strictly required, the relationship between the school district and the engineers had to be so close as to approach privity. The Court found that the allegations satisfied this near-privity requirement because the engineers knew their reports would be relied upon by the school district for a specific purpose.

    Facts

    The Ossining Union Free School District hired Anderson LaRocca Anderson (Anderson), an architectural firm, to evaluate its buildings. Anderson retained Thune Associates and Geiger Associates as engineering consultants to assess the structural soundness of the high school annex. Thune and Geiger tested the concrete and reported serious weaknesses. The school district, relying on these reports, closed the annex. A subsequent expert found that the concrete was a lightweight type known as “Gritcrete,” a fact allegedly available to Thune and Geiger in the original building plans. The school district claimed that Thune and Geiger’s negligence caused them substantial expenses related to the unnecessary closure of the annex.

    Procedural History

    The school district sued Anderson, Thune, and Geiger, asserting claims of negligence and malpractice. Thune and Geiger moved to dismiss the complaint, arguing a lack of contractual privity. The Supreme Court granted the motion, and the Appellate Division affirmed. The New York Court of Appeals reversed the Appellate Division’s order and denied the motion to dismiss the complaint against Thune and Geiger.

    Issue(s)

    Whether, in a negligent misrepresentation case producing only economic injury, a plaintiff must demonstrate contractual privity with the defendant or a relationship so close as to be the functional equivalent of contractual privity to state a cause of action.

    Holding

    Yes, because while strict contractual privity is not required, the relationship between the plaintiff and defendant must be so close as to approach that of privity for a negligent misrepresentation claim to proceed when only economic damages are sought.

    Court’s Reasoning

    The Court of Appeals relied on the principle established in Glanzer v. Shepard (233 N.Y. 236 (1922)) and Ultramares Corp. v. Touche (255 N.Y. 170 (1931)), which addressed the limits of liability for negligent misrepresentation causing economic loss. The Court distinguished between foreseeable reliance and a relationship approaching privity. “If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.” (Ultramares Corp. v Touche, 255 N.Y. 170, 179-180 (1931)). The Court articulated a three-part test derived from Credit Alliance Corp. v. Andersen & Co. (65 N.Y.2d 536 (1985)): (1) awareness that the reports were to be used for a particular purpose; (2) reliance by a known party or parties in furtherance of that purpose; and (3) conduct by the defendants linking them to the party or parties and evincing defendant’s understanding of their reliance. The Court found that the school district’s allegations satisfied these criteria, as the engineers knew their reports would be transmitted to and relied upon by the school district for the evaluation of the school buildings’ structural soundness, and that there was direct contact between the school and the engineers, thus linking the two parties in a manner that met the “near privity” standard. The court emphasized that this narrower rule, requiring near-privity, was a matter of policy to avoid imposing overly broad liability, rather than a limitation applying only to accountants.

  • 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.

  • Coolite Corp. v. American Cyanamid Co., 52 A.D.2d 486 (1976): Limits on Damages in Negligent Misrepresentation Claims

    Coolite Corp. v. American Cyanamid Co., 52 A.D.2d 486 (1976)

    In a cause of action for negligent misrepresentation, a plaintiff cannot recover damages for lost profits.

    Summary

    Coolite Corp. sued American Cyanamid Co. for negligent misrepresentation. The court addressed whether the defendant’s representatives made statements of opinion or fact, whether the claims were time-barred, and if a special relationship existed to support the claim. Crucially, the court also considered whether Coolite could recover lost profits. The court held that questions of fact existed regarding the nature of the statements and the statute of limitations. Further, the existence of a “special relationship” should be determined by the fact-finder. However, the court definitively ruled that lost profits are not recoverable in actions based on negligent misrepresentation under New York law, thus modifying the lower court’s order.

    Facts

    Coolite Corp. claimed that American Cyanamid Co. made negligent misrepresentations. Specific details of the misrepresentations are not elaborated in the short opinion, but the issues on appeal suggest they involved statements that induced Coolite to act. Coolite presumably relied on these misrepresentations to their detriment, seeking damages including lost profits.

    Procedural History

    The case reached the Appellate Division, which addressed multiple issues raised on appeal from the lower court’s decision on summary judgment. The Appellate Division’s order was appealed to the New York Court of Appeals. The Court of Appeals modified the Appellate Division’s order by granting the defendant’s motion for summary judgment to the extent of dismissing the complaint regarding damages for lost profits. The Court of Appeals affirmed the order as modified.

    Issue(s)

    1. Whether questions of fact exist as to whether the defendant’s representatives intended their statements to be opinions or positive statements of present intention?

    2. Whether questions of fact exist as to whether the plaintiff’s claims are time-barred?

    3. Whether a “special relationship” exists sufficient to make out a cause of action for negligent misrepresentation?

    4. Whether the plaintiff can recover damages for loss of profit in an action grounded in negligent misrepresentation?

    Holding

    1. The question certified was answered in the negative, meaning that there were questions of fact as to the intention of the representatives’ statements.

    2. The question certified was answered in the negative, meaning that there were questions of fact as to whether the claims were time-barred.

    3. The existence of a special relationship should be left to the finder of fact.

    4. No, because “the rule in this State is that all elements of profit are excluded from a computation of damages in an action grounded in fraud.” The court applied this rule to negligent misrepresentation as well.

    Court’s Reasoning

    The Court of Appeals determined that genuine issues of material fact existed regarding the nature of the statements made by the defendant’s representatives (opinion vs. fact) and whether the statute of limitations barred the plaintiff’s claims. Further, the existence of a “special relationship,” a prerequisite for a negligent misrepresentation claim, was deemed a factual question for the fact-finder to resolve, citing White v Guarente, 43 NY2d 356; International Prods. Co. v Erie R. R. Co., 244 NY 331; and Coolite Corp. v American Cyan-amid Co., 52 AD2d 486; and referencing the Restatement (Second) of Torts § 552.

    However, the Court of Appeals definitively stated that New York law prohibits the recovery of lost profits in negligent misrepresentation cases, citing Reno v Bull, 226 NY 546, which concerns fraud. The court extended the rule regarding fraud to negligent misrepresentation, stating, “As for damages, the rule in this State is that all elements of profit are excluded from a computation of damages in an action grounded in fraud.” This bright-line rule limits the scope of recoverable damages in such actions, regardless of the specific circumstances or the foreseeability of such losses. This decision aligns with a more restrictive view of damages in cases lacking the element of intentional wrongdoing, as found in fraud cases.

  • Broadway Bank v. Balboa Ins. Co., 48 N.Y.2d 572 (1979): No Duty Owed by Premium Finance Agency to Insurer Regarding Policy Cancellation

    Broadway Bank v. Balboa Ins. Co., 48 N.Y.2d 572 (1979)

    A premium finance agency owes no duty to an insurer to ensure the proper cancellation of an insurance policy following an insured’s default on premium payments, and is not liable for the insurer’s losses resulting from a negligent misrepresentation of cancellation when acting in its own self-interest.

    Summary

    Broadway Bank, a premium finance agency, financed an automobile liability insurance policy for Shelva Ludwig. When Ludwig defaulted on her payments, the bank attempted to cancel the policy and erroneously informed Balboa Insurance Co. that the policy was canceled. Relying on this misrepresentation, Balboa refunded the unearned premium to the bank. Later, Ludwig was involved in an accident. Balboa settled the resulting personal injury claim and sued Broadway Bank to recover the settlement amount, arguing negligent misrepresentation. The New York Court of Appeals held that the bank owed no duty to the insurer regarding the cancellation, as it was acting in its own interest to recoup premiums, and reversed the lower court’s ruling.

    Facts

    Shelva Ludwig entered into a premium finance agreement with Broadway Bank to finance an automobile liability policy issued by Balboa Insurance Co.
    Ludwig defaulted on her premium payments to the bank.
    Broadway Bank sent a default notice to Ludwig and her agent.
    Subsequently, the bank sent a cancellation notice to Ludwig, her agent, and Balboa Insurance, erroneously indicating that the statutory notice period had been met.
    Balboa Insurance, relying on the bank’s representation, refunded the unearned premium to Broadway Bank.
    Ludwig was involved in an accident after the supposed cancellation date.
    Balboa Insurance settled the personal injury claim resulting from the accident.

    Procedural History

    Balboa Insurance Co. sued Broadway Bank to recover the settlement amount and associated costs.
    The Supreme Court ruled that the bank was not Balboa’s agent but was liable for negligent misrepresentation, awarding Balboa only the amount of the unearned premium refunded.
    The Appellate Division affirmed the Supreme Court’s judgment.
    The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a premium finance agency owes a duty to an insurer to ensure the proper cancellation of an insurance policy following the insured’s default on premium payments, such that a negligent misrepresentation of cancellation can give rise to liability for losses incurred by the insurer in settling a claim covered by the policy.

    Holding

    No, because the premium finance agency was acting in its own interest to recoup its advanced premium, not to benefit the insurer, and thus owed no duty of care to the insurer to ensure the policy was properly canceled. The court also held that public policy considerations weigh against imposing such a duty, as it could discourage lenders from engaging in premium finance agreements.

    Court’s Reasoning

    The Court of Appeals reasoned that the bank’s power to cancel the policy stemmed from its interest in recouping the premium it had advanced, not from any obligation to the insurer. The court emphasized that Balboa Insurance Co. had no right to demand or expect cancellation of the policy and cited Pulka v. Edelman, 40 N.Y.2d 781, 785, stating, “Foreseeability should not be confused with duty…Since there is no duty here, that principle is inapplicable”.

    The court distinguished the case from situations where one party gratuitously assumes a duty to aid another, noting that the bank was acting for its own benefit, similar to the insurance carrier in Gerace v. Liberty Mut. Ins. Co., 264 F. Supp. 95.

    The court highlighted public policy concerns, suggesting that imposing such a duty on premium finance agencies could discourage them from offering such services, frustrating the legislative intent behind Article 12-B of the Banking Law.

    The court also found that Balboa’s reliance on the bank’s misrepresentation extended only to refunding the unearned premium, which was already accounted for in the lower court’s judgment, and did not cause the insurer to take or omit any action regarding its contractual obligations to the insured. The court stated, “words communicated must be ‘words upon which others were expected to rely and upon which they did act or failed to act to their damage’ (White v Guarente, 43 NY2d 356, 363)”.