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.