• New Jersey's Appellate Division Limits Accountant's Liability to Third Parties
  • May 5, 2003 | Author: John L. Slimm
  • Law Firm: Marshall, Dennehey, Warner, Coleman & Goggin - Cherry Hill Office
  • Generally, to recover for an economic loss resulting from negligence by one furnishing a service, a direct contractual relationship between the parties must exist, or the injured party must be a known beneficiary of the defendants undertaking. In Rosenblum v. Adler, 93 N.J. 324 (1983), the court held that an accountant who prepared an audit was responsible for negligence to those persons whom the accountant should have reasonably foreseen would receive and rely upon the audit.

    After Rosenblum, the New Jersey Legislature was concerned about lawsuits against accountants because of an accountant's failure to detect the fraud of his or her client. Sponsors Statement to Senate Bill No. 826 (March 10, 1994). Therefore, the Legislature enacted N.J.S.A. 2A:53A-25b to limit an accountant's liability to third parties for the accountant's negligent acts. That Bill restored the concept of privity to accountant's liability towards third parties. Senate Commerce Committee Statement to Senate Bill No. 826 (October 13, 1994).

    The Statute provides that there is immunity for negligence arising out of and in the course of rendering professional accounting services, unless the claimant against the accountant was the accountant's client; or the accountant knew at the time of the engagement by the client, or agreed with the client after the time of the engagement, that the professional accounting service rendered to the client would be made available to the claimant, who was specifically identified to the accountant in connection with a specified transaction made by the claimant. The Statute also provides for immunity, unless the accountant knew that the claimant intended to rely upon the professional accounting service in connection with that specified transaction, and directly expressed to the claimant, by words or conduct, the accountant's understanding of the claimant's intended reliance on the professional accounting service.

    On November 20, 2002, New Jersey's Appellate Division issued its opinion in Finderne Management Co., Inc. v. Barrett, A-3073-00T5 (App. Div. November 20, 2002). In Finderne, the plaintiffs, small business entities, and their principals asserted that they were fraudulently induced to establish a welfare benefit plan by defendants, Barrett, Pappetti, and Redferne. The plan, known as the EPIC plan, called for employers to fund both pre-retirement and post-retirement death benefits for their employees through the purchase of life insurance.

    The plaintiffs claimed that certain defendants represented to them that their contributions to the plan, which were used to pay the life insurance premiums, would be tax deductible. However, in 1997, the Tax Court concluded that plans similar to the EPIC plan did not qualify for favorable tax treatment. Subsequently, the IRS disallowed the plaintiffs' deductions for plan contributions.

    The plaintiffs asserted that certain defendants misrepresented the tax benefits of the plan, causing plaintiffs' damages. Those defendants filed a Third-Party Complaint against accountant, John Rossi, CPA. The defendants asserted that Rossi was negligent because (1) he failed to reinstate life insurance policies which funded Finderne's employees' participation in the plan; (2) caused them to forfeit the conversion privilege afforded by the policies; (3) negligently allowed the policies to lapse; (4) failed to recommend that Finderne appeal certain deficiency determinations made by the IRS; and (5) negligently advised plaintiffs to enter into a settlement with the IRS that was detrimental to plaintiffs' interest. Rossi had been retained by Finderne to oversee and facilitate its participation in the plan. When the IRS issued a Notice of Deficiency, Rossi reviewed Finderne's participation in the plan, and advised Finderne not to contribute to the plan. Finderne, on Rossi's, advice, ceased paying its life insurance premiums.

    Pappetti and US Financial filed a Third-Party Complaint against Rossi, alleging he was liable for negligence, contribution, and indemnity. Barrett crossclaimed against Rossi for contribution and indemnification. They claimed plaintiff's loss of benefits, resulting from the cancellation of the life insurance policies, contributed to plaintiff's damages. Rossi moved to dismiss. That motion was granted by the Trial Court pursuant to N.J.S.A. 2A:53A-25. The Trial Court concluded that the privity provisions of the Statute applied, resulting in Rossi's immunity. The defendants never relied upon Rossi's professional opinion nor did they have a relationship with him. There was no suggestion that the accountant was aware that those defendants would even rely on the advice that he gave to the plaintiff.

    The Appellate Division noted that the Trial Judge relied on the Statute as the basis to dismiss the complaint. The Appellate Division did not reach whether Rossi had immunity under the Statute, because it found that Rossi had no duty to Barrett, Pappetti, or US Financial with respect to advice Rossi had provided to his client, Finderne. The Appellate Division was not persuaded that the accountant owed a duty to Barrett. This is so because, in order to recover for an economic loss resulting from negligence by one furnishing a service, there must be a direct contractual relationship between the parties, or the injured party must be a known beneficiary of the defendant's undertaking. Also, the alleged negligence did not apply to the accountant's auditing function. Rossi was accused of giving Finderne negligent advice concerning the EPIC plan and the insurance policies that funded the plan. There was no evidence that Rossi knew or should have known that Barrett, Pappetti, or US Financial would rely on his advice to Finderne. In fact, neither Barrett, Pappetti, or US Financial had made such a claim. The Appellate Division noted that N.J.S.A. 2A:53-25b expresses a policy that, subject to its limitations, accountants should not be responsible to third parties for negligent acts arising out of the services the accountant has provided to his client. The purpose of the Statute is to limit an accountant's liability to third parties, and restore privity for the accountant's negligent acts. Neither Barrett, Pappetti, or US Financial had a contractual relationship with Rossi. Therefore, without the existence of a duty, they did not have an actionable claim against the accountant.

    Also, the defendants were not entitled to contribution from Rossi as a joint tortfeasor. That was so because the wrongs did not relate to the same injury. The plaintiff's action against Barrett, Pappetti, and US Financial were related to alleged misrepresentations that induced Finderne to participate in the plan. The action Finderne would bring against Rossi would be based on accountant malpractice. Therefore, the Appellate Division affirmed the decision of the Trial Court dismissing the third party claims for contribution and indemnification.

    This opinion is helpful to accountants defending against claims brought by third parties who are not in privity with the accountant. Absent an auditing function in which third parties were definitely in a position to rely, privity will be required in order for a third party to file a direct claim, or a claim for contribution or indemnification against an accountant.