1-877-cmsynergy/1-877-267-9637
Hyde Mulvihill APC Lawyers
216 W. Foothill Blvd (91016) PO Box 1007
Monrovia CA 91017
(626) 358-7471 Fax: (626) 358-2894
|
|
|
|
70
Cal. App. 4th 685, *;
1999 Cal. App.
LEXIS 192, **; 82
Cal. Rptr. 2d 671, ***
DAVID
W. MARIANI et al., Plaintiffs and Appellants, v. PRICE WATERHOUSE, Defendant
and Respondent. No.
F026343. COURT
OF APPEAL OF CALIFORNIA, FIFTH APPELLATE DISTRICT 70
Cal. App. 4th 685; 1999 Cal. App. LEXIS 192; 82 Cal. Rptr. 2d 671
February
9, 1999, Decided SUBSEQUENT HISTORY:
[**1] The
Publication Status has been Changed by the Court from Unpublished to Published
March 8, 1999. Review Denied April 28, 1999, Reported at: 1999
Cal. LEXIS 2940. PRIOR HISTORY:
APPEAL from a judgment of the Superior Court of Fresno County. Super. Ct. No.
373105-6. Ralph Nunez, Judge. DISPOSITION: The judgment is affirmed. Respondent is awarded its
costs on appeal. CASE
SUMMARY
CORE TERMS: audit,
third party, auditor, beneficiary, audit report, guarantor, guaranty, breach of
contract, type of transaction, engagement, negligent misrepresentation, cause of
action, demurrer, lender, lease, appraisal, board of directors, intend,
partnership, accountants, investor, misrepresentation, restructuring,
intentional misrepresentation, causes of action, granted summary adjudication,
general partner, guaranteed, chairman, summary adjudication COUNSEL:
Carr,
DeFilippo & Ferrell, Robert J. Yorio and James W. Lucey for Plaintiffs and
Appellants.
O'Melveny
& Myers, Linda J. Smith, Kenneth R. O'Rourke, Kevin M. Harr, Karen L.
Stevenson; McCormick, Barstow, Sheppard, Wayte & Carruth and Marshall C.
Whitney for Defendant and Respondent. JUDGES:
Opinion by Vartabedian, J., with Ardaiz, P. J., and Harris, J., concurring. OPINIONBY:
VARTABEDIAN OPINION:
[*689]
[***672] VARTABEDIAN,
J. Plaintiffs
David W. Mariani, Herbert R. Benham, Jr., and the David W. Mariani Investment
Partnership (Mariani Investment Partnership) (appellants) appeal from a judgment
entered in favor of respondent Price Waterhouse. The cause below arose from
appellants' assertion that respondent allegedly misrepresented the financial
condition of a [***673]
corporation whose debts appellants [**2]
guaranteed. As to two counts, the trial court sustained respondent's demurrer
without leave to amend; as to the remaining counts, the court granted summary
judgment for respondent. We affirm the judgment. FACTS
AND PROCEDURAL HISTORY
American
Western Banker (AWB) is a California leasing corporation organized in 1979. As
relevant here, AWB served agricultural customers who wanted to lease equipment,
such as tractors, or fixtures, such as irrigation systems and silos. AWB
borrowed money from commercial banks to purchase the equipment or fixtures, then
leased the item to its customer. AWB either held the lease in its own portfolio
or assigned the lease to the lender bank, normally with recourse against AWB.
Because of the high cost of the money available to AWB, its customers tended to
be marginal borrowers who could not obtain loans or leases in the primary
market. Appellants
Mariani and Benham were major stockholders in AWB; they were on the AWB board of
directors and Mariani was its chairman. In addition, to facilitate the borrowing
that was essential to AWB's business plan, Mariani and Benham--through various
investment partnerships of which they were general partners, including [**3]
appellant Mariani Investment Partnership--guaranteed AWB's lines of credit with
various commercial lenders. Appellants had no role in the day-to-day operations
of AWB. When
AWB initially was organized, the investors tried to structure the corporation so
that management (many members of which were also shareholders and members of the
board of directors) was strictly accountable for the quality of the leases
obtained and for the financial practices of the company. Accordingly, the board
of directors adopted the following measure at its first meeting in 1979: [*690]
"RESOLVED:
This corporation shall, and hereby does, adopt a procedure to be followed for
the approval of leases. The procedure shall be to: "
"4.
Submit lease analysis to all Board members. "5.
Gain credit approval [of lessee] by a bank credit department. "6.
Obtain approval from one director representing the Mariani Group (David or Mark
Mariani). "7.
Obtain approval from one director representing the Berrenda Mesa Group (Herb
Benham or Jack LaGrass). "In
the case that there is no director available from either the Mariani Group or
the Berrenda Mesa Group then Phil Benner or the second person [**4]
in the other group is authori[z]ed to approve the transaction." Around
the time of that first board meeting, AWB retained the accounting firm of
Deloitte, Haskins & Sells. n1 As Mariani stated in various declarations
filed in this action:
-
- - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -
n1
Deloitte Touche, successor to Deloitte, Haskins & Sells (hereafter Deloitte
as to either entity), originally was a defendant in this action. Deloitte's
motion for summary judgment was denied and, we are informed, appellants and
Deloitte reached a settlement of the claims against it.
-
- - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - "It
was expressly made known to the AWB auditors, by me or under my direction, that
management practices should be reviewed and that I and the board of directors of
AWB should be informed of any irregularities or questionable practices. ".
. . Auditors . . . were specifically hired with directions to institute a system
of checks and balances to insure that management executed the directives of the
board of directors of AWB, under my direction, and in accordance with
established policies [**5]
and procedures." (From a 1990 declaration.) "When
[AWB] was formed in 1979, plaintiff Herbert R. Benham, Jr., and I were insistent
upon the use of a Big Eight (now Big Six) accounting firm to regularly audit
AWB's financial statements regardless of the additional cost. Mr. Benham and I
requested that audited financials be prepared and that AWB's accountants be
instructed to monitor the implementation of the system of checks and balances
governing the authorization of lease transactions [***674] in order to protect our
interests as guarantors of AWB's debt. . . ." [*691]
"
"At
or about the time of that Board meeting, I met with Deloitte representatives and
discussed with them the scope of their services. . . . At that initial meeting,
the basic business of AWB was discussed with Deloitte representatives along with
the critical need for continued and expanded bank borrowings on the part of AWB,
to be secured, in part, upon [sic] guarantees by Mr. Benham and
myself." (From a 1995 declaration.) With
some exceptions, Deloitte gave AWB a clean bill of financial health for the
fiscal years ending June 30, 1980, through 1983. Nevertheless,
because of a downturn [**6]
in the agricultural economy in the early 1980's and because of allegedly corrupt
practices by management of AWB throughout its existence, AWB was in serious
financial trouble by 1984. Its lines of credit were exhausted, lease payments
were not generating sufficient cash flow to service the corporate debt, and the
collateral securing its lessees' obligations proved insufficient when AWB sought
to foreclose on delinquent accounts. By this time, all of the lines of credit
that appellants guaranteed had been fully drawn down by AWB. AWB
hired respondent to audit its financial statement for the fiscal year ending
June 30, 1984. Mariani stated in his 1990 declaration that respondent also was
"specifically hired with directions to institute a system of checks and
balances to insure that management executed the directives of the board of
directors of AWB, under my direction, . . ." Respondent
issued an unqualified audit of AWB's June 30, 1984, financial statement. Its
audit of the June 30, 1985, financial statement was qualified by respondent's
conclusion that it was questionable whether AWB could continue as a "going
concern" as then structured, but the audit report failed to note any [**7]
qualifications to the financial condition as stated by AWB management. During
1985, AWB defaulted on its bank loans and did not write any new leases.
Plaintiffs were called upon to pay AWB's debt to three lenders pursuant to their
guaranties. They did so in two cases and Mariani entered into a long-term payout
agreement with the third lender. The total amount paid or to be paid on the
guaranties is alleged to be $ 7.5 million. In
1987, AWB sued Deloitte and respondent for negligence and breach of contract.
That complaint was never served on the defendants. In 1988, AWB filed an amended
complaint which added the present appellants as plaintiffs [*692]
and added misrepresentation counts against each defendant. This complaint was
served in 1990. That same year, the trial court dismissed the entire action for
failure to serve the initial complaint within two years after the action was
filed. On appeal, we affirmed the dismissal as to AWB, but reversed as to the
present appellants to the extent they sued as "guarantor[s] . . . in their
own right, not as subrogees of AWB." ( American
Western Banker v. Price Waterhouse (1993) 12 Cal. App. 4th 39, 51 [14 Cal.
Rptr. 2d 916].) [**8]
On
remand, appellants filed a second amended complaint. That complaint alleged
causes of action against Deloitte and respondent for negligence, breach of
contract, negligent misrepresentation and intentional misrepresentation. By
order filed June 7, 1994, the trial court sustained the demurrers of Deloitte
and respondent, without leave to amend, as to the counts for negligence and
breach of contract. The court sustained the demurrers with leave to amend as to
the misrepresentation counts. Appellants
filed a third amended complaint against Deloitte and respondent. The complaint
alleged a cause of action for negligent misrepresentation and one for
intentional misrepresentation against each defendant. On February 2, 1996, the
trial court filed a written opinion and order granting respondent's motion for
summary judgment on both counts. In particular, the court concluded there was no
triable issue of material fact concerning appellants' actual reliance on
respondent's audit reports or other representations; the court also found that
appellants lacked "standing" to pursue misrepresentation causes of
action against respondent. "In addition," the court granted summary
adjudication [***675]
[**9] on
the cause of action for negligent misrepresentation "for failure to satisfy
[the] standards" set forth in Bily
v. Arthur Young & Co. (1992) 3 Cal. 4th 370 [11 Cal. Rptr. 2d 51, 834
P.2d 745, 48 A.L.R.5th 835] (hereafter Bily). "Finally,"
the court also granted summary adjudication on both causes of action to the
extent they arose from the 1985 audit report, on the basis that any reliance on
that report was unjustifiable. (The court denied Deloitte's motion for summary
judgment. Appellants settled with Deloitte just before the scheduled date of
voluntary mediation.) On
April 25, 1996, the trial court entered judgment against appellants and in favor
of respondent. Appellants filed a timely notice of appeal. DISCUSSION
A.
APPELLANTS' CONTENTIONS Appellants'
contentions on this appeal are numerous. However, resolution of all issues is
controlled by Bily. The issues appellants raise are these: [*693]
(1)
The court erred in sustaining the demurrer without leave to amend as to the
negligence and breach of contract counts. (a) As to the negligence count,
appellants contend Mariani is the person who contracted for and engaged the
audit services. [**10]
Accordingly, he may pursue a general negligence claim under the standard
established in Bily, supra, 3 Cal. 4th at page 406. (b) As to
the breach of contract claim, appellants contend they were traditional third
party beneficiaries of the auditing contract with respondent and that Bily
still permits an action by express third party beneficiaries. They rely
primarily on Soderberg
v. McKinney (1996) 44 Cal. App. 4th 1760 [52 Cal. Rptr. 2d 635]. (2)
The court erred in granting summary judgment and summary adjudication. (a)
Appellants contend the trial court erred in finding there was no triable issue
concerning their actual reliance on respondent's representations. They contend
both Mariani and Benham failed to seize control of management of AWB in a timely
manner because they relied on respondent's representations. They also contend
Mariani entered into new guaranties of the corporate debt at a time when
accurate information from respondent would have allowed him to reduce his
exposure. (b) As to the negligent misrepresentation count, appellants contend
there was a triable issue of fact concerning whether, in the words of Bily,
respondent made representations [**11]
" 'with the intent to induce plaintiff, or a particular class of persons to
which plaintiff belongs, to act in reliance upon the representation in a
specific transaction, or a specific type of transaction . . . .' " (Bily,
supra, 3 Cal. 4th at p. 414.) (c) Finally, appellants argue that the
trial court erred in granting summary adjudication of both counts insofar as
they concern the 1985 audit report. Appellants contend the court could not
restructure the third amended complaint to, in effect, state separate causes of
action on each set of representations by respondent, then summarily adjudicate
some of the restructured causes of action. B.
BILY The
plaintiffs in Bily were investors in a company; some of the plaintiffs
had purchased stock from the company, while others loaned money or guaranteed
the company's bank loans in exchange for stock options. The lead plaintiff,
Robert Bily, had purchased $ 1.5 million in stock in early 1983 and was a
director of the company. (Bily, supra, 3 Cal. 4th at p. 377.) Arthur
Young & Company was the outside auditor for the company. It issued
unqualified audit reports on the company's 1981 and 1982 financial statements.
[**12] ( Bily,
supra, 3 Cal. 4th at p. 377.) The plaintiffs relied on these reports in
making their investment decisions. ( Id.
at pp. 377-378.) [*694]
In
September of 1983, the company filed for bankruptcy and the plaintiffs
ultimately lost their investments. ( Bily,
supra, 3 Cal. 4th at p. 378.) The plaintiffs sued Arthur Young &
Company for professional negligence, negligent misrepresentation and intentional
fraud. (Ibid.) A jury found in favor of defendant on the
misrepresentation [***676]
and fraud counts, but found in the plaintiffs' favor on the professional
negligence count. ( Id.
at p. 379.) The defendant appealed; the Court of Appeal affirmed the
judgment; the Supreme Court granted review. The
Supreme Court used the case before it to engage in a wide-ranging discussion of
the liability of certified public accountants to the various segments of the
public who may come to rely on their audit reports. The court noted that an
auditor reasonably may foresee an expansive distribution of an audit report by
the audited company itself and by stockbrokers and institutional investors, with
the result that the [**13]
report may come into the hands of, and be used to make business or investment
decisions by, "practically anyone." ( Bily,
supra, 3 Cal. 4th at p. 390.) The problem before the court was to weigh
the "conceivably limitless scope of an accountant's [potential] liability
to nonclients who may come to read and rely on audit reports, and the effect of
tort liability rules on the availability, cost, and reliability of those
reports," which fulfill an essential role in the business world. ( Id.
at pp. 376, 383.) After
surveying existing approaches to auditor liability, the court turned to the
three tort causes of action involved in the case before it. For each type of
tort the court set forth the requirements for imposing liability on negligent
auditors. In
the case of a professional negligence cause of action, the court adopted a
narrow rule. The court stated: "In our judgment, a foreseeability rule
applied in this context inevitably produces large numbers of expensive and
complex lawsuits of questionable merit as scores of investors and lenders seek
to recoup business losses. In view of the prospects of vast if not limitless
liability for the 'thoughtless [**14]
slip or blunder,' the availability of other efficient means of self-protection
for a generally sophisticated class of plaintiffs, and the dubious benefits of a
broad rule of liability, we opt for a more circumscribed approach." ( Bily,
supra, 3 Cal. 4th at p. 406.) The
"circumscribed" rule adopted by the court was stated succinctly:
"an auditor's liability for general negligence in the conduct of an audit
of its client financial statements is confined to the client, i.e., the person
who contracts for or engages the audit services." ( Bily,
supra, 3 Cal. 4th at p. 406.) The court also noted that an audit
engagement contract "might expressly [*695]
identify a particular third party or parties so as to make them" the
"practical and legal equivalent of 'clients.' " ( Id.
at pp. 406-407, fn. 16.) However, the court continued, "we have no
occasion to decide [in the present case] whether and under what circumstances
[such] express third party beneficiaries of audit engagement contracts may
recover as 'clients' under our holding." (Ibid.) The
court then turned to the cause of action for negligent misrepresentation, which
it [**15]
carefully distinguished from the tort of negligence. ( Bily,
supra, 3 Cal. 4th at p. 407.) n2 As to negligent misrepresentation, the
auditor's potential liability extends beyond "clients." Instead, it
extends to a third party if the auditor "intends to supply the information
for the benefit of one or more third parties in a specific transaction or type
of transaction identified" to the auditor. ( Id.
at pp. 392, 408.) This extension of potential liability "attempts to
identify those situations in which the [auditor] undertakes to supply
information to a third party whom he or she knows is likely to rely on it in a
transaction that has sufficiently specific economic parameters to permit the
[auditor] to assess the risk of moving forward." ( Id.
at p. 409.)
-
- - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -
n2
The primary distinction, as important in the present case, is that in a
negligent misrepresentation action, justifiable reliance on the false statement
is indispensable, whereas such reliance in a negligence case only arises as a
facet of the causality issue. (Bily, supra, 3 Cal. 4th at p.
413.)
-
- - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -
[**16] The
Bily court emphasized that the "intends to benefit"
requirement establishes an objective standard that "looks to the specific
circumstances (e.g., [auditor]-client engagement and the [auditor's]
communications with the third party) [***677]
to ascertain whether [an auditor] has undertaken to inform and guide a third
party with respect to an identified transaction or type of transaction.
If such a specific undertaking has been made, liability is imposed on the
[auditor]. If, on the other hand, the [auditor] 'merely knows of the
ever-present possibility of repetition to anyone, and the possibility of action
in reliance upon [the information] on the part of anyone to whom it may be
repeated,' the [auditor] bears no legal responsibility." (Bily, supra,
3 Cal. 4th at p. 410, italics in original.) "If
competent evidence does not permit a reasonable inference that the auditor
supplied its report with knowledge of the existence of a specific transaction or
a well-defined type of transaction which the report was intended to influence,
the auditor is not placed on notice of the risks of the audit engagement. In
such cases, summary adjudication will be [**17]
appropriate because plaintiff will not, as a matter of law, fall within the
class of intended beneficiaries." ( Bily,
supra, 3 Cal. 4th at pp. 414-415.) Finally,
the court addressed the intentional misrepresentation cause of action. In this
situation, liability may arise when an auditor makes a [*696]
fraudulent misrepresentation, that is, when the auditor knows its
representations are false or baseless, or if the auditor has no belief in the
truth of the representations, making them recklessly and without knowing whether
they are true or false. If the auditor makes such a fraudulent misrepresentation
to the plaintiff or a class of persons to which the plaintiff belongs (the
general public may be such a class) intending or reasonably expecting such
persons to rely on the misrepresentation, the auditor may be liable to a
plaintiff who is actually misled by the misrepresentations. ( Bily,
supra, 3 Cal. 4th at p. 415.) The broadened class of persons to whom
the auditor may be liable is justified because the auditor's fraudulent conduct
"thrusts [the auditor] into a primary and nefarious role in the
transaction." (Ibid.) C.
APPELLANTS' [**18]
PROFESSIONAL NEGLIGENCE CAUSE OF ACTION In
appellants' opening brief, they contend Mariani should have been permitted to
pursue his general negligence claim. Appellants first contend Mariani "was
precisely the person 'who contract[ed] for or engage[d] the audit services,'
" making him respondent's actual client within the meaning of Bily.
(See 3
Cal. 4th at p. 406.) There
was no allegation in the second amended (or any other) complaint that Mariani,
as an individual or as general partner of one of the guarantor partnerships,
engaged respondent's services. To the contrary, the second amended complaint
explicitly alleged (and the record in connection with the summary judgment
motion confirms): "AWB engaged defendant . . . to perform accounting
services for AWB, including an audit of AWB's books and records, according to
generally accepted accounting principles." Mariani was not respondent's
client. Appellants
also now claim, "Mariani was expressly named in the engagement contracts
issued by . . . Price Waterhouse," thereby bringing him within the class of
"practical and legal equivalent of 'clients.' " (See Bily,
supra, 3 Cal. 4th at p. 406, fn. 16.) [**19]
Although this is not alleged in the complaint, appellants cite to the summary
judgment record, impliedly arguing they should have been permitted to amend the
negligence cause of action. Appellants' record citations fail to support their
argument. The
first citation is to a letter from Price Waterhouse to "Mr. David W.
Mariani, Chairman of the Board of Directors, American Western Banker, Inc."
THE LETTER BEGINS: "Subsequent to the submission of our proposal to serve
American Western Banker as independent accountants . . . ." There is no
mention in the letter of serving Mariani in any personal capacity or as
guarantor; in fact, the letter does not refer to Mariani in any way beyond the
formal greeting. [*697]
The
second record citation pertains to the initial proposal from Price Waterhouse.
Again, this letter is addressed to [***678]
Mariani as chairman of the board of AWB. It welcomes "this opportunity to
present to you and the Board of Directors our qualifications to serve as
independent accountants for" AWB. The letter touts respondent's ability
"to provide AWB with the highest level of professional services."
Mariani's name does not appear after the greeting; instead, [**20]
the letter concludes with assurances respondent can "meet AWB's objectives
and requirements" and "serv[e] AWB's needs." Next,
appellants cite to a letter from Deloitte, not respondent. Directed to Mariani
as chairman of the board, the letter says: "Please be assured that we are
anxious to serve the needs and address the concerns of the Board." Once
again, a full reading of the letter demonstrates no mention of Mariani
individually or as a guarantor. The
final record citation, a letter by Deloitte to Mariani as "Audit Committee
Chairman, American Western Banker Co. Inc." states that Deloitte's manager
has enclosed a booklet that "will be of interest and assistance to you in
your duties as Audit Committee Chairman." The letter implies that Mariani
had contacted Deloitte in his role as audit committee chairman to ask certain
questions about the 1981 audit. It neither states nor implies anything about
Mariani's role as guarantor of AWB corporate debt. Appellants
make other statements attempting to show Mariani was intimately involved in
hiring respondent and receiving respondent's work product. While the record
citations do largely support the idea of Mariani's involvement with [**21]
respondent, such involvement uniformly is in his capacity as a director of AWB,
not personally and not as a guarantor of its debt. There
is no reasonable possibility appellants could further amend their complaint to
allege that Mariani was respondent's "client" or client equivalent
within the meaning of Bily. (See Silva
v. Block (1996) 49 Cal. App. 4th 345, 349 [56 Cal. Rptr. 2d 613]; Smith
v. County of Kern (1993) 20 Cal. App. 4th 1826, 1832 [25 Cal. Rptr. 2d
716].) The court properly sustained the demurrer to the negligence cause of
action and properly denied leave to amend. D.
APPELLANTS' BREACH OF CONTRACT CAUSE OF ACTION The
trial court sustained respondent's demurrer to the breach of contract count,
concluding appellants had not adequately alleged their third party beneficiary
status under the audit engagement contract. As relevant to the issues on appeal,
the breach of contract count first alleged respondent [*698]
and AWB "entered into a written contract under which defendant agreed to
perform accounting services for AWB . . . ." IT THEN ALLEGED:
"Plaintiffs were direct third party beneficiaries of this contract by
virtue [**22]
of Mariani's status as Chairman of the Board, and plaintiffs' status as major
shareholders and guarantors of substantial debts of AWB. . . . Price Waterhouse
understood that plaintiffs would (and intended to) benefit from its issuance of
audit options [sic] in 1984, 1985, and 1986 because Price Waterhouse
knew, or reasonably should have known, that plaintiffs, as guarantors, would
have not agreed [sic] to continue to guarantee substantial debts of AWB
or to renew those guarantees, if they had known the true . . . financial
condition of the company." Appellants
contend they adequately alleged a third party beneficiary basis for their breach
of contract claim and that nothing in Bily requires a contrary
conclusion. As
we have noted above, Bily directly concerned only tort causes of
action: "We granted review to consider whether and to what extent an
accountant's duty of care in the preparation of an independent audit of
a client's financial statements extends to persons other than the client."
(Bily, supra, 3 Cal. 4th at p. 375, italics added; id.
at p. 376 ["difficult questions concerning . . . the effect of tort
liability rules on the availability, [**23]
cost, and reliability of (audit) reports"].) Somewhat cryptically, however,
the Bily opinion also notes that third party beneficiaries of a
contract "may under appropriate circumstances possess the rights of parties
to the contract. . . . [W]e have no occasion to decide [in the present case]
whether and under what circumstances [***679]
express third party beneficiaries of audit engagement contracts may recover as
'clients' under our holding." (Id. at pp. 406-407, fn. 16.) We
must consider what, if anything, this statement means in relationship to breach
of contract claims against auditors. Appellants contend, first, that Bily
did not intend to change the law concerning breach of contract claims by third
party beneficiaries so as to permit recovery only by one who is expressly named
as a third party beneficiary in the contract. Second, they contend the trial
court found that Bily did intend to restrict third party contract
claims to persons expressly named in the contract. Appellants'
second contention clearly is wrong. In sustaining the demurrer, the trial court
stated: "The Complaint fails to adequately allege that plaintiffs were express
or implied [**24]
third party beneficiaries . . . under the standards set forth in Cal. Civil Code
§
1559, Bily, . . . and [the earlier [*699]
opinion in the present case]." n3 (Italics added.) The trial court did not
sustain the demurrer on the basis that the complaint lacked an allegation that
appellants appeared by name in the engagement contract.
-
- - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -
n3
-
- - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - The
validity of appellants' first contention, that Bily did not intend to
change the traditional law of third party beneficiaries, is more plausible. In
the first place, of course, the court expressly declined to resolve the issue. Second,
the Bily court did not distinguish between the tort and contract rights
of third party beneficiaries. It simply noted that
Third,
even though Bily used the phrase "express" third party
beneficiary, that phrase has long been a term of art in third party beneficiary
cases; it does not appear Bily meant to create a new category of
specifically designated beneficiaries, whether for tort or breach of contract
purposes. (But see Soderberg
v. McKinney, supra, 44 Cal. App. 4th at p. 1774.) [**26]
Thus, in Outdoor Services the court stated: "
Although
it is conceivable the court's language in Bily's footnote 16 is a
harbinger of a drastic new restriction in the law of third party beneficiaries,
we think that possibility is remote. In any event, for present purposes we will
assume appellants are correct; we will assume Bily did not narrow the
traditional principles of third party beneficiary law in the context of auditor
liability, at least as to breach of contract actions. (Cf. Soderberg
v. McKinney, supra, 44 Cal. App. 4th at p. 1774.) That
assumption, however, does not aid appellants. As the trial court found, the
second amended complaint does not adequately allege appellants [*700]
were third party beneficiaries of the contract even under the traditional test,
when that [**27]
test is applied in the context of audit reports. We will explain. Two
aspects of audit reports provided the foundation upon which the Bily
court constructed [***680]
its opinion. Each of these aspects necessarily has an impact on an analysis of
the third party beneficiary issue in audit report cases.
-
- - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -
n4
Companies that issue federally registered securities may be required to
file audited financial statements in some circumstances. Such audits may be the
basis for statutory liability to third parties who buy or sell shares in the
company in reliance on an audit not prepared "in good faith and [without]
knowledge that such [audit report] was false or misleading." (15
U.S.C. § 78r(a), quoted in Bily, supra, 3 Cal. 4th at p.
396.) The present case does not involve such a company. (See also Arthur
Andersen v. Superior Court (1998) 67 Cal. App. 4th 1481, 1491, 1507 [79
Cal. Rptr. 2d 879] [insurance company required by statute to file annual
independent audit with Insurance Commissioner; liability to Insurance
Commissioner exists under Bily].) [**29]
n5
This relationship is exemplified in the language used by the auditors in their
communications with AWB in the present case.
-
- - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -
-
- - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -
n6
This factor distinguishes the present case from Anderson
v. Deloitte & Touche (1997) 56 Cal. App. 4th 1468 [66 Cal. Rptr. 2d
512]. In that case, the accountant's projections of earnings were
"designed for the specific purpose of attracting investors in the limited
partnerships, i.e., to induce reliance, and [could not] reasonably be understood
to have [had] any other purpose." ( Id.
at p. 1478.)
-
- - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -
[**31] Thus,
we conclude, in keeping with Bily, that
We
then come to the question whether the second amended complaint alleges any facts
that would permit an inference that respondent's services were performed
pursuant to a contract that was out of the ordinary--that established appellants
as third party beneficiaries. Phrased in terms of the traditional test for
express third party beneficiary status, were facts alleged to show that AWB
clearly manifested an intent to benefit appellants and that respondent
understood that AWB had such intent? ( Lucas
v. Hamm, supra, 56 Cal. 2d at p. 591; Sofias
v. Bank of America (1985) 172 Cal. App. 3d 583, 587 [218 Cal. Rptr. 388].)
As
noted, the second amended complaint alleged that appellants were "direct
third party beneficiaries of [the audit engagement] contract by virtue of
Mariani's status as Chairman of the Board, and plaintiffs' status as major
shareholders and [**32]
guarantors of substantial debts of AWB." It also alleged respondent knew or
should have known appellants would not have "agreed to continue to
guarantee substantial debts of AWB or to renew those guarantees" if they
had known the true financial condition of AWB. On their [*702]
face, these allegations fail to distinguish appellants from the class of persons
who normally rely on audit reports: no investor, creditor, shareholder or
guarantor would act in the same manner toward an insolvent business as it would
toward a thriving business, and any reasonable auditor would know that. Appellants
present no reasoned argument to show how the allegations might permit an
inference of express third party beneficiary status. Thus, even though
appellants articulate a reliance on the traditional law of third party
beneficiary actions, strikingly absent from their briefs is any discussion
whatsoever of that body of law. Instead, they merely state that a third party
need only "demonstrate that he is a member of the class of persons for whom
the contract was made." That statement clearly is true (see 1 Witkin,
Summary of Cal. Law (9th ed. 1987) Contracts, § 666, p. 604), but it does not
help [**33]
us determine whether the complaint actually demonstrates the fact in question. In
the absence of a reasoned argument by appellants concerning the manner in which
they contend AWB's contract with respondent differs from the ordinary audit
contract, we are unable to delineate and consider every conceivable way in which
the evidence might, but fails to, establish that appellants were third party
beneficiaries. We will, however, survey the obvious contenders. There
is a complete absence of any allegation in the complaint (or evidence in the
record) of any formal or informal contract in which AWB agreed to provide an
audit report to appellants as a condition of their agreement to guarantee or
continue to guarantee AWB's debts. By contrast, in COAC,
Inc. v. Kennedy Engineers (1977) 67 Cal. App. 3d 916, 919-920 [136 Cal.
Rptr. 890], such an agreement was found. In that case, COAC contracted with
a water district to build a treatment facility for the district. The appellate
court found the district had an implied duty under the contract to provide an
environmental impact report (EIR) to facilitate the plaintiff's construction of
the project. The district retained defendant [**34]
to prepare the EIR. Defendant's failure to prepare a competent EIR allegedly
caused delay in the construction project, thereby injuring plaintiff. In
reversing an order sustaining the defendant's demurrer without leave to amend,
the appellate court held that the duty running from the district to the
plaintiff was sufficient to support an amendment of the complaint to allege that
the plaintiff was a third party beneficiary of the district's contract with the
defendant. (See Rest.2d Contracts, § 302, subd. (1).) No undertaking,
contractual or otherwise, for AWB to supply audit reports to appellants is
reasonably inferable from the present record. [*703]
[***682]
Similarly, there is no allegation (or evidence) that the audit contract
contemplated that respondent would provide audit reports or financial advice
directly to appellants, whether described individually or as part of a class. By
contrast, in Harper
v. Wausau Ins. Co. (1997) 56 Cal. App. 4th 1079, 1089 [66 Cal. Rptr. 2d
64], the appellate court found that the defendant did agree to provide
benefits directly to third persons. In that case, a property owner had obtained
premises liability insurance [**35]
from defendant. The insurance included liability coverage for the owner, but
also included a provision to pay the medical costs of any person injured on the
property, regardless of fault. The plaintiff was injured while on the property
and sued the defendant insurer under the owner's insurance policy for her
medical costs. Because the medical benefits coverage was provided regardless of
the property owner's fault, the appellate court concluded the plaintiff was a
member of a class of persons who were the express third party beneficiaries of
the insurance policy: the "medical coverage provisions provide direct
obligations on the part of the insurer to the intended beneficiaries." Nor
does the case before us present any allegations (or evidence) from which one
reasonably could infer that AWB intended the audit report (as opposed to the
generalized body of knowledge and information Mariani and Benham obtained about
AWB through their roles as directors and stockholders) to guide any decisions
appellants might make as guarantors of corporate lines of credit. By contrast,
in Alling
v. Universal Manufacturing Corp. (1992) 5 Cal. App. 4th 1412, 1440 [7 Cal.
Rptr. 2d 718], [**36]
the court found evidence that supported an inference that a party which
contracted with the defendant intended its contract to benefit the plaintiff. In
Alling, the contracting parties' course of conduct established that a
patent licensee intended the plaintiff, licensor of the patent, to benefit from
the licensee's best efforts contract with the manufacturer-defendant when the
licensor entered into its own licensing agreement with defendant. Even though
the plaintiff conceded the defendant had not breached the licensing agreement
between them, the appellate court concluded the plaintiff's suit alleging breach
of the defendant's "best efforts" obligations under the licensee's
contract was proper. ( Id.
at p. 1441.) Finally,
there was no allegation (or evidence) that the course of dealing between AWB and
respondent permitted an inference that AWB intended to use the audit report to
influence appellants in any particular transaction or type of transaction. By
contrast, in Soderberg
v. McKinney, supra, 44 Cal. App. 4th 1760, the case upon which
the appellants extensively rely, the evidence permitted a reasonable inference
that the defendant knew [**37] the plaintiffs or someone like the
plaintiffs would rely on the work product in making a particular investment
decision. The defendant was a real estate [*704]
appraiser. According to the plaintiffs' evidence, the defendant had prepared
appraisal reports on approximately 200 properties for a particular mortgage
broker, who in turn gave the appraisals to prospective lenders. On occasion, the
broker contacted the defendant with questions from prospective lenders
concerning the appraisal reports. The plaintiffs were private lenders who had
received one of the defendant's appraisal reports from the broker and relied on
the appraisal in making a loan secured by the appraised property. ( Id.
at p. 1771.) The defendant submitted evidence in support of his motion for
summary adjudication of the plaintiffs' breach of contract claim that indicated
the defendant did not know the appraisal would be passed on by the broker and
that the appraisal report itself stated it was for the use of the broker only. (
Id.
at p. 1770.) The
appellate court reversed the trial court's order granting summary adjudication.
Impliedly finding that the plaintiffs' evidence supported [**38]
a reasonable inference that the plaintiffs belonged to a class for whose ex-
press benefit the contract was made ( Soderberg
v. McKinney, supra, 44 Cal. App. 4th at p. 1774), the court remanded
the matter for the trial court "to rule on plaintiffs' request that they be
granted leave to amend the complaint to allege a third party beneficiary theory
on the contract claim." ( Id.
at p. 1775.) No similar course of dealing between AWB and respondent is
inferable from the present record, nor is there any [***683]
evidence that appellants received any of respondent's audit reports in
conjunction with a particular transaction or type of transaction. The
complaint establishes (and the evidence confirms) that appellants were nothing
more than incidental beneficiaries of the audit engagement contract; as such
they are not entitled to sue for breach of the contract. ( Sofias
v. Bank of America, supra, 172 Cal. App. 3d at p. 587.) E.
APPELLANTS' NEGLIGENT MISREPRESENTATION CAUSE OF ACTION The
trial court granted summary adjudication on appellants' negligent
misrepresentation cause of action.
The
trial court stated two separate reasons for granting the summary adjudication
motion. First, the court concluded appellants did not [*705]
actually rely, as required by Bily, on respondent's audit reports or
other information supplied by it: the lines of credit appellants guaranteed had
been fully drawn down by the time respondent was hired as AWB's auditor and
thereafter appellants incurred no new guaranty obligations. (See Bily,
supra, 3 Cal. 4th at p. 409 [liability limited "to cases in
which the supplier [of audit information] 'manifests an intent to
supply the information for the sort of use in which the plaintiff's
loss occurs.' " (Original italics.)].) Second, the trial court ruled that
[**40]
respondent did not intend to induce appellants to act in reliance on
respondent's representations as required by Bily because, inter alia,
appellants did not establish that there was any guaranty transaction respondent
knew about and intended to influence. (See id.
at p. 414 ["If competent evidence does not permit a reasonable
inference that the auditor supplied its report with knowledge of the existence
of a specific transaction or a well-defined type of transaction which the report
was intended to influence," summary adjudication for auditor is
appropriate].) Appellants
disagree with both of the trial court's conclusions. They contend they relied on
respondent's audit reports in deciding not to oust or more closely supervise
management, and in renegotiating certain of their guaranties of AWB's debt. The
decisions to retain current management and to let it proceed without closer
supervision were decisions that could only be taken by the board of directors,
not by guarantors of the corporate debt. Appellants recognize this, but they
contend it is immaterial what capacity they acted in when they relied--the
important fact is that they acted in reliance. [**41]
Appellants'
argument ignores the context in which the showing of reliance must be made in a
third party suit against an auditor. Bily emphasizes that
[***684]
Justifiable reliance can only arise in the context of the duty existing between
the parties. (See Bily,
supra, 3 Cal. 4th at p. 408.) In other words, only to the extent
appellants relied as guarantors did they rely at all, for purposes of
the limited causes of action still viable after our decision in American
Western Banker v. Price Waterhouse, supra, 12 Cal. App. 4th at
page 51. The trial court was correct in concluding that appellants'
retention of the management team in reliance on the audit report did not
constitute cognizable reliance for purposes of the present action. Appellants
also contend the evidence shows they acted in reliance on the audit reports as
guarantors when Mariani Investment Partnership signed a guaranty with B.A.
Leasing Corporation (BALCO) after issuance of the 1984 audit report and Mariani
signed a new guaranty with Wells Fargo Bank (Wells Fargo) after issuance of the
draft 1985 audit report. Neither argument is convincing. A
general partner, of course, is liable for all debts of a partnership. ( Home
Federal Savings & Loan Assn. v. Ramos (1991) 229 Cal. App. 3d 1609,
1614 [284 Cal. Rptr. 1].) [**43]
Mariani was general partner of the Mariani Children's Investment Partnership; he
executed the original BALCO guaranty in 1980 on behalf of the partnership. The
Mariani Children's Investment Partnership changed its name to Mariani Investment
Partnership, one of the present appellants. In 1985, Mariani signed, on behalf
of Mariani Investment Partnership, a replacement guaranty for the BALCO line of
credit. No new debt was guaranteed and Mariani's exposure was in no way
increased. Inexplicably,
and despite the fact that the 1985 guaranty was a mere formality that changed
none of the existing legal relationships, appellants argue that the guaranty
shows justifiable reliance on respondent's 1984 audit report because "Mariani
did not take steps to either resign as a general partner of the Mariani
Investment Partnership or enter into a serious renegotiation workout arrangement
with BALCO." "Indeed," appellants continue, "if [Mariani]
merely resigned as general partner, that act alone would have eliminated his
liability to BALCO because the partnership was the only guarantor to that bank.
See Corporations Code section
15015(b)." The
citation to Corporations Code [**44]
section
15015, subdivision (b), is inexplicable because that subdivision deals with
the liability of partners in a registered limited liability partnership, as
defined in Corporations Code section
15002, subdivision (i)(1)(C). It has no applicability whatsoever to general
partners. Rather, pursuant to Corporations Code section
15015, subdivision (a)(2), a general partner is liable for all debts of the
partnership. [*707]
The
reference to a failure to "enter into a serious renegotiation workout
arrangement with BALCO" is inexplicable because there is no evidence
whatsoever of the existence of an opportunity for such a workout of which
appellants failed to avail themselves, much less of a workout opportunity that
would have reduced the amount Mariani paid to BALCO. Appellants
also contend they relied on respondent's 1984 and 1985 (draft) audit reports in
entering into the restructuring agreement with Wells Fargo in 1986. However,
appellants fail even to argue, much less to show from the evidence, any manner
in which the restructuring agreement adversely affected the legal rights of
appellants [**45]
or any of them. (See Alliance
Mortgage Co. v. Rothwell (1995) 10 Cal. 4th 1226, 1239 [44 Cal. Rptr. 2d
352, 900 P.2d 601] ["
Viewed
in this context, the analysis never reaches the question whether Mariani
reasonably could not have known about AWB's financial condition by the time it
entered into [***685]
the restructuring agreement in February of 1986. While Mariani may have
"acted" in a factual sense when he signed the restructuring agreement,
he did not "rely" in a legal sense because he did not alter his legal
relations with Wells Fargo. The guaranty Mariani signed in 1986 was essentially
in the same terms as the original 1982 guaranty, except that the maximum amount
of the 1986 guaranty included accrued, unpaid [**46]
interest that was payable but unliquidated under the terms of the 1982 guaranty.
n7
-
- - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -
n7
Because Mariani "unconditionally guarantee[d] and promise[d] to pay"
AWB's debts to Wells Fargo under both guaranties, it simply does not matter
whether Mariani thought, in 1986, that the assets of AWB would satisfy the Wells
Fargo debt, whether that thought was based on respondent's audit report, and
whether that thought was reasonable in light of the circumstances known to
Mariani at the time of the 1986 restructuring agreement. Neither does it matter
that, as appellants' accounting expert stated in his declaration, "Price
Waterhouse influenced the making of personal guarantees by Mariani in connection
with work-outs and restructurings . . ." because those decisions did not
constitute reliance in the legal sense. Because of our resolution of this issue,
it is not necessary that we consider appellants' claim that the trial court
erred in concluding that any possible reliance on the 1985 audit report would
have been unjustified given Mariani's state of knowledge by the time the report
issued.
-
- - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -
[**47] Viewed
in this context, as well, it is apparent the trial court's second reason for
granting summary adjudication was correct: respondent did not intend to induce
appellants to act in reliance on its representations in any [*708]
specific transaction or type of transaction because there is no evidence any
such material transaction occurred, or even was contemplated. n8
-
- - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -
n8
Appellants' argument consistently goes astray when it restates the Bily
requirements. Thus, in their opening brief appellants state: "All that Bily
requires is that plaintiffs establish that Price Waterhouse knew with
substantial certainty that plaintiffs, or the particular class of persons to
which they belonged, would rely on the accountants' representations in the
course of their transactions involving AWB." (Subsequently, they reduce
their statement of the Bily requirement even further, simply calling it
the "intent to influence" requirement.) Appellants cited to page 414
of the Bily opinion as the source of this requirement. As we have
repeatedly emphasized in this opinion, Bily, at page 414 and elsewhere,
requires not just an intent to influence appellants' actions "in their
transactions with AWB," but rather an intent to influence actions "
'in a specific transaction, or a specific type of transaction' " or "a
specific transaction or a well-defined type of transaction." (Bily,
supra, 3 Cal. 4th at p. 414.) In
Soderberg
v. McKinney, supra, 44 Cal. App. 4th at pages 1766-1768, upon
which appellants rely heavily, the real estate appraisal was submitted to a
mortgage broker in circumstances that reasonably permitted an inference that a
potential lender would rely on the report in making a loan on that property.
There is no indication the result in Soderberg would have been the same
if the mortgage broker managed the property as a rental agent and wanted the
appraisal to obtain insurance on the property, challenge the assessed tax
valuation, specify limits of indemnity by a movie producer who wanted to film
scenes in the house, list the house for sale, and, in addition, seek new
financing for the owners of the house. In such circumstances, Bily
would require a conclusion the appraiser was not liable for an insurance agent's
reliance on the appraisal report, nor for a lender's reliance on it, even if the
appraiser knew generally that the broker would use the appraisal for some
purpose. This
point is particularly pertinent in light of the absence of any evidence
whatsoever that respondent knew Mariani contemplated attempting to restructure
his debt with Wells Fargo at the time it provided information to Mariani,
whether as a director or otherwise.
-
- - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -
[**48] Accordingly,
we conclude the trial court correctly granted summary adjudication in favor of
respondent on appellants' negligent misrepresentation cause of action. F.
APPELLANTS' INTENTIONAL MISREPRESENTATION CAUSE OF ACTION The
trial court granted summary adjudication of appellants' intentional
misrepresentation cause of action on the basis that appellants did not actually
rely on any of respondent's representations--in other words, on the first basis
for which it granted summary adjudication of the negligent misrepresentation
count.
Appellants
present no separate argument concerning actual reliance in the context of [***686]
their intentional misrepresentation argument. In our view, the issues and
inquiry are identical in both contexts. Accordingly, it suffices to say that we
conclude in the present context, as well, that appellants did not show they
relied on respondent's representations in the legal sense of reliance. Actions
appellants took after receiving respondent's [**49]
reports did not [*709]
change their legal relationship with AWB's creditors, so those actions did not
constitute legal reliance on the representations. G.
CONCLUSION The
trial court properly sustained respondent's demurrer to the second amended
complaint as to appellants' negligence and breach of contract causes of action.
The court properly granted summary adjudication on the negligent
misrepresentation count of the third amended complaint because appellants did
not demonstrate a reasonable inference that respondent intended to influence
them in any identifiable transaction or type of transaction. The court properly
granted summary judgment on the intentional misrepresentation cause of action of
the third amended complaint because respondent presented evidence to establish
that appellants did not rely on respondent's representations in any guaranty or
guaranty-related transaction that altered appellants' legal relationships. Disposition
The judgment is affirmed. Respondent is awarded its |
