Defense Digest

New Jersey Supreme Court Limits Accountants Liability To Third Parties
By John L. Slimm, Esq.*

In E. Dickerson and Son, Inc. v. Ernst & Young, L.L.P., (May 6, 2004), the Supreme Court of New Jersey held that the Legislature intended to limit the liability of accountants to third-parties when it enacted N.J.S.A. 2A:53A-25.  Dickerson was the first time the Supreme Court considered this issue.  The Court noted that the legislative intent in adopting N.J.S.A. 2A:53A-25 was to limit the impact of H. Rosenblum, Inc. v. Adler, 93 N.J. at 324 (1983), a decision that greatly expanded the scope of an accountant's liability to all reasonably foreseeable claimants, including stockholders and public investors.  The statute restored the concept of privity to accountants' liability towards third parties.  E. Dickerson & Son, 361 N.J. Super. at 367; Finderne Management Co. v. Barrett, 355 N.J. Super. 197 (App. Div. 2002).  According to the statute, no accountant shall be liable for damages for negligence arising out of the rendering of accounting services unless 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 service rendered to the client would be made available to the claimant who is specifically identified to the accountant in connection with a specified transaction made by the claimant; knew that the claimant intended to rely upon 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.  N.J.S.A. 2A:53A-25(b)(2)(a), (b), (c). 

In Dickerson, Ernst & Young was hired by Twin County Grocers, Inc. to conduct audits of financial statements.   Apparently, the audits were performed negligently for four years.  As a result, they failed to disclose that one of the directors had perpetrated fraud, which adversely affected Twin County and its members.  The plaintiffs were seventeen corporations that owned and operated supermarkets and were members or stockholders of Twin County Grocers, Inc., a wholesale distributor of supermarket products described as a cooperative serving the needs of supermarket members.  Most of the individual owners of the corporations were also members of Twin County Cooperative's Board of Directors.  However, Ernst & Young's accounting services were rendered to Twin County as the client. 

The plaintiff's complaint failed to satisfy the statute because it did not allege a transaction between the client, Twin County, and the plaintiffs.   Also, the complaint did not allege that the plaintiffs were specifically identified as possible claimants.  In addition, the plaintiffs failed to allege any specific transaction in which they were going to engage with Twin County.  Also, there was nothing in the complaint to suggest that Ernst & Young provided any expression directly to the plaintiffs or any expression reflecting an understanding that the plaintiffs intended to rely on the audits.  In addition, the plaintiffs were members of the Twin County Cooperative, which was not formally organized as a buying cooperative under New Jersey law.  Rather, Twin County was a New Jersey corporation in which the plaintiffs were shareholders. Therefore, there was no special status that the plaintiffs achieved by virtue of their announced cooperative purpose that would distinguish them from individual shareholders of an accountant's corporate client.  

The court found that the plaintiffs were not clients of Ernst & Young within the statutory definition.  Also, the plaintiffs' reliance on the annual audit report alone did not satisfy the "specified transaction" definition in the statute, i.e., a particular transaction between a client and a claimant.

Accordingly, the Supreme Court affirmed the decision of the Appellate Division dismissing the plaintiffs' claims.

*Jack, a shareholder in our Cherry Hill, NJ office, can be reached at (856) 414-6021 or jslimm@mdwcg.com.