203 A.3d 494
R.I.2019Background
- Feeley & Driscoll (an accounting/auditing firm) issued audited financial statements for Capco for 2009 (the 2009 Audit Report). IRBA later received that report.
- Webster Bank made a $20M revolving credit facility to Capco and purchased $6M of bonds; IRBA insured up to $5M of those bonds. Capco was contractually required to provide annual audited financials during the term of the credit/bond arrangements.
- After the 2009 report was issued, Capco requested a short-term increase (first credit increase) to its credit line; IRBA consented and says it relied on the 2009 Audit Report in so consenting. Feeley disputes negligence and whether IRBA relied on the report for that transaction.
- IRBA sued Feeley for negligence after Capco defaulted on bonds; Feeley moved for summary judgment arguing it owed no duty to IRBA under the applicable legal standard for third-party accountant liability.
- The Superior Court granted summary judgment for Feeley applying the Restatement (Second) of Torts § 552 test; Rhode Island Supreme Court affirmed, holding Feeley owed no duty to IRBA as a matter of law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What rule governs accountant liability to third parties? | Bowen allows third-party suits; adopt a rule that permits recovery here. | Restatement §552 is the appropriate middle ground. | Court adopted the Restatement (Second) Torts §552 approach. |
| Did Feeley owe a duty because it intended the 2009 report be used during the term of the transaction? | Feeley knew audited statements would be used by Webster/IRBA during the credit/bond term, so liability follows. | That assertion effectively advances a foreseeability standard; Restatement focuses on intent/knowledge at time of report. | Rejects plaintiff; foreseeability alone is insufficient under §552—no duty on that basis. |
| Was the first credit increase "substantially similar" to the original transactions (so liability attaches)? | The parties and general transaction type were the same; amount change was minor and IRBA's exposure remained $5M. | The increase materially changed the credit terms (17.5% increase, different risks) and was not what the auditor reasonably perceived when issuing the report. | Held not substantially similar; no duty under §552. |
| Did Feeley "authorize" Capco's use of the 2009 report (creating duty)? | Feeley reviewed Capco’s credit request pre-submission and contract language required prepublication review, implying authorization. | Minimal inclusion of audit data and absence of affirmative consent or active participation do not amount to authorization. | Held no authorization shown; mere failure to object is insufficient to create §552 duty. |
Key Cases Cited
- Bowen Court Assocs. v. Ernst & Young, LLP, 818 A.2d 721 (R.I. 2003) (Rhode Island precedent on third-party accountant claims and setting stage for selecting a governing test)
- Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931) (origin of near-privity limitation on accountant liability)
- Nycal Corp. v. KPMG Peat Marwick LLP, 688 N.E.2d 1368 (Mass. 1998) (criticizing overly narrow near-privity rule and discussing Restatement balance)
- North Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35 (1st Cir. 2001) (articulating two-step substantial-similarity analysis under §552)
- Bily v. Arthur Young & Co., 834 P.2d 745 (Cal. 1992) (endorsing Restatement §552 as sensible middle ground)