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E. Dickerson & Sons, Inc. v. Ernst & Young

May 06, 2004

E. DICKERSON & SON, INC., ESTEVEZ GROUP, INC., FOOD CIRCUS SUPER MARKETS, INC., FOOD KING, INC., FRANELEN, INC., CHARLANN, INC., 444 FULTON MANAGEMENT CORP., HARP MARKETING CORPORATION, LJV, INC., MANYFOODS, INC., NICHOLAS MARKETS, INC., NORKUS ENTERPRISES, INC., RAMLAC CORPORATION/BELL BEEF CO., SIDNEY CHARLES MARKETS, INC., SUPERMARKET ACQUISITION CO., LLC, V & V SUPERMARKETS, INC., OLIVA SUPERMARKETS, LLC AND FOODTOWN, PLAINTIFFS-APPELLANTS,
v.
ERNST & YOUNG, LLP, DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 361 N.J. Super. 362 (2003).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

Plaintiffs, seventeen corporations owning and operating supermarkets, are members or stockholders of Twin County Grocers, Inc. (Twin County), a wholesale distributor of supermarket products, described as "a cooperative organization serving the mutual need of supermarket members..." Most of the individual owners of the corporations were also members of Twin County Cooperative's Board of Directors. Twin County hired Ernst & Young, a public accounting firm, to conduct audits of its financial statements. The annual audits were performed negligently for four years and, as a result, failed to disclose that one of the directors had perpetrated numerous frauds adversely affecting Twin County and its members, including plaintiffs.

Plaintiffs sued Ernst & Young, alleging that its negligence in performing audits for Twin County caused them damages. In their complaint, plaintiffs allege that Ernst & Young knew that the members of Twin County's Board of Directors, including the plaintiffs, relied on Ernst & Young's audits in connection with their individual store operations, including but not limited to, their individual decisions concerning the nature and extent of their continued participation in the cooperative. Plaintiffs further allege that Ernst and Young breached a fiduciary duty to inform them about the fraudulent acts and that, as beneficiaries of the engagement agreement hiring the accounting firm, Ernst and Young had a written obligation to report directly to the Twin City Board of Directors and their respective operating entities.

Ernst & Young filed a motion to dismiss for failure to state a claim upon which relief can be granted, which the trial court granted. On appeal, the Appellate Division affirmed the decision of the trial court to dismiss the complaint, finding that the allegations of the complaint do not meet the requirements of N.J.S.A. 2A:53A-25 (the statute), which governs the negligence liability of accountants to third parties for all transactions entered into after March 17, 1995. After reviewing the statutory language and legislative history, the Appellate Division concluded that the claims of the seventeen corporate plaintiffs arising from allegedly inaccurate annual audits did not satisfy the requirements for accountant third-party liability pursuant to the statute.

The Supreme Court granted certification.

HELD: Plaintiff corporations were not the client of Ernst & Young within the statutory definition of N.J.S.A. 2A:53A-25 and general reliance by these individual corporate shareholders of Twin County on annual audits was not sufficient to satisfy the statutory conditions for liability and confer a cause of action for accounting negligence.

1. Ernst & Young's accounting services were rendered to Twin City as the "client," which was driven into bankruptcy and liquidation by the fraudulent conduct of its management. Thus, plaintiffs must satisfy subsections 2(a), (b), and (c) of the statute for Ernst & Young to be liable to them as third parties. As noted by the Appellate Division, none of those conditions was satisfied by the claims pleaded in the complaint. Thus, the Court affirms the decision of the Appellate Division substantially for the reasons stated in its opinion. (Pp. 2-4)

2. The complaint does not allege a transaction between the client, Twin County, and the claimants, the plaintiffs; therefore, subsection 2(a) is not satisfied. In addition, the complaint does not allege that plaintiffs were specifically identified as possible claimants. The assertion that plaintiffs' relied on audit services in connection with their individual decisions to continue participating in the cooperative fails to allege any specific transaction in which plaintiffs were going to engage with the client. Thus, subsections 2 (a) and (b) are not satisfied. Lastly, the complaint fails to satisfy subsection2(c) because it contains no language suggesting that Ernst & Young provided any expression directly to plaintiffs or any expression reflecting an understanding that plaintiffs intended to rely on the audits. (P. 4)

3. The manifest legislative intent in adopting N.J.S.A. 2A:53A-25 was to limit the impact of the Court's decision in H. Rosenblum v.Adler, which expanded the scope of accountants' liability to all reasonably foreseeable claimants, including stockholders and public investors. As noted in the sponsor statement of the bill, the statute would restore the concept of privity to accountants' liability toward third parties. (Pp. 5-6)

4. Most of the individual owners of plaintiff corporations were members of the "Twin County Cooperative;" however, Twin County was not formally organized as a buying cooperative under New Jersey law. Rather, Twin County was a New Jersey general corporation in which these plaintiffs were shareholders. Thus, there is no special status that plaintiffs achieved by virtue of their announced cooperative purpose that would distinguish them from the individual shareholders of an accountant's corporate client. Plaintiffs were not clients of Ernst & Young within the statutory definition and plaintiffs' reliance on annual audit report alone does not satisfy the "specified transaction" definition in the statute, that is, "a particular transaction between a client and a claimant." (Pp. 6-9)

Judgment of the Appellate Division is AFFIRMED.

CHIEF JUSTICE PORITZ and JUSTICES LONG, VERNIERO, and ZAZZALI and JUDGES SKILLMAN and KESTIN (temporarily assigned) join in JUDGE KING's opinion. JUSTICES LaVECCHIA, ALBIN and WALLACE did not participate.

The opinion of the court was delivered by: Judge King ...


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