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Despite Lack of Formal Relationship, Accountant Can Be Liable In Fraud & Negligence, NY Appeals Court Holds


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1/1/2016
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While it is true that, generally speaking, you can't recover in fraud or negligence against someone unless you actually have an agreement with them (or in legal terms, are "in privity"), there is a narrow - but important - exception to this rule. And that is when the relationship is close enough that they're no longer at arms' length, or as the Appellate Court in its October 26 opinion in Seaview Mezzanine Fund, LP v. Ramson put it, "approaching privity." In Seaview, the Plaintiff, a funding corporation, extended a capital loan to the defendant corporation based, in large part, on the defendant's accountants' representations (which turned out to be misrepresentations) about the defendant's economic situation. After the defendant defaulted, the plaintiff learned that the accountants willfully exaggerated the defendant'€™s net worth and financial condition, notwithstanding that they knew that the plaintiff intended to rely upon this information in deciding whether to extend the loan to their client (the defendant). In denying the accountants’ motion to dismiss the claims against them, the Court stated, in pertinent part, as follows: "[W]e agree with the motion court that plaintiff has alleged the existence of a relationship sufficiently approaching privity so as to allow plaintiff to assert claims against the [accountants] in the absence of a direct contractual relationship ... Plaintiff also properly pled ... the causes of action for fraud ... alleging that the [accountants] knowingly made false representations regarding the [defendant's] finances ... including exaggerating their net worth and financial condition by underreporting a certain loan, failing to disclose the existence of another loan and misrepresenting the status of an arbitration proceeding." At this point, something should be made clear: this decision is only Round 1; it does not, by any means, suggest that the plaintiff has won this case.



Category: Business Litigation

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