Providence County Superior Court PB 13-2069 Michael A.
Silverstein Associate Justice.
Plaintiff: Michael T. Eskey, Esq.
Defendant: Susan E. Cohen, Pro Hac Vice Susan M. Silva, Esq.
Lindsey A. Gil, Esq.
Present: Suttell, C.J., Goldberg, Flaherty, Robinson, and
William P. Robinson III Associate Justice.
plaintiff, The Rhode Island Industrial-Recreational Building
Authority (IRBA), appeals from an April 27, 2017 judgment in
Providence County Superior Court entering judgment for Feeley
& Driscoll, P.C. (Feeley) on all claims by IRBA and
reflecting the previous grant of summary judgment in favor of
Feeley by that court. IRBA avers that the hearing justice erred
in holding that Feeley did not owe a duty of care to IRBA as
a third-party with respect to what IRBA alleges was a
negligently prepared report by Feeley, an accounting firm, on
which IRBA posits it relied. Initially, IRBA argues that this
Court should adopt the "Restatement Rule" for
assessing whether or not a duty exists "between an
accountant-auditor and an aggrieved third party * * *."
It proceeds to contend that the hearing justice misapplied
the Restatement Rule and thus erred in granting summary
judgment in Feeley's favor.
reasons set forth in this opinion, we affirm the judgment of
the Superior Court.
facts in this case are largely undisputed. In setting forth
those facts, we draw upon the bench decision of the hearing
justice as well as other documents contained in the record.
We shall summarize in chronological order the transactions
which form the factual basis of this case.
is an accounting firm that prepared audited annual financial
statements for Capco Steel, LLC and Capco Endurance, LLC
(collectively Capco). The report at issue in this case is the
report prepared by Feeley for Capco for the year 2009 (the
2009 Audit Report). It is that report which IRBA contends it
relied on and which it further contends was negligently
prepared by Feeley.
February of 2010, Webster Bank (Webster) agreed to provide
Capco with a twenty million dollar revolving line of credit.
As part of that agreement, Webster also agreed to make a six
million dollar term loan to Capco by purchasing six million
dollars of bonds from the Rhode Island Industrial Facilities
Corporation. IRBA agreed to insure those bonds up to the
amount of five million dollars. Accordingly, two separate
transactions ensued-one for the line of credit and one for
March of 2010, the twenty million dollar line of credit
involving Capco and Webster closed (the original line of
credit transaction). Webster's "Summary of Committed
Terms and Conditions," which was given to Capco before
the closing on that loan, included the requirement that Capco
provide the bank over the course of the term of the loan
"annual CPA-prepared, audited consolidated financial
statements * * *."
April of 2010, after the original line of credit transaction
closed but before the bond transaction involving IRBA closed,
Feeley issued the 2009 Audit Report to Capco, wherein it
indicated that Capco had earned a profit of $552, 000 in
2009. Subsequently, on June 15, 2010, the bond transaction
closed (the original bond transaction). Significantly, Capco
did not provide IRBA with a copy of the 2009 Audit Report
either at or before the closing on the original bond
transaction, although a copy of the 2009 Audit Report was
provided to IRBA sometime thereafter. Given that the basis of
IRBA's case against Feeley is IRBA's alleged reliance
on the purportedly negligently prepared 2009 Audit Report, it
is undisputed that we are not concerned in this
action with IRBA's reliance on the 2009 Audit Report with
respect to either the original line of credit transaction or
the original bond transaction; IRBA could not have relied on
a document it did not have.
early 2011, Capco sought to extend its revolving line of
credit to twenty-three and a half million dollars for a
period of six months (the first "overline"
request). In March of 2011, Capco and Webster requested
IRBA's consent to the temporary extension, and IRBA did
consent (the first credit increase). At that time, IRBA had
been provided with the 2009 Audit Report. IRBA contends that
it relied on the 2009 Audit Report in approving the first
credit increase. Feeley's counsel agreed at oral argument
before this Court that, for the purpose of the instant
appeal, we need be concerned only with IRBA's alleged
reliance on the 2009 Audit Report with respect to the first
credit increase; it is that transaction, and only that
transaction, that is at issue in this case. Specifically, we
must determine whether or not Feeley owed a duty of care to
IRBA with respect to IRBA's alleged reliance on the 2009
Audit Report in consenting to the first credit increase.
of 2011, Capco's relationship with Feeley had been
terminated, and Capco eventually hired a different auditing
firm. IRBA contends that the auditing firm that succeeded
Feeley indicated that the 2009 Audit Report was erroneous and
that Capco had actually lost approximately one and a half
million dollars in 2009. Feeley does not concede that the
2009 Audit Report was erroneous or negligently prepared.
August of 2011, a request was again made to IRBA to consent
to a further extension of Capco's line of credit to over
twenty-eight million dollars (the second "overline"
request), and IRBA was also asked to subordinate its security
interest to that of Webster. IRBA agreed to both requests
(the second credit increase).
in March of 2012, Capco failed to make required payments on
the bonds, thus triggering IRBA's obligation as the
insurer of five million dollars worth of the bonds.
1, 2013, IRBA filed the instant action against Capco, Feeley,
and numerous other defendants. For the purposes of the
instant appeal, we are concerned with IRBA's allegations
of negligence only as they relate to Feeley.
August of 2015, Feeley moved for summary judgment. In a
January 15, 2016 order, the hearing justice granted the
parties additional time for discovery until February 29,
2016, and he permitted Feeley to file a revised motion for
summary judgment after February 29, 2016. In accordance with
that order, on October 20, 2016, Feeley renewed its motion
for summary judgment, which was predicated on its contention
that it did not owe a duty to IRBA with respect to the 2009
March 3, 2017, the hearing justice rendered a bench decision
granting Feeley's renewed motion for summary judgment.
The hearing justice limited his decision to addressing the
issue of whether or not Feeley owed a duty to IRBA as a
matter of law. The hearing justice acknowledged that this
Court had not as of then opined on what test should be
applied to determine whether or not a duty exists between an
accountant/auditor and a third party (i.e., a person
or entity that was not at the relevant point in time a client
of the accountant/auditor). After referencing the three
different tests employed by various other courts, the hearing
justice chose to apply the one which he characterized as
"the Restatement approach" (the Restatement rule),
determining that it "struck a proper balance * *
*." The hearing justice detailed the Restatement rule as
"The Restatement (Second) of Torts § 522 limits an
accountant's liability for negligently prepared financial
statements to loss incurred:
"(a) [B]y the person or one of a limited group of
persons for whose benefit and guidance acts to supply the
information * * * and
"(b) [T]hrough reliance upon it in a transaction that he
intends the information to influence * * * or in a
substantially similar transaction." (Internal quotation
hearing justice then concluded that the first credit increase
and the second credit increase were "non-substantially
similar" to the original bond transaction. He noted that it
was the original bond transaction that Feeley "might
have known of when it issued the 2009 audited
financials." Thus, he then held that, under the
Restatement rule, Feeley owed no duty to IRBA.
April 10, 2017, an order entered granting Feeley's
renewed motion for summary judgment. Subsequently, on April
27, 2017, judgment entered in Feeley's favor on all of