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The Rhode Island Industrial-Recreational Building Authority v. Capco Endurance, LLC

Supreme Court of Rhode Island

March 26, 2019

The Rhode Island Industrial-Recreational Building Authority
v.
Capco Endurance, LLC et al.

          Providence County Superior Court PB 13-2069 Michael A. Silverstein Associate Justice.

          For Plaintiff: Michael T. Eskey, Esq.

          For Defendant: Susan E. Cohen, Pro Hac Vice Susan M. Silva, Esq. Lindsey A. Gil, Esq.

          Present: Suttell, C.J., Goldberg, Flaherty, Robinson, and Indeglia, JJ.

          OPINION

          William P. Robinson III Associate Justice.

         The 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.[1] 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.

         For the reasons set forth in this opinion, we affirm the judgment of the Superior Court.

         I

         Facts and Travel

         The 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.

         Feeley 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.

         In 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 the bonds.

         In 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 * * *."

         In 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.

         In 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.

         In June 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.

         In 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).

         Ultimately, 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.

         On May 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.

         In 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 Audit Report.

         On 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 follows:

"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 marks omitted.)

         The hearing justice then concluded that the first credit increase and the second credit increase were "non-substantially similar" to the original bond transaction.[2] 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.

         On 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 IRBA's ...


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