Fulton Bank, N.A. v. Sandquist, P.

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
FULTON BANK, N.A. IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
PAUL A. SANDQUIST, PATRICIA A.
ZWAAN, BARRY L. SPEVAK AND
DOWNEY, SPEVAK & ASSOCIATES, LTD.
Appellee No. 2306 EDA 2016
Appeal from the Order June 1, 2016
In the Court of Common Pleas of Chester County
Civil Division at No(s): 2016-01908-TT
BEFORE: OTT, J., RANSOM, J., and FITZGERALD, J.*
MEMORANDUM BY OTT, J.: FILED SEPTEMBER 27, 2017
Fulton Bank, N.A. (“Bank”), appeals from the order entered on June 1,
2016, which granted Barry L. Spevak1 and Downey, Spevak & Associates,
Ltd.’s (“Accountants”) preliminary objections.2 The Bank asserts the court
____________________________________________
*
Former Justice specially assigned to the Superior Court.
1
Spevak is a certified public accountant and a principal of the accounting
firm, Downey, Spevak & Associates, Ltd. See Amended Complaint,
4/19/2016, at 3.
2
The court entered a companion order on the same day, dismissing all
claims as to co-defendants Patricia Zwaan and A. Paul Sandquist. Zwaan
was the Director of Operations at HiFi House, a home theater installation
business that was founded by Saul Robbins. Sandquist was the Chief
Financial Officer/Chief Operating Officer of HiFi House. As will be discussed
(Footnote Continued Next Page)
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erred in finding that it did not present viable claims for negligent
misrepresentation, fraud, and negligence per se. Based on the following, we
affirm in part and reverse in part.
The trial court set forth the facts as follows:
This matter arises out of a relationship between High
Fidelity House, Inc. (“HiFi House” [or “HiFi”]), who is not a party
to this action, and the Bank related to a loan made to HiFi House
… by the Bank. The Accountants, since at least 1986 had been
providing accounting services, including preparation of tax
returns, financial statements, to HiFi House and had no
independent relationship with the Bank. In 2012, HiFi House
reached out to the Bank to advise that it was seeking refinancing
of its existing indebtedness. At the initial meeting,
representatives from HiFi House and the Bank met and began
introductory conversations. Following the meeting, the Bank
requested certain financial documentation in order to evaluate
HiFi House’s request for financing, which HiFi House provided,
including the 2008-2011 financial statements prepared by the
Accountants. The Bank alleges that these financial documents
contained material misrepresentations as to the financial
condition of HiFi House.
At a second meeting, the discussions focused on the 2011
Financial Statement, which the Bank alleges that the
Accountants gave to HiFi House for the express purpose of
providing to the Bank. The Bank avers that the financial
statements at issue were required to comply with generally
accepted accounting principles. Following its review of HiFi
House’s financial documentation, the Bank issued a commitment
letter to HiFi House, which accepted the terms and conditions set
forth therein. The Bank subsequently extended HiFi House a
commercial line of credit in the original principal amount of
$4,200,000. In addition, the Bank extended another loan to HiFi
House in the amount of $1,800,000.
_______________________
(Footnote Continued)
in more detail below, the Accountants provided accounting services to HiFi
House. That companion order was not appealed.
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The commitment letter required HiFi House to prepare and
submit to the Bank monthly borrowing base certificates (“BB
Certificates”), certifying the value of inventory and the amount
and age of its accounts receivable. The Accountants did not
prepare the BB Certificates.
In October of 2012, HiFi House sought an additional line of
credit to support a project at Drexel University. On January 7,
2013, the Bank extended another commercial loan to HiFi House
in the amount of $1,250,000.
The commitment letter also required that HiFi House
maintain[] certain financial ratios and other financial covenants,
which HiFi House did not meet for fiscal year 2012. However,
the Amended Complaint avers that HiFi House and Accountants
represented to the Bank that they would be cleaning up HiFi
House’s books and records moving forward. As a result, the
Bank agreed to waive the covenant violations.
In spring of 2014, the Bank alleges it learned of certain
systemic fraudulent practices of HiFi House with respect to its
accounts receivable reporting whereby HiFi [House] “refreshed”
accounts receivable that had aged to or beyond ninety (90) days
from the original date of invoice. The Bank alleges that the
Accountants were “aware” of this practice. There is no allegation
that HiFi House’s practice was initiated by or done with the
concurrence of the Accountants. The Bank alleges that the
Accountants did not take sufficient steps to determine whether
the age of the receivable remained less than one year old. This
practice, according to the Bank’s allegations, allegedly violated
generally accepted accounting principles.
The Accountants prepared a draft 2013 Financial
Statement showing a loss of $583,000 for 2013. HiFi House
again informed the Bank that it would not meet its loan
covenants. HiFi House subsequently retained a financial
management consulting company (“ESB”) which specialized in
turning around troubled companies. The Bank also engaged an
independent financial investigation of HiFi House, performed by
Trump Lender Services, Inc. (“TLS”). TLS prepared a report
which, according to the Bank, details the manner in which HiFi
House “fraudulently and intentionally manufactured inaccurate
records of inventory and accounts receivable, using same to
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induce [the Bank] into extending credit to HiFi House.” The
Bank clearly avers that HiFi House “intentionally and grossly
exaggerated and misrepresented” its inventory and accounts
receivable. HiFi House has ceased operations as of spring or
summer of 2014. It has insufficient assets to repay the Bank.
[On March 3, 2016, t]he Bank commenced litigation
against the owners of HiFi House, Saul Robbins and Jon Robbins,
in the Delaware County Court of Common Pleas.[3] In the instant
action, the Bank asserted claims, including fraud (Count I),
fraudulent misrepresentation (Count II), fraud in the inducement
(Count III), negligent misrepresentation (Count IV), [c]onspiracy
(Count V), [n]egligence [p]er [s]e (Count VI) and [c]oncerted
[t]ortious [c]onduct ([a]iding and [a]betting) (Count VII) against
Accountants.
Trial Court Opinion, 7/15/2016, at 1-4 (record citations omitted; emphasis
removed).
The Bank filed an amended complaint on April 19, 2016. The
Accountants filed preliminary objections on May 11, 2016. On June 1, 2016,
the court granted the preliminary objections and dismissed the Bank’s
amended complaint with prejudice. The Bank did not seek reconsideration
of the trial court’s decision. This appeal followed.4, 5
____________________________________________
3
The Delaware County action is not a part of the present appeal.
4
On June 21, 2016, the trial court ordered the Bank to file a concise
statement of errors complained of on appeal pursuant to Pa.R.A.P. 1925(b).
The Bank filed a concise statement on July 7, 2016. The trial court issued
an opinion pursuant to Pa.R.A.P. 1925(a) on July 15, 2016, adopting in part
its findings made in its June 1, 2016, order.
5
In its statement of questions involved, the Bank presented the following
additional issue: “Did the trial court abuse its discretion in refusing to
(Footnote Continued Next Page)
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We begin with our well-settled standard of review:
[O]ur standard of review of an order of the trial court overruling
or granting preliminary objections is to determine whether the
trial court committed an error of law. When considering the
appropriateness of a ruling on preliminary objections, the
appellate court must apply the same standard as the trial court.
Preliminary objections in the nature of a demurrer test the legal
sufficiency of the complaint. When considering preliminary
objections, all material facts set forth in the challenged pleadings
are admitted as true, as well as all inferences reasonably
deducible therefrom. Preliminary objections which seek the
dismissal of a cause of action should be sustained only in cases
in which it is clear and free from doubt that the pleader will be
unable to prove facts legally sufficient to establish the right to
relief. If any doubt exists as to whether a demurrer should be
sustained, it should be resolved in favor of overruling the
preliminary objections.
Richmond v. McHale, 35 A.3d 779, 783 (Pa. Super. 2012) (internal
citations omitted).
In the Bank’s first issue, it claims the Accountants are liable for
negligent misrepresentation pursuant to Section 552 of the Restatement
(Second) of Torts. See Bank’s Brief at 18. Specifically, the Bank states that
Section 552 applies “directly and precisely to the conduct engaged in by” the
Accountants. Id. In support of this argument, the Bank relies on Bilt-Rite
Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa. 2005),
in which the Pennsylvania Supreme Court expressly adopted Section 552.
_______________________
(Footnote Continued)
permit the filing of an amended complaint?” Bank’s Brief at 7. However, it
has abandoned that issue in the argument section of the brief. Therefore,
we need not address the claim further.
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The Bank suggests the trial court erroneously “found that Bilt-Rite applies
only to architects, and distinguishes Bilt-Rite from the instant case, based
upon the difference between architects and accountants.” Bank’s Brief at
19. The Bank contends the language in Bilt-Rite is not limited to just
architects. Id. at 19-20. Furthermore, it states:
The Bank is not aware of any Pennsylvania case directly on point
with the instant case, i.e., involving a bank seeking damages
from its borrower’s outside accountants, premised on the bank’s
reliance on the accountant’s negligent misrepresentations
contained in the accountant’s financial statements that were
prepared in connection with the accountant’s engagement with
the borrower. There seems no reason – logical, policy-based, or
otherwise – however, to exempt accountants from the
application of this holding. Bilt-Rite held that an architect,
hired by a property owner to prepare plans and specifications,
could be liable to a contractor that relied upon the architect’s
plans and specifications in preparing its bid to the owner. There
is really nothing different here, where the borrower hires the
accountant to prepare financial statements, which are then
provided to a bank, which uses them to underwrite a loan
request from its potential borrower. [The Bank]’s position vis a
vis Spevak is exactly analogous to the contractor’s position in
relation to the architect in Bilt-Rite. Spevak prepared financial
statements for HiFi pursuant to his firm’s longstanding
professional engagement with HiFI. Spevak knew that the
financial statements were to be relied upon by HiFi’s lenders. In
fact, Spevak actually provided, by email on May 3, 2012, the
financial statements that were actually delivered to the Bank[.]
Spevak met with the Bank on May 11, 2012 to discuss these
very same financial statements. The financial statements
attached as Exhibit C to the Amended Complaint contain material
misrepresentations as to the value of HiFi’s accounts receivable
and its inventory that [Accountants] knew were false. [The
Bank] relied upon and used these materials to analyze HiFi’s
financial status, and formulated its loan proposal for HiFi based
upon those financial statements. [The Bank]’s loan proposal
was, in this regard, no different from the contractor’s bid to the
owner in Bilt-Rite. The loan proposal, like the contractor’s bid,
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was accepted, and [the Bank], like Bilt-Rite, came out on the
short end of things, because of the misrepresentations.
Bank’s Brief at 21-22 (record citations omitted).
Pennsylvania has applied both the common law and Restatement
(Second) of Torts § 552 interpretations of a negligent misrepresentation
claim to case law. See Bortz v. Noon, 729 A.2d 555, 561 (Pa. 1999); Bilt-
Rite Contractors, Inc., 866 A.2d at 280, 285. The common law factors are
as follows:
Negligent misrepresentation requires proof of: (1) a
misrepresentation of a material fact; (2) made under
circumstances in which the misrepresenter ought to have known
its falsity; (3) with an intent to induce another to act on it; and
(4) which results in injury to a party acting in justifiable reliance
on the misrepresentation. The elements of negligent
misrepresentation differ from intentional misrepresentation in
that the misrepresentation must concern a material fact and the
speaker need not know his or her words are untrue, but must
have failed to make a reasonable investigation of the truth of
these words. Moreover, like any action in negligence, there must
be an existence of a duty owed by one party to another.
Bilt-Rite, 866 A.2d at 277 (citations omitted).
Section 552 sets forth the elements in a different manner:
(1) One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the guidance of
others in their business transactions, is subject to liability for
pecuniary loss caused to them by their justifiable reliance upon
the information, if he fails to exercise reasonable care or
competence in obtaining or communicating the information.
(2) Except as stated in Subsection (3), the liability stated in
Subsection (1) is limited to loss suffered
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(a) by the person or one of a limited group of persons for whose
benefit and guidance he intends to supply the information or
knows that the recipient intends to supply it; and
(b) through reliance upon it in a transaction that he intends the
information to influence or knows that the recipient so intends or
in a substantially similar transaction. . . .
Restatement (Second) of Torts § 552 (1979).
In Bilt-Rite, supra, a school district entered into a contract with an
architectural firm, The Architectural Studio (“TAS”), to design a new school.
The district also solicited bids from contractors for all aspects of the project,
including the firm’s “plans, drawings, and specifications in the bid documents
supplied to the contractors.” Bilt-Rite, 866 A.2d at 272. The school district
awarded the general construction contract to Bilt-Rite, who was the lowest
responsible bidder. Id. “TAS’s plans provided for the installation of an
aluminum curtain wall system, sloped glazing system and metal support
systems, all of which TAS expressly represented could be installed and
constructed through the use of normal and reasonable construction means
and methods, using standard construction design tables.” Id. After
construction commenced, though, Bilt-Rite discovered the work required it
“to employ special construction means, methods and design tables, resulting
in substantially increased construction costs.” Id. Bilt-Rite then filed a suit
against TAS based upon a theory of negligent misrepresentation pursuant to
Section 552, “claiming that TAS’s specifications were false and/or
misleading, and seeking damages for its increased construction costs.” Id.
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at 273. TAS filed preliminary objections, which were sustained by the trial
court and affirmed by a panel of this Court. Id. at 273-274.
The Pennsylvania Supreme Court granted review to determine
the first impression question of whether a building contractor
may maintain a negligent misrepresentation claim against an
architect for alleged misrepresentations in the architect’s plans
for a public construction contract, where there was no privity of
contract between the architect and the contractor, but the
contractor reasonably relied upon the misrepresentations in
submitting its winning bid and consequently suffered purely
economic damages as a result of that reliance.
Id. at 272. In analyzing the issue, the Supreme Court opined:
We are persuaded by [] decisions from our sister jurisdictions
that: (1) this Court should formally adopt Section 552 of the
Restatement (Second), which we have cited with approval in the
past, as applied by those jurisdictions in the architect/contractor
scenario; (2) there is no requirement of privity in order to
recover under Section 552; and (3) the economic loss rule does
not bar recovery in such a case. Recognizing such a cause of
action, with such contours, is consistent with Pennsylvania’s
traditional common law formulation of the tort of negligent
misrepresentation.
Section 552 sets forth the parameters of a duty owed when one
supplies information to others, for one’s own pecuniary gain,
where one intends or knows that the information will be used by
others in the course of their own business activities. The tort is
narrowly tailored, as it applies only to those businesses which
provide services and/or information that they know will be relied
upon by third parties in their business endeavors, and it includes
a foreseeability requirement, thereby reasonably restricting the
class of potential plaintiffs. The Section imposes a simple
reasonable man standard upon the supplier of the information.
As is demonstrated by the existing case law from Pennsylvania
and other jurisdictions, and given the tenor of modern business
practices with fewer generalists and more experts operating in
the business world, business persons have found themselves in a
position of increasing reliance upon the guidance of those
possessing special expertise. Oftentimes, the party ultimately
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relying upon the specialized expertise has no direct contractual
relationship with the expert supplier of information, and
therefore, no contractual recourse if the supplier negligently
misrepresents the information to another in privity. And yet, the
supplier of the information is well aware that this third party
exists (even if the supplier is unaware of his specific identity)
and well knows that the information it has provided was to be
relied upon by that party. Section 552 is not radical or
revolutionary; reflecting modern business realities, it merely
recognizes that it is reasonable to hold such professionals to a
traditional duty of care for foreseeable harm.
Id. at 285-286. Consequently, the Supreme Court held:
[W]e hereby adopt Section 552 as the law in Pennsylvania in
cases where information is negligently supplied by one in the
business of supplying information, such as an architect or design
professional, and where it is foreseeable that the information will
be used and relied upon by third persons, even if the third
parties have no direct contractual relationship with the supplier
of information. In so doing, we emphasize that we do not view
Section 552 as supplanting the common law tort of negligent
misrepresentation, but rather, as clarifying the contours of the
tort as it applies to those in the business of providing
information to others.
Id. at 287.
Turning to the present matter, in its Rule 1925(a) opinion, the trial
court addressed the issue of whether Bilt-Rite and Section 552 were
applicable to the case. The court opined:
In Bilt-Rite, the Pennsylvania Supreme Court considered on first
impression the question of whether a viable negligent
misrepresentation claim could be asserted in the context of an
architect/contractor/no privity scenario. After a lengthy opinion,
the Court held that (1) the Supreme Court should formally adopt
§ 552 of the Restatement (Second) of Torts as applied in the
architect/contractor scenario; (2) there is no requirement of
privity in order to recover under § 552 in the architect/contractor
scenario; and (3) the economic loss rule did not bar recovery in
such a case. Thus, the holding appears to be limited to factual
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scenarios involving negligent misrepresentation claims by a
contractor against the architect or similar design professionals.
…
Applying the Bilt-Rite case to the instant matter, the
matters are distinguishable. Here, the issue of negligent
misrepresentation arises in the accounting context whereas Bilt-
Rite involved a general contractor bringing suit against an
architect in a school construction case. The Supreme Court’s
lengthy opinion makes this distinction clear, indicating that its
ruling applies specifically to the design professional or limited
analogous scenarios. Because the factual context differs and
Bilt-Rite’s holding appears to be limited, I sought direction from
several federal cases which were directly on point.
In Williams Controls, Inc. v. Parente, Randolph,
Orlando, Carey & Associates, 39 F. Supp.2d 517 (M.D. Pa.
1999), the buyer of a corporate division sued the seller’s
accountants for, inter alia, negligent misrepresentation. In
denying defendant-accountants[’] motion for summary
judgment, the court placed great emphasis on the fact that the
defendant-accountants were engaged for the purpose of
performing certain accounting work related to the sale at issue.
Id. at 520 (emphasis added). The court also noted that the
defendant-accountants had actual notice, prior to their
performance, that the work product would be used, inter alia, for
finalizing the purchase price. Id. at 552.
Similarly, in In re Phar-Mor, Inc. Sec. Litig. and PNC
Bank, Kentucky, Inc. v. Hous. Mortgage Corp., the courts
noted the distinction between an accounting firm engaged for a
specific purpose, e.g., to audit financial statements, or as part of
an ongoing business relationship. In re Phar-Mor, Inc. Sec.
Litig., 892 F. Supp. 676 (W.D. Pa. 1995); see also, PNC Bank,
Kentucky, Inc. v. Hous. Mortgage Corp., 899 F. Supp. 1399(W.D. Pa. 1994).
The instant matter is distinguishable in that the Amended
Complaint avers that the Accountants had a long-standing
relationship with HiFi House and performed various accounting
services for decades, including verifying the accuracy of HiFi
House’s balance sheets, preparing financial statements and
preparing tax returns. See, Amended Complaint at ¶17, ¶18 and
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¶47. They were not engaged, nor is there any allegation that
they were engaged, for the purpose of preparing financial
statements to be used in obtaining credit from the Bank, or any
other potential lending institution. It is reasonably deducible, in
the absence of averments to the contrary, that the financial
statements provided to the Bank were prepared in the regular
course of the ongoing business relationship between HiFi House
and the Accountants; that the statements were prepared for HiFi
House and no one else; and the relationship between HiFi House
and the Accountants predated any contact with this Bank by
more than twenty years.
Moreover, § 552 provides an example, Illustration 10
under comment H, which is directly on point:
A, an independent public accountant, is retained by B
Company to conduct an annual audit of the customary
scope for the corporation and to furnish his opinion on the
corporation's financial statements. A is not informed of
any intended use of the financial statements; but A knows
that the financial statements, accompanied by an auditor’s
opinion, are customarily used in a wide variety of financial
transactions by the corporation and that they may be
relied upon by lenders, investors, shareholders, creditors,
purchasers and the like, in numerous possible kinds of
transactions. In fact B Company uses the financial
statements and accompanying auditor’s opinion to obtain a
loan from X Bank. Because of A’s negligence, he issues an
unqualifiedly favorable opinion upon a balance sheet that
materially misstates the financial position of B Company,
and through reliance upon it X Bank suffers pecuniary loss.
A is not liable to X Bank. See, Williams Controls, Inc.,
supra, at 537, fn. 10.
In accordance with this illustration, the Accountants could
not be held liable to the Bank with respect to any financial
statements Accountants prepared for HiFi House prior to the
Bank extending credit because there was no factual allegation
that the Accountants understood, prior to performing the
accounting services at issue, e.g. the preparation of the 2011
Financial Statement, that such work would be used in connection
with HiFi House’s efforts to seek credit with any financial
institution.
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In contrast, the Amended Complaint merely alleges that
the 2011 Financial Statement had been prepared and that the
Accountants at some point thereafter provided it to HiFi House
upon request of the Bank for the Bank’s review. Thus, the
distinction is small but important – there is no allegation that the
Accountants prepared the financial documentation with actual
notice that it would be used by the Bank (or some other lending
institution as opposed to internal use by HiFi House); rather, the
Accountants prepared the documents prior to the relationship
with the Bank, but subsequently transmitted the documentation
upon request to HiFi House, with knowledge that it was going to
be reviewed by the Bank.
Perhaps more importantly, however, is the absence of any
allegation regarding a pecuniary interest on behalf of the
Accountants in the transaction between HiFi House and the
Bank, an essential element of the claim for negligent
misrepresentation. Instead, the allegation that is at the heart of
the Bank’s negligent misrepresentation claim, to wit, that
Accountants breached their duty to prepare financial statements
and review balance sheets in accordance with generally accepted
accounting principles, is the very essence of a claim for
professional negligence. The Bank is not permitted to
circumvent the law through artful pleading to recast a
professional negligence claim as one for negligent
misrepresentation. See, In re Phar-Mor, Inc., supra, 892 F.
Supp. 676 at 693; see also, PNC Bank, Kentucky, Inc., supra,
899 F. Supp. at 1408.
Trial Court Opinion, 7/15/2016, at 7-12. While the trial court’s analysis is
thorough, we are constrained to disagree.
We find the court applied a too narrow reading to Bilt-Rite in
determining that the case only concerns disputes involving an
architect/contractor scenario. Rather, we conclude Bilt-Rite can be applied
to other factual scenarios where a party is providing professional information
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that is designed to be relied upon by a third party. Bilt-Rite, 866 A.2d at
287. As the Bank argues,6 the Bilt-Rite holding points to the architect or
design professional example as an illustrative suggestion, but the Court’s
wording does not impose a limitation on which kind of situation Section 552
can apply. See id. (“[W]e hereby adopt Section 552 as the law in
Pennsylvania in cases where information is negligently supplied by one in the
business of supplying information, such as an architect or design
professional, and where it is foreseeable that the information will be used
and relied upon by third persons, even if the third parties have no direct
contractual relationship with the supplier of information.”) (emphasis
added).
Moreover, our research has revealed that, while limited, precedence
has applied Section 552 and Bilt-Rite to a non-architect/contractor dispute.
In Kirschner v. K&L Gates LLP, 46 A.3d 737, 741 (Pa. Super. 2012),
appeal denied, 65 A.3d 414 (Pa. 2013), a bankruptcy trustee for a bottle
beverage corporation brought an action against the retained law firm and an
investigating fraud company, claiming, inter alia, negligent
misrepresentation pursuant to Section 552 and Bilt-Rite. On appeal, the
issue was whether the trial court erred in dismissing the trustee’s negligent
misrepresentation claim at the preliminary objection stage because the
____________________________________________
6
See Bank’s Brief at 20.
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trustee alleged: (1) both defendants were professional firms in the business
of supplying information; (2) they provided false information concerning the
absence of any evidence of fraud; and (3) the bottle beverage company, to
its substantial financial harm, justifiably relied on their false information.
Kirschner, 46 A.3d at 747. A panel of this Court determined that Section
552 and Bilt-Rite did apply and the amended complaint averred a legally
sufficient cause of action for negligent misrepresentation. Kirschner, 46
A.3d at 760.
Additionally, with respect to the court’s reliance on Williams
Controls, Inc., supra, and In re Phar-Mor, Inc. Sec. Litig., supra, we
note that while persuasive, “decisions of the federal district courts ... are not
binding on Pennsylvania courts, even when a federal question is involved.”
Kubik v. Route 252, Inc., 762 A.2d 1119, 1124 (Pa. Super. 2000) (citation
omitted); see also Feleccia v. Lackawanna Coll., 156 A.3d 1200, 1214
n.6 (Pa. Super. 2017). It merits mention that both federal cases relied upon
by the trial court in the present matter predate the Pennsylvania Supreme
Court’s decision in Bilt-Rite.7
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7
Likewise, Illustration 10 under comment H of Section 552, which was
noted by Williams Controls, Inc. and cited by the trial court in the present
matter, was not specifically adopted by the Bilt-Rite Court. Further, as will
be discussed below, the facts set forth in Illustration 10 are distinguishable
from the present matter. Here, as averred by the Bank, the Accountants
were informed of the intended use of the financial statements whereas in the
(Footnote Continued Next Page)
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Furthermore, returning to the trial court’s analysis of the allegations
set forth in the Bank’s amended complaint, see Trial Court Opinion,
7/15/2016, at 10-12, we note the Bank alleged the following relevant facts:
32. On the evening of May 3, 2012, at or about 7:04 p.m.,
Sandquist e-mailed [Betsy] Niedziejko [of the Bank] HiFi House
Financial Statements (2008 through 2011), prepared by
Defendant Spevak.
…
36. [Jon A.] Robbins,[8] together with Spevak and Sandquist,
had a follow-up meeting with Niedziejko and Ken Goddu of
Fulton on May 11, 2012 (the “Second Meeting”).
37. During this Second Meeting, discussions occurred between
Robbins, Spevak, Sandquist (on behalf of HiFi House) and
Niedziejko and Goddu, regarding HiFi House’s financial
statements and financial conditions.
38. The discussions regarding HiFi House’s financials were
primarily focused on the 2011 Financial Statement, prepared by
[the Accountants], which Spevak gave to Sandquist for the
express purpose of Sandquist transmitting same to Niedziejko
prior to the Second Meeting.
…
44. In preparing financial statements, one of Spevak’s inquiries
under the review engagement was to ascertain whether HiFi
House’s accounts receivable were properly reported as current
and collectible.
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(Footnote Continued)
illustration, the accountant merely knew the documents were customarily
used in a wide variety of financial transactions by the corporation.
8
Robbins was the son of the founder of Hifi House and eventually became
Chief Executive Officer and President of the business. See Amended
Complaint, 4/19/2016, at 4.
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45. Spevak testified that accounts receivable may be reported
on a balance sheet as current assets if they are less than one
year old and deemed collectible by management.
46. Financial Statements, such as those prepared and furnished
by [the Accountants] to [the Bank], must be free of material
misstatements and must be fairly presented in accordance with
generally accepted accounting principles.
…
48. Spevak knew that the 2011 Financial Statement would be
used by [the Bank] to assess the financial condition of HiFi
House in response to HiFi’s request for credit from [the Bank].
…
Count IV: Negligent Misrepresentation
…
167. [The Accountants] misrepresented the state of HiFi House’s
accounts receivable and inventory, through information and
documents submitted by [the Accountants] to [the Bank] for
purposes of obtaining loans.
168. In the alternative that [the Accountants] did not knowingly
make such misrepresentations, they were made negligently
which induced [the Bank] into believing that HiFi House was in a
better financial position than it actually was.
169. Assuming arguendo that their acts were not intentional,
[the Accountants] failed to exercise reasonable care or
competence in providing accurate financial information to [the
Bank], whereby such inaccuracies and misrepresentations
improperly inflated HiFi’s borrowing base for Loans I, [II,] and
III[9] and the value of the collateral for Loans I, II, and III.
____________________________________________
9
Loan I pertains to a commercial line of credit the Bank extended to HiFi
House in the original principal amount of $4,200,000.00 on June 11, 2012.
Loan II pertains to a commercial line of credit the Bank extended to HiFi
(Footnote Continued Next Page)
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170. [The Accountants] played a role, through their actions
and/or inactions aforesaid, in misrepresenting material
information and documentation to [the Bank] for purposes of
securing and maintaining Loans I, II, and III.
171. Assuming arguendo that their acts were not intentional,
[the Accountants]’ negligent accounting of its financial condition,
including age and value of its accounts receivable and inventory,
induced [the Bank] to extend Loans I, II, and III.
172. [The Bank]’s reliance upon the false figures reported by
[the Accountants] on behalf of HiFi House was justifiable as [the
Bank] should not reasonably expect a potential borrower to
violate the law in providing [the Bank] with financial information.
173. Further, the actual books and records of HiFi House were
kept in such a manner that without knowing of HiFi’s improper
accounting practices, [the] Bank would have been able to
determine same.
174. [The Bank]’s inability to now collect on the substantial
indebtedness owed thereto by HiFi House, causing substantial
economic harm, is a proximate and direct result of the Bank’s
justifiable reliance on [the Accountants]’ misrepresentations.
Amended Complaint, 4/19/2016, at 29-30.
Contrary to the trial court’s comments, we find that at this stage of the
pleadings, the Bank presented a plausible claim alleging a legally sufficient
cause of action for negligent misrepresentation. In accordance with Section
552, the Bank alleged: (1) the Accountants were in the business of
_______________________
(Footnote Continued)
House in the original principal amount of $1,800,000.00 on the same day.
Loan III pertains to a commercial loan the Bank extended to HiFi House in
the original principal amount of $1,250,000.00 on January 7, 2013. See
Amended Complaint, 4/19/2016, at ¶¶ 56, 61, and 69.
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supplying professional accounting information for HiFi House; (2) they
supplied information regarding the financial condition of HiFi House for the
preparation of a May 2012 meeting with the Bank; (3) Spevak was present
at that meeting where the 2011 financial statements were discussed; and
(4) the Bank relied on this information and extended multiple loans to HiFi
House. Indeed, the allegations in the amended complaint appear to aver the
Accountants prepared the documents for the express purpose of the May
2012 meeting with the Bank. Accordingly, we reverse the trial court’s June
1, 2016, order granting the Accountant’s preliminary objections as to the
negligent misrepresentation cause of action and reinstate the Bank’s
amended complaint as to that count.
In its next argument, the Bank contends its amended complaint set
forth a claim of fraud. Bank’s Brief at 28. Specifically, it states:
To be liable for fraud, Spevak need only to have had reason to
expect that [the Bank] would act based on the false and
misleading financial statements that he prepared. As the
Amended Complaint makes clear, the only purpose for the
practice of “refreshing” the accounts receivable was to deceive
the only entity relying on the accuracy of those numbers: the
lender. There is no legitimate business purpose for this practice.
…
As there is no legitimate basis for the false representations to
[the Bank], the totality of the circumstances as pled in the
Amended Complaint shows Spevak’s intent to deceive [the
Bank].
Id. at 29-30 (citations omitted). Moreover, the Bank claims:
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The trial court … disregards the overall substance of the scheme
engaged in by HiFi and Spevak, which is adequately set forth in
the Amended Complaint, and elevates form over substance,
relying largely upon the single fact that Sandquist was the
person that physically emailed the financial statement to the
Bank, and that Spevak did not hand them directly to the Bank.
The trial court also takes the position that any complaint as to
the content of the financial statement, lies with the accountant’s
client, HiFi. These points, however, do not address the issue of
“particularity” of a particular averment. Rather, these points
illustrate a fundamental policy position, which, in reality, attends
more directly to the applicability of § 552 to this case. It is not
an indictment as to a lack of specifics in the pleading.
As set forth above, the financial statements prepared by Spevak
were filled with false information, intentionally so, in order to
inflate the value of HiFi’s assets, and to induce the Bank in to
lending more money than it otherwise would.
Id. at 31-32.
“Fraud is a generic term used to describe anything calculated to
deceive, whether by a single act or combination, or by suppression of the
truth, or suggestion of what is false, whether it be by direct falsehood or by
innuendo, by speech or silence, word of mouth, or look or gesture.”
Blumenstock v. Gibson, 811 A.2d 1029, 1034 (Pa. Super. 2003), appeal
denied, 828 A.2d 349 (Pa. 2003).
To prove fraud, a plaintiff must demonstrate by clear and
convincing evidence: (1) a representation; (2) which is material
to the transaction at hand; (3) made falsely, with knowledge of
its falsity or recklessness as to whether it is true or false; (4)
with the intent of misleading another into relying on it; (5)
justifiable reliance on the misrepresentation; and (6) the
resulting injury was proximately caused by the reliance.
Unsupported assertions and conclusory accusations cannot
create genuine issues of material fact as to the existence of
fraud.
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Id. (internal citations omitted).
Here, in its amended complaint, the Bank alleged its fraud claim as
follows:
134. [The Accountants] knew that the financial statements,
information and documentation maintained, prepared and
transmitted by HiFi House to [the Bank] would be used by [the
Bank] to assess the financial condition of HiFi House, and to
develop the lending limits and borrowing base for Loans I, II and
III.
135. [The Accountants] also knew that their business assets,
the majority value of which was accounts receivable and
inventory, was the collateral for Loans I, II, and III and thus a
primary consideration of [the Bank] in determining whether to
extend credit to HiFi.
136. A large portion of Loan I and Loan II was used to pay off
HiFi’s obligations to its prior lender, M&T Bank, and thus without
the amount of funds ultimately loaned by [the Bank], there
would have been no lending relationship at all between HiFi and
Fulton.
137. [The Accountants] acted in bad faith with regard to the
information and documentation – comprised of material
misrepresentations – provided to [the Bank].
138. Each and every document HiFi provided to [the Bank] with
representations of HiFi’s assets, materially misrepresented the
age and value of HiFi House’s accounts receivables, concealed
HiFi House’s advanced billing practices, and misstated the value
of HiFi’s inventory.
139. The Financial Statements prepared and furnished by [the
Accountants] were known by [the Accountants] not to present a
fair or accurate image of HiFi’s financial position, contrary to
generally accepted accounting principles.
140. [The Accountants]’ misrepresentation of HiFi House’s
finances was intentional.
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141. Consequently, the misrepresentations fraudulently inflated
HiFi House’s lending base and the value of the collateral for Loan
I, Loan II, and Loan III, while concurrently concealing HiFi
House’s financial troubles from [the Bank].
142. The improper practice was known by [the Accountants]
and used and concealed by [the Accountants] to secure Loan I,
Loan II, and Loan III.
143. [The Bank] would not have extended HiFi House credit if it
knew of HiFi’s fraudulent accounting practices.
144. [The Bank] also would not have provided HiFi House with
Loan I, Loan II, and Loan III if it knew of the actual value of
HiFi’s collateral and borrowing base, as this would not have
supported lending enough money to pay off HiFi’s prior lender,
M&T Bank.
145. [The Bank]’s reliance upon the fraudulent figures reported
by [the Accountants] on behalf of HiFi House was justifiable, as
[the Bank] should not reasonably expect a potential borrower to
violate the law in providing [the Bank] with financial information.
146. Further, the actual books and records of HiFi House were
kept in such a manner that, without knowing of HiFi’s fraudulent
accounting practices, [the] Bank would not have been able to
determine the existence of same.
147. [The Bank]’s inability to now collect on the substantial
money loaned to HiFi House, causing substantial economic harm
to [the Bank], is a proximate and direct result of the Bank’s
justifiable reliance on [the Accountants]’ misrepresentations.
Amended Complaint, 4/19/2016, at 23-25.
In sustaining the preliminary objections regarding this claim, the trial
court found the following:
Our review of the Amended Complaint reveals that [the Bank]
has not pleaded fraud with the requisite particularity. Generally,
[the Bank] complains about financial documentation, in part
prepared by [the Accountants], which contained misleading
and/or false information regarding the financial condition of HiFi.
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However, [the Bank] specifically alleges that the HiFi Financial
Statements from 2008 through 2011 were provided to [the
Bank] by Defendant Sandquist, not [the Accountants]. Any
complaints regarding the content of the financial documents
prepared by [the Accountants] lies with its client, HiFi, and are
not properly asserted by [the Bank]. [The Bank] further alleges
that Defendant Spevak attended a meeting with [the Bank], but
does not make any specific allegations regarding
misrepresentations that were made by Defendant Spevak to [the
Bank]. Fraud is insufficiently pleaded where [the Bank] merely
complains that the financial documentation created by [the
Accountants] and provided to their client, HiFi, contained
misrepresentations. Complaints that [the Accountants] failed to
use generally accepted accounting principles sounds in
negligence, not fraud.
The Amended Complaint further alleges that Defendant Spevak
attended a subsequent meeting and, together with Defendant
Sandquist, informed [the Bank] that HiFi was unable to meet the
financial covenants for the year 2012. This is not alleged to be a
false or misleading statement. Additionally, [the Bank] claims
that Defendants Spevak and Sanquist represented that they
recently discovered the misdealings of HiFi’s former CEO, cut ties
with him, and would be “cleaning up HiFi House’s books and
records and financial practices going forward, to ensure nothing
like this happened again.” At this same meeting, [the Bank]
alleges Defendants Spevak and Sandquist represented that they
had a strategic plan to improve HiFi’s financial position. Again,
these representations are not alleged to be false; rather, they
constitute “promises” to do something in the future.
Accordingly, they cannot form the basis of a claim for fraud. The
remainder of [the Bank]’s allegations regarding [the
Accountants] similarly cannot support a claim for fraud because
they do not amount to representations or were not alleged to be
false. Thus, [the Bank] has failed to state a cognizable claim for
fraud because it does not plead each element with the requisite
level of specificity.
Order of Court, 6/1/2016, at n.1, 3 (record citations omitted). Keeping our
standard of review in mind, we conclude the trial court has thoroughly and
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accurately disposed of this fraud issue. Accordingly, we affirm on the basis
of the court’s analysis.
Lastly, the Bank asserts it set forth a viable claim of negligence per se
in its amended complaint. Banks’ Brief at 33. Specifically, it states:
The Trial Court found that the Amended Complaint failed to state
a claim for Negligence Per Se, as the relevant criminal statutes
do not exist to “secure to individuals the enjoyment of rights or
privileges to which they are entitled only as members of the
public.” This, however, is a misrepresentation of this
requirement, as the statutes relied upon in the Amended
Complaint clearly exist to protect a specific class of individual
crime victims, and not the public at large.
Id. (citation omitted). Moreover, the Bank asserted:
[The Bank]’s negligence per se claims are based upon violations
of 18 U.S.C. § 1343, related to wire fraud, and 18 Pa.C.S.A. §
4107(a)(6) related to deceptive or fraudulent business practices.
18 U.S.C. § 1343 contains a specific provision for actions that
affect a financial institution (i.e. [the Bank]), and it seems
implausible to suggest this statute is not intended to protect [the
Bank], a financial institution, as opposed to society at large.
Similarly, 18 Pa.C.S.A. § 4107(a)(6) makes it a crime to make or
induce “others” to rely on a false or misleading written
statement for the purpose of obtaining property or credit. The
“others” in the instant matter is clearly [the Bank], as opposed
to society at large. In fact, 18 Pa.C.S.A. § 104, it is clearly
stated that the purpose of Title 18 of the Crimes Code, is “[t]o
forbid and prevent conduct that unjustifiably inflicts or threatens
substantial harm to individual or public interest[.]” Id.
Individual interest is unmistakably what 18 Pa.C.S.A. §
4107(a)(6) exists to prote[c]t.
Id. at 34-35.
In order to prove a claim based on negligence per se, the
following four requirements must be met:
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(1) The purpose of the statute must be, at least in part, to
protect the interest of a group of individuals, as opposed to
the public generally;
(2) The statute or regulation must clearly apply to the
conduct of the defendant;
(3) The defendant must violate the statute or regulation;
(4) The violation of the statute or regulation must be the
proximate cause of the plaintiff's injuries.
Mahan v. Am-Gard, Inc., 2003 PA Super 510, 841 A.2d 1052,
1058-1059 (Pa. Super. 2003) (citations and quotations omitted).
Schemberg v. Smicherko, 85 A.3d 1071, 1074 (Pa. Super. 2014).
The statutes the Bank claims the Accountants violated are as follows.
Section 1343 states:
Whoever, having devised or intending to devise any scheme or
artifice to defraud, or for obtaining money or property by means
of false or fraudulent pretenses, representations, or promises,
transmits or causes to be transmitted by means of wire, radio, or
television communication in interstate or foreign commerce, any
writings, signs, signals, pictures, or sounds for the purpose of
executing such scheme or artifice, shall be fined under this title
or imprisoned not more than 20 years, or both. If the violation
occurs in relation to, or involving any benefit authorized,
transported, transmitted, transferred, disbursed, or paid in
connection with, a presidentially declared major disaster or
emergency (as those terms are defined in section 102 of the
Robert T. Stafford Disaster Relief and Emergency Assistance Act
(42 U.S.C. 5122)), or affects a financial institution, such person
shall be fined not more than $ 1,000,000 or imprisoned not more
than 30 years, or both.
18 U.S.C. § 1343.
Section 4107 provides, in pertinent part:
(a) Offense defined. — A person commits an offense if, in the
course of business, the person:
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…
(6) makes or induces others to rely on a false or misleading
written statement for the purpose of obtaining property or
credit[.]
18 Pa.C.S. § 4107(a)(6).
Here, the trial court found the following:
Statutes which the Superior Court has held were too general to
support a negligence per se claim involve statutes that less
clearly indicate an intention to protect specific groups from
specific types of harm. See, e.g., Wagner v. Anzon, Inc., 684
A.2d 570, 574-575 (Pa. Super. 1996) (holding that there was no
negligence per se claim based upon violation of Philadelphia Air
Management Code, because “the purpose of the Code was to
protect the ‘atmosphere over the City’ of Philadelphia, with …
concomitant benefits to its ‘inhabitants.’”). After careful review,
we conclude that the purposes of 18 U.S.C. § 1343 and 18
Pa.C.S.A. § 4107 are to protect the interests of the general
public against wire fraud and deceptive business practices,
respectively. We find no indication that either statute was
designed to protect a specific group, such as banks or lending
institutions. Because [the Bank] does not plead that is a
member of a specific protected group, [the Bank]’s claim for
negligence per se fails.
Order of Court, 6/1/2016, at n.1, 4. Again, keeping our standard of review
in mind, we conclude the trial court has thoroughly and accurately disposed
of the Bank’s negligence per se issue. Therefore, we affirm this issue on the
basis of the court’s analysis.
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Accordingly, we affirm the trial court’s June 1, 2016, order with
respect to the fraud and negligence per se causes of action and reverse with
regard to the negligent misrepresentation count.10
Order affirmed in part and reversed in part. Case remanded for
further proceedings. Application for relief denied. Jurisdiction relinquished.
Fitzgerald, J., joins this memorandum.
Ransom, J., files a concurring and dissenting memorandum.
____________________________________________
10
We deny the Accountants’ December 30, 2016, application for relief
based on the argument that the Bank’s claims are barred by res judicata.
The ruling the Accountants seek to introduce is a December 21, 2016,
decision by the Honorable Ashely M. Chen of the United States Bankruptcy
Court for the Eastern District of Pennsylvania. See Fulton, N.A. v.
Robbins (In re Robbins), 562 B.R. 83 (Bankr. E.D. Pa. 2016). The related
proceeding involved Jon A. Robbins, the debtor, and the Bank. It merits
mention:
The doctrine of res judicata will preclude an action where the
former and latter suits possess the following common elements:
(1) identity of issues; (2) identity in the cause of action; (3)
identity of persons and parties to the action; and (4) identity of
the capacity of the parties suing or being sued.
Daley v. A.W. Chesterton, Inc., 37 A.3d 1175, 1189-1190 (Pa. 2012). A
review of both cases reveals that the bankruptcy action and present matter
involve different parties and causes of actions. As a result, the doctrine of
res judicata does not apply.
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Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 9/27/2017
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