Court rules Bily decision is retroactive.

A California appellate court ruled the California Supreme Court decision in Bily v. Arthur Young & Company (Legal Scene, JofA, Nov.92, page 37), which had limited auditors' duties to nonclients, applies retroactively to cases pending in California.

The case before the appellate court arose from audit services performed by Touche Ross & Co. (now Deloitte & Touche) for Buttes Gas and Oil Co. In March 1984, Touche issued an unqualified audit opinion on Buttes's 1983 financial statements. In October 1984, allegedly relying on the audited financial statements, Dimensional Credit Corp. (DCC) approved a $10 million line of credit for Buttes. Industrial Indemnity, an insurer, agreed to guarantee the loan.

In 1985, Buttes defaulted on the entire loan. Industrial repaid the noteholders and then filed suit against Touche.

The jury in this case had returned a general verdict for Industrial and had awarded $1 in damages. Subsequently, Industrial was granted a new trial on the damages issue. Touche appealed the order granting the new trial.

The appellate court noted that since Touche's appeal, the Bily case had held that accountants generally are not liable to third parties for general negligence. Since neither Industrial nor DCC contracted for or engaged Touche's audit services, the court ruled Industrial cannot recover from Touche for general negligence and reversed the order granting a new trial. (Industrial Indemnity v. Touche Ross & Co., 13 Cal.App.4th 1086)