Court upholds privity defense in Illinois.

CIV 93-0406, U.S. Dist. Ct., District of New Mexico)

The U.S. District Court for tile Northern District of Illinois ruled that under Illinois law unless the plaintiff is in privity of contract with an accountant, the accountant generally will not be held liable for negligence. Maureen Dougherty brought an action against accountant Albert Zimbler, alleging he had made false statements of fact to her and omitted material facts in his representations to convince her to purchase a business from one of his clients, Tad Bero. Specifically, Dougherty alleged that the accountant had been aware the business had accumulated liabilities and liens against it for failing to pay state sales taxes and state and federal payroll taxes. Dougherty claimed she had met with both the owner and the accountant to discuss buying the business. She further alleged that the accountant had given her all income statement for the business, assisted in the negotiations and orally represented that the business was very successful and stable and had profit margins of 35% to 40%. Dougherty's own accountant also reviewed the business and indicated it had a reasonable chance to make a profit if she was able to keep costs at the level estimated and made sales of $850,000.

The defendant denied he had met on any occasion with either the purchaser or her accountant before the closing date. He moved to dismiss Dougherty's action on the basis that he was not in privity of contract with the plaintiff. In dismissing the negligence portion of this claim, the court said that under the Illinois Public Accounting Act an accountant can be liable for negligence only if the accountant was aware that a primary intent of the client (the owner) was for the professional services to benefit or influence the particular person bringing the action. (That is, the accountant can be liable for negligence only if he knew the owner was using the accountant to influence a third party.) The accountant also must have identified in writing the persons who were intended to rely on the services and have sent a copy of this list of persons to them. Since Dougherty did not allege she was in privity of contract with the accountant or that she received notification in writing authorizing her to rely on the accountant's work, the negligence count against him was dismissed. (Dougherty v. Zimbler, no. 95 C 406, U.S. Dist. Ct., Northern District of Illinois)

Editor's Note: Thanks to John Shutkin of KPMG Peat Marwick for the Sanchez case and Randy Sue Schreiber of Querrey and Harrow for the Dougherty case

--Edited by Wayne Baliga, CPA, JD. CPCU, CFE, president of Aon Technical Insurance Services.