Tennessee Business Litigation Law Blog

The Supreme Court of New Jersey ruled that an accounting firm may be liable to shareholders for failing to detect high-level fraud.  In NCP Litigation Trust v. KPMG LLP, a trust representing shareholders of bankrupt corporation Physician Computer Network sued the company's former accounting firm, KPMG. The suit alleged negligence, negligent misrepresentation, breach of contract, and breach of fiduciary duty.  From the case syllabus, among other factual allegations:

According to the Trust, PCN’s 1995 financial records, which KPMG certified, were in such disarray that the successor auditor could not reconstitute them. The Trust also alleged that KPMG failed to verify PCN’s receipt and deposit of a $3.5 million check that was part of a fraudulent asset purchase arranged by Mortell and Wraback. According to the Trust, a simple examination of PCN’s bank records would have revealed that this amount was never deposited. 

The trial court dismissed the lawsuit, concluding that the corporate officers' fraud was imputable to the litigation trust because it was the successor-in-interest to the corporation itself.  The appellate court reversed, and the Supreme Court affirmed with modifications.  The Supreme Court ruled that  when an auditor is negligent within the scope of its engagement, the imputation doctrine does not prevent corporate shareholders who are innocent of corporate wrongdoing from seeking to recover. 

It's not clear what standard of proof should be applied to cases alleging fraud. The Western Section Court of Appeals' recent opinion in Capital Mgmt. Partners v. Eggleston is the closest we have to a definitive answer right now:

The clear and convincing standard of proof is appropriate to those cases where a party seeks the reform or rescission of a written instrument due to fraudulent inducement. But in all other cases involving claims of fraud, the standard of proof is preponderance of evidence.

Still, the Court of Appeals in Eggleston acknowledged that the law in Tennessee is anything but clear. For now, the best course of action for trial judges may be to follow the trial court's lead in Eggleston: state on the record what the court's ruling would be under both standards.

This opinion from the Tennessee Court of Appeals is a good one to have handy for beating a motion for summary judgment against a plaintiff's claim of misrepresentation. Briefly, the plaintiff was offered a job by an Internet startup, and in the process asked for and received assurances that the startup had financing in place. The plaintiff then quit his existing job and moved to Tennessee to join the startup. Even after quitting and moving, the plaintiff continued to ask about the status of the startup copmany's financing. Lo and behold, the financing was not in place, the company went under, and the plaintiff was terminated. The defendant obtained a summary judgment against the plaintiff's claims of fraud and misrepresentation. The key question appears to hav been whether the plaintiff actually relied on the defendant's representations, given that the plaintiff still questioned the status of financing even after quitting and moving. The Court of Appeals reversed the summary judgment, ruling that this was a question of fact.
Basically, the plaintiff's trust was not as apparent as his reliance. A good opinion to have around when you face similar issues representing a plaintiff.

The Eighth Circuit recently issued an opinion in Moses.com Securities, Inc. v. Comprehensive Software Systems, Inc. containing a good description of the prima facie cases for fraudulent misrepresentation, fraudulent omission, and negligent misrepresentation under Missouri law. Two aspects of the Court’s discussion of negligent misrepresentation warrant mentioning. First, the plaintiff must prove that the information was provided by the defendant to the plaintiff in a particular business transaction. Thus, a press release to the public at large did not suffice in this case. Second, a party is not justified in relying on a speaker’s representation that concerns a future action of a third party that is outside of the speaker’s control. Tennessee law goes further, providing that no statement of future action can form the basis for a negligent misrepresentation claim, even if a statement that the speaker herself will perform the action.

To prevail on a claim of negligent misrepresentation, a plaintiff must prove that the defendant made “a statement of material past or present fact.” Look to Naifeh v. Valley Forge Life Ins. Co. for a brief refresher on statements that do not qualify as a negligent misrepresentation. “[S]tatements of opinion or intention are not actionable. … Likewise, puffing or other sales talk is generally not actionable. … Similarly, conjecture or representations concerning future events are not actionable even though they may later prove to be false.” In Naifeh, the Court distinguished an insurance agent’s statement that he would “keep [the plaintiff] posted” if there were any problems with a policy was not a negligent misrepresentation – it was merely a statement of intenion. The true complaint, instead, is failure to comply with a duty – such as negligence or breach of contract. Indeed, the Court went on to analyze whether the defendant was liable for negligence.