UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 07-1804
WATERSIDE CAPITAL CORPORATION; WESLACO HOLDING COMPANY,
LLC,
Plaintiffs - Appellants,
and
CAPITALSOUTH PARTNERS FUND I, L.P.,
Plaintiff,
v.
HALES, BRADFORD & ALLEN, LLP; SALINAS, ALLEN & SCHMITT, LLP,
Defendants – Appellees,
and
HALES-BRADFORD, LLP; BILLY R. BRADFORD; DARRYL D. BAIRD,
Defendants.
Appeal from the United States District Court for the Eastern
District of Virginia, at Norfolk. Rebecca Beach Smith, District
Judge. (2:05-cv-00727-RBS)
Argued: January 26, 2009 Decided: March 25, 2009
Before NIEMEYER, KING, and DUNCAN, Circuit Judges.
Affirmed by unpublished opinion. Judge Niemeyer wrote the
opinion, in which Judge King and Judge Duncan joined.
ARGUED: Ann Burke Brogan, CROWLEY LIBERATORE & RYAN, P.C.,
Chesapeake, Virginia, for Appellants. Brian Nelson Casey,
TAYLOR & WALKER, P.C., Norfolk, Virginia, for Appellees. ON
BRIEF: Frank J. Santoro, Karen M. Crowley, MARCUS, SANTORO &
KOZAK, P.C., Chesapeake, Virginia, for Appellants. John
Franklin, III, TAYLOR & WALKER, P.C., Norfolk, Virginia, for
Appellees.
Unpublished opinions are not binding precedent in this circuit.
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NIEMEYER, Circuit Judge:
Waterside Capital Corporation, a Virginia corporation,
appeals the district court’s order dismissing, under Federal
Rule of Civil Procedure 12(b)(6), its accounting malpractice
complaint against Hales, Bradford & Allen, LLP (“HB&A”), a Texas
accounting firm. Waterside claims that it loaned several
million dollars to Caldwell/VSR, Inc. (“Caldwell”), a Texas-
based manufacturer of window blinds and shutters, relying on
audit reports that HB&A prepared for Caldwell. Later Caldwell
filed a petition in bankruptcy, and Waterside discovered that
HB&A’s audits failed to expose substantial accounting
irregularities in Caldwell’s books.
In its complaint, Waterside asserted four causes of action
and demanded $4 million in damages, plus late fees, costs, and
attorneys’ fees. In Count I, it claimed that HB&A, in preparing
the audit reports for Caldwell for fiscal years 2001, 2002, and
2003, breached its accounting engagement contracts and that
Waterside, as a lender relying on the reports, was a third-party
beneficiary of the engagement contracts between Caldwell and
HB&A, entitled to sue for the breaches. In Count II, Waterside
alleged “professional malpractice” in that HB&A breached its
“duty to observe professional standards in the conduct of its
audit[s].” In Count III, Waterside alleged that HB&A was liable
for “constructive fraud/negligent misrepresentation” when it
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certified Caldwell’s financial statements in the audit reports.
And in Count IV, Waterside alleged fraudulent misrepresentation.
The district court granted HB&A’s motion to dismiss as to
Counts I, II, and III, and Waterside voluntarily dismissed Count
IV. From the final judgment dismissing Counts I, II, and III,
Waterside appeals. We affirm.
Count I alleges that Waterside is a third-party beneficiary
of the accounting engagement contracts entered into between
Caldwell and HB&A. Because the engagement contracts were formed
and performed in Texas, Texas law governs whether Count I states
a claim upon which relief can be granted. Texas law is cautious
in finding persons to be third-party beneficiaries and allows
courts to look only within the contract’s “four corners” to
determine whether the contracting parties intended to create a
third-party beneficiary. See In re El Paso Refinery, LP, 302
F.3d 343, 354 (5th Cir. 2002); MCI Telecomms. Corp. v. Texas
Utils. Elec. Co., 995 S.W.2d 647, 650-52 (Tex. 1999). “The
intention to contract or confer a direct benefit to a third
party must be clearly and fully spelled out or enforcement by
the third party must be denied.” MCI Telecomms., 995 S.W.2d at
651. In this case, the accounting engagement contracts between
HB&A and Caldwell, entered into annually, provide no indication
that the parties to those contracts intended to “confer a direct
benefit” on Waterside. Similarly, HB&A’s later letters,
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transmitting copies of the audit reports and repeating what the
reports certified, indicate no such undertaking. The engagement
contracts were part of a routine annual practice of Caldwell and
HB&A to have HB&A audit Caldwell’s books and prepare its tax
returns. Moreover, nothing in the factual circumstances alleged
in the complaint suggests that the audit engagements were
undertaken for the direct benefit of Waterside or to induce
Waterside to make a loan to Caldwell. Thus, when applying Texas
law, we conclude that it is not “plausible” that Waterside could
prove that it was a third-party beneficiary of the engagement
contracts entitled to sue under them. See Bell Atlantic Corp.
v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1974 (2007) (adopting
a plausibility standard for deciding Rule 12(b)(6) motions).
Count II alleges professional malpractice by HB&A in
auditing Caldwell’s books. Regardless of whether this claim is
governed by Virginia or Texas law, privity is a prerequisite for
malpractice liability. See McCamish, Martin, Brown & Loeffler
v. F.E. Appling Interests, 991 S.W.2d 787, 792 (Tex. 1999);
Ervin v. Mann Frankfort Stein & Lipp CPAs, L.L.P., 234 S.W.3d
172, 176-77 (Tex. App. 2007); Ward v. Ernst & Young, 246 Va.
317, 323-24 (1993). Because it is undisputed that Waterside was
not in privity with HB&A, Count II fails to state a claim upon
which relief can be granted, regardless of which State’s law
applies.
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Finally, Count III alleges “constructive fraud/negligent
misrepresentation,” claiming that HB&A constructively defrauded
Waterside by reaffirming to it the audit reports of Caldwell’s
financial condition. The parties agree that this count is a
tort claim governed by Virginia law, inasmuch as Waterside is a
Virginia corporation and sustained any injury in Virginia.
Virginia law bars recovery for purely economic losses due to
negligence, unless the parties are in privity, see Ward, 246 Va.
at 323-24, and a claim for “constructive fraud/negligent
misrepresentation” is covered by this rule. See Richmond Metro.
Auth. v. McDevitt Street Bovis, Inc., 256 Va. 553, 559 (1998)
(“The essence of constructive fraud is negligent
misrepresentation”); Waytec Elecs. Corp. v. Rohm & Haas Elec.
Materials, LLC, 459 F. Supp. 2d 480, 491-92 (W.D. Va. 2006)
(finding a constructive fraud claim barred by Virginia’s
economic loss rule). Because Count III alleges only economic
losses and Waterside was not in privity with HB&A, Count III
also fails to state a claim upon which relief can be granted.
Accordingly we affirm the judgment of the district court.
AFFIRMED
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