Scottish Heritable Trust v. Peat Marwick Main & Co.

United States Court of Appeals,

Fifth Circuit.

No. 94-10952.

The SCOTTISH HERITABLE TRUST, PLC and SHT Holdings (US), Inc.,
Plaintiffs-Appellees Cross-Appellants,

PEAT MARWICK MAIN & CO., a partnership and KPMG Peat Marwick, a
partnership, Defendants-Appellants Cross-Appellees.

April 30, 1996.

Appeals from the United States District Court for the Northern
District of Texas.

Before REYNALDO G. GARZA, WIENER and STEWART, Circuit Judges.

WIENER, Circuit Judge:

Defendant-Appellant Peat Marwick Main & Co. (Peat Marwick)

appeals from an adverse judgment following a jury verdict that Peat

Marwick is liable to a third party for negligent misrepresentations

contained in audit reports. Concluding that Texas law does not

permit the plaintiffs to recover in these particular circumstances,

we reverse the district court's judgment and render a take-nothing

judgment in favor of Peat Marwick.

FACTS AND PROCEEDINGS

The plaintiffs in this case are The Scottish Heritable Trust,

PLC (SHT/PLC) and SHT Holdings (US), Inc. (SHT(US)) (collectively,

SHT). SHT/PLC is a British conglomerate based in York, England.

SHT/PLC owns many diverse businesses around the world and has

generated annual sales in excess of $200 million. SHT(US) is a

wholly-owned subsidiary of SHT/PLC which holds companies that have

1
been acquired in the United States.

Through a series of stock purchases made in 1988, SHT acquired

a controlling interest in Rangaire Corporation. Based in Cleburne,

Texas, Rangaire's principal business is lime production. The stock

of Rangaire is publicly traded on the National Association of

Securities Dealers Automated Quotation System (NASDAQ).

SHT's investment in Rangaire ultimately proved to be

unsuccessful. SHT now seeks to hold Peat Marwick—the auditor of

Rangaire's financial statements from 1962 to 1990—liable for this

loss. SHT claims that the audit reports with respect to the fiscal

years ended July 31, 1987 and July 31, 1988 were deficient in that

Peat Marwick issued an unqualified opinion on financial statements

that materially overstated the net book value1 of Rangaire's fixed

assets. SHT further claims that its justifiable reliance on these

faulty audit reports caused the loss which it sustained on the

Rangaire stock.

The background and timing of SHT's stock purchases are

important to this case. In 1985, Rangaire hired an investment

banker for the purpose of locating a buyer for the company. Unable

to find a willing buyer, Rangaire instead conducted a tender offer

in which its Employee Stock Ownership Plan (ESOP) purchased stock

from Rangaire's stockholders. The only evidence that Rangaire was

for sale following this August 1986 tender offer consists of

1
Book value is generally equal to the historical cost of an
asset. Net book value is equal to book value less depreciation.
Neither book value nor net book value is the same as fair market
value.

2
testimony from a former employee that some of the "major players"

in the industry toured the plant facilities as prospective

purchasers.2

Peat Marwick issued the audit reports in question on the

following dates:

Report for Date

the Fiscal Report

Year Ended Issued

July 31, 1987 October 7, 1987

July 31, 1988 September 30, 1988

SHT acquired its controlling interest in Rangaire in the

following series of transactions:

Percentage Total

of Rangaire Percentage

Date Purchased Owned

August 8, 1988 28% 28%

September 30 &

October 11, 1988 5% 33%

December 14 & 15, 1988 17% 50%

SHT's initial purchase of Rangaire stock was from the

bankruptcy estate of Rangaire's founder and Chairman, Eugene

2
The officers and directors of Rangaire would have a
fiduciary duty to consider any bona fide offer for the company.
In this vein, Joseph Hill, Rangaire's former President and Chief
Operating Officer, testified that Rangaire would be for sale "if
the right price came along."

3
Roberts. Roberts had filed for bankruptcy in December 1987,

several months after Peat Marwick issued the 1987 audit report.

SHT had learned of the availability of the Roberts' stock in June

1988, from an investment banker who it had retained for the purpose

of locating a publicly-traded U.S. company in which to acquire a

block of stock.

After SHT and its investment banker made their own independent

evaluation of Rangaire, SHT acquired Roberts' 28 percent interest

in the company from the bankruptcy trustee. That was on August 8,

1988, approximately 11 months after Peat Marwick issued the 1987

audit report. It is undisputed that Peat Marwick had no actual

knowledge of this transaction before an agreement had been reached

between SHT and Roberts' bankruptcy estate.

Following this initial purchase, Robin Garland, the Chief

Executive Officer of SHT/PLC, was elected to the Rangaire board of

directors. As a result, Garland had access to Rangaire's internal

financial records and began to receive detailed financial data.

Garland was troubled to learn of certain accounting practices which

had the effect of increasing the book value of the fixed assets as

reflected on the financial statements. Concerned that this might

be the "tip of the iceberg," Garland directed Robert Elliot—a

partner with SHT/PLC's English auditors, Moores &

Rowland—specifically to investigate, among other things, the fixed

assets on Rangaire's books.

Elliot prepared a report dated September 20, 1988, which

suggested that Rangaire's financial statements overstated the

4
proper net book value of the fixed assets. The report recommended

that SHT obtain an appraisal of the fixed assets to confirm (1)

their existence and (2) their cost, and advised that any related

write-offs would probably be treated as a prior period adjustment.

This recommendation apparently was not heeded, as SHT took no

immediate action on this matter.

In late September and October 1988—after the Elliot report had

been completed—SHT acquired an additional 5 percent of Rangaire.

This purchase was made from Eugene Roberts' family and was

described by SHT as a "courtesy," whatever that may mean.

As the months passed, SHT became increasingly dissatisfied

with the management of Rangaire. In an effort to oust Joseph Hill,

Rangaire's President and Chief Operating Officer, SHT decided to

purchase enough additional Rangaire stock to give SHT a controlling

interest in the company. This final purchase occurred in December

1988 and brought SHT's ownership in Rangaire to approximately 50

percent. As with SHT's initial purchase, it is undisputed that

Peat Marwick had no actual knowledge of any of SHT's subsequent

purchases of Rangaire stock prior to their respective

consummations.

In January 1989, shortly after SHT had acquired a controlling

interest, SHT successfully ousted Hill and named Stephen McBride,

the Chief Financial Officer of SHT/PLC, to be Rangaire's President

and Chief Executive Officer. During his six-month tenure as

President, McBride made significant changes in the company's

operations. McBride also instituted accounting policy changes.

5
These accounting changes conformed with SHT's home office policies

and had the effect of reducing the net book value of the fixed

assets.

During the fiscal year ended December 31, 1989,3 Rangaire

wrote off millions of dollars of fixed assets which had been

reflected on prior year financial statements. During its 1989

audit, Peat Marwick agreed that generally accepted accounting

principles (GAAP) permitted Rangaire to take a $12.1 million

write-off. A dispute arose, however, as to whether these

write-offs were properly attributable to 1989 or if instead they

were attributable to errors made in prior years. McBride contended

that almost all of the write-offs were the correction of prior year

accounting errors.4 Rangaire's Audit Committee, however, disagreed

and concluded that most of the write-offs were properly recorded in

1989. Consequently, Rangaire decided that it was not necessary to

amend its prior year financial statements that Peat Marwick had

audited. From 1989 through 1992, Rangaire republished the July 31,

1987, 1988, and 1989 financial statements four times without any

changes. Indeed, Rangaire's new auditors, Aronson, Fetridge,

Weigle & Stern, sent Peat Marwick a "comfort letter" in 1990, as

3
After SHT acquired a controlling interest, Rangaire's new
management changed the fiscal year end from July 31 to December
31, to conform with SHT's year end.
4
SHT claims that these write-offs are the result of the
improper extension of the useful lives of the fixed assets, the
improper capitalization of repairs, the continuation of assets on
the books after they either ceased to exist or had been
abandoned, and the capitalization of small assets normally
expensed.

6
well as in 1991 and 1992, stating that it had no information to

indicate that Rangaire's previous financial statements needed to be

restated.

The $12.1 million write-off was publicly disclosed in October

1989. Rangaire's stock price, however, did not significantly

change during the several weeks following this disclosure. During

the year 1990, though, Rangaire's stock price spiraled steadily

downward, and SHT suffered a substantial loss on its investment

when it eventually sold the stock.

It was only then that SHT brought suit against Peat Marwick,

claiming security law violations and negligent misrepresentations.

The jury determined that Peat Marwick was not liable for any

security law violations. On the negligent misrepresentation claim,

however, the jury found against Peat Marwick and awarded $8,500,000

in damages.

Peat Marwick then moved for judgment as a matter of law or, in

the alternative, for a new trial. SHT moved to strike Peat

Marwick's motion for judgment as a matter of law on grounds that

Peat Marwick failed to make a motion for judgment at the close of

all the evidence pursuant to Rule 50(b) of the Federal Rules of

Civil Procedure and that Peat Marwick's objections to the jury

charge did not cure this omission.

The district court denied both SHT's motion to strike and Peat

Marwick's motion for a new trial. Concluding that there was

insufficient evidence to support some of the damages awarded by the

jury, the district court granted in part Peat Marwick's motion for

7
judgment as a matter of law, reducing the judgment to $4,725,000.

Both Peat Marwick and SHT now appeal on many issues related to

the negligent misrepresentation claim. SHT does not challenge the

negative jury verdict with respect to the security law claim.

II.

ANALYSIS

A. STANDARD OF REVIEW

We review a jury's findings of fact under the "sufficiency of

the evidence" standard.5 Under that standard, "[t]he verdict must

be upheld unless the facts and inferences point so strongly and so

overwhelmingly in favor of one party that reasonable men could not

arrive at any verdict to the contrary. If there is evidence of

such quality and weight that reasonable and fair minded men in the

exercise of impartial judgment might reach different conclusions,

the jury function may not be invaded."6 A district court's

application of state law is reviewed de novo.7

B. WAIVER

As an initial matter, SHT argues that Peat Marwick has waived

its right to challenge the sufficiency of the evidence on appeal

because it failed to move for judgment as a matter of law at the

5
Granberry v. O'Barr, 866 F.2d 112, 113 (5th Cir.1988).
6
Id. (quoting Western Co. of N. Am. v. United States, 699
F.2d 264, 276 (5th Cir.), cert. denied, 464 U.S. 892, 104 S.Ct.
237, 78 L.Ed.2d 228 (1983)).
7
Salve Regina College v. Russell, 499 U.S. 225, 231, 111
S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991).

8
conclusion of all the evidence.8 We disagree.

Although we acknowledge that a failure to move for judgment

as a matter of law at the conclusion of all the evidence may result

in a waiver of the right to challenge the sufficiency of the

evidence,9 we liberally construes Rule 50(b) of the Federal Rules

of Civil Procedure.10 Technical noncompliance with Rule 50(b) may

be excused in situations in which the purposes of the rule are

satisfied.11 As we have often recited, the two basic purposes of

this rule are "to enable the trial court to re-examine the question

of evidentiary insufficiency as a matter of law if the jury returns

a verdict contrary to the movant, and to alert the opposing party

to the insufficiency before the case is submitted to the jury."12

A defendant's objection to proposed jury instructions on grounds

pertaining to the sufficiency of evidence issues it seeks to appeal

may satisfy these purposes.13

After reviewing the record in minute detail, particularly

8
FED.R.CIV.P. 50(b); McCann v. Texas City Refining, Inc.,
984 F.2d 667, 671 (5th Cir.1993).
9
When no timely motion has been made, we review only whether
there was any evidence to support the jury's verdict, regardless
of its sufficiency. Wellborn v. Sears, Roebuck & Co., 970 F.2d
1420, 1424 (5th Cir.1992).
10
See Polanco v. City of Austin, 78 F.3d 968 (5th Cir.1996)
(discussing this circuit's liberal construction of Rule 50(b)).
11
MacArthur v. University of Texas Health Ctr., 45 F.3d 890,
896-97 (5th Cir.1995).
12
Id. at 897.
13
Purcell v. Seguin State Bank and Trust Co., 999 F.2d 950,
956 (5th Cir.1993); Jones v. Benefit Trust Life Ins. Co., 800
F.2d 1397, 1401 (5th Cir.1986).

9
Peat Marwick's motion for judgment as a matter of law made prior to

the conclusion of all evidence and Peat Marwick's objections to the

proposed jury charge, we are convinced that the purposes of Rule

50(b) have been served and that the district court properly denied

SHT's motion to strike. Peat Marwick's objections to the jury

charge adequately addressed the sufficiency of the evidence issues

which it now seeks to appeal.14 Under these particular

circumstances, a holding that these issues have not been preserved

on appeal would constitute a "slavish adherence" to the Rules, a

position which we have repeatedly counseled against.15 Accordingly,

we conclude that Peat Marwick has not waived its right to challenge

the sufficiency of the evidence on appeal.

C. ACCOUNTANTS' LIABILITY TO THIRD PARTIES FOR NEGLIGENT MISREPRESENTATION

1. Basic Approaches

Three basic approaches have been developed by the courts for

determining the scope of accountants' liability to third parties

who use and rely on their audit reports. The first approach

requires either strict privity of contract or "near privity" with

an auditor before he may be held liable for negligent

14
Our review also convinces us that Peat Marwick's
objections to the jury charge satisfy Rule 50(a)(2). We
therefore reject SHT's argument that the 1991 amendments to Rule
50(a)(2) mandate a finding of waiver.
15
See, e.g., Bohrer v. Hanes Corp., 715 F.2d 213, 217 (5th
Cir.1983), cert. denied, 465 U.S. 1026, 104 S.Ct. 1284, 79
L.Ed.2d 687 (1984) (stating that "[t]o demand a slavish adherence
to the procedural sequence and to require these defendants, in
this case, to articulate the words of renewal once the motion had
been taken under advisement, would be "to succumb to a nominalism
and a rigid trial scenario as equally at variance as ambush with
the spirit of the rules.' ").

10
misrepresentation.16 "Near privity" somewhat relaxes the

requirement of actual privity of contract and requires only that

(1) the accountants have actual knowledge that their reports will

be used for a particular purpose; (2) the accountants have actual

knowledge that a nonclient is expected to rely on the reports in

furtherance of a particular purpose; and (3) there has been some

conduct on the part of the accountants linking them to that party,

which evinces the accountants' understanding of that party's

reliance.17 This is the most restrictive view of accountants'

liability to third parties and is followed by a minority of the

states.

The second approach is the "foreseeability" approach. Under

this one, accountants are subject to liability to third parties

much like any other tortfeasor. Thus, accountants may be held

liable to any third party for negligent misrepresentation if it is

reasonably foreseeable that such third party might obtain and rely

on the audit report.18 This expansive view of accountants'

liability has been adopted in only a few states,19 and some of them

16
E.g., Ward v. Ernst & Young, 246 Va. 317, 435 S.E.2d 628,
631 (1993) (requiring privity); Credit Alliance Corp. v. Arthur
Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 443-44, 483
N.E.2d 110, 118 (1985) (requiring "near privity").
17
Credit Alliance Corp., 493 N.Y.S.2d at 443-44, 483 N.E.2d
at 118.
18
E.g., Touche Ross & Co. v. Commercial Union Ins. Co., 514
So.2d 315 (Miss.1987).
19
See First Nat'l Bank v. Monco Agency, Inc., 911 F.2d 1053,
1058-59 (5th Cir.1990).

11
have recently retreated from this approach.20

The third approach is the one adopted by the Restatement

(Second) of Torts, which provides in the relevant part:

§ 552. Information Negligently Supplied for the Guidance of Others

(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

(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.21

Although not as restrictive as the privity or "near privity"

approach, the Restatement approach does not allow recovery for

every reasonably foreseeable consumer of financial information.22

20
See Bily v. Arthur Young & Co., 3 Cal.4th 370, 11
Cal.Rptr.2d 51, 63, 74-75, 834 P.2d 745, 757, 769 (1992)
(rejecting the foreseeability approach which had been adopted by
lower courts and noting that the foreseeability approach has not
attracted a substantial following and has encountered substantial
criticism from commentators); Petrillo v. Bachenburg, 139 N.J.
472, 655 A.2d 1354, 1360 (1995) (noting that New Jersey has
statutorily changed its foreseeability rule for accountants to a
more restrictive test).
21
RESTATEMENT (SECOND) OF TORTS § 552 (1977).
22
First Nat'l Bank v. Monco Agency, Inc., 911 F.2d 1053,
1060 (5th Cir.1990) (discussing application of the Restatement
under Louisiana law).

12
Rather, the Restatement approach steers a middle course by allowing

only a prescribed group of third parties to recover for pecuniary

losses attributable to inaccurate financial statements. This is

the approach that the majority of states have adopted. The

popularity of the Restatement approach appears to be a result of

many courts' finding it to be most consistent with the policy

foundations underlying the tort of negligent misrepresentation.23

2. Texas Approach

Texas law governs this diversity case. Along with the

majority of other jurisdictions, the Texas courts have adopted the

Restatement approach with respect to accountants' liability to

third parties for negligent misrepresentation.24 Among the many

issues raised in this appeal, Peat Marwick argues that the district

court improperly applied Texas law when it concluded that SHT—a

potential investor with respect to its initial purchase and an

existing shareholder with respect to its subsequent purchases—could

be a member of a "limited group" contemplated by the Restatement.

a. Member of "Limited Group"

23
E.g., Bily v. Arthur Young & Co., 3 Cal.4th 370, 11
Cal.Rptr.2d 51, 74-75, 834 P.2d 745, 769 (1992) ("The rule
expressed [in the Restatement] attempts to define a narrow class
and circumscribed class of persons to whom or for whom
representations are made. In this way, it recognizes commercial
realities by avoiding both unlimited and uncertain liability for
economic losses in cases of professional mistake and exoneration
of the auditor in situations where it clearly intended to
undertake the responsibility of influencing particular business
transactions involving third persons.").
24
Federal Land Bank Ass'n. v. Sloane, 825 S.W.2d 439, 442
(Tex.1991); Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co.,
715 S.W.2d 408, 411 (Tex.App.—Dallas 1986, writ ref'd n.r.e.).

13
1. Initial Purchase

As noted, Restatement (Second) of Torts § 552 requires that

a plaintiff claiming negligent misrepresentation be the person, or

a member of a "limited group" of persons, for whose benefit and

guidance the defendant either intends to supply the information or

knows that the recipient intends to supply it. The Restatement

thus restricts the persons to whom accountants owe a duty and does

not allow recovery for every foreseeable user of financial

statements.25 In its order addressing Peat Marwick's motion for

judgment as a matter of law, the district court concluded that the

"limited group" in this case was "potential purchasers of a

controlling share of Rangaire."26 Peat Marwick insists that this

ruling is an improper application of Texas law.

SHT made its initial purchase of Rangaire stock in August 1988

from Eugene Roberts' bankruptcy estate in a privately negotiated

transaction with the bankruptcy trustee. Peat Marwick had no

actual knowledge of this transaction prior to its consummation, and

SHT had no previous connection to Rangaire. At the time Peat

Marwick issued the 1987 audit report, Roberts had not yet filed for

25
See First Nat'l Bank v. Monco Agency, Inc., 911 F.2d 1053,
1060 (5th Cir.1990).
26
We are troubled by the fact that this legal determination
was not announced until after the jury had entered a verdict.
The jury asked for assistance on this issue while it was
deliberating, but received no guidance as to the boundaries of a
limited group. Even if the court's post-verdict statement were
legally correct, and even if SHT fit that definition when it made
its initial purchase—which is highly problematic—there is nothing
to indicate that the jury had any guidance as to the limits of
the group.

14
bankruptcy. As SHT simply belonged to the universe of all

potential investors in Rangaire, argues Peat Marwick, SHT was not

a member of a "limited group" contemplated by the Restatement as a

matter of law.

In support of its argument, Peat Marwick contends that Texas

would follow a number of other jurisdictions that have held

potential investors not to be members of a "limited group."27 As

one court has explained, to interpret the "limited group"

requirement as including all potential investors would render that

requirement meaningless.28

Peat Marwick argues further that the district court's ruling

that the "limited group" in the instant case consisted of potential

purchasers of a controlling interest of Rangaire rather than all

potential investors, does not save it from error. In support of

this contention, Peat Marwick relies on In re Crazy Eddie

Securities Litigation,29 an analogous case in which Texas law also

governed.

In re Crazy Eddie involved a situation in which the auditors

knew at the time they issued the audited financial statements that

27
E.g., In re ML-Lee Acquisition Fund II, L.P., 848 F.Supp.
527, 556 (D.Del.1994); In re Crazy Eddie Sec. Litig., 812
F.Supp. 338, 360 (E.D.N.Y.1993); In re Sahlen & Assoc. Sec.
Litig., 773 F.Supp. 342, 374 (S.D.Fla.1991).
28
In re ML-Lee Acquisition Fund II, L.P., 848 F.Supp. 527,
556 (D.Del.1994) (quoting Brug v. Enstar Group, Inc., 755 F.Supp.
1247, 1258 (D.Del.1991)).
29
812 F.Supp. 338 (E.D.N.Y.1993).

15
its client was "in play" as a potential take-over target.30 After

analyzing the same Texas authorities relied on by SHT in the

instant case, the district court concluded that "these cases do not

suggest that Texas courts have or would find that accountants owe

a duty of care to a "limited class' of future major investors

seeking to acquire control, through open-market purchases, of a

publicly-traded company."31 The court further stated that:

Plaintiffs have not cited, and the court cannot find, a single
decision by any court extending an accountant's duty of care
to as-yet unidentified future open-market buyers of
publicly-traded securities, even when that duty is limited to
the rarified class of buyers with sufficient resources to
acquire control of entire companies.

This court believes that the Texas Supreme Court is
unlikely to adopt a rule so universally avoided by sister
states.32

The Texas courts have not had occasion to decide this

particular aspect of the "limited group" requirement, so we must

make an Erie guess as to how the Texas courts would come down on

this issue. Although the authorities discussed above have no

binding effect on this court, we conclude that their analysis

accurately represents Texas law. To hold that a potential

purchaser, even one of a controlling interest, is generally not a

member of a "limited group" contemplated by the Restatement is

consistent with the Restatement's objective of restricting

accountants' liability to a prescribed group and not allowing

30
In re Crazy Eddie, 812 F.Supp. at 357.
31
Id. at 360.
32
Id. (internal citations omitted).

16
recovery for all foreseeable users of an accountants' audit report.

Moreover, the Texas courts have intimated this same view, albeit in

dicta. In Cook Consultants, a negligent misrepresentation case in

which the defendant was a surveyor, the Texas court stated that

"[u]nlike, for example, future purchasers of shares of stock

attempting to hold an accountant liable, [plaintiff] Larson is not

a member of an unlimited class...."33

Relying on cases such as Blue Bell,34 SHT insists that Texas

law is more expansive than the Restatement approach and permits a

finding that Peat Marwick owed SHT a duty in this context. We

disagree.

In Blue Bell, the court held that actual knowledge of a

particular plaintiff or class of plaintiffs is not necessary if the

defendant should have had this knowledge.35 To this extent, Texas

law is indeed less restrictive than the Restatement. Blue Bell,

however, in no way abandoned the "limited group" requirement.

Indeed, the court expressly declined an invitation to adopt the

foreseeability approach.36

With regard to the "limited group" requirement, the court in

Blue Bell held that when the auditors supplied the corporation with

a number of audit reports, indicating knowledge by the auditors

33
Cook Consultants v. Larson, 700 S.W.2d 231, 236
(Tex.App.—Dallas 1985, writ ref'd n.r.e.).
34
Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co., 715
S.W.2d 408, 411 (Tex.App.—Dallas 1986, writ ref'd n.r.e.).
35
Id. at 412.
36
Id.

17
that third parties would be given these reports, "one of a limited

number of existing trade creditors" was in a "limited group" so as

to make summary judgment in favor of the accountants

inappropriate.37 This holding, however, falls far short of deciding

that a potential investor with no previous connection to either the

corporation or the accountant is within such group. As stated

above, we conclude that such a potential investor is generally not

within a "limited group" under Texas law.

SHT further insists that the question whether an accountant

owes a duty to a third party is in part a fact question.38 SHT thus

makes much of the testimony of Peat Marwick partners that they knew

that investors in general might rely on audited financial

statements. SHT also notes that Eugene Roberts had cash flow

problems many years before his filing for bankruptcy and that it is

a reasonable inference to assume that he would sell his stock in

the company.39 These and similar facts and inferences, argues SHT,

are enough to permit a conclusion that SHT was a member of a

"limited group." We again disagree.

We acknowledge SHT's contention that the question whether an

accountant owes a duty to a third party is in part a fact

37
Id. at 413 (emphasis added).
38
See Steiner v. Southmark Corp., 739 F.Supp. 1087, 1088
(N.D.Tex1990) (Texas law).
39
We note that Roberts received approximately $5 million
dollars from the August 1986 tender offer prior to his filing for
bankruptcy.

18
question.40 The outer boundaries of a "limited group" referred to

in the Restatement, however, is a legal determination. Although we

do not suggest that a potential purchaser can never be a member of

a "limited group," the facts in this particular case, even when

viewed in a light most favorable to the jury's verdict, simply do

not provide a nexus sufficient to bring a potential investor like

SHT within the ambit of the "limited group" requirement. To

predicate an accountants' duty to third parties on such things as

the general knowledge that accountants possess about typical

investors or tenuous inferences concerning future events would be

to eviscerate the Restatement rule in favor of a de facto

foreseeability approach—an approach which the Texas courts have

refused to embrace.

We therefore conclude that as a matter of law Peat Marwick

owed SHT no duty with respect to SHT's initial purchase of Rangaire

stock.

2. Subsequent Purchases

With respect to the several stock purchases following its

initial purchase, SHT occupied the status of an existing

minority-interest shareholder. Peat Marwick argues that an

existing shareholder, like a potential investor, also is not a

member of a "limited group." Indeed, at least one jurisdiction has

accepted this argument.41 Nevertheless, as the other issues raised

40
See Steiner, 739 F.Supp. at 1088.
41
Machata v. Seidman & Seidman, 644 So.2d 114, 116
(Fla.App.1994), review denied, 654 So.2d 919 (Fla.1995).

19
on appeal by Peat Marwick even more clearly mandate a reversal in

this case, we simply assume without deciding that SHT could be a

member of a "limited group" with respect to its subsequent stock

purchases.

b. Justifiable Reliance

In addition to the "limited group" requirement discussed

above, the Restatement requires that a plaintiff justifiably rely

on the information that the defendant negligently misrepresents.42

Like the Restatement, Texas law requires that a plaintiff claiming

negligent misrepresentation prove that its reliance was

justifiable.43

As the words of the phrase imply, justifiable reliance

comprises two elements: (1) the plaintiff must in fact rely on the

information; and (2) the reliance must be reasonable.44 The

justifiableness of the reliance is judged in light of the

plaintiff's intelligence and experience.45 For purposes of the tort

of negligent misrepresentation, reliance is unjustified when the

relying party is negligent.46

42
RESTATEMENT (SECOND) OF TORTS § 552(1) (1977).
43
Airborne Freight Corp. v. C.R. Lee Enter., Inc., 847
S.W.2d 289, 294 (Tex.App.—El Paso 1992, writ denied).
44
Geosearch, Inc. v. Howell Petroleum Corp., 819 F.2d 521,
526 (5th Cir.1987).
45
See Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014,
1026 (5th Cir.1990).
46
Id. at 1025, n. 5; see RESTATEMENT (SECOND) OF TORTS § 552A
(1977) (barring recovery for negligent misrepresentation if the
recipient of the misrepresentation is negligent in so relying).

20
Peat Marwick argues that as a matter of law SHT cannot prove

justifiable reliance. As we have concluded that SHT was not a

member of a "limited group" with respect to its first purchase of

Rangaire stock, we only address justifiable reliance with respect

to the subsequent purchases.

SHT has vast and sophisticated experience in acquiring both

public and private businesses around the world. In addition, SHT

placed its Chief Executive Officer on Rangaire's board of directors

and had access to virtually all of Rangaire's internal financial

records. Well in advance of SHT's second stock purchase, Garland,

SHT's CEO, learned of and was concerned by questionable accounting

practices which had the effect of inflating the book value of

Rangaire's fixed assets. Garland's concerns were later confirmed

by Elliot, SHT's long-time advisor. Elliot recommended an

appraisal of the fixed assets to determine their existence and

cost, and advised SHT on how to treat the related write-offs. Yet

SHT now claims to have justifiably relied on Peat Marwick's

negligent misrepresentations involving an overstatement of the net

book value of Rangaire's fixed assets.

Given that prior to making the subsequent stock purchases, SHT

(1) was an extremely sophisticated multi-national conglomerate;

(2) had virtually complete access to the internal financial records

of Rangaire; and (3) suspected, and was later warned by its

advisor, that a problem existed regarding the book value of fixed

assets which it now complains that Peat Marwick failed to detect or

disclose, we find it simply incredible that SHT could have been

21
justified in relying on the audit reports in question, if in fact

it relied on them at all.47 And even when we view the evidence in

the light most favorable to the verdict, we must conclude that no

reasonable jury could arrive at a verdict to the contrary.48 We

therefore hold as a matter of law that if SHT did indeed rely on

Peat Marwick's audit reports with respect to its stock purchases

following the initial acquisition, such reliance was simply

unjustified.

D. OTHER ISSUES

As we conclude that SHT either was not within a "limited

group" or lacked justifiable reliance as to all of its purchases of

Rangaire stock, we need not and therefore do not address Peat

Marwick's other arguments. We note in passing, however, that some

of the other issues raised by Peat Marwick, such as loss causation

and damages, have considerable merit. Similarly, we do not address

SHT's arguments regarding the district court's reduction of

damages, as our take-nothing judgment makes that issue moot.

III.

CONCLUSION

With respect to its first purchase of Rangaire stock, SHT was

47
See id. at 1026 (citing Grumman Allied Indus., Inc. v.
Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir.1984) and suggesting
that Texas courts, like New York courts, are "particularly
disinclined to entertain claims of justifiable reliance when
sophisticated plaintiff has access to information that would
reveal fraud at a time when harm could be averted.").
48
We cannot help but speculate that the failure to submit
separate jury questions with respect to the different stock
purchases may in large part explain the jury's finding.

22
not a member of a "limited group," as contemplated by the

Restatement and Texas law. With respect to all subsequent

purchases, SHT lacked justifiable reliance as a matter of law.

Therefore under Texas law SHT is not entitled to recover against

Peat Marwick for negligent misrepresentation. Accordingly, the

judgment of the district court is reversed and a take-nothing

judgment in favor of Peat Marwick is rendered.

REVERSED and RENDERED.