United States Court of Appeals
For the First Circuit
No. 00-2408
NORTH AMERICAN SPECIALTY INSURANCE COMPANY,
Plaintiff, Appellant,
v.
DAVID LAPALME ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Boudin, Chief Judge,
Selya, Circuit Judge,
and Schwarzer,* Senior District Judge.
Peter B. McGlynn, with whom Bruce D. Levin and Bernkopf,
Goodman & Baseman LP were on brief, for appellant.
Warren D. Hutchison, with whom Nancy M. Reimer and Donovan
Hatem LP were on brief, for appellees.
August 2, 2001
______________
*Of the Northern District of California, sitting by designation.
SELYA, Circuit Judge. Audit reports and financial
statements are staples of the accounting profession. Accuracy
is a paramount concern, for much can turn on a relatively minor
bevue. But mistakes occur, and courts have grappled with the
extent of an accountant's liability to third parties (i.e., non-
clients) for such errors. This appeal requires us to enter the
fray.
The case at hand involves ostensible misstatements
attributed to the carelessness of the defendants (an accounting
firm and one of its principals). The court below, ruling on a
motion for summary judgment, concluded that even if the
financial statement prepared by the defendants for their client
corporation contained negligent misrepresentations, the
defendants were not liable to the plaintiff (a third party) for
those misrepresentations. Although our appraisal of the
governing law differs in one salient respect from that of the
lower court, we reach the same conclusion. Accordingly, we
affirm.
I. BACKGROUND
A brief recitation of the facts suffices to put the
pivotal legal issue into perspective. Following the
conventional summary judgment praxis, we recount the facts in
the light most favorable to the nonmovant (here, the plaintiff).
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Houlton Citizens' Coalition v. Town of Houlton, 175 F.3d 178,
184 (1st Cir. 1999).
In the 1980s, Jeffrey Canty formed Canty Roofing and
Sheetmetal, Inc. (CRS). As the name implies, CRS's principal
business was the installation and repair of roofs. For much of
CRS's existence, the firm of Dias & Lapalme (D&L) rendered
accounting services to it. The partner in charge was David
Lapalme. For the most part, the work was mundane, involving,
inter alia, the preparation of annual financial statements and
tax returns.
Over the years, CRS installed and repaired roofs on a
variety of public and private buildings. Contractors working on
public construction projects in Massachusetts are required by
statute to post payment and performance bonds on a project-by-
project basis. See Mass. Gen. Laws ch. 149, § 29. CRS
routinely bid on public works jobs and, thus, from time to time
required bonds.
In 1994, Martin Donovan, an insurance broker,
introduced CRS to plaintiff-appellant North American Specialty
Insurance Co. (NASI). At Donovan's instance, NASI inspected
CRS's financial records and Canty's personal finances.
Apparently satisfied with the results of its review, NASI
entered into a bonding relationship with CRS. Once this
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relationship commenced, NASI told Canty that CRS would be
required to provide updated financial statements, prepared by an
independent certified public accountant, for each succeeding
calendar year.
In late 1995, Canty agreed to sell CRS to a group
composed of three businessmen, namely, Robert Cote, Paul Flynn,
and David Beasley. The transfer of ownership, structured as a
sale of stock, occurred on December 29, 1995. Shortly
thereafter, D&L prepared an independent, review-level financial
statement for CRS with respect to calendar year 1995. This
statement, issued by D&L on March 25, 1996, lacked specific
information anent the change in ownership. To make matters
worse, the notes to the financial statement contained three
arguably misleading comments that implied Canty's continuing
participation as CRS's sole shareholder (or so NASI now
contends). We summarize these comments in the margin.1
CRS thereafter obtained new contracts for work on
public buildings. To facilitate these engagements, NASI wrote
1
In "Note D - Notes Payable," D&L indicated the CRS's line
of credit was secured, inter alia, by "a personal guarantee by
the Corporation's sole stockholder." In "Note F - Related Party
Transactions," D&L reported both that "[t]he Company is involved
in a related party transaction through the rental of equipment
from a corporation wholly owned by the same stockholder," and
that "[t]he Company is involved in a related party transaction
through the rental of real estate owned by the stockholder."
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bonds (relying, it claims, on the 1995 financial statement)
totaling $847,630 on June 14, 1996, and bonds totaling $874,500
on August 21, 1996. But CRS foundered under the stewardship of
its new owners and eventually defaulted on these bonds. This
calamity forced NASI, qua surety, to step into the breach.
Doing so cost it nearly $2,000,000.
Invoking diversity jurisdiction, 28 U.S.C. § 1332(a),
NASI sued D&L and Lapalme in the United States District Court
for the District of Massachusetts. It charged the accountants
with negligent misrepresentation and deceptive trade practices.
NASI grounded its complaint on the assertion that, but for the
accountants' omission of accurate ownership information in the
1995 financial statement, it would not have continued furnishing
bonds for CRS (and, therefore, would have avoided the ensuing
losses). After allowing an extended period for pretrial
discovery, the district court granted summary judgment in the
defendants' favor.
This timely appeal ensued. In it, NASI challenges the
district court's interpretation and application of the legal
regime governing an accountant's liability to third persons and
maintains that, under a proper formulation of the law, the
existence of genuine issues of material fact would preclude the
entry of summary judgment.
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II. SOME THRESHOLD PRINCIPLES
We preface our discussion of the central issue with a
reminder as to certain threshold principles that inform our
analysis. Summary judgment is appropriate only when "the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law."
Fed. R. Civ. P. 56(c). In reviewing an order granting summary
judgment, we construe the record and all reasonable inferences
from it in favor of the summary judgment loser. Grant's Dairy-
Me., LLC v. Comm'r of Me. Dep't of Agric., Food & Rural Res.,
232 F.3d 8, 14 (1st Cir. 2000); Houlton Citizens' Coalition, 175
F.3d at 184. Our review is plenary, so that we may, "if the
occasion arises, reject the rationale employed by the lower
court and still uphold its order for summary judgment." Perez
v. Volvo Car Corp., 247 F.3d 303, 310 (1st Cir. 2001) (citation
and internal quotation marks omitted).
In this diversity case, we look to state law (here, the
law of Massachusetts) for the substantive rules of decision.
Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Fithian v.
Reed, 204 F.3d 306, 308 (1st Cir. 2000). In such matters, we
are bound by the teachings of the state's highest court.
-7-
Blinzler v. Marriott Int'l, Inc., 81 F.3d 1148, 1151 (1st Cir.
1996). "In the absence of a definitive ruling by the highest
state court, a federal court may consider analogous decisions,
considered dicta, scholarly works, and any other reliable data
tending convincingly to show how the highest court in the state
would decide the issue at hand . . . ." Gibson v. City of
Cranston, 37 F.3d 731, 736 (1st Cir. 1994) (citation and
internal quotation marks omitted). Our duty is to make an
informed prophecy — to "discern the rule the state's highest
court would be most likely to follow under these circumstances,
even if our independent judgment might differ." Ambrose v. New
Engl. Ass'n of Schs. & Colls., 252 F.3d 488, 497-98 (1st Cir.
2001).
III. NEGLIGENT MISREPRESENTATION
Against this backdrop, we turn to the law pertaining
to accountants' liability to third parties for negligent
misrepresentation and, in particular, the watershed opinion of
the Massachusetts Supreme Judicial Court (SJC) in Nycal Corp. v.
KPMG Peat Marwick LLP, 688 N.E.2d 1368 (Mass. 1998). We next
examine the decision below and discuss an area of disagreement.
We then offer our views on the meaning, under Massachusetts law,
of the phrase "substantially similar transactions" as that
phrase relates to an accountant's liability to third parties for
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negligent misrepresentations. Finally, we apply the discerned
law to the gleaned facts to complete our canvass.
A. The Watershed Case.
Nycal v. KPMG Peat Marwick LLP is the SJC's most
comprehensive effort to plot the borders of an accountant's
liability to third parties for negligent misrepresentations. In
that case, the plaintiffs – purchasers of stock – alleged that
they had relied to their determent on financial statements
prepared for the acquired company by the defendant (a well-known
accounting firm). Nycal, 688 N.E.2d at 1369. After studying
the available options,2 the SJC adopted the Restatement rule
anent the scope of an accountant's liability to a third party
for negligent misrepresentations. Id. at 1370-71 (citing with
approval Restatement (Second) of Torts § 552 (1977)). The SJC's
description of the rule follows:
Section 552 describes the tort of negligent
misrepresentation committed in the process
of supplying information for the guidance of
others as follows: (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
2Other possible tests for determining the scope of an
accountant's liability to third parties include the
foreseeability test (imposing broad liability) and the near-
privity test (constricting liability). See Bily v. Arthur Young
& Co., 834 P.2d 745, 752-57 (Cal. 1992) (discussing these
theories).
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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.
That liability is [(2)] 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.
Id. at 1371-72 (internal quotation marks omitted).
The SJC recognized that section 552 was not self-
elucidating, and that courts had been erratic in interpreting
and applying it. Id. at 1372. This lack of uniformity seemed
most readily apparent in respect to the level of knowledge —
actual or constructive — required on the part of the putative
defendant. The SJC opted to demand actual knowledge. Id. In
so doing, it interpreted section 552 "as limiting the potential
liability of an accountant to noncontractual third parties who
can demonstrate actual knowledge on the part of accountants of
the limited – though unnamed – group of potential third parties
that will rely upon the [accountant's work product], as well as
actual knowledge of the particular financial transaction that
such information is designed to influence." Id. (citations and
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internal quotation marks omitted). The accountant's actual
knowledge, the court added, should be ascertained at the time
the audit report or financial statement is issued. Id. at 1372-
73.
Despite this emphasis on actual knowledge, the SJC
added a caveat. It cautioned that accountants could not avoid
liability by burying their heads in the sand: "the Restatement
standard will not excuse an accountant's 'willful ignorance.'"
Id. at 1373.
B. The Decision Below.
The district court appropriately acknowledged Nycal as
the starting point for its analysis. The fulcrum of the court's
unpublished opinion is its determination that the SJC had not
fully embraced the Restatement rule, but, rather, had rejected
the language of section 552(2)(b) (which extends an accountant's
liability beyond particular transactions that the accountant
knowingly intended to influence to substantially similar
transactions). In reaching this conclusion, the veteran
district judge relied on the fact that the Nycal court, at one
point in its opinion, referred to "actual knowledge of the
particular financial transaction," 688 N.E.2d at 1372, without
including the Restatement's reference to substantially similar
transactions. Having embraced this narrow reading of Nycal, the
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judge envisioned that the case at hand hinged on whether the
defendants "knew of the particular financial transaction that
the [financial statement] was designed to influence." 3
Discerning no evidence that D&L actually knew, in March of 1996,
of a particular bonding transaction scheduled to occur later
that year, Judge Tauro entered judgment for the defendants.
In effect, then, the district court held that
substantially similar transactions, by definition, could not
reach the level of particularity that Nycal required. NASI
vigorously attacks this holding, and we think that it may read
too much into what might well be an economy of words. After
all, the SJC mentioned the "substantially similar transactions"
variant in its initial recital of the rule, Nycal, 668 N.E.2d at
1372, and we can think of three reasons why the court's omission
of this reference in its reprise may well lack decretory
significance. First, the language and structure of Nycal point
toward outright acceptance of the Restatement rule, uncurtailed.
See, e.g., id. at 1371 (remarking that the Restatement rule
"comports most closely" with the standard of liability
3
To reach this point in its analysis, the court first found
that the record contained sufficient evidence to create
trialworthy issues as to whether the accountants, at the time
they issued the financial statement, knew that CRS would forward
it to NASI and that NASI would rely on it for some underwriting
purpose.
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traditionally imposed by the Massachusetts courts in other
professional contexts). Second, Nycal itself did not involve a
dispute about whether transactions were or were not
substantially similar (and, thus, the SJC had no incentive to
discuss that aspect of the Restatement rule in any detail).
Third, the Nycal court's language requiring "actual knowledge of
a particular financial transaction," id. at 1372, just as easily
can be read to incorporate substantially similar transactions as
to exclude them.4
In the end, we need not probe this point too deeply.
The extent to which Massachusetts accepts the Restatement rule
is a matter of state law, and the SJC some day will resolve all
doubt. For now, we assume arguendo, favorably to NASI, that
Massachusetts follows the rule of section 552 of the
Restatement, without reservation. That rule limits an
accountant's liability for negligent misrepresentation to those
4 The SJC quoted this language from First Nat'l Bank of
Commerce v. Monco Agency Inc., 911 F.2d 1053, 1062 (5th Cir.
1990), in connection with a discussion of the level of knowledge
required under the Restatement rule. In Monco Agency, the Fifth
Circuit, applying state law, found that Louisiana followed the
Restatement rule. The court then opined that section 552
imposed an "actual knowledge" requirement. Id. at 1061-62. The
court made clear, however, that such a requirement did not
eliminate liability for substantially similar transactions. See
id. at 1061 (explaining that "the misinformer must know that its
client intends to use the inaccurate information to influence a
particular business transaction, or a 'substantially similar
transaction,' to follow").
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third parties who the accountant actually knows will receive the
information, and then, only for transactions that are the same
as, or substantially similar to, the ones which the accountant
actually knows will be influenced by the supplied information.
In other words, an accountant remains potentially liable in
situations in which he actually knows that a third-party
recipient of his information will rely on that information in
the course of a specific transaction, even though the
transaction itself does not transpire, as long as it is
supplanted by a substantially similar transaction.
C. Defining Substantially Similar Transactions.
Although substantially similar transactions can serve
as a basis for an accountant's liability to a third party under
the Restatement rule, the dimensions of that doctrine remain in
doubt.5 Our interest, of course, is in how the Massachusetts
courts would define the term — but neither the SJC nor the
Massachusetts Appeals Court has addressed this issue.
5
We have located only a single case that explores the reach
of this rule. In that case, an audit had been performed and a
report developed with knowledge that Creditor "A" would rely on
it. Creditor "B" later sued the accounting firm, asserting that
the audit report contained a negligent misrepresentation. The
court refused to impose liability, finding that the
transaction's essential character had changed. ML-Lee Acquis.
Fund, L.P. v. Deloitte & Touche, 463 S.E.2d 618, 628-29 (S.C.
Ct. App. 1995), rev'd in part on other grounds, 489 S.E.2d 470
(S.C. 1997).
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The Restatement does not attempt to define the phrase
"substantially similar transactions." Nevertheless, the
commentary offers some insight into what is meant by the term.
Thus, when a corporation seeking a bank loan asks an accountant
to audit the books and prepare a report for the prospective
lender, liability for negligence will attach even though the
corporation delays for a month in obtaining the loan. See
Restatement (Second) of Torts § 552 cmt. j. The transaction,
though later in time, remains substantially similar because its
"essential character" – the amount and terms of the credit – has
not changed. Id. So too if the amount of the anticipated loan
varies slightly, the ensuing transaction nonetheless will remain
substantially similar; slight variances do not affect a
transaction's essential character. Id. If, however, after the
accountant's report is delivered the corporation seeks and
receives a much larger loan, the transactions will no longer be
substantially similar and the accountant will not be liable to
the bank for a careless misstatement. Id.
In the last analysis, "[t]he question [is] one of the
extent of the departure that the maker of the representation
understands is to be expected." Id. Minor deviations are to be
anticipated in complex business transactions, and such
deviations ordinarily do not allow the misinformer to escape
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liability to a known third party. If the departure is major,
however, a different result obtains; the transaction actually
consummated cannot then be regarded as essentially the same as
the transaction originally contemplated (and, therefore, cannot
be regarded as substantially similar).
Quite plainly, this definition is fact-sensitive and
requires case-by-case development. We think that, under it, an
accountant's liability for substantially similar transactions
must be determined in two steps. First, the rule implicitly
recognizes that the risk perceived by the accountant at the time
of the engagement cabins the extent of the duty that he owes to
known third parties. Cf. Rusch Factors, Inc. v. Levin, 284 F.
Supp. 85, 91 (D.R.I. 1968) (advocating this proposition prior to
promulgation of the final version of the Restatement rule); Ryan
v. Kanne, 170 N.W.2d 395, 401-02 (Iowa 1969) (same; citing draft
version of the Restatement). Thus, an inquiring court initially
must consider, from the preparer's standpoint, what risks he
reasonably perceived he was undertaking when he delivered the
challenged report or financial statement.
Second, the court must undertake an objective
comparison between the transaction of which the accountant had
actual knowledge and the transaction that in fact occurred.
This comparison cannot be hypertechnical, but, rather, must be
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conducted in light of "[t]he ordinary practices and attitudes of
the business world." Restatement (Second) of Torts § 552 cmt.
j. The goal of this inquiry is to determine whether the two
transactions share essentially the same character. If so, the
actual transaction is substantially similar to the contemplated
transaction (and, therefore, liability-inducing). Elsewise, the
third party has no recourse against the accountant for negligent
misrepresentation.
D. The Merits.
With these guideposts in place, we turn to the case at
hand. To recapitulate, the district court granted summary
judgment for the defendants because it found insufficient
evidence to show that they had actual knowledge of the critical
transactions (i.e., the issuance of several bonds on which CRS
eventually defaulted). In so holding, however, the court
employed a "same transaction" standard, to the exclusion of
substantially similar transactions. We now employ the more
inclusive standard (assuming, albeit without deciding, that the
SJC would adopt it in an appropriate case).
The Restatement rule has six elements. A finding of
liability requires (1) inaccurate information, (2) negligently
supplied, (3) in the course of an accountant's professional
endeavors, (4) to a third person or limited group of third
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persons whom the accountant actually intends or knows will
receive the information, (5) for a transaction that the
accountant actually intends to influence (or for a substantially
similar transaction), (6) with the result that the third party
justifiably relies on such misinformation to his detriment. See
Nycal, 688 N.E.2d at 1371-72. The third party has the burden of
proving each of these elements. Consequently, he must create a
trialworthy issue on all six in order to avoid the entry of
summary judgment. See McIntosh v. Antonino, 71 F.3d 29, 33 (1st
Cir. 1995) (discussing the burden of production that devolves
upon a nonmovant who bears the ultimate burden of persuasion on
an issue underlying a summary judgment motion). Creating such
an issue necessitates the production of "specific facts, in
suitable evidentiary form." Id. (citation and internal
quotation marks omitted).
Assuming, for argument's sake, that the evidence,
viewed in the light most favorable to NASI, suffices to limn
genuine issues of material fact on five of the six elements,6 the
6
On these five elements, NASI has proffered evidence aimed
at showing that the notes to the financial statement contained
misinformation about whether Canty remained the sole stockholder
of CRS; and that D&L, which knew the true facts, negligently
prepared and released the misleading financial statement to CRS
in the ordinary course of D&L's business, knowing that CRS
planned to submit it to NASI (and intending to influence NASI's
consideration of the status of the bonds outstanding on ongoing
projects). NASI also proffered some evidence tending to show
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question reduces to whether NASI's issuance, in 1996, of the
particular bonds upon which CRS defaulted constituted
transactions that D&L actually sought to influence, or,
alternatively, substantially similar transactions. NASI would
have us answer this question affirmatively for three reasons.
We examine these reasons separately.
First, NASI argues that the bonds which it issued in
1996 were part of a regular "bonding program" and that D&L
prepared the financial statement with this program in mind. To
buttress this argument, NASI describes its relationship with CRS
as common in the industry, explaining that sureties typically
"prequalify" contractors for underwriting purposes, establishing
maximum limits on both individual and aggregate bonds. Such
bonding programs, NASI tells us, usually stay in place for a
year at a time.
While this trade usage might be conventional – NASI
neglected to offer any evidence of trade usage below – the
proper focus is on the accountant's actual knowledge and intent
to influence. See Nycal, 688 N.E.2d at 1372; Spencer v. Doyle,
733 N.E.2d 1082, 1087 (Mass. App. Ct. 2000). Regardless of how
NASI perceived the situation, the critical issue is what the
that it relied on the misinformation in writing the 1996 bonds
(although this issue, in particular, is hotly disputed).
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defendants actually knew, when they released the financial
statement, about NASI's intent to use the statement in deciding
whether to maintain a bonding program which involved writing new
bonds for CRS in 1996. See Nycal, 688 N.E.2d at 1372-73. The
evidence here, even when viewed in a light favorable to NASI,
does not support a conclusion that the defendants intended to
undertake the risk of a full year's worth of bonds.
To establish the defendants' actual knowledge and
intent to influence, NASI relies most heavily on Cote's
deposition. Cote testified in substance that once he and his
partners had acquired the stock of CRS, he met with Lapalme to
discuss the preparation of the 1995 financial statement. At
that time, he informed Lapalme that CRS's new owners planned to
use the financial statement to meet the corporation's
obligations for "ongoing" bonds (which he described as "projects
that were currently being worked on by [CRS] for which bonds had
been issued"). Cote specifically disclaimed having told Lapalme
that the financial statement would be used to obtain future
bonds, and NASI points to no other hard evidence to fill this
gap.
Taken at face value, Cote's testimony does not support
a conclusion that the defendants knowingly undertook the
substantial risks inherent in the issuance of future bonds. To
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the contrary, an objectively reasonable accountant in Lapalme's
position doubtless would have thought, based on Cote's request,
that he was subjecting his firm to possible liability for NASI's
inventory of bonds previously issued (those that related to
CRS's "ongoing" construction contracts), not for NASI's forward-
looking bonding program. Since no reasonable jury could have
concluded otherwise, NASI failed to show facts sufficient to
support its "bonding program" hypothesis.
If more were needed – and we doubt that it is – the
surrounding circumstances suggest how improbable it is that D&L
would have been willing to undertake liability for future bonds.
Lapalme was keenly aware that the preparation of the 1995
financial statement was likely to be D&L's last engagement for
CRS. Cote testified that he and his partners had begun looking
for a new accountant by the time that D&L completed its work on
the 1995 financial statement. This was to be expected: D&L had
been retained to handle the CRS account by the former owner,
Canty, and the purchase-and-sale agreement obligated the new
owners to retain D&L only until the firm had completed the tax
returns and other financials necessary to close out calendar
year 1995. It strains credulity to believe that an experienced
C.P.A. would undertake liability for indeterminate amounts of
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bonds not yet written when he had no reasonable anticipation of
working for the principal in the future.
NASI next contends that the defaulted bonds represented
transactions which were substantially similar to those that the
defendants intended to influence. Here, however, as we shortly
will show, the 1996 bond transactions plainly did not share the
essential character of the earlier transactions about which the
defendants knew (and which they intended to influence).
Accordingly, the two sets of transactions cannot be considered
substantially similar.
To be sure, determinations of this type involve matters
of degree. If, for example, D&L had agreed to release the 1995
financial statement in anticipation of allowing NASI to review
it before issuing a $500,000 bond for a specific future project,
and NASI thereafter issued a bond for that project in an amount
that varied by, say, $50,000, D&L would be liable to NASI for
any loss occasioned by a negligent misrepresentation. 7 See
Restatement (Second) Torts § 552 cmt. j. Similarly, if D&L had
agreed to provide the 1995 financial statement in anticipation
7This and subsequent examples are merely our best
predictions, based on the sparse case law now available, as to
how the "substantially similar transactions" rubric will unfold
in specific situations. The examples are subject to
reconsideration if actual cases presenting the same facts arise
or if further enlightenment emerges from the Massachusetts
courts.
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of allowing NASI to review it before bonding a project that was
slated to start on May 1, but the project did not get underway
until June 15, D&L would still be liable. Id. In each
instance, the key is the accounting firm's actual knowledge of
the surety's intention to rely on the financial statement for a
specific purpose — deciding whether to issue a bond in a known
amount for a known project. The firm thus could anticipate its
likely exposure from attempting to influence the surety's
decision, and the imposition of liability for negligence should
not be defeated by modest variances that the firm, given the way
in which business transactions typically develop, reasonably
could have anticipated. See id.
In this context, there is no scientific formula for
ascertaining substantial similarity. Even if the change
involves a new transaction, rather than merely a modification of
the earlier (known) transaction, the accounting firm might still
be held liable if the identity of the third party is unchanged,
the type of transaction pretty much the same, and the firm's
exposure relatively constant. Imagine, for example, that D&L
agreed to provide the financial statement in anticipation that
NASI would review it in deciding whether to write a $500,000
bond referable to a specific roofing contract that CRS hoped to
secure. Imagine, too, that the project fell through, but CRS
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instead obtained a different, roughly comparable roofing
contract, likewise requiring a $500,000 bond, and NASI, relying
on the financial statement, provided the bond. In that
hypothetical situation, D&L likely would be liable to the surety
for misinformation. See id. cmt. j, illus. 15.
There is an obvious difference between these examples
and the case at hand. The examples presume that the accountants
knew the general nature of the risk they were taking and the
approximate dollar amount of their potential liability. In this
case, however, D&L accepted potential liability only for ongoing
work — known projects in various stages of completion — but NASI
seeks to hold the firm liable for unknown future projects not
yet begun (or even bid) when the financial statement was
delivered. The increased degree of risk is patent. By like
token, D&L accepted potential liability only for bonds
previously issued — bonds with fixed, easily ascertainable
dollar limits — but NASI seeks to hold D&L liable for bonds
which, at the relevant time, were not yet issued (and which,
therefore, had no monetary limit). Those bonds would be written
for whatever sums the contract documents might require. Once
again, the increased degree of risk is patent. Consequently,
the liability that NASI wishes us to impose on the defendants is
well beyond the outermost frontier of Massachusetts law. It is
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not liability for transactions substantially similar to the ones
which D&L knowingly undertook to influence, but for new
transactions that differ in their essential character and entail
a new, unanticipated level of risk.
That ends this aspect of the matter. Without some
evidence that the defendants knew that they were undertaking
additional, open-ended liability with respect to future bonds by
releasing the financial statement, NASI's second argument
founders. Simply because transactions are of the same general
nature (e.g., "bonds") is not enough to render them
substantially similar for purposes of the Restatement rule. Any
other conclusion would make a mockery of a basic premise that
underbraces the Restatement rule: that an acquiescent
accountant is only deemed to accept the risks of specific
transactions that were made known to him in advance (or
substantially similar ones). See Bily v. Arthur Young & Co.,
834 P.2d 745, 769 (Cal. 1992) (holding that an accountant is
liable for negligent misrepresentation to a third party only if
he knowingly supplies the information for the benefit of the
third party, and the information is relied on by the third party
in a transaction previously identified to the accountant, or a
substantially similar transaction).
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In a last-ditch effort to impose liability, NASI lodges
a claim of willful blindness. It asserts that D&L, through
Lapalme, closed its eyes to commercial realities in a struthious
attempt to avoid liability for future transactions. The legal
foundation on which this argument rests is impeccable. See
Nycal, 688 N.E.2d at 1373 ("[T]he Restatement standard will not
excuse an accountant's 'willful ignorance.'"). However, the
record does not lend substance to NASI's allegations.
NASI points to three facts which it claims show willful
blindness. First, it notes that the dollar amount of the bonds
issued for CRS in 1996 was on the same order of magnitude as the
aggregate dollar amount of the bonds underwritten for CRS in
1995. This proves nothing of significance. The defendants were
not made privy to CRS's plans for the future. Without such
knowledge, the past year's experience was not likely to be a
reliable indicator of a future course of dealings (especially
given the changes in CRS's ownership and management). In all
events, there is no evidence that the defendants were informed
either that CRS, as reconstituted, would continue to use NASI as
its principal bonding source or that NASI intended to use the
1995 financial statement as a basis for evaluating the
advisability of issuing future bonds. Absent such forewarning,
knowledge of past practice would be irrelevant in this context.
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NASI next suggests that D&L should have asked the new
owners what types of bonds CRS might need in 1996. The problem
with this suggestion is that D&L was retained to do a
retrospective account of CRS's finances as of December 31, 1995.
Hence, any inquiry into CRS's future plans would have been
gratuitous.
Finally, NASI harps on D&L's practice of asking Canty
how many copies of the financials he would need. NASI argues
that the incidence of multiple copies should have put D&L on
guard. We are at a loss to follow NASI's logic. D&L knew all
along, through Lapalme's conversation with Cote, that CRS would
supply a copy of the 1995 financial statement to NASI. The
relevant question, therefore, was not who received the financial
statement but for what purpose it was tendered.
We need not paint the lily. NASI has failed to
identify any plausible evidence of willful blindness or
otherwise to demonstrate the existence of a genuine issue of
material fact as to the defendants' actual knowledge of a
substantially similar, loss-inducing transaction. Accordingly,
we uphold the district court's entry of summary judgment in the
defendants' favor on the negligent misrepresentation claim. See
Perez, 247 F.3d at 310 (explaining that the court of appeals may
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affirm a summary judgment on any ground made manifest by the
record).
IV. THE CHAPTER 93A CLAIM
NASI originally pleaded a claim, arising out of the
same facts, for deceptive trade practices. See Mass. Gen. Laws
ch. 93A, § 2(a). The district court granted summary judgment
for the defendants on that claim. In its opening brief to this
court, NASI offered no developed challenge to the correctness of
that ruling. In its reply brief, however, NASI attempts to
remedy this omission. Its attempt fails.
There are few principles more securely settled in this
court than the principle which holds that, absent exceptional
circumstances, an appellant cannot raise an argument for the
first time in a reply brief. E.g., Aulson v. Blanchard, 83 F.3d
1, 7 (1st Cir. 1996); Pritzker v. Yari, 42 F.3d 53, 71 n.19 (1st
Cir. 1994); Mesnick v. Gen. Elec. Co., 950 F.2d 816, 829 n.11
(1st Cir. 1991); Sandstrom v. ChemLawn Corp., 904 F.2d 83, 87
(1st Cir. 1990). NASI flagrantly violated that established
principle. At any rate, the belatedly asserted claim is weak
and NASI has cited no exceptional circumstances which might
excuse the claim's omission from its opening brief. Given those
verities, we see no basis for overlooking NASI's procedural
default.
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V. CONCLUSION
We need go no further. This is a novel case, made
easier because it was well presented by able advocates on both
sides. In the end, we are confident that the law is not so
elastic as NASI maintains, and that the core claim asserted here
falls beyond the scope of an accountant's liability to a third
party. Accordingly, we uphold the entry of summary judgment in
the defendants' favor.
Affirmed.
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