## Facts

- KPMG Peat Marwick LLP audited Gulf Resources & Chemical Corporation’s 1990 financial statements and issued an auditor’s report.
- Nycal Corporation bought a controlling interest in Gulf by entering a stock purchase agreement with Gulf’s controlling shareholders on May 24, 1991; the transaction closed July 12, 1991.
- Nycal alleged it relied on KPMG’s audit report and that the report materially misrepresented Gulf’s financial condition, including by omitting a “going concern” qualification.
- Gulf filed for bankruptcy protection in October 1993, and Nycal claimed its investment became worthless.
- Nycal sued KPMG in Massachusetts Superior Court for negligent misrepresentation seeking economic damages, despite having no contractual relationship with KPMG.
- The Superior Court granted summary judgment for KPMG under Restatement (Second) of Torts § 552; the Supreme Judicial Court of Massachusetts granted direct appellate review.

## Issues

1. What duty standard governs an accountant’s liability for negligent misrepresentation to a nonclient who claims to have relied on an audit report.
2. Whether, under that standard, KPMG owed Nycal a duty of care where the record did not show KPMG knew or intended that Nycal (or a limited group including Nycal) would rely on the audit report for the stock purchase.

## Decision

- The Supreme Judicial Court affirmed summary judgment for KPMG.
- The court adopted Restatement (Second) of Torts § 552 as the governing standard for accountant liability to nonclients for negligent misrepresentation.
- The court rejected a pure foreseeability approach and declined to adopt a “near-privity” test.
- Applying § 552, the court held KPMG owed no duty to Nycal because the undisputed facts did not show KPMG knew or intended that Nycal, or a specifically limited group including Nycal, would rely on the audit report in connection with an investment decision.

## Legal Principles

- Under Restatement (Second) of Torts § 552, a professional who supplies information for the guidance of others in business transactions is liable for pecuniary loss caused by justifiable reliance only if the professional failed to use reasonable care, and only to:
  - the person or a limited group of persons for whose benefit and guidance the information was supplied, and
  - transactions the professional intended the information to influence (or substantially similar transactions).
- For nonclient claims against accountants based on an audit report, Massachusetts does not impose a duty to all reasonably foreseeable users; duty is limited to those the accountant knew would rely, or those within a specific, limited class the accountant knew would rely, for a known type of transaction.
- In cases seeking recovery for purely economic loss, Massachusetts applies restrictive duty limits to avoid indeterminate liability to an indeterminate class.

## Conclusion

Massachusetts limited an auditor’s negligence exposure to nonclients by adopting Restatement § 552 and holding that, without evidence the auditor knew or intended that a specific third party (or defined limited group) would rely on the audit report for the relevant transaction type, no duty of care exists and summary judgment for the auditor is proper.


Nycal Corp. v. KPMG Peat Marwick LLP, 426 Mass. 491 (1998)