Minnesota Federal District Court clears up confusion regarding accountant malpractice claims in North American Specialty Insurance Company v. WIPfli, LLC, et al.

On July 26, 2013, the Federal District Court for the District of Minnesota issued an order reconciling almost 40 years of ambiguous rulings concerning the claims available to a third party non-client seeking to sue an accountant. The case is North American Specialty Insurance Company v. WIPfli, LLC, et al. A copy of the Order, which denied WIPfli, LLC’s (“WIPfli”) motion to dismiss the complaint for failure to state claims against it, can be read here.

The case involved North American Specialty Insurance Company (“NAS”), which provided statutory performance and payment bonds on projects performed by general contractor Crowley Company, Inc. (“Crowley”). The purpose of these bonds is to guaranty for the project owner or developer that, in the event Crowley were to fail to perform its obligations under its contract, which might involve failure to complete the work (performance bonds) or failure to make full payment to all of its subcontractors and suppliers (payment bonds), NAS would act as “surety”, and would pay to ensure those obligations were met.

According to the Court’s Order, NAS alleged that WIPfli performed accounting and auditing services for Crowley. Thus, NAS was not WIPfli’s client. However, WIPfli prepared two “Independent Auditor’s Reports” regarding Crowley’s financial statements and condition, on which NAS claims it relied in providing $8 million in bonds on Crowley’s projects. Ultimately, according to NAS, Crowley began defaulting on its obligations to several parties because it was in poorer financial condition than Crowley’s financial statements suggested, and NAS alleges it ultimately was obligated to pay on approximately $2 million in claims.

NAS apparently alleged several items contained in WIPfli’s reports were inaccurate and were not based on generally accepted accounting standards despite a statement within the reports that WIPfli had done so. Importantly, NAS also alleged that WIPfli was aware that NAS would rely on the WIPfli reports. Therefore, in addition to suing Crowley to recover the amounts it claims it had to pay because it relied on the contractor’s misleading financial statements, NAS sued WIPfli alleging it failed to catch certain manipulated and inaccurate figures in those financial statements when preparing its “Independent Auditor’s Reports.”

WIPfli argued that NAS’s complaint should be dismissed because: 1) Minnesota does not recognize a claim for negligence against accountants by parties who were not clients of that accountant; and 2) failed to state with the required specificity a claim for negligent misrepresentation. The Court analyzed whether Minnesota law recognizes a claim for negligence (otherwise known as malpractice when referring to a professional such as a doctor or accountant) by a party in NAS’s position against an accountant providing services for another party (in this case, Crowley). Although noting that several cases issued by Minnesota’s appellate courts have allowed claims to proceed against accountants on claims that were referred to as based on “negligence”, this Court observed that a close reading of those cases demonstrates that Minnesota Courts had never held “negligence” was the appropriate cause of action. Rather, the claims at issue were permitted to proceed because they satisfied the standard for negligent misrepresentation.

The Court suspected the apparently confusing holdings in prior cases was due to the similarity between claims for negligence and claims for negligent misrepresentation. Ordinary negligence requires, among other things, that a defendant, who owes a duty to the plaintiff, breaches that duty (generally by failing to exercise the appropriate degree of care or competence). Negligent misrepresentation contains several additional elements, including the nature of the defendant’s role in the applicable transaction, but also includes a failure “to exercise reasonable care or competence in obtaining the information or communicating . . . information” to the plaintiff. A failure to exercise reasonable care is required under both claims, but the Court determined that a party in NAS’s position has been recognized as having a cause of action against another party’s accountant for negligent misrepresentation; not for negligence/malpractice.

The Court went on to determine that NAS had sufficiently pled facts necessary to continue with its negligent misrepresentation claim against the accounting firm. More importantly, however, based on its incisive analysis, the Court dismissed NAS’s claim for negligence against WIPfli after concluding that Minnesota courts had never intended to recognize such a claim despite certain cases that may at first have suggested otherwise.

Matt Drewes contributed this article. Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s eight-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law, and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in print publications such as the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, and on various websites including Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations, and real property issues. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Whose Foot Is It? Subway sued for failing to ensure all footlongs are 12 inches

Two men in New Jersey have sued Subway, alleging that the sandwich chain’s sandwiches aren’t as advertised. A New York Post story on the suit is available here.

The attorney for the men explained the suit: “The case is about holding companies to deliver what they’ve promised,” according to the Post article.

The piece also includes an investigation performed by the newspaper that revealed four out of seven sandwiches purchased in Manhattan, Brooklyn, and Queens measured less than 12 inches, instead running 11 to 11.5 inches.

The attorney in the New Jersey case plans to seek class action status for this lawsuit, and to commence a similar class action suit on behalf of allegedly short-changed customers in Pennsylvania, according to this piece from the Associated Press.

It appears these cases and the New York Post’s investigation arose from a recent post on Subway’s Facebook page holding a tape measure up next to a sandwich apparently showing it to be just 11 inches long.

For its part, it appears Subway hasn’t run from the controversy. While it has stated that sometimes individual stores may deviate slightly from corporate practices, resulting in varied sandwich lengths, according to the linked article its spokesperson has also stated that Subway intends to honor its “footlong” representations going forward.

At this time, we have not seen whether or how the New Jersey lawsuit may be resolved. But while it’s easy to scoff at something relatively minor to an average sandwich purchaser, news sources say Subway has more than 37,000 stores worldwide, and cutting even small corners (if done intentionally) can lead to significant total savings for those who own the stores. It is worth noting that Minnesota laws currently on the books likely would apply to this situation, including the Minnesota Consumer Fraud Act, and Minnesota’s version of the Uniform Deceptive Trade Practices Act. These laws are to protect consumers and competitive businesses from one party misleading people into purchasing its products over a competitors, or purchasing a product that is not what it’s supposed to be. Whether this is a case that justifies invoking these strong public protections is another question.

Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations and real property issues . He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.