Ty Coon was furious after Tightwad Bank’s internal bank audit of Leaven and Earth’s books revealed the company’s inventory and accounts receivable levels materially lower than the company’s audited financial statements. Those financial statements, upon which Tightwad Bank relied, were prepared by Leaven and Earth’s outside auditors Cook, Books & Hyde and were a requirement when Leaven and Earth’s $5 million credit and loan facility came up for renewal. Ty called Leaven and Earth and advised that he was calling the $5 million loan because the financial statements did not disclose Leaven and Earth’s true financial position and were a breach of the loan agreement. Ty told Cook, Books & Hyde that because Leaven and Earth’s assets are insufficient to cover its loans, Tightwad Bank will sue Cook, Books & Hyde for negligent misrepresentation. Does Tightwad Bank have a good case against Cook, Books & Hyde?

Very possibly. Although Leaven and Earth signed the loan documents and received the loan proceeds, Tightwad Bank will argue that there would have been no loan or proceeds without the audited financial statements from Cook, Books and Hyde. Moreover, Ty Coon and his bank will take the position that Cook, Books and Hyde got the audit job only because of Tightwad Bank’s new credit requirements, and that Cook, Books & Hyde knew or should have known that the audit was being prepared expressly for that purpose.

The tort of negligent misrepresentation occurs when someone acting in the course of their business provides false information to guide others in a business transaction. That person is subject to liability for damages caused by another’s justifiable reliance if the person who provides the information failed to exercise reasonable care in obtaining or communicating the information. There are several important features to notice about the tort of negligent misrepresentation. First, it is restricted to business transactions. Second, the group who may sue for negligent misrepresentation is not everyone who relies upon it, but only those who the provider intended to rely or who he knew would rely on it. Third, the reliance must be justifiable. In other words, if the person who receives the information and relies upon it, but his reliance is unreasonable, then his claim for damages is either defeated or reduced. Finally, damages are restricted to actual monetary losses, not mental anguish.

Tilting the Scales in Your Favor. All the parties – Tightwad Bank, Leaven and Earth and Cook, Books & Hyde – would be better served to address what work was being done, for whom, and who was requiring / relying upon it. For example, while Cook, Books & Hyde’s engagement letter probably states that the report being delivered was only for Leaven and Earth and should not and could not be relied upon by anyone else, the bank would not be a party to the engagement letter. Finally, check your malpractice liability policy insurance policy. You may well have insurance coverage for such claims.