Walpert11/21/2000
Opinion by Bell, C.J. Wilner, J., concurs
This case presents the issue of under what circumstances, if any, absent a contractual relationship, an accountant is liable for the economic losses of a party who relied on a financial report which the accountant prepared. The Circuit Court for Baltimore City concluded that, under the circumstances of this case - where there is no privity between the accountant and plaintiff and the plaintiff is not the intended beneficiary of the accountant's contract - no duty is owed. Although agreeing with the trial court that the plaintiffs were not the intended beneficiaries, the Court of Special Appeals nevertheless reversed the judgment of the Circuit Court. It held, in an unreported opinion, that there was sufficient evidence from which a trier of fact could find that, under the circumstances, a duty was owed to the plaintiffs. This Court granted the petitioner's Petition for Writ of Certiorari in order to review this matter of first impression. We agree with the intermediate appellate court and, accordingly, affirm.
I.
The respondents, George and Shirley Katz (the "Katzses"), filed suit in the Circuit Court for Baltimore City against Walpert, Smullian & Blumenthal, P. A. ("WS&B;), the petitioner accountants, seeking damages for negligence, gross negligence, negligent misrepresentation and breach of contract, as a consequence of loans they made to Magnetics, Inc., George Katz's former company and the petitioner's client. The complaint alleged that George Katz was the owner and president of Magnetics, a printing supplies and press repair business, until 1987 when, as a result of failing health, he retired as both owner and operator. At that time, George Katz relinquished both his ownership interest in the company to his wife, Shirley, and their two sons, giving each a one third interest, and passed control of the company to his son, Philip. Although he continued to be listed on the books as president, George Katz neither attended meetings of the board of directors nor participated in the day-to-day management of the company. In 1989, George Katz's health further deteriorated.
The Katzses remained financially interested in, and involved with, Magnetics after George Katz's retirement. George Katz received an annual salary of $5,000 and Mrs. Katz, now a one third owner, received $20,000 annually as a consulting fee. In addition, the Katzses received $120,000 a year as rental for the building out of which the business was operated.
Subsequent to George Katz's relinquishment of control of Magnetics, Philip Katz retained WS&B;as Magnetics' accounting firm. WS&B;s dual undertaking through its contract was to perform annual audits of Magnetics' financial statements as well as prepare unaudited reports for the company every six months. In the course of the engagement, it prepared unaudited compilations of Magnetics' financial statements for the periods ending: (1) April 30, 1989; (2) April 30, 1990; (3) April 30, 1991; and (4) April 30, 1992. Moreover, for those same years, WS&B;audited Magnetics' annual year-end financial statements. Additionally, as part of the contractual services provided to Magnetics, WS&B;prepared personal income tax returns for the Katzses from 1988 through 1992, and prepared an estate plan in 1990.
Also subsequent to his retirement, George Katz and his wife entered into four financial transactions with Magnetics. In 1990, they loaned Magnetics $425,000 and then in 1992, they pledged $150,000 to Magnetics, executed a limited payment guarantee of $1,000,000 to Magnetics and also signed an indemnity deed of trust and security agreement securing a debt previously incurr
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