Find Legal Information

THE STATE OF SOUTH CAROLINA

In the Supreme Court

ML-Lee Acquisition Fund, L.P., Respondent,

v.

Deloitte & Touche, Petitioner.

ON WRIT OF CERTIORARI TO THE COURT OF APPEALS

Appeal From Greenville County

Charles B. Simmons, Jr., Master-in-Equity

Opinion No. 24676

Heard May 21, 1997 - Filed August 11, 1997

AFFIRMED IN PART; REVERSED IN PART.

Jefferson V. Smith, Jr., of Carter, Smith, Merriam, Rogers

& Traxler, P.A., of Greer; and James T. Williams, Jr. and S.

Leigh Rodenbough, IV, both of Brooks, Pierce, McLendon,

Humphrey & Leonard, L.L.P., of Greensboro, North

Carolina, for petitioner.

Wilbum Brewer, Jr., Marcus A. Manos, and Jennifer J.

Aldrich, all of Nexsen, Pruet, Jacobs & Pollard, L.L.P., of

Columbia; and John D. Hughes and David A. Martland,

both of Hutchins, Wheeler & Dittmar, of Boston,

Massachusetts, for respondent.

MOORE, A.J.: This case is before us on a Writ of certiorari to review

the Court of Appeals' decision reported at ')20 S.C. 143, 463 S.E.2d 618 (Ct. App.

1995). We affirm in part and reverse in part.

p56

ML-LEE ACQUISITION v. DELOITTE & TOUCHE

FACTS1

Petitioner Deloitte & Touche (Accountant) was retained by Emb-Tex

Corporation to audit its financial statements from 1982 through 1988. Respondent

ML-Lee Acquisition Fund (Investor) made two investments in Emb-Tex, one in 1988

for $16 million and one in 1990 for $2 million. Investor subsequently commenced this

action against Accountant for professional negligence and negligent misrepresentation

alleging it suffered a loss because its agent, Thomas H. Lee Company (Advisor), relied

on the audit reports and Accountant's 1988 "comfort letter" in recommending the

investments in Emb-Tex.

As Investor learned in 1991, Emb-Tex's financial statements for 1985 and

after overstated its inventory. Consequently, the audit reports prepared by Accountant

for those years did not reflect Emb-Tex's true financial condition when Investor made

its investments in 1988 and 1990. Investor alleged Accountant knew or should have

known about the inventory overstatements.

The master granted Accountant summary judgment on both causes of

action. On the professional negligence claim, the master found Investor could not

maintain such an action because Investor was not Accountant's client. This holding

was not appealed. On the claim for negligent misrepresentation, the master adopted

the standard of liability set forth in § 552 of the Restatement (2d) of Torts (1977).2 __________________________

1We refer the reader to the Court of Appeals' opinion for a complete recital of the

complex facts in this case.

2This section of the Restatement provides as follows:

INFORMATION NEGLIGENTLY SUPPLIED FOR THE GUIDANCE OF OTHERS.

(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 in their business transaction, is

subject to liability for pecuniary loss caused to them by

their justifiable reliance upon the information, if he falls

to exercise reasonable care or competence in obtaining

or communicating, the information.

(2) [T]he liability stated in subsection (1) is limited to

loss suffered

p57

ML-LEE ACQUISITION v. DELOITTE & TOUCHE

Applying this standard, the master held (1) Accountant owed Investor no duty

regarding either investment and (2) Investor did not justifiably rely on the information

supplied by Accountant.

On appeal, the Court of Appeals reversed in part the master's ruling that

Accountant had no duty to Investor. It found in pertinent part that Investor was

Accountant's client for purposes of the 1990 investment and accordingly owed Investor

a duty to disclose information regarding Emb-Tex's inventory overstatement for that

year. The Court of Appeals also reversed the master's holding there was no justifiable

reliance and held the reliance of an agent is sufficient to establish liability to a

principal for a negligent misrepresentation.

ISSUES

I . Did Accountant have a duty to disclose the current

inventory overstatement?

2. Is the reliance of an agent sufficient to establish

justifiable reliance?

DISCUSSION

1. Duty

The Court of Appeals held Accountant owed Investor a duty to disclose

Emb-Tex's current inventory overstatement, not under §552,3 but based on the __________________________

(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.

3We adopt the §552 standard of liability for the reasons set forth in the Court of

Appeals' decision. Under §552, and accountant has a duty to exercise reasonable care

or competence in obtaining or communicating information. This section imposes no

p58

ML-LEE ACQUISITION v. DELOITTE & TOUCHE

conclusion Investor was Accountant's client for purposes of the 1990 investment.4

There was no appeal of the master's ruling that Investor was not

Accountant's client. This unappealed ruling is the law of the case, In re: Morrison, _

S.C. _, 468 S.E.2d 651 (1996), and should not have been reconsidered by the Court

of Appeals. Since it is the law of the case that Investor was not Accountant's client,

we reverse the Court of Appeals' ruling that Accountant had a duty to disclose.

2. Reliance

To establish liability under Restatement §552, the party seeking to

recover for a negligent misrepresentation must show he justifiably relied on the

information communicated by the accountant. The master held that in order to

establish justifiable reliance, a plaintiff must prove it relied directly on the information

provided by the accountant. He concluded the facts showed at best only that Investor's

agent, Advisor, relied on the information in recommending these investments but

Investor's actual decision-makers did not. Accordingly, he held there was no justifiable

reliance as a matter of law. The Court of Appeals found this ruling inconsistent with

general agency law. We agree.

It is well-settled that the authorized acts of an agent are the acts of the

principal. Crim v. Hutton, 298 S.C. 448, 381 S.E.2d 492 (1989); Carver v. Morrow,

213 S.C. 199, 48 S.E.2d 814 (1948); Palmer v. Sovereign Camp, W.O.W., 197 S.C.

379, 15 S.E.2d 655 (1941). The Court of Appeals properly applied this general rule to

conclude the reliance of an agent acting within the scope of his agency is the reliance

of the principal. See also Restatement (2d) of Agency, §315 comment b ("One making

a misrepresentation to an agent in order to obtain a contract with the principal is

subject to liability if the contract is obtained as a result of it, whether the agent to

whom the statement is made, or another agent, or the principal consummates the

transaction in reliance upon it."). Accordingly, we hold the Court of Appeals properly

reversed the master's grant of summary judgment on the issue of reliance.

AFFIRMED IN PART; REVERSED IN PART.

FINNEY, C.J., TOAL, WALLER and BURNETT, JJ., concur. __________________________

duty to disclose information.

4The Court of Appeals relied on evidence that Investor wanted Accountant to

complete a 1988 audit of Emb-Tex and provide 1989 and 1990 audits and a discussion

regarding a client representation letter.

p59