West Virginia Business Litigation Lawyer & Attorney : Law Office of Jeffrey V. Mehalic : Charleston, Huntington, Parkersburg

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The principal issue presented in this appeal is whether Grant Thornton LLP (Grant Thornton), an accounting firm retained by First National Bank of Keystone (Keystone), in response to an investigation by the Office of the Comptroller of the Currency (OCC) into Keystone’s banking activities, owed a duty of care under the West Virginia law of negligent misrepresentation to Gary Ellis, who allegedly relied on oral statements made by Stan Quay (Quay), a Grant Thornton partner, and a Grant Thornton audit report of Keystone’s 1998 financial statements in deciding to accept the job as president of Keystone. We hold that Grant Thornton owed Ellis no such duty under West Virginia law.

Ellis v. Grant Thornton LLP, 2008 WL 2514182 (4th Cir. 2008).

    In a bench trial before Judge David A. Faber of the Southern District of West Virginia, Ellis obtained a verdict of $2,419,233, based on the court’s finding that Grant Thornton negligently misrepresented Keystone’s financial condition, knowing that Ellis would rely on such misrepresentations in deciding whether to go to work for Keystone.
   
    And bear in mind that Grant Thornton's misrepresentation was not insignificant: it failed to uncover that Keystone had overestimated the value of its loans by $515 million.  Ultimately, the FDIC paid $664 million to cover Keystone's losses after its collapse.

    In addressing Grant Thornton's appeal, the Fourth Circuit had to predict how the Supreme Court of Appeals of West Virginia would rule on Ellis’ claim of negligent misrepresentation because the Supreme Court has not addressed directly or indirectly this issue,

    Although the district court had relied on First Nat. Bank of Bluefield v. Crawford, 386 S.E.2d 310 (W.Va. 1989) in ruling for Ellis, the Fourth Circuit found that, “other than the adoption of the Restatement [(Second) of Torts § 552] approach, the Bank of Bluefield court gave no further meaningful guidance concerning under what circumstances an accountant can be liable to third parties for negligent misrepresentations under §552.”

    The Fourth Circuit found that other courts had  set forth six factors based on the Restatement's language, which emphasize the third party's reliance on the inaccurate information.  Unlike Ellis' situation, however, the application of those factors focuses on the accountant or auditor's knowledge or intention that the third party will rely on the information.

    This decision provokes – to me, at least – an obvious question: why should Ellis’ reliance on the flawed Grant Thornton audit be any different than the bank management's or the OCC’s reliance on the audit?  The audit report stated on its first page that it was for the information and use of Keystone’s management and its regulatory agencies and “should not be used by third parties for any other purpose.”  But does that absolve Grant Thornton of liability if its employees misrepresented -- in any other context, lied about -- Keystone's condition? 
   
    Apparently it does.  But there is something fundamentally wrong with this decision.  The Fourth Circuit declined to employ any type of "foreseeability" standard, even though it is reasonably foreseeable that a third party like Ellis will rely on the audit report, or the representations made to him by Grant Thornton employees, who did not preface their statements with the type of disclaimer found on the first page of the audit report.