Levine v. Wiss & Co.

478 A.2d 397, 97 N.J. 242, 1984 N.J. LEXIS 2705

• Court: Supreme Court of New Jersey
• Decided: July 31, 1984
• Status: Published

Opinions

The opinion of the court was delivered by

HANDLER, J.

This case raises the question of whether an accountant, selected by the litigants in a contested matrimonial case and appointed by the court to act as an “impartial expert” in rendering a binding valuation of a business asset for purposes of equitable distribution, should be held liable for negligence in deviating from accepted standards applicable to the accounting profession.

I

The parties are in agreement as to the relevant facts. Grace Levine, upon filing for divorce from Bernard Levine, moved that an impartial expert be appointed by the court to evaluate her husband’s interest in Unified Components Corporation/Uni-corp (Unicorp), in anticipation of an equitable distribution. Both parties agreed to this procedure and consented to an order that provided in relevant part:

3. That the parties direct their respective attorney [sic ] to engage an impartial accountant, acceptable to both, to examine the books and records of defendant Unicorp, and value said corporation.

4. That the impartial expert so selected shall make a report of his findings which shall be binding and conclusive on both parties.

The parties engaged defendant Wiss & Company (Wiss), an accounting firm, to undertake the evaluation. In April 1977 Herbert Rudnick, one of the firm’s partners and a named defendant, reviewed Unicorp’s records and submitted a report to the court on behalf of Wiss, estimating the Levines’ equity interest in Unicorp and reporting the company’s cash-basis income for the four previous years.

Before trial, the Levines reached a settlement with respect to equitable distribution, alimony and child support. In February 1979, however, the parties moved jointly to vacate the settlement. The trial court denied this motion, and a judgment of divorce incorporating the property settlement was entered on April 9, 1979. Mr. Levine appealed the denial of the motion, requesting also that the consent order providing for defendants’ appointment be vacated and that the matter be remanded for a plenary hearing on the issues of equitable distribution and support. In December 1980, in a per curiam opinion, the Appellate Division affirmed the judgment of the lower court, upholding the settlement agreement. 190 N.J.Super. 335 (1983).

In March 1982 Mr. Levine brought the instant action against Wiss and Rudnick, alleging negligence in their valuation of Unicorp, breach of agreement, and breach of fiduciary duty. The consequent damage asserted was part of the sum paid to Mrs. Levine pursuant to the terms of the settlement. Plaintiff claimed that he was forced to accept an unfavorable settlement because of the allegedly incorrect values furnished by defendants.

On defendants’ motion, the trial court dismissed the complaint for failure to state a claim upon which relief could be granted. The court, relying substantially on English common-law precedent, held that an accountant appointed pursuant to court order enjoys “limited immunity” from suit and will be liable only if he or she acts in bad faith. The Appellate Division reversed, concluding that defendants’ role was comparable to that of any expert hired by parties to a contract to resolve a dispute over a particular term’s meaning, and therefore that defendants were not shielded from potential liability. 190 N.J. . We granted defendants’ petition for certification, 94 N.J. 613 (1983). For the reasons expressed in this opinion, we affirm the judgment of the Appellate Division.

II

One who undertakes to render services in the practice of a profession or trade is required to exercise the skill and knowledge normally possessed by members of that profession in good standing in similar communities. Restatement (Second) of Torts § 299A (1965). We have held that deviation from the accepted standards of care governing the professional conduct of, for example, doctors, Tramutola v. Bortone, 118 N.J.Super. 503 (App.Div.1972), modified on other grounds, 63 N.J. 9 (1973), dentists, Sanzari v. Rosenfeld, 34 N.J. 128 (1961), chiropractors, Klimko v. Rose, 84 N.J. 496 (1980), pharmacists, In re Suspension of Heller, 73 N.J. 292 (1977), lawyers, St. Pius X House of Retreats v. Camden Diocese, 88 N.J. 571 (1982), and insurance brokers, Milliken v. Woodward, 64 N.J.L. 444 (Sup.Ct.1900), will result in liability for negligence. Significantly, we have expressly recognized, and recently stressed, that an accountant may be held responsible to those to whom a duty is owed, for failure to adhere to the standards of the profession. See Rosenblum v. Adler, 93 N.J. 324 (1983).

“Accounting is the act of identifying, measuring, recording and communicating financial information about an economic unit.” Id. at 342, citing W. Pyle and J. White, Fundamental Accounting Principles 1 (1972). An accountant must exercise reasonable care in preparing reports, verifying underlying data, and examining the methods employed in arriving at financial statements. An incorrect financial statement, negligently prepared by an accountant and justifiably relied upon, “may be the basis for recovery of damages for economic loss or injury sustained as a consequence of that reliance.” Id. at 334. We have recognized that the public interest to be served by the rule holding accountants responsible for negligence is sufficiently compelling to warrant extension of the duty of care not only to those with whom the accountant is in privity, but also to those third persons known and intended to be the recipients of the representations, as well as those who foreseeably might rely on those representations. Id. at 352.

In the instant case, defendants were engaged as accountants to value plaintiffs business interest in accordance with the professional standards governing accountancy. This would call for application of general principles of accountancy in examination of the company’s financial statements and records, critical review of supporting documents, and consideration of the underlying accounting methodology used in the business. Commission on Auditor’s Responsibilities, American Institute of Certified Public Accountants, Report, Conclusions and Recommendations 1, 45 (1978). This standard of care, and the general rule of professional responsibility and liability for negligence, are implicated in plaintiff’s complaint.

Defendants contend that they are not liable for any negligence in the performance of their professional duties on behalf of the parties. They stress that they were court-appointed, and that the litigants agreed that the valuation would be binding. These factors, defendants argue, elevated them beyond the status of accountants to the quasi-judicial role of “arbitrators,” who would generally be shielded from private actions for damages brought by the parties to a given dispute.

Plaintiff maintains that defendants were engaged and appointed as accountants, and, consequently, they were expected to employ customary professional skill in the accomplishment of their designated task. As accountants, plaintiff asserts, defendants are more fittingly analogized to experts such as “appraisers” or “valuers,” as opposed to arbitrators. The appraiser or valuer, unlike the arbitrator, is an expert or technician retained to apply professional or specialized knowledge and skill in the determination of “specific issues of actual cash value.” 5 Am.Jur.2d “Arbitration & Award” § 3 (1962).

In this case, defendants were expected to apply their professional accountancy skills to determine the valuation of Unicorp. See Bewick v. Mecham, 26 Cal.2d 92, 156 P.2d 757 (1945); Litman v. Holtzman, 219 Md. 353, 149 A. 2d 385 (1959); In re Delmar Box Co., 309 N.Y. 60, 127 N.E. 2d 808 (1955). They can appropriately be considered “appraisers,” applying principles of accountancy in making their determination. Consequently, the standards of reasonable care applied to lawyers, doctors, engineers, and other professionals charged with furnishing skilled services for compensation attach with equal force and justification to defendants here. Gammel v. Ernst & Ernst, 245 Minn. 249, 72 N.W.2d 364 (1955). Under this standard of duty, defendants are required “to perform the services for which they were engaged in good faith and with reasonable care and competence, and [are] liable for damages occasioned by any failure to do so.”. Id. at 254, 72 N.W.2d at 367.

We have recognized the distinction between a person engaged because of special knowledge, technical skill, or expertise to act as an “appraiser” in a dispute, as opposed to one appointed to serve in a quasi-judicial capacity as an “arbitrator,” in whose hands “the dispute resolution process is entrusted.” Barcon Assocs. v. Tri-County Asphalt Corp., 86 N.J. 179,188 (1981). The appraiser is expected to perform a discrete function involving only the ascertainment of particular facts. This function, which entails neither a hearing nor the exercise of judicial discretion, is not to be confused with the duty of the arbitrator. Elberon Bathing Co. v. Ambassador Ins. Co., 77 N.J. 1, 16-17 (1978) (agreement for arbitration ordinarily encompasses disposition of entire controversy between the parties upon which award or judgment may be entered; on the other hand, agreement for appraisal extends merely to resolution of specific issues of actual cash value with all other issues reserved for determination in plenary action before court); Lakewood Tp. Mun. Util. v. South Lakewood Water Co., 129 N.J.Super. 462, 471 (App.Div.1974) (when parties to a contract provide for method of ascertaining cash value of item related to negotiations, provision is one for an appraisement, and not for an arbitration); see also E.C. Ernst, Inc. v. Manhattan Constr. Co. of Texas, 551 F.2d 1026, 1033 (5th Cir.1977), cert. den., 434 US. 1067, 98 S.Ct. 1246, 55 L.Ed.2d 769 (1978); Sanitary Farm Dairies, Inc. v. Gammel, 195 F.2d 106 (8th Cir.1952).

Although, as recognized by the dissent, arbitration can proceed informally, arbitrators typically act in an adjudicatory mode. They may receive the evidence of witnesses or the views of a party to a dispute only in the presence of, or on notice to, all parties, and may adjudge the matters to be resolved only on what is presented in the course of an adversary proceeding. Barcon Assocs. v. Tri-County Asphalt Corp., supra, 86 N.J. 179; Carpenter v. Bloomer, 54 N.J.Super. 157 (App.Div.1959). By contrast, “the skill, knowledge, and experience of the valuer are substituted for the taking of evidence- and hearing of argument, and the appraisal becomes only a link in the chain of evidence and not a final settlement of the dispute.” Note, “Arbitration or Appraisement?,” 8 Syracuse L.Rev. 205, 206 (1957).

Arbitration is conducted as a quasi-judicial proceeding, with hearings, notice of hearings, oaths of arbitrators and oaths of witnesses. Appraisers act only on their own [discretion] * * * [and] need not be sworn and need hold no formal hearings so long as both sides are given an opportunity to state their positions. [Elberon Bathing Co. v. Ambassador Ins. Co., supra, 77 N.J. at 17.]

An arbitrator “must render a faithful, honest and disinterested opinion upon the testimony submitted to him.” Brotherton, Inc. v. Kreielsheimer, 8 N.J. 66, 70 (1951); see also Barcon Assocs. v. Tri-County Asphalt Corp., supra, 86 N.J. at 192 (every arbitrator, neutral or party-designated, must make full disclosure of possible conflicts of interest to parties, prior to commencement of arbitration proceedings); American Eagle Fire Ins. Co. v. New Jersey Ins. Co., 240 N.Y. 398, 405, 148 N.E. 562, 564 (1925) (“[An arbitrator] should sedulously refrain from any conduct which might justify even the inference that either party is the special recipient of his solicitude or favor.”)

These principles are incorporated in onr arbitration act, N.J. S.A. 2A:24-1 to -11, which grants arbitrators “extremely broad powers and extends judicial support to the arbitration process subject only to limited review.” Barcon Assocs. v. Tri-County Asphalt Corp., supra, 86 N.J. at 187. “[Arbitrators decide both the facts and the law,” Daly v. Komline-Sanderson Engineering Corp., 40 N.J. 175,178 (1963), and the dispositions reached by arbitrators are afforded collateral estoppel effect by reviewing courts. Ukrainian Nat’l Urban Renewal Corp. v. Joseph L. Muscarelle, Inc., 151 N.J.Super. 386, 398 (App.Div.1977), certif. den., 75 N.J. 529 (1977). In some circumstances the arbiter’s determination can acquire the hue of judicial decisions, in terms of its legal effect in independent judicial proceedings. Thornton v. Potamkin Chevrolet, 94 N.J. 1 (1983).

Because they frequently proceed quasi-judicially, arbitrators are generally afforded an immunity from liability for the consequences of their decisions or awards that is Comparable to that accorded judges. Craviolini v. Scholer & Fuller Associated Architects, 89 Ariz. 24, 357 P.2d 611 (1961); Gammel v. Ernst & Ernst, supra, 245 Minn. 249, 72 N.W.2d 364; see 5 Am.Jur. 2d “Arbitration and Award,” supra, § 107. There is much to recommend this rule, as it supports a strong public policy favoring arbitration. See Barcon Assocs. v. Tri-County Asphalt Corp., supra, 86 N.J. at 210 (Clifford, J., dissenting) (“[T]he paramount public policy consideration of reviewing courts [is] the promotion and encouragement of voluntary arbitration as a means of resolving commercial disputes informally, expeditiously, relatively inexpensively, and in a manner that relieves our overburdened judicial resources.”); Hudik-Ross, Inc. v. 1530 Palisade Ave. Corp., 131 N.J.Super. 159, 166 (App.Div.1974); Carpenter v. Bloomer, supra, 54 N.J.Super. 157,162. The grant of immunity serves to preserve the arbitrator's integrity and independence, and to ensure that arbiters will act upon their convictions, free from the apprehension of adverse consequences. The scope of such an immunity in this context should be only coextensive with the purposes of arbitration and its most central role as an important substitution “of another tribunal for the tribunal provided by the ordinary processes of law,” Barcon Assocs. v. Tri-County Asphalt Corp., supra, 86 N.J. at 187 with its goal of providing for “the final disposition 11 * * of the controversial differences between the parties.” Eastern Engineering Co. v. City of Ocean City, 11 N.J.Misc. 508, 510 (Sup.Ct.1933). Accordingly, the immunity should be extended no further than is needed to advance these purposes and underlying policies. Consequently, it should not be available to shield from liability for negligence appraisers or other experts performing limited functions, as part of their regular professional responsibilities, in the context of judicial proceedings. E.C. Ernst, Inc. v. Manhattan Constr. Co. of Texas, supra, 551 A.2d at 1033. To do so would not only stretch beyond social need and utility the policy that encourages arbitration, but would also create an additional legal immunity — a consequence contrary to our prevailing philosophy and practice that strive to provide redress for wrongful injury. See, e.g., Kelly v. Gwinnell, 96 N.J. 538 (1984).

The defendants before us — experts retained by the parties to a dispute to perform a valuation in accordance with recognized principles of accountancy — did not remotely resemble arbitrators when they performed their assigned function, and, accordingly, they are not entitled to immunity from legal responsibility for any malfeasance. See Elberon Bathing Co. v. Ambassador Ins. Co., supra, 77 N.J. at 17; 6A A. Corbin, Contracts § 1442 (1962 & Supp.1982). Defendants simply rendered a singular determination — a finding of fact by which the parties had agreed to be bound. They did not resolve any conflicting claims or determine legal rights and obligations. They did not exercise the discretionary judgment that is the hallmark of the arbitrator’s function. In short, in discharging their very discrete and limited duties, defendants were not acting quasi-judicially. Since they bore little, if any, resemblance to judicial officers, the very rationale that would warrant a grant of immunity is absent.

Contrary to the finding of the trial court, there is no special significance to be attached to the fact that defendants were appointed by the parties pursuant to court order. As succinctly stated by the Appellate Division:

The fact remains that defendants were selected by the parties to a lawsuit to perform a valuation that the parties agreed would be binding. The trial judge’s entry of a consent order embodying the parties' settlement did not alter the private and consensual nature of that settlement, and did not endow defendants with a judicial immunity that would have been absent without the consent order. Rather, defendants' role was indistinguishable from that of the experts often retained by the parties to a private contract to fix a term upon which they cannot agree or have not the expertise to determine. It is in this role that we evaluate defendants’ exposure to suit. [190 N.J.Swper. at 338.]

A court-appointment is not a talisman for immunity. It does not alter the critical fact that defendants engaged in no adjudication and exercised no quasi-judicial power. Rather, they acted as “creatures of contract,” E.C. Ernst, Inc. v. Manhattan Constr. Co. of Texas, supra, 551 F.2d at 1033, retained by the parties to perform a specific duty. That duty was to apply established accounting principles to the financial facts as they found them. See Rosenblum v. Adler, supra, 93 N.J. at 342. The submitted finding bound the parties only because they had made a specific private decision to be bound.

We find ourselves in full accord with the decision of Gammel v. Ernst & Ernst, supra, 245 Minn. 249, 72 N.W.2d 364. There the Minnesota Supreme Court held that an accountant hired to audit a corporation, pursuant to the terms of a binding agreement entered into by the parties to a planned merger, was not a quasi-arbitrator entitled to immunity from suit for his negligence. The court found that the accountant could be sued for negligence in assessing the per-share earnings of the company’s stock. Alluding to the policies justifying immunity, the court rejected the claim, raised here as well, that because the parties had agreed to be bound by the value, the valuer had acted as an arbitrator and was immune from liability. Id. 72 N.W.2d at . Rather, the court placed the defendant experts in the category with other professionals who furnish skilled services for compensation. As such, they were outside the narrow grant of judicial immunity. “Where the agreement does not call for the exercise of judicial authority, ordinarily the person selected to perform skilled or professional services is not immune from charges of negligence.” Id. at 368; see also Annot., “Accountant’s Malpractice Liability to Client,” 92 A.L.R.3d 396, 409 (1979).

This reasoning applies with equal cogency to the facts now before us. “An accountant in defendants’ position does not exercise judicial authority.” 190 N.J.Super. at 339. Accordingly, we find unpersuasive, as did the Minnesota Supreme Court, the two early English cases relied on by the trial court here in granting defendants’ motion for summary judgment, Pappa v. Rose, 7 L.R.-C.P. 32 (1871), 7 L.R.-C.P. 525 (1872); Finnegan v. Allen, [1943] 1 K.B. 425.¹

III

For the reasons set forth in this opinion, we affirm the judgment of the Appellate Division.

1 These English precedents extended to valuers the immunity generally reserved to arbitrators. In Pappa v. Rose, supra, 7 L.R.-C.P. 32, a broker, pursuant to contract, agreed to sell raisins for a producer. In a subsequent contract between the broker and a buyer, the broker agreed to certify the quality of those raisins. Upon finding the goods substandard, the broker subsequently refused to attest to their quality, and the buyer, in turn, refused to perform. The producer then sued the broker, claiming that he was negligent in his assessment of the raisins' quality. The court held that the broker could not be sued. As with a submission to an arbiter, the parties had agreed to be bound by the broker’s determination and, accordingly, had to bear the risk of a negligent assessment. However, the court hastened to add that the broker had made no claim of expertise as an assessor of raisins — he had held himself out only as a broker. Inferentially, the function he performed was more analogous to an arbiter than a valuer. The instant case is therefore distinguishable, insofar as defendants held themselves out as accountants and, in fact, performed as accountants.

Finnegan v. Allen, supra, [1943] 1 K.B. 425, succeeded Pappa v. Rose and broadened its predecessor’s rule, according a "valuer" immunity for negligence. There, the parties to a contract had agreed to submit the stock of a closely held company to defendant for valuation. Noting that its holding was aimed at protecting a valuer from suit by the inevitable dissatisfied party, the court ruled that, absent a showing of bad faith, plaintiff could not sue defendant for want of care and skill in rendering the valuation. The court, however, distinguished the valuer from the arbitrator; unlike the arbitrator, the valuer could be sued for failure to follow instruction.