own expert concludes that Coopers was merely "reckless," performed "deficient audit work," and "should have detected the accounting fraud." The expert does not suggest, and the evidence does not support, plaintiffs' contention that Coopers' was a knowing participant in the fraud. Therefore, as in University of Maryland, the fact, as alleged by plaintiffs, that Coopers "consciously ignored warnings that Phar-Mor's financial statements were fraudulent" is insufficient to establish a RICO claim. Id. at 1538-39 (fact that Peat Marwick "ignored numerous signs of Mutual Fire's precarious financial condition" is not sufficient to satisfy "operation or management" test).
For the reasons stated above, we hold that plaintiffs have failed to establish that Coopers was a participant in the operation and management of Phar-Mor, and we will enter judgment in favor of Coopers on plaintiffs' section 1962(c) claim. Moreover, because "any claim under Section 1962(d) based on a conspiracy to violate other subsections of section 1962 necessarily must fail if the substantive claims are themselves deficient," Lightning Lube, Inc. v. Witco, 4 F.3d 1153, 1191 (3d Cir. 1993), judgment will be entered in favor of Coopers on plaintiffs' section 1962(d) claim as well.
Plaintiffs' remaining claims are all state law claims, therefore, we must engage in a choice of law analysis to determine the appropriate state law to apply to these actions. Because each of the actions was initially filed in New Jersey, we must apply New Jersey's choice of law rules. In re Air Crash Disaster Near Chicago, Illinois, 644 F.2d 594 (7th Cir. 1981), cert. denied, 454 U.S. 878, 102 S. Ct. 358, 70 L. Ed. 2d 187 (1981). New Jersey applies a "governmental interest" approach, which provides that "the determinative law is that of the state with the greatest interest in governing the particular issue." Veazey v. Doremus, 103 N.J. 244, 510 A.2d 1187, 1189 (N.J. 1986).
TriCon and CLI contend that the law of New Jersey, where they have their principal places of business and where they received and allegedly relied upon Phar-Mor's financial statements, is controlling of their state law claims. On the other hand, Coopers asserts that Pennsylvania law, where the audit reports were prepared, signed and issued, and where Coopers' auditors are licensed, should be applied to the state law claims.
TriCon and CLI submit that the recent case of Performance Motorcars of Westchester, Inc. v. KPMG Peat Marwick, 274 N.J. Super. 56, 643 A.2d 39 (N.J.Super. 1994), cert. denied, 139 N.J. 183, 652 A.2d 172 (N.J. 1994), is directly on point and dispositive of the choice of law issue. In that case, the New Jersey Superior Court held that New Jersey law applied to the accounting malpractice claims brought by a corporation, having its principal place of business in New Jersey, for losses that it suffered in entering into a lease agreement with a New Jersey corporation. The plaintiff had received the audit report in New Jersey. The defendant, Peat Marwick, was a New York partnership, the auditors that worked on the audits were primarily licensed by the state of New York, the audit field work was performed in New York, and the audit reports were drafted, signed, and issued in New York.
In its choice of law analysis, the court noted that New York, by requiring privity for the maintenance of negligence claims against accountants, had expressed an undeniable interest in protecting its accountants from unlimited liability. However the court noted that New Jersey, by rejecting the privity requirement in Rosenblum, Inc. v. Adler, 93 N.J. 324, 461 A.2d 138 (N.J. 1983), had determined that its interest in protecting accountants was secondary to its interest in "compensating innocent creditors or investors [domiciled in New Jersey] who have sustained damages due to an independent auditor's negligence." Performance Motorcars at 40 (brackets supplied). Therefore, the court applied New Jersey law to the plaintiff's claims.
TriCon and CLI contend that, because their actions are nearly indistinguishable from Performance Motorcars, in terms of the factors relevant to a choice of law analysis, we must apply New Jersey law to their claims. However, we submit that our choice of law analysis must take into account that the legislature of New Jersey recently enacted a statute which dramatically limits accountant liability to third parties under New Jersey law. On March 17, 1995, less than a year after Performance Motorcars was decided, the Governor of New Jersey signed into law the Act of March 17, 1995, ch. 49, 1995 N.J. Laws 826. That act provides, in relevant part, that:
no accountant shall be liable for damages for negligence arising out of and in the course of rendering any professional accounting service unless: (1) the claimant . . . was the accountant's client; or (2) the accountant: (a) knew at the time of the engagement by the client, or agreed with the client after the time of the engagement, that the professional accounting service rendered to the client would be made available to the claimant, who was specifically identified to the accountant in connection with a specified transaction made by the claimant; (b) knew that the claimant intended to rely upon the professional accounting service in connection with that specified transaction; and (c) directly expressed to the claimant, by words or conduct, the accountant's understanding of the claimant's intended reliance on the professional accounting service .
Act of March 17, 1995, ch. 49, 1995 N.J. Laws 826, § 1.
New Jersey's enactment of a strict privity rule with respect to claims brought against accountants demonstrates that New Jersey now places a greater interest in the protection of accountants from unlimited liability than in compensating creditors or investors for accounting negligence. Thus, the foundation for the application of New Jersey law in Performance Motorcars, to-wit, the protection of New Jersey domiciliaries from the negligence of accountants, has eroded in favor of the policy concerns underlying the strict privity rule. Coopers argues that, in the face of the new statute, New Jersey's choice of law rules favor the application of Pennsylvania law. We agree.
While we recognize that New Jersey's new privity statute applies prospectively and, hence, would not apply as the substantive law to the claims asserted against Coopers, that fact does not make the statute irrelevant to our choice of law analysis. As rehearsed, we are to apply the law of the state "with the greatest interest in governing the particular issue." Clearly, New Jersey has little or no interest in the application of court-made law which its legislature has effectively overruled.
Indeed, New Jersey's interest would be best served in these actions by the application of Pennsylvania law, a strict privity state. Giant Eagle of Delaware, Inc. v. Coopers, 1995 U.S. Dist. LEXIS 8697, C.A. No. 92-2269, slip op. at 22-37 (W.D.Pa. June 20, 1995) (Pennsylvania requires privity in negligence claims against accountants). We will apply Pennsylvania law to the claims of TriCon and CLI.
We turn now to the merits of plaintiffs' state law claims. We will grant the motions of Coopers with respect to plaintiffs' claims of professional negligence and negligent misrepresentation on the basis that plaintiffs were not in privity with Coopers. Giant Eagle, supra, at 22-37 (under Pennsylvania law, plaintiff must be in privity with Coopers to assert claims for negligence and negligent misrepresentation). Accordingly, judgment will be entered in favor of Coopers on these claims.
Next, we hold that plaintiffs' common law fraud claims survive summary judgment because there is sufficient evidence of record from which a reasonable jury could conclude that Coopers performed its audits of Phar-Mor recklessly. Giant Eagle, supra, at 10-16.
Finally, we reject Coopers' contention that it is entitled to judgment to the extent that plaintiffs seek punitive damages. See Phar-Mor, Inc. v. Coopers, C.A. No. 92-2108, slip op. at 8 (W.D.Pa. June 1, 1995) (punitive damages may be awarded where a defendant acts with reckless indifference to the rights of others).
An appropriate written order will follow.
Dated: July 26, 1995
Donald E. Ziegler
ORDER OF COURT
AND NOW, this 26th day of July, 1995,
IT IS ORDERED that the motions (document nos. 1437 and 1567) of defendants, Coopers & Lybrand and a defendant class of Coopers' partners and principals (collectively "Coopers"), for summary judgment with respect to the claims of plaintiffs, TriCon Capital, Computer Leasing Inc, Center Capital Corporation, and New England Capital Corporation (collectively "plaintiffs"), be and hereby are granted in part and denied in part.
IT IS FURTHER ORDERED that the motions be and hereby are granted with respect to the claims of plaintiffs TriCon Capital, Center Capital Corporation and New England Capital Corporation for violation of sections 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c) and (d). Judgment be and hereby is entered in favor of Coopers and against plaintiffs on these claims.
IT IS FURTHER ORDERED that the motions be and hereby are granted with respect to the claims of plaintiffs for professional negligence and negligent misrepresentation. Judgment be and hereby is entered in favor of Coopers and against plaintiffs on these claims.
IT IS FURTHER ORDERED that the motions be and hereby are denied in all other respects.
Donald E. Ziegler