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March 15, 1999


The opinion of the court was delivered by: Vanaskie, District Judge.



A. Material Facts*fn1

Sparkomatic and Parente had a business relationship for nearly twenty years prior to the events surrounding this action. (Dion Dep. (Dkt. Entry 27) at 17.) For several years prior to its agreement with Williams, Sparkomatic had been attempting to sell its Kenco division. (Id. at 4.) Although Parente had prepared audited financial statements for Sparkomatic for 1990 through 1992, Parente had never created a separate audited financial statement for the Kenco Division only. (Id. at 18-19.)

On June 14, 1993, Sparkomatic and Williams entered into a Memorandum of Intent for the purchase of "certain assets of the Kenco Division." (Appendix (Dkt. Entry 30), Tab A, Ex. 4.) In this Memorandum of Intent, "audited book value" is defined as follows:

    The term "audited book value" . . . refers to
  certified statements of data which are agreed to by
  both [Sparkomatic's] certified public accountant and
  [Williams'] certified public accountant. Such
  information and data would be prepared by
  [Sparkomatic's] certified public accountant at the
  cost of [Sparkomatic] and be reviewed by [Williams']
  certified public accountant.

(Id. at 7.) Sparkomatic's representative, Ronald Dion (Dion), testified that he believed that the Memorandum of Intent provided that Parente would audit a June 30, 1993 balance sheet that had been prepared by Sparkomatic and presented to Williams. (Dion Dep. (Dkt. Entry 27) at 15, 38; Pl's SMF (Dkt. Entry 33) ¶ 9.) Parente, however, did not audit, nor had any involvement with, the June 30, 1993 balance sheet. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 8.)*fn2

In late June or early July 1993, Parente became aware of the proposed sale of Kenco Division by Sparkomatic to Williams. (Pelesh Dep. (Dkt. Entry 28) at 16-17.) On July 27, 1993, Sparkomatic formally engaged Parente to perform certain accounting work with respect the Kenco Division, namely, to audit Kenco Division financial statements for December 31, 1992, December 31, 1991, and December 31, 1990. (Def's SMF (Dkt. Entry 24) Ex. A, ¶¶ 4-5.) Moreover, Parente was also engaged to certify an "interim balance sheet" which would be prepared by Sparkomatic management and presented as part of the closing documents. This interim balance sheet was to be dated July 31, 1993 and certified by September 13, 1993. (Id. ¶ 5; Pelesh Dep. (Dkt. Entry 28) at 13.) Williams was not mentioned in this engagement letter. (Id. ¶ 6.)

On July 27, 1993, Parente prepared a planning memorandum which provided:

  We have been engaged to audit Kenco Engineering, a
  division of Sparkomatic Corporation, for the years
  ended December 31, 1992, 1991 and 1990. Kenco is in
  the process of being sold, and as part of the sale
  agreement, audited financials are necessary.

(Appendix (Dkt. Entry 30) Tab A, Ex. 11.)*fn3 Williams is not mentioned in this planning memorandum.

On August 1, 1993, Sparkomatic and Williams executed an Asset Purchase Agreement concerning the purchase of Kenco Division. (Def's SMF (Dkt. Entry 23) Ex. A, ¶ 9.) The Asset Purchase Agreement provided that the June 30, 1993 balance sheet was unaudited and that it had not been prepared by Parente, but rather had been certified by a Sparkomatic financial officer. (Appendix (Dkt. Entry 30) Tab A, Ex. 5, ¶ 1.6.) The Asset Purchase Agreement provided that Sparkomatic would provide Williams with the following documentation within thirty days of the closing date:

  (a) True and complete copies of the Balance Sheet,
  related statements of income and retained earnings
  and related statements of cash flows of the Business
  as of and for the years ended December 31, 1992, 1991
  and 1990 and the period from January 1, 1993 up to
  and through the Closing Date prepared in accordance
  with GAAP and audited by Sparkomatic's independent
  public accountants; and
  (b) A true and complete copy of the Interim Balance
  Sheet; and
  (c) A true and complete copy of the Closing Balance

(Id. ¶ 2.4) Thus, as of August 1, 1993, Williams was aware that the June 30, 1993 balance sheet had not been prepared by Parente and that it would not be certified or audited by Parente.*fn4

In relation to the audited financial statements, the Asset Purchase Agreement provided that Williams or its independent public accountant would have access to Sparkomatic's records and work papers as well as Sparkomatic's independent public accountant's records and work papers for review. (Id. ¶ 1.6) After the closing balance sheet was submitted to Williams, the Asset Purchase Agreement afforded Williams "the right, at its own expense to observe the taking of inventory on behalf of the Seller in connection with the preparation of the Closing Balance Sheet and to submit such Closing Balance Sheet to its own internal accounting and auditing staff or independent public accountants (at Purchaser's expense) for verification, such verification to be concluded no later than 30 days after the Purchaser's receipt." (Id.)

The Asset Purchase Agreement extended additional safeguards to Williams:

  5.6 Examination and Investigations. Prior to the
  Closing Date, the Purchaser shall be entitled,
  through its employees and representatives, including,
  without limitation, Brenman Raskin & Friebold, P.C.,
  and its lenders, appraisers and accountants, to
  make such investigation of the assets, properties,
  business and operations of the Business, and such
  examination of the books, records and financial
  condition of the Business as the Purchaser wishes.
  Any such investigation and examination shall be
  conducted at reasonable times and under reasonable
  circumstances and the Seller shall cooperate fully.
  The Seller shall furnish the representatives of the
  Purchaser with all information and copies of
  documents concerning the affairs of the Business as
  representatives of the Purchaser may reasonably
  request and shall cause the Seller's officers,
  employees, consultants, agents, accountants and
  attorneys to cooperate fully with the Purchaser's
  representatives in connection with such review,
  examination and investigation. If, through the
  Purchaser's examination and investigation, the
  Purchaser discovers discrepancies in the books and
  records of the Division or any other matter
  unacceptable to the Purchaser, the Purchaser shall
  give prompt written notice to the Seller in
  accordance with Section 11.7 and the Seller shall
  have ten days thereafter to resolve the matter(s) to
  the satisfaction of the Purchaser or the Purchaser
  shall have the right to terminate this Agreement
  under Section 10.1. If the Seller is unable to
  resolve the matter within the prescribed period and
  the Purchaser does not elect to terminate the
  Agreement in accordance with Section 11.7 and the
  Closing occurs, as of the Closing Date the Purchaser
  shall be deemed to have automatically waived its
  right to demand that the matter be resolved following
  the Closing. No review, examination or investigation
  by the Purchaser, shall diminish or obviate any of
  the representations, warranties, covenants or
  agreements of the Seller under this Agreement.

(Id. (emphasis added).)

Aside from a reference to Sparkomatic's independent public accountants, Parente was not identified, directly or indirectly, in the Asset Purchase Agreement. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 10.) Parente admitted, however, that it reviewed the Asset Purchase Agreement with Sparkomatic prior to closing. (Pelesh Dep. (Dkt. Entry 28) at 14-17.)

On August 14, 1993, the closing was held. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 16.) At the time of the closing, Williams had not yet received any audited material from Parente in relation to the Kenco Division. A month after the closing, on September 15, 1993, Kenco Division financial statements for the years ending December 31, 1992, 1991, and 1990, which were prepared by Sparkomatic and audited by Parente according to the terms of the engagement letter, were transmitted to Sparkomatic. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 17 .) On September 17, 1993, the closing balance sheet, prepared by Sparkomatic and audited by Parente in accordance with the terms of the engagement letter, was transmitted to Sparkomatic. (Id. ¶ 18.) At some point thereafter, Sparkomatic provided these audited reports and balance sheet to Williams.*fn5

The Asset Purchase Agreement provided that the final purchase price could be adjusted either upward or downward "by an amount equal to the difference in the net book value on the Closing Balance Sheet as compared to the Interim Balance Sheet." (Appendix (Dkt. Entry 30) Ex. A, ¶ 1.6.) It is undisputed that Parente audited the financial information necessary for the final closing balance sheet. It is undisputed that Parente reviewed the Asset Purchase Agreement with Sparkomatic and, therefore, had notice that its work product would be used to determine the final adjusted purchase price for the Kenco Division.

Williams had an independent public accountant, namely Kronick, Kalada & Berdy, review Parente's work papers with respect to the Closing Balance Sheet in late September 1993. (Def's SMF (Dkt. Entry 24) Ex. A, ¶ 21.) At the conclusion of this review, Williams' independent public accountants determined that there were no errors in Parente's work and, thus, no adjustments in the purchase price were necessary. (Id. ¶ 22.) Although Parente's work papers for the years 1990, 1991 and 1992 were available for review, Williams' independent public accountant failed to review those documents. (Id. ¶ 23.)

B. Procedural History

Parente originally filed a motion to dismiss, asserting, inter alia, that no privity existed between it and Williams. (Dkt. Entry 6.) After a case management conference with the parties, Parente's motion to dismiss was denied without prejudice, with the understanding that Parente would advance the same arguments in a summary judgment motion after limited discovery. (Dkt. Entry 16.) The parties entered into a stipulation governing discovery. (Dkt. Entry 15.)*fn6 On May 1, 1997, after the conclusion of the limited discovery, Parente filed its motion for summary judgment. (Dkt. Entry 24.)


Summary judgment should be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A fact is "material" if proof of its existence or non-existence might affect the outcome of the suit under the applicable law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "Facts that could alter the outcome are material facts." Charlton v. Paramus Bd. of Educ., 25 F.3d 194, 197 (3d Cir.), cert. denied, 513 U.S. 1022, 115 S.Ct. 590, 130 L.Ed.2d 503 (1994). "Summary judgment will not lie if the dispute about a material fact is `genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248, 106 S.Ct. 2505.

Initially, the moving party must show the absence of a genuine issue concerning any material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 329, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). All doubts as to the existence of a genuine issue of material fact must be resolved against the moving party, and the entire record must be examined in the light most favorable to the nonmoving party. White v. Westinghouse Elec. Co., 862 F.2d 56, 59 (3d Cir. 1988); Continental Ins. Co. v. Bodie, 682 F.2d 436 (3d Cir. 1982). Once the moving party has satisfied its burden, the nonmoving party "must present affirmative evidence to defeat a properly supported motion for summary judgment." Anderson, 477 U.S. at 256-57, 106 S.Ct. 2505. The affirmative evidence must consist of verified or documented materials. Mere conclusory allegations or denials taken from the pleadings are insufficient to withstand a motion for summary judgment once the moving party has presented evidentiary materials. Schoch v. First Fidelity Bancorporation, 912 F.2d 654, 657 (3d Cir. 1990). Rule 56 requires the entry of summary judgment, after adequate time for discovery, where a party "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S.Ct. 2548.

A. Negligence

The Pennsylvania Supreme Court requires privity between a plaintiff and a defendant-accountant to maintain a professional negligence action. In Landell v. Lybrand, 264 Pa. 406, 107 A. 783 (1919), the plaintiff claimed that he had been induced to purchase stock in a company and that he relied upon reports that had been prepared for the company by the defendant-accountants. The plaintiff brought a ...

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