S.E. 2d
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.
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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
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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
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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.
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