Chapter 11 Case 1

Chapter 11 Case 1


Facts:
-Credit Alliance provided financing to LB Smith
-Credit Alliance told Smith that before they extended financing they would have to to examine audit financial statements
-Smith provided Credit Alliance with its consolidated financials
-contained an auditors report prepared by Arthur Anderson saying it was in accordance with GAAP and GAAS(standards)
-Credit Alliance relied on these statements and provided substantial funding to Smith
-1980- Smith filed a petition for bankruptcy
-had already defaulted on several millions of dollars of credit obligations to CA
-1981- CA sued for damages on outstanding loans to Smith
-CA claimed negligence and fraud by Andersen in the preparation of the audit reports
-Said that Andersen knew (or should have known) that the statements were used by smith to receive credit

Issue: Whether Smith can rely on the financial statements audited by Andersen. Whether there is privity of contract between Credit Alliance and Arthur Andersen

Rationale: (1) the accountants must have awareness that the financial reports were to be used for a particular purpose (2) in the furtherance of which a known party was intended to rely and (3) there must have been some conduct on the part of the accountants linking them to that party which evinces the accountants’ understanding of that parties reliance

There was no allegation, Andersen had direct dealings with Credit Alliance

Conclusion: CA fell within the exception to the general rule that requires privity to maintain an accounting against an accountant for negligence. The dismissed the charges against Andersen