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Institute in the Courts: State Supreme Courts Adopt Torts 2d Provisions

The Supreme Judicial Court of Maine and the Supreme Court of Rhode Island recently adopted Sections of the Restatement of the Law Second, Torts. Summaries of those opinions follow.

In Cianchette v. Cianchette, 2019 WL 2345434 (Me. June 4, 2019), the Supreme Judicial Court of Maine adopted the formulation of fraudulent misrepresentation set forth in the Restatement of the Law Second, Torts. In that case, the owner of a car dealership offered the plaintiff, the general manager of the dealership, the opportunity to purchase the dealership and the land on which it sat. The plaintiff sought financing from his stepmother and father, the defendants, and together the parties formed a limited-liability company to “purchase, own, and operate the dealership.” After completing the purchase of the real estate and dealership, the parties subsequently executed agreements under which the plaintiff was to purchase the real estate and the defendants’ interests in the company, but the defendants purported to terminate the agreements, and the plaintiff was fired as general manager. The plaintiff filed claims for, among other things, fraudulent misrepresentation against the defendants, alleging that the defendants never intended to perform their obligations under the agreements. The trial court entered judgment following a jury verdict for the plaintiff, awarded him damages, and denied the defendants’ motions for a new trial and judgment as a matter of law. The Supreme Judicial Court of Maine affirmed, holding, inter alia, that the trial court did not err in denying the defendants’ motion for judgment as a matter of law as to the plaintiff’s fraudulent-misrepresentation claim, because “a reasonable view of the evidence and all justifiable inferences support[ed] the jury’s finding that [the defendants] entered into the membership agreement with the intent of never performing their obligations under that contract” and that the plaintiff “justifiably relied upon that false representation to his detriment,” satisfying Restatement of the Law Second, Torts § 525.

The court rejected the defendants’ argument, which relied on Shine v. Dodge, 157 A. 318 (Me. 1931), that “an intention not to perform a contract, even when such an intention existed at the time of the execution of the contract, [could not] support an action for fraudulent misrepresentation because it [was] not a false representation of a material fact.” In Shine, the court stated that it was ‘“well settled in this state that the breach of a promise to do something in the future [would] not support an action of deceit, even though there [could] have been a preconceived intention not to perform.”’ The court took “this opportunity to explicitly adopt the Restatement’s formulation of fraudulent misrepresentation and overrule the contrary rule stated in Shine.” The court explained that, pursuant to the Restatement of the Law Second, Torts § 530(1), ‘“[a] representation of the maker’s own intention to do or not to do a  particular thing [was] fraudulent if he [did] not have that intention.’ . . . This [was] true regardless of whether there [was] an express statement of intent because ‘a promise necessarily carrie[d] with it the implied assertion of an intention to perform.’ Id. § 530(1) cmt. c.” The court noted that a “fact” could include a state of mind, citing § 525, Comment d, and § 530, Comment a, and that §§ 538A, 539, and 542-543 “acknowledge[d] that a misrepresentation of opinion [could] be actionable in the appropriate circumstances.” In this case, the jury found that the defendants entered into an agreement with the plaintiff with no intention of actually performing, which constituted a false representation that was a fact material to the formation of the agreement. The court reasoned that, under § 538(2)(a), the intention to never perform a contract at the time of its execution was material because a reasonable person would attach importance to that fact, and that, under § 530, Comment b, “the intent to not perform [had to] be present at the time the parties [were] entering into the contract.”

In Rhode Island Industrial-Recreational Building Authority v. Capco Endurance, LLC, 203 A.3d 494 (R.I. 2019), the Supreme Court of Rhode Island adopted Restatement of the Law Second, Torts § 552 in determining whether there was a duty of care between a third party and an accountant/auditor in the context of a negligence claim. In that case, an insurer of bonds that were issued to limited-liability companies as part of an agreement between the companies and a lender for a revolving line of credit brought an action against, among others, an accounting firm that prepared audited annual financial statements for the companies, alleging that, in approving a temporary 17.5 percent increase in the companies’ credit in 2011, it relied on a 2009 audit report for the companies that the defendant negligently prepared. The trial court rendered a bench decision granting summary judgment for the defendant, finding that, under Restatement of the Law Second, Torts § 552, the defendant did not owe a duty to the plaintiff with respect to the 2009 audit report. The Supreme Court of Rhode Island affirmed and remanded, holding that, under § 552, when the defendant produced the 2009 audit report, it did not owe a duty to the plaintiff with respect to the plaintiff’s use of that report in approving the 2011 credit increase. It explained that § 552 ‘“limit[ed] an accountant’s liability for negligent misrepresentation to those third parties who the accountant actually kn[ew would] receive the information, and then, only for transactions that [were] the same as, or substantially similar to, the ones which the accountant actually kn[ew would] be influenced by the supplied information.’” The court determined, among other things, that there was “no basis whatsoever for holding that the hearing justice erred in concluding that the [2011] credit increase was not substantially similar, under the Restatement rule, to the original line of credit and bond transactions.”

The court noted that “both parties agree[d] that the Restatement rule was correctly chosen by the hearing justice as the best analytical approach” in determining whether a duty of care existed in an action by third parties against auditors, and explained that “[a]fter careful consideration of the three different standards relied upon by other courts, [the court was] in wholehearted agreement with the hearing justice and the parties as to the preferability of the Restatement rule” over the near-privity test and the reasonable-foreseeability rule. In adopting Restatement of the Law Second, Torts § 552, the court reasoned that “the Restatement rule is the most sensible middle-of-the-road approach to the question of the extent of potential liability to third parties to which an accountant/auditor should be exposed for alleged negligence on his or her part.” The court pointed out that it agreed with the statement of the Supreme Judicial Court of Massachusetts in Nycal Corp. v.KPMG Peat Marwick LLP., 688 N.E.2d 1368 (Mass. 1998) that ‘“the Restatement test properly balances the indeterminate liability of the foreseeability test and the restrictiveness of the near-privity rule. Section 552 recognizes commercial realities by avoiding both unlimited and uncertain liability for economic losses in cases of professional mistake and exoneration of the auditor in situations where it clearly intended to undertake the responsibility of influencing particular business transactions involving third persons.”’