Filed: January 28, 2016
Opinion by: James K. Bredar
Holding: The U.S. District Court for the District of Maryland, declining to import the doctrine of presumed reliance from federal securities-fraud cases, held that to succeed on a negligent misrepresentation theory involving audit reports made in connection with a 401(k) Plan, employees must prove, among other matters, justifiable action was taken in reliance on the alleged misrepresentation.
Facts: Plaintiffs were former employees of a transportation contractor. The company established a 401(k) Plan as an employee benefit plan governed by ERISA. Defendant-auditor was retained to perform an audit of the Plan’s financial statements for 2009, 2010 and 2011, as required by ERISA’s detailed reporting requirements.
By year-end 2011, the company’s contributions to the Plan were several quarters behind, such that the company owed over $700,000 to the Plan. Plaintiffs alleged that the Defendant’s audit reports for 2010 and 2011 contained material omissions regarding the Plan.
Analysis: A plaintiff asserting a claim for negligent misrepresentation must prove that, among other factors, the plaintiff took justifiable action in reliance on the statement. The Court stated that for purposes of the Plaintiff’s negligent misrepresentation theory, it was not enough that the audit reports may have contained omissions or even misinformation. The Plaintiffs must demonstrate that they relied on the reports to their detriment. The Court highlighted that four of the five Plaintiffs admitted that they had no independent recollection of reading or reviewing the audit reports.
Plaintiffs urged the Court to import the doctrine of presumed reliance from federal securities-fraud cases into this state law claim. The Court noted precedent indicating that the “most prominent distinction between common law fraud and a [10b-5] violation is that the latter permits recovery based on a … theory which presumes reliance, while the former requires proof of actual reliance.” The Court, noting that it was a federal court sitting in diversity, declined to expand tort liability under Maryland law and granted summary judgment on the negligent misrepresentation claim.
Plaintiffs also alleged breach of professional negligence. The Court stated that a professional negligence claim, similar to any negligence claim, requires the plaintiff to establish: (i) a duty was owed to Plaintiff; (ii) a breach of that duty; (iii) causation between the breach and the harm; and (iv) damages. Maryland courts recognize the “but for” test and the substantial factor test when analyzing whether causation exists. The Court noted that the Defendants, as auditors, were not directly responsible for the over $700,000 deficiency in the Plan. The Court also noted that the Plaintiffs cannot contend they would have taken action to remedy the deficiencies in the Plan because four of five of the Plaintiffs never saw the reports.
Plaintiffs argued that the audit reports serve a dual purpose of alerting the Plan participants and the Department of Labor of irregularities and that “but for” the inaccurate audit reports the DOL would have been on notice of the deficiencies and able to correct the arrearage. The Court stated that the DOL was already conducting an investigation at the time of the 2011 report and that “a careful study of the documents [from the 2010 report] shows the numbers reconcile.” The Court granted summary judgment on the professional negligence claim.