Anderson v. Deloitte & Touche

JUDY ANDERSON et al., Plaintiffs and Appellants, v. DELOITTE & TOUCHE LLP, Defendant and Respondent. Nos. A073793 A075276, A076590 (Sonoma County Super. Ct. Nos. 190464 & 193204) California Court of Appeal First Appellate District Division Five Filed August 11, 1997 CERTIFIED FOR PARTIAL PUBLICATION ¹
        In this consolidated appeal, plaintiffs and appellants Judy Anderson et al. ² appeal a summary judgment in favor of defendant and respondent Deloitte & Touche LLP in appellants' action for intentional and negligent misrepresentation, and violation of California securities statutes.

BACKGROUND         Vintech, Inc., is a California corporation specializing in research, analysis, acquisition, management and development of agricultural property. Its sole owner is Donald D. Bade (Bade). Between April 1988 and May 1990 Vintech, Inc., and Bade (collectively, Vintech) sought investors for four limited partnerships of which they were the general partners. The objectives of the limited partnerships were to (1) purchase four existing wineries: Lyeth, Domaine Laurier, Mazzocco, and Jekel; (2) generate cash from operating the wineries; and (3) realize capital appreciation upon sale of the wineries. Minimum investment in a limited partnership unit was $25,000.
        Vintech made information and disclosures regarding the limited partnerships available to prospective investors by way of a confidential offering memorandum (COM). The COM's stated they were prepared by Vintech's attorneys, and that Vintech retained respondent, an accounting firm, to prepare financial statements and tax returns for the partnerships. Each COM contained financial projections or forecasts for a six-year period after formation of the partnership. A summary of significant forecast assumptions and accounting policies accompanied the forecasts, which projected a return of 16 to 19 percent over the six-year period. Each COM also contained several caveats that the investment involved a high degree of risk and should be made only by investors who could afford a total loss of their contributions. The Mazzocco and Jekel COM's included an "Independent Accountants' Report" (IAR) prepared by respondent which states, inter alia, that respondent reviewed the forecasted income-tax basis statements of income, expenses, partners' capital and cash flows for each of the years included in the economic forecasts of Mazzocco and Jekel. The IAR's further state that the review was "made in accordance with the standards for an examination of [a forecast] established by the American Institute of Certified Public Accountants (AICPA)," and that "[i]n our opinion, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the [AICPA], and the underlying assumptions provide a reasonable basis for [management's] forecast."
        Between December 1990 and May 1991 all four limited partnerships, as well as Vintech, Inc., and Bade, filed Chapter 11 bankruptcy petitions.
        Appellants are purchasers of limited partnership interests who lost their investments when the partnerships failed. They allege generally that respondent knew, but failed to disclose in the COM's that the partnerships would be required to incur significant debt to continue in business and that the necessary loans were unavailable, and therefore the Mazzocco and Jekel forecasts had no reasonable basis in fact. They also allege that respondent continued to participate in partnership offerings even though it was aware of the lack of funding, marketing difficulties, and management problems of the first partnership, and that they relied on the COM's in deciding to invest.
        Appellants also allege that respondent aided, abetted and conspired with Vintech in the latter's fraud, breach of fiduciary duty, and violation of state securities laws.

DISCUSSION [THIS PART IS NOT CERTIFIED FOR PUBLICATION] I*         Appellants first contend the summary judgment is invalid because it was initially heard by a referee.
        The parties initially stipulated to the appointment of a referee to hear discovery disputes and status and settlement conferences, and the court accordingly appointed a referee for such purposes. Following completion of discovery, respondent moved for summary judgment, and on its own motion the court ordered the referee to hear respondent's summary judgment motion. Appellants objected on the grounds that the order exceeded the scope of the stipulation that discovery disputes and settlement conferences could be submitted to a referee, that the process would entail additional time and expense, and that Code of Civil Procedure ³ section 639 does not permit the assignment of summary judgment motions to referees.
        The court then issued an amended referral order, pursuant to section 639. It based the order on (1) the fact that the referee was familiar with the case and its legal issues, having heard not only discovery matters, but by agreement of the parties a previous motion by another defendant (not a party to this appeal) for summary judgment; and (2) the court's limited time to hear lengthy motions given the recent reassignment of judges and restructuring of the law and motion department, and consequent likely inability to decide the motion before the scheduled trial date. The order states that the referee's recommendations and proposed order would not be binding on the court, and that following receipt of the referee's report, the court would schedule the summary judgment motion for further hearing and consider it independently of the referee's report. Each party was ordered to pay one-half of the referee's fees within 30 days of his statement, with the court reserving jurisdiction to allow fees for the reference as a cost of suit to the prevailing party.
        Appellants objected to the amended referral on the same grounds they objected to the original referral.
        The referee's ensuing report concluded that respondent was entitled to summary judgment. Appellants objected to his report on the grounds that it was not issued within 20 days of the hearing, that he was married to the presiding judge of the superior court, and that he was the former law partner of the judge who appointed him. They also objected to the report on the grounds the referee made incorrect evidentiary rulings and that his conclusions were legally incorrect.
        Following a subsequent hearing before the court, it granted the summary judgment, stating its reasons in a detailed written order. It awarded respondent as a cost of suit its half of the referee's fees in the summary judgment proceedings. It also ordered appellants to pay the balance of the referee's fees.
        Referees can make binding determinations which conclusively decide matters only in a consensual general reference. (§ 638; In re Edgar M. (1975) 14 Cal.3d 727, 734; Aetna Life Ins. Co. v. Superior Court (1986) 182 Cal.App.3d 431, 435-436 (Aetna).) If the parties do not consent, the court may direct a reference when questions of fact arise at any stage of the proceedings or when it is necessary for the information of the court in a special proceeding. Such references are advisory only, and not binding on the court. (§ 639, subds. (c) & (d); Aetna, supra, at pp. 435-436.) If the court treats the referee's findings and conclusions as binding decisions, it has impermissibly delegated its judicial power. (Marathon Nat. Bank v. Superior Court (1993) 19 Cal.App.4th 1256, 1260.)
        This record does not demonstrate that the reference was an impermissible abdication of judicial responsibility. The court's reference stated explicitly that the referee's findings would not be binding or determinative on the court, and that the court would consider the summary judgment motion independently after conducting its own hearing. The court not only conducted another hearing, it permitted appellants to present declarations additional to those presented to the referee. Although reaching the same ultimate conclusion as the referee, it made different rulings. Its 10-page order reiterates that it reviewed the evidence and reached its conclusion independently of the referee.
        Appellants waived any objection to the referee's appointment on the grounds of his marriage to the presiding judge and his prior professional association with the trial judge. They did not raise this objection until after the referee heard and issued his report on the summary judgment motion, and they do not contend they were unaware of these relationships until after the hearing. (See Estate of Hart (1938) 11 Cal.2d 89, 92.) In any case, such an assertion would be disingenuous, insofar as appellants had been appearing before the referee for nearly two years before he issued his report, and they previously stipulated he could hear the summary judgment motion of another defendant.
        In summary, appellants have failed to establish that the summary judgment motion was not heard and decided by the court.

II*         Appellants also contend the court abused its discretion in ordering them to pay the referee's fees, because the reference was unauthorized by law. Section 639 provides that when the parties do not consent, the court may direct a reference only as authorized therein, and the limited circumstances in which nonconsensual references may be directed do not include motions for summary judgment. Consequently, the reference for this purpose exceeded the court's authority. (See, e.g., Bird v. Superior Court (1980) 112 Cal.App.3d 595.) Appellants made a timely objection to the reference, and thus cannot be ordered to pay any portion of the referee's fees for the summary judgment motion.

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III         Appellants next contend triable issues of material fact exist in each of their causes of action, and thereby preclude summary judgment.
        Summary judgment is properly granted if the record reveals no triable issues of material fact, and that the moving party is entitled to judgment as a matter of law. (§ 437c, subd. (c).) Defendants moving for summary judgment meet their burden of negating the plaintiff's action by establishing a complete defense thereto, or showing that one or more elements of the cause of action cannot be established. (McCarthy v. Fletcher (1989) 207 Cal.App.3d 130, 138.) The burden then shifts to the plaintiff to set forth specific facts showing the existence of a triable issue. (§ 437c, subd. (o)(2).) Summary judgments are reviewed de novo. (Jambazian v. Borden (1994) 25 Cal.App.4th 836, 844.)
        Appellants' theories of recovery are dependent upon their ability to establish either fraud or negligent misrepresentation. However, the causes of action for negligent misrepresentation are based on respondent's IAR's and confined to the investors in Mazzocco and Jekel, which are the only two limited partnerships that disseminated respondent's report in their COM's.

A. The Mazzocco and Jekel Offerings         Appellants contend there is a triable issue of material fact concerning respondent's knowledge of false and misleading statements in the Mazzocco and Jekel COM's. Appellants refer to respondent's statements in its IAR's that it examined the Mazzocco and Jekel forecasted balance sheets and income tax basis statements of income, partners' capital and cash flows for the forecasted years in accordance with the AICPA standards for examination of prospective financial statements, and that the underlying assumptions provide a reasonable basis for management's forecast.

1. Fraud
        The elements of intentional misrepresentation, or actual fraud, are: "(1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage. [Citation.]" (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1108 (Molko).)
        In support of respondent's motion for summary judgment, Michael Rudy, respondent's engagement partner responsible for examination of the forecast material contained in the COM's, declared that the Mazzocco and Jekel forecasts were prepared by Vintech personnel, not respondent; that respondent examined the forecasts according to the AICPA guidelines governing such examinations; that respondent concluded the forecast was presented in conformity with those guidelines and that the assumptions underlying the forecast provided a reasonable basis for the forecast at the time of the examination; that respondent had no knowledge that any assumptions on which the forecast was based were false; and that respondent's report contains no misstatements or omissions.
        Respondent also supported its motion with AICPA guidelines for prospective financial statements. The guidelines state that a prospective financial statement, including the underlying assumptions, is the responsibility of the entity's responsible party. "Entity" is defined as any unit for which financial statements could be prepared in accordance with generally accepted accounting principles, such as a partnership. "Responsible party" is the person, usually management, responsible for the assumptions underlying the prospective financial statement. The guidelines further state that an accountant engaged to examine a prospective financial statement "should evaluate support for assumptions," and can conclude the assumptions are suitably supported if the preponderance of information, i.e., the weight of available information, supports each significant assumption. In evaluating the support for assumptions, the accountant should consider "whether sufficient pertinent sources of information about the assumptions have been considered." Sources might include government and industry publications, economic forecasts, existing and proposed legislation, changing technology, and the entity's budgets, sales records, and debt agreements.
        Appellants opposed respondent's motion principally with the declaration of Mike Fisher, a certified public accountant with substantial accounting experience in the California premium wine industry and degrees in both enology and accounting. He declared that he reviewed the forecasted financial statements and respondent's IAR's, respondent's supporting work papers for its reports, and depositions and declarations of respondent's and Vintech's personnel. He opined that respondent not only failed to conduct its examination of the forecasts according to relevant AICPA guidelines, but that its accounting procedures "were so deficient as to constitute an extreme departure from the applicable accounting standards." He further declared that under AICPA guidelines an accountant should consider, inter alia, sales backlog records, debt agreements, market surveys, industry statistics, and trends and patterns developed from an entity's operation history in evaluating the support for assumptions. He stated that respondent violated these guidelines in its Mazzocco and Jekel reports. In Fisher's opinion, respondent should have verified the forecasts' assumptions that the partnerships would secure certain specified financing by independently investigating lenders and the current financing market. Instead, according to its work papers respondent relied only on general partner Bade's representations that necessary future financing was available. Fisher also declared that respondent's work papers do not mention independent research in the marketing and demand of Mazzocco and Jekel wines to support their sales assumptions, but again rely solely on Bade's representations of aggressive marketing and increased sales staff.
        The requisite state of mind, or scienter, for actual fraud or intentional misrepresentation is disbelief in the truth of the statement, i.e., knowledge of falsity. (Molko, supra, 46 Cal.3d at p. 1108.) Assuming that respondent's statement in the COM's that "the underlying assumptions [for the forecasted balance sheets] provide a reasonable basis for [management's] forecast" was incorrect, Fisher's declaration does not state that respondent made this misrepresentation knowing it was not true, or that respondent did not believe the representation to be true. As we understand their argument, appellants claim that Fisher's opinion regarding respondent's "extreme deviation" from AICPA standards raises a question that respondent made representations about forecasts without first checking the facts upon which its representations were based, i.e., that it didn't do its homework. This constitutes a claim of negligent misrepresentation rather than an intent to deceive, which is the basis of actual fraud. (See, e.g., Gagne v. Bertran (1954) 43 Cal.2d 481, 487-488 (Gagne); 5 Witkin, Cal. Procedure (4th ed. 1997) Pleading, §§ 682-683, pp. 140-142; 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 704, pp. 805-806.)

2. Negligent Misrepresentation
        Negligent misrepresentation is the assertion of a false statement, honestly made in the belief it is true, but without reasonable ground for such belief. (Civ. Code, §§ 1572, subd. (2); 1710, subd. (2); Bily, supra, 3 Cal.4th at pp. 407-408.) "[T]he broad statements that 'scienter' is an element of every cause of action for deceit, and that an 'intent to deceive' is essential, are untrue, since neither is a requisite of negligent misrepresentation. [Citations.]" (5 Witkin, Summary of Cal. Law, Torts, supra, § 722, p. 821.) ⁴
        "Under certain circumstances, expressions of professional opinion are treated as representations of fact. When a statement, although in the form of an opinion, is 'not a casual expression of belief' but 'a deliberate affirmation of the matters stated,' it may be regarded as a positive assertion of fact. [Citation.] Moreover, when a party possesses or holds itself out as possessing superior knowledge or special information or expertise regarding the subject matter and a plaintiff is so situated that it may reasonably rely on such supposed knowledge, information, or expertise, the defendant's representation may be treated as one of material fact. [Citations.]" (Bily, supra, 3 Cal.4th at p. 408; see also Gagne, supra, 43 Cal.2d at p. 489; Cohen v. S & S Construction Co. (1983) 151 Cal.App.3d 941, 946.)
        The liability of accountants to third parties, i.e., parties other than their actual clients, for negligent misrepresentation in connection with the preparation of audit reports is set forth in Bily. Bily adopted the position of Restatement Second of Torts section 552, subdivision (2), as summarized in the jury instruction Bily fashioned for trial courts in such cases: "'The representation must have been made with the intent to induce plaintiff, or a particular class of persons to which plaintiff belongs, to act in reliance upon the representation in a specific transaction, or a specific type of transaction, that defendant intended to influence. Defendant is deemed to have intended to influence [its client's] transaction with plaintiff whenever defendant knows with substantial certainty that plaintiff, or the particular class of persons to which plaintiff belongs, will rely on the representation in the course of the transaction. If others become aware of the representation and act upon it, there is no liability even though defendant should reasonably have foreseen such a possibility.'" (Bily, supra, 3 Cal.4th at p. 414.)
        We conclude that appellants have raised a triable issue concerning the reliability of respondent's IAR's through Fisher's declaration in opposition to respondent's motion for summary judgment. If the acts or conduct of a professional accountant performed in preparation for an audit or representation fall below the applicable standard of care for the profession, in that the accountant failed to examine or acquire the necessary information required to support the accountant's professional opinion disseminated to potential investors, the opinion is made without a reasonable ground for believing it to be true. (See Gagne, supra, 43 Cal.2d at pp. 488-489.) When a statement, although in the form of an opinion, constitutes "'a deliberate affirmation of the matters stated'" (Bily, supra, 3 Cal.4th at p. 408, citing Gagne, supra, 43 Cal.2d at p. 489), as occurred here, "it may be regarded as a positive assertion of fact." (Bily at p. 408.)
        The next question is whether appellants presented a triable issue of whether respondent knew with substantial certainty that appellants, or the particular class of persons to which they belong, would rely on the IAR's in the course of the transaction. The answer to that inquiry requires analysis of the circumstances surrounding the preparation of the IAR's.
        In Roberts v. Ball, Hunt, Hart, Brown & Baerwitz (1976) 57 Cal.App.3d 104 (Roberts) a law firm prepared an opinion letter for its client for delivery to a prospective lender. When the client defaulted on the loan, the lender sued the attorneys alleging that the loan was extended on the basis of erroneous information in the opinion letter. In holding that the allegation in the lender's complaint that the attorneys knew and understood that the opinion letter was to be shown to the lender to induce it to make the loan stated a cause of action, the court stated: "[A] legal opinion intended to secure benefit for the client, either monetary or otherwise, must be issued with due care, or the attorneys who do not act carefully will have breached a duty owed to those they attempted or expected to influence on behalf of their clients." (Id. at p. 111.)
        In Soderberg v. McKinney (1996) 44 Cal.App.4th 1760 (Soderberg), plaintiff trustee was contacted by a mortgage broker to invest in a second deed of trust on residential property. Plaintiff did so in reliance on an appraisal prepared under an agreement between the appraiser and the mortgage broker. After the borrowers defaulted on the deeds of trust, plaintiff brought an action against the appraiser for negligent misrepresentation of the property's value.
        Soderberg reversed a summary adjudication in favor of the appraiser, concluding that the appraiser's knowledge of the potential investors by name or specific identity was not a prerequisite to bringing the action. It was sufficient that the appraiser supplied the information for repetition to a certain group or class of persons. It further concluded the appraiser could not establish as a matter of law that he knew the appraisal would be used solely by the mortgage broker, because he knew that the particular class of persons to which plaintiff belonged - potential investors contacted by the mortgage broker - would rely on his report for their investment decisions.
        This case is comparable to Roberts and Soderberg. There is ample evidence to support a finding that respondent knew its reports were not limited to Vintech's internal or personal use, but were to be included in the COM's and thus communicated to potential investors in the Mazzocco and Jekel limited partnerships. The forecast and underlying assumptions to which the IAR's refer are designed for the specific purpose of attracting investors in the limited partnerships, i.e., to induce reliance, and cannot reasonably be understood to have any other purpose.
        As we noted earlier, in order to prevail on summary judgment respondent had to negate appellants' action either by establishing a complete defense or by showing that one or more of its elements did not exist. Respondent asserted no affirmative defense, and the record demonstrates triable issues of fact concerning the falsity of the IAR's and respondent's intent to induce reliance.
        "Reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiff's conduct which altered his or her legal relations, and when without such misrepresentation or nondisclosure he or she would not, in all reasonable probability, have entered into the contract or other transaction. [Citations.]" (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.) Except for "'rare'" cases where "'the undisputed facts leave no room for a reasonable difference of opinion,'" whether the plaintiff's reliance is reasonable is a question of fact. (Ibid.)
        Respondent's IAR's accompanied only the Mazzocco and Jekel COM's, and investors therein were instructed not to execute any investment documents until they had reviewed the COM's. The subscription agreements contain a paragraph acknowledging that "I received and reviewed the [COM] . . . [and] have not relied upon any information concerning the offering, written or oral, other than that contained in such documents." Several appellants testified at their depositions that they relied on the IAR's in making their investment decisions. Respondent has not negated the element of reliance by these investors.
        However, the IAR's are specific only to Mazzocco and Jekel, and not to any other entity. Appellants have presented no reliable evidence that investors in the Lyeth and Domaine Laurier partnerships could reasonably have relied on the Mazzocco and Jekel IAR's in making their investment decisions. Consequently, any liability of respondent for negligent misrepresentation reaches only investors in the Mazzocco and Jekel entities. Respondent has negated the element of reliance by investors in Lyeth and Domaine Laurier.

[THIS PART IS NOT CERTIFIED FOR PUBLICATION] B.* Conspiracy in All Offerings         Appellants contend triable issues of fact exist as to whether respondent conspired with or aided Vintech in making misrepresentations in all four COM's.
        Although sometimes characterized as an "action" with "elements," civil conspiracy is not a discrete tort giving rise to an independent cause of action. (Doctors' Co. v. Superior Court (1989) 49 Cal.3d 39, 44; Revert v. Hesse (1920) 184 Cal. 295, 301; Kerr v. Rose (1990) 216 Cal.App.3d 1551, 1564.) It is merely a method of determining liability among alleged tortfeasors once a tortious act has been committed, resulting in damage to the plaintiff. (See, e.g., Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-511; Unruh v. Truck Insurance Exchange (1972) 7 Cal.3d 616, 631 (Unruh); Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 515.)
        To establish liability under a civil conspiracy theory, there must be evidence of the formation and operation of the conspiracy, wrongful acts accomplished pursuant thereto, and resulting damage. (Unruh, supra, 7 Cal.3d at p. 631.) To support their claim that respondent conspired with Vintech to disseminate false and misleading information to potential investors, appellants must produce evidence of an agreement between respondent and Vintech to defraud, and respondent's knowledge of and intent to aid in achieving the agreement's unlawful objective. (See Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784; Schick v. Lerner (1987) 193 Cal.App.3d 1321, 1328 (Schick).)
        Appellants' evidence does not show that by providing accounting services to Vintech, respondent knew it was serving and intended to serve Vintech's alleged wrongful end, i.e., intentionally misrepresenting the forecasts in the COM's. An agreement to perform professional services, and receiving fees therefor, does not constitute, in itself, an agreement to participate in a wrongful act. (Cf., Schick, supra, 193 Cal.App.3d at p. 1328; DiLeo v. Ernst & Young (7th Cir. 1990) 901 F.2d 624, 629.)
        The basis of appellants' contention that triable issues exist concerning respondent's conspiracy liability is not clear. They appear to rely principally on the declaration of Gary Topper, the former Vintech vice president for marketing, and deposition testimony of Michael Rudy, respondent's "engagement partner." Topper stated that he helped develop sales projection figures to be used to obtain debt and equity financing for the partnerships and for the sales company's budget, and that "we put down numbers that we believed we could not make. I recall one meeting that was attended [by respondent's unnamed representative], when we discussed numbers that were needed for prospectuses and budgeting."
        Rudy testified that he, Topper and Bade had a meeting at which the forecasted Jekel sales and the basis for those forecasts were discussed. Respondent expressed concern that the forecast was based on Riesling growth, which did not seem reasonable in the current market, but after further discussions that the growth was forecast on chardonnay, he concluded there was a reasonable basis for the forecast.
        This evidence does not raise a triable issue whether respondent conspired with Vintech. Nothing in Topper's declaration suggests that respondent actually knew that the overall projected sales figures were beyond Vintech's reach or that this fact was discussed at the meeting. The fact that respondent's representative expressed concern about the basis of one aspect of one winery's projected figures does not reasonably imply an agreement to assist in the perpetration of a fraud.
        For the same reasons the evidence does not raise a factual issue of conspiracy, it does not raise an issue of violation of California security laws. It is unlawful to offer or sell a security by means of a written communication which includes an untrue statement of material fact or omits a material fact. (Corp. Code, § 25401.) Any person who "materially assists in any violation [of Corporations Code section 25401] with intent to deceive or defraud" is jointly and severally liable for the violation. (Corp. Code, § 25504.1.) Assuming the COM's contained untrue statements, there is no evidence that respondent's contribution thereto was made with intent to deceive.
        Appellants further contend, however, that the court erroneously excluded parts of other declarations that would have reinforced their secondary liability theory.

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1. Paganessi Declaration
        Arthur Paganessi, a securities broker who sought investors for Domaine Laurier, declared that at a "rep" meeting at which Rudy was present, a Vintech representative stated in Rudy's presence that respondent had reviewed all figures contained in the pro forma operating projections for Domaine Laurier. Rudy then answered questions regarding the Domaine Laurier projections. The statement was excluded as hearsay. Appellants argue it was an adoptive admission, since it was made in Rudy's presence (Evid. Code, § 1221) and was admissible as a statement of a party (Evid. Code, § 1220). Paganessi also stated that based on the Vintech representations made in Rudy's presence, he understood that respondent reviewed all pro forma operating projections of Domaine Laurier and accepted the figures contained therein. This statement was excluded as hearsay and irrelevant. Appellants argue it is admissible under the state of mind exception and as a nonexpert opinion. (Evid. Code, §§ 800, 1250.)

2. Hopkins Declaration
        Thomas Hopkins, president of an Illinois investment company, declared he attended a meeting in the Vintech office during which Rudy "was the promoter of the Lyeth Winery COM . . . ." The statement was excluded as conclusory and lacking foundation. Appellants argue the statement is admissible as the rationally based opinion of a nonexpert and within the state of mind exception (Evid. Code, §§ 800, 1250). He also declared that due to Bade's lack of experience in the wine industry he requested a meeting with respondent's "partner in charge." The statement was excluded as lacking knowledge and foundation. Appellant argues that Hopkins was qualified to explain the reasons for his actions.

3. Rowan Declaration
        J. Michael Rowan, former Vintech vice president for winery operations, declared that Vintech employed the most aggressive interpretations possible in describing the economic viability of the wineries. The statement was excluded as lacking foundation, speculative, and conclusory. Appellant argues the statement was a direct statement of relevant fact and admissible as a lay opinion (Evid. Code, § 800).

4. Topper Declaration
        Gary Topper, former Vintech vice president for marketing, declared that Bade was constantly telling him "We need better numbers," and that Bade assured him that borrowing from other partnerships and Vintech entities to construct the Domaine Laurier facility was permissible. The statements were excluded as hearsay. Appellants argue their admissibility under the coconspirator exception (Evid. Code, § 1223). The court also excluded as lacking foundation, conclusory and speculative Topper's statement that "In my observation, Mr. Bade didn't respect the investors in the partnerships. . . . I believe that the investors in the Mazzocco and Jekel limited partnerships were misled, and would not have invested had the truth been disclosed. My assumption is that the failure of these partnerships was a direct result of the unrealistic sales and financing assumptions that they were based upon." Appellants argue this was admissible opinion testimony.

5. Flynn Declaration
        Robert Flynn, chairman of a Chicago company that raises funds for limited partnerships, declared that based on the Lyeth COM and representations made to him, he became licensed to sell partnership interests in Lyeth. His sales or investors came from referrals from CPA's who reviewed the Lyeth COM and relied on its projections and assumptions and would not have made the referrals if not for respondent's involvement in the COM. Bade and Rowan accompanied him on visits to investors and represented that the projections in the Lyeth COM were authored and reviewed by respondent, and neither he nor his company would have sold the Lyeth partnership interests if not for respondent's represented involvement in the Lyeth COM. The statement was excluded as lacking foundation and personal knowledge. Appellants argue that the foundation for the importance of respondent's involvement is admissible as a lay opinion, and the statement attributed to Bade is admissible under the coconspirator exception.

6. Lipps Declaration
        Willard Lipps, a Vintech representative in the Midwest, declared that Thomas Hopkins told him and Bade that his company would not become involved in the sale of Lyeth partnership interests unless he (Hopkins) could meet with respondent's representative, because Bade had informed him (Hopkins) that the Lyeth COM projections were authored by Rudy and/or respondent. He also declared that Bade, discussing the use of funds raised for the four partnerships and the note offerings, stated: "I consider this my money, I personally guaranteed it, and I'll use it wherever I feel it's needed." These statements were excluded as hearsay. Appellants argue they are admissible under the coconspirator exception.
        Regardless of whether the foregoing portions of the declarations were admissible,
their exclusion did not prejudice appellants because none of them reveal any intent to conspire.

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IV*         Appellants contend the court erroneously sustained, without leave to amend, respondent's demurrer to their cause of action for professional malpractice.
        Generally, an accountant owes no duty of care regarding the conduct of an audit to persons other than the client. (Bily, supra, 3 Cal.4th at p. 376.) Therefore, an accountant's liability for general negligence in the conduct of an audit of its client's financial statements is confined to the client who contracts for audit services (Bily at p. 406), unless the contract specifically identifies particular third parties so as to make them express third party beneficiaries of the contract. (Bily at p. 406, fn. 16; Software Design & Application, Ltd. v. Price Waterhouse (1996) 49 Cal.App.4th 464, 469.)
        Respondent's clients were the limited partnerships. Respondent was engaged to prepare and submit its reports before the individuals partners invested. Appellants did not allege that any engagement contract between the partnerships and respondent expressly identified them in a manner to make them third party beneficiaries.
        Citing an observation in Bedolla v. Logan & Frazer (1975) 52 Cal.App.3d 118, 127 (Bedolla) that in California a limited partnership is not considered a separate legal entity but an association of individuals, appellants argue that because a limited partnership is a "person" under California law (Evid. Code, § 175), the individual members can assert a negligence claim directly against respondent.
        Bedolla, which is pre-Bily, is inapposite. It was concerned with when a partnership is on notice of alleged negligence for statute of limitations purposes, and concluded that the knowledge of the individual partners should be imputed to the partnership. (Bedolla, supra, 52 Cal.App.3d at pp. 126-127.) Not only was the definition of an accountant's "client" not at issue in Bedolla, the individual partners had the status of "limited partners" when the alleged negligence occurred. In this case the class members were simply unknown possible investors when respondent prepared its analysis for the Jekel and Mazzocco COM's. Allowing them to bring a negligence action against respondent would contravene Bily's rationale for refusing to extend "pure negligence" liability to all foreseeably injured third party users of an accounting report, i.e., exposure to liability far out of proportion to fault, and the ability of potential investors to "privately order" the risk of inaccurate financial reporting through their own contractual arrangements with the accountant's client. (Bily, supra, 3 Cal.4th at pp. 399-403.)

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CONCLUSION*         Respondent has not negated the cause of action for negligent misrepresentation by the limited partners in the Mazzocco and Jekel limited partnerships, and as to them the summary judgment must be reversed. The investors in the Lyeth and Domaine Laurier limited partnerships have failed to establish a cause of action against respondent, and the summary judgment of their claims is affirmed. The imposition of the referee's fee on appellants for the summary judgment motion was erroneous and must be reversed.

DISPOSITION         The judgment is reversed and remanded for further proceedings consistent with this opinion. The parties shall bear their own costs on appeal.

We concur:
        PETERSON, P.J.
        JONES, J.


Trial Court
        Sonoma County
        Superior Court
        Case Nos. 190464 and 193204

Trial Judge
        Laurence K. Sawyer, Judge

Counsel for Appellants
        The Minton Firm and Michael Harry Minton
        Krause & Kalfayan and James C. Krause
        Furth, Fahrner & Mason, Craig C. Corbitt and David A. Hoskins

Counsel for Respondents
        McCutchen, Doyle, Brown & Enersen, Donn P. Pickett and Karen Kennard



¹          1.         Pursuant to California Rules of Court, rule 976.1, parts I, II, IIIB, IV and the Conclusion of this opinion are not certified for publication.
         ² .         Plaintiffs and appellants consist of Judy Anderson, Donna Berchtold, Lester Berchtold, James Stack, I. Joseph Shyne, Michael P. Grossman, and Advanced Web Graphics, Inc., individually and on behalf of a class consisting of all persons who purchased or hold legal or beneficial limited partnership interests in Lyeth Winery Ltd. (Lyeth), Domaine Laurier Partners (Domaine Laurier), Mazzocco Winery Partners (Mazzocco), and Jekel Winery Partners (Jekel). The class is comprised of approximately 545 investors.
³  *        See footnote 1, ante.
         ⁴ .         Unless otherwise indicated, all further statutory references are to Code of Civil Procedure.
*        See footnote 1, ante.
        1.         Both parties rely exclusively on federal cases based on federal, as opposed to California, law in making their respective arguments. Federal precedent may be appropriate in the absence of existing state law on an issue, but California has an existing body of law on the tort of negligent misrepresentation. "In California, the elements of the misrepresentation torts (which are also denominated forms of 'deceit') are prescribed by statute ([Civ. Code,] §§ 1572; 1710) and our common law tradition." (Bily, supra, 3 Cal.4th at p. 414.) Therefore, we rely on California law in our analysis.
*        See footnote 1, ante.
*        See footnote 1, ante.
*        See footnote 1, ante.