Arbramo v. Teal, Becker & Chiaramonte, CPA’s, P.C. 2011 WL 4592830 (NDNY , Sept 30, 2011) Abramo and two others (the “Indemnitors”) along with Steven Shaw, the president of the company, were the owners of Tougher Industries, a general contractor. In Sept 2003 the defendant CPA’s were employed by Shaw to perform various accounting services for Tougher. In April 2004 the Indemnitors signed an indemnity agreement in favor of F&D of Maryland with the usual personal guarantees. In May and June of 2005 the Indemnitors, acting in reliance upon audits prepared by the defendants,  permitted F&D to issue  bonds on two jobs requested by Tougher. In October 2005 the Indemnitors’ personal accountant reviewed Tougher’s financial records and determined that the company’s accounts receivable and recognized revenue figures were “grossly overstated.” In December 2005 the Indemnitors sold their interest to Shaw after which Tougher defaulted on its obligations under the bonded contracts. The defaults resulted in a loss to F&D in excess of $1 million for which it made a demand for reimbursement from the Indemnitors. The Indemnitors sued the CPA’s for malpractice in March 2008, and the CPA’s in response moved to dismiss the complaint on the grounds that the complaint was untimely and failed to allege facts supporting proximate causation, and that the Indemnitors lacked standing. The court found the suit to be timely for acts of the CPA’s after March 2005. As to proximate cause, the court stated the general tort law in NY that “In order to properly show proximate cause, the ‘damages suffered by plaintiff must be a foreseeable consequence of any misrepresentation or material omission,’ as when ‘the risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged’.” In this case the Court found that “…[the Indemnitors] have sufficiently alleged facts to state a claim that Defendants’ negligently prepared financial statements caused them injury. [Indemnitors] allege that, based on their reasonable reliance on the financial reports prepared by Defendants, they had an inaccurate understanding of Tougher’s financial situation. As the Court found in the May 2010 Order, “[Indemnitors] raise the possibility that they may have had opportunities to [avoid] incurring potential liabilities under the [indemnification] agreement if they had known about the poor financial and operational health of Tougher.” Accepting all of the factual allegations in the Amended Complaint as true, the Court finds that the {Indemnitors’] claim of proximate causation is plausible on its face and is adequate to overcome a motion to dismiss.” As to CPA’s argument that the Indemnitors lacked “standing,”  the court stated “… that the Amended Complaint alleges individual harm to the [Indemnitors] rather than harm to Tougher or the corporate entity. [Indemnitors] are not seeking losses to the corporation based on Defendant’s alleged negligence. Rather, [Indemnitors] claim that they each signed an indemnity agreement that exposed them to personal liability on Tougher’s bond obligations. [Indemnitors] further allege that the Surety has demanded indemnification from them for losses in excess of $1 million resulting claims against the May and June 2005 Bonds. Taking [Indemnitors’]  allegations of personal harm and personal liability in the Amended Complaint as factual, the Court denies Defendants’ motion to dismiss for lack of standing. COMMENT: Under NY law, as interpreted by the federal judge in this case, an accountant’s liability is not limited to the construction company with whom it has contracted to perform accounting and audit services, but may extend to those who are Indemnitors to the company’s surety with whom the accountant did not have a contract. Furthermore, potential harm to the contractor’s indemnitors  is within the “zone of risk” resulting in the accountant’s negligence being  the proximate cause of the indemnitors’ damages.