Ernst & Young v. Pacific Mutual Life Insurance Co

In Ernst & Young v. Pacific Mutual Life Insurance Co., 51 S.W.3d 573, 44 Tex. Sup. Ct. J. 955 (Tex. 2001), the supreme court set forth the following test for a fraudfeasor's liability to third parties: One who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons whom he intends or has reason to expect to act or to refrain from action in reliance upon the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the type of transaction in which he intends or has reason to expect their conduct to be influenced. 51 S.W.3d at 578. Even an obvious risk that a misrepresentation might be repeated to a third party is not enough to satisfy the reason-to-expect standard; rather, the alleged fraudfeasor must "have information that would lead a reasonable [person] to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct." Id. at 580. Further, mere foreseeability will not meet the reason-to-expect standard; instead, the claimant's reliance must be "especially likely" and justifiable, and the transaction sued upon must be the type the defendant contemplated. Id. In Ernst & Young, an investor alleged that an accounting firm knowingly or recklessly materially misrepresented the financial health of a bank and intended investors to rely on the misrepresentation, and that the investor actually and justifiably relied on the misrepresentation when it bought notes from a bank with which the audited bank was about to merge. The supreme court held that the accounting firm established as a matter of law that it had no reason to expect the investor's reliance on the audit report in the transaction at issue. Ernst & Young, L.L.P., 51 S.W.3d at 582.