Delaware Business Litigation Report

Court of Chancery Addresses Personal Jurisdiction and Negligent Misrepresentation Claims Involving Accounting Firm KPMG

Otto Candies LLC v. KPMG LLP, C.A. No. 2018-0435-MTZ (Del. Ch. Feb. 28, 2019) (Zurn, V.C.).

This decision grants a motion to dismiss by accounting firm KPMG on jurisdictional and substantive grounds in litigation involving creditors and bondholders of a KPMG client. The plaintiffs claimed fraud by the company and its bank. They sued several KPMG entities, and sought over $1 billion in damages, claiming they relied to their detriment on KPMG’s audits. While the decision involved various interesting aspects, two are particularly noteworthy.

The first is the Court of Chancery’s holding that the plaintiffs failed to establish personal jurisdiction over the foreign KMPG defendants under Delaware’s long-arm statute, 10 Del. C. § 3104. Paraphrased, Section 3104(c)(6) authorizes jurisdiction over a defendant who, directly or through an agent, contracts to insure a matter within the State. Because this portion of the long-arm statute concerns specific jurisdiction, it requires a nexus between the act and the suit. According to the Court, Delaware courts have typically applied Section 3104(c)(6) to obtain jurisdiction over insurers for claims regarding matters insured in Delaware, like property located here or work performed here. In this case, none of the KPMG defendants insured the challenged audits. However, KPMG did have a requirement among its member firms concerning insurance, which involved it approving of the policies. Plaintiffs relied on this fact to argue for a Delaware connection because KMPG’s Delaware subsidiaries participated in the program. The Court rejected this theory. In doing so, it declined to extend Section 3104(c)(6) to cover companies who simply directed their Delaware subsidiaries to obtain insurance, without any other Delaware contacts having a nexus to the claim.

The second is the Court of Chancery’s holding that the plaintiffs failed to state a claim of negligent misrepresentation against KPMG under Delaware law. Such a claim requires, inter alia, that plaintiffs adequately plead the defendant had a pecuniary duty to provide accurate information. Plaintiffs failed to establish this element. Applying Section 552 of the Restatement (Second) of Torts concerning negligent misrepresentation claims, the Court found that KPMG owed no duty to the creditor and bondholder plaintiffs, who were not KMPG clients. According to the Court, for a duty to attach for misrepresentation purposes, “an auditor must intend to supply the relevant information, or know that the recipient intends to supply it, for the benefit and guidance of a limited group. But the knowledge that a group may rely on the audits is not enough to establish liability. The auditor must also know, or have reason to know, how that group intends to use the information.” That is, “Section 552 limits liability of information suppliers when that information gets into the hands of the public to situations when the information supplier has or should have (a) knowledge of a limited, but perhaps unnamed, group, as well as (b) knowledge of the actual financial transactions that the information is designed to influence.” Plaintiffs’ allegations did not satisfy these two requirements.

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