Article

Note: Johnson Bank, a Wisconsin state chartered bank, had extended credit to Brandon Apparel, Inc. (Borrower/Applicant), a company engaged in the manufacture, distribution, and sale of children's apparel, which credit included a US$5,000,000 loan and a revolving line of credit of up to US$4,000,000 based on a complex formula. Up to US$500,000 was available for LCs.

During the course of the lending relationship, George Korbakes & Co., Certified Public Accountants (Auditor), was retained to perform an audit for the calendar year 1998.

By 2000, Borrower/Applicant was in serious financial condition, and the bank filed an action which eventually resulted in an uncollected judgment of more than US$12,000,000.

Claiming reliance on alleged errors and a failure to comply with generally accepted accounting standards in making subsequent extensions of credit, including decisions related to letters of credit, the bank subsequently sued Auditor as a third party beneficiary for breach of contract and for negligent misrepresentation.

After a bench trial, the US District Court for the Northern District of Illinois, Eastern Division, Pallmeyer, J., entered judgment for Auditor.

The court rejected the bank's claim that the audit misrepresented Borrower/Applicant's assets and misled the bank into issuing additional credit to Borrower/Applicant and the claim that there was reasonable reliance on the audit. The court concluded that the "loan history does not support the Bank's claim that it relied on the Audit in extending credit to [Borrower/Applicant], much less that any such reliance was reasonable. No documentary evidence supports the Bank's assertion that it relied on the Audit; steps were in the works to proceed with additional lending to [Borrower/Applicant] well prior to its receipt."

[JEB/az]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.