Johnson Bank V. Korbakes Case Study

Good Essays
Johnson Bank v. George Korbakes & Co., LLP

Commercial Law
03/17/2013
Facts of the case
Brandon Apparel Group, Inc. (“Brandon”) was involved in the business of manufacturing and sales of casual apparel as well as licensed other companies to manufacture, distribute and sell its clothing lines. Additionally, Brandon had licensing agreements with several colleges, universities, and sports organizations, such as the National Football League. In 1997 Brandon borrowed funds from Johnson Bank (the “Bank”). Brandon’s owners signed all the necessary paperwork and personally guaranteed a $5 million term loan and a $4 million line of credit. Brandon agreed to make monthly payments for the term loan and pay the full balance by June
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The primary legal issue was the claim of negligent misinterpretation and the secondary issue was the third party breach of contract. The Bank claimed that it suffered losses as a third-party beneficiary of the engagement contract to conduct the audit between Brandon and GKCO. The Bank also claimed that GKCO committed the tort of negligent misrepresentation. According to the definition, when the parties enter into a contact, they can agree that the performance of one of the parties should be rendered to or directly benefit a third party, which then becomes an intended third-party beneficiary (Cheeseman, 2012, p. 266). An intended third-party beneficiary has the right to enforce the contract against the breaching party. As described in Section 552 of the Restatement (Second) of Torts, an accountant is liable for his or her negligence to any member of a limited class of intended users for whose benefit the accountant has been employed to prepare the client’s financial statements or to whom the accountant knows the client will supply copies of the financial statements (Cheeseman, 2012, p. 896). An accountant can be found liable to a third-party beneficiary if the following conditions are met: (1) the client intended the accountant’s work to benefit or influence the third party; and (2) the accountant knew of that intent (Johnson Bank v. Korbakes, 2005). Both the U.S. …show more content…
The court believed that even with presence of some errors, the audit report fully disclosed all the important information regarding the state of the company’s financial

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