Mustian Properties, Inc. recently filed bankruptcy, as it is unable to make payments on several vacant properties in its condominium complexes near Las Vegas and Lake Tahoe.
Last year, Mustian borrowed $3 million from Field Centre Bank under the terms of a 36-month note payable. The loan application process required Mustian to present audited financial statements. The firm of Delan & Delan, CPAs performed the audit and issued an unqualified opinion on Mustian’s financial statements. The audit was performed under an expedited schedule, thus causing Delan & Delan to be negligent in documenting the results of their risk assessment and other evidence upon which their opinion was based.
Field Centre Bank is now suing Delan & Delan, claiming that Mustian’s financial statements contained material misstatements and that it relied upon the firm’s unqualified opinion on those financial statements in its decision to extend financing to Mustian. Delan & Delan expects to avoid liability based on the privity defense.

a. Explain the privity defense.
b. Does the privity defense apply to Delan & Delan in its defense against Field Centre Bank’s lawsuit?
c. Will Field Centre Bank be able to argue its case based on exceptions to the privity defense?

  • CreatedJanuary 21, 2015
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