Prudential Securities Inc. v. E-Net, Inc.

KENNEY, Judge. Appellant, Prudential Securities, Inc. (“Prudential”), appeals .the entry of judgment by the Circuit Court for Montgomery County granting motions to strike the Amended Complaint and motions for summary judgment filed by appellees, e-Net, Inc. (“e-Net”) and American Stock Transfer and Trust Co (“AST”). It presents six issues on appeal, which we have rephrased and reordered as follows: I. Did the trial court err when it granted summary judgment in favor of appellees on Count I of the Complaint because both § 8-204 of the Uniform Com- ' mercial Code and Maryland common law recognize a cause of action for appellees’ negligence?

II

Did the trial court err when it found there were no genuine issues of material fact as to whether appellees’ failure to enforce the lockup was the proximate cause of appellant’s loss? ²⁰¹ III. Did the trial court err in granting summary judgment on the grounds of assumption of the risk because there were issues of material fact as to whether appellant assumed or appreciated the risk that the collateral shares would not bear their required restrictive legends, or would not be subject to a stop transfer order?

IV

Did the trial court err because there were genuine issues of material fact as to whether PSI was contributorily negligent? V. Did the trial court err in dismissing PSI’s claim for negligent misrepresentation because PSI proved all the essential elements of such a cause of action, including misrepresentation by e-Net and AST?

VI

Did the trial court abuse its discretion in granting appellees’ motion to strike the Amended Complaint where there was no pending trial date, where appellant diligently amended the Complaint to conform to the facts of the case, and where appellees suffered no prejudice from the amendment? For the reasons set forth below, we reverse the trial court’s ruling striking the amended complaint but affirm its decision granting summary judgment. FACTUAL AND PROCEDURAL BACKGROUND Appellee e-Net, Inc. is a Delaware corporation with its principal place of business in Germantown, Maryland. It provides a service whereby customers can make telephone calls over the internet.

Thomas Prousalis, Jr. acquired 450,-000 shares of e-Net stock in January 1995, apparently in exchange for acting as counsel to e-Net in connection with its formation and initial capitalization. In 1997, e-Net sought to initiate an Initial Public Offering (“IPO”) and again enlisted Prousalis’s legal services. In connection with the IPO, Prousalis agreed not to sell, transfer, or otherwise dispose of his shares for two years after e-Net’s IPO, which was scheduled for April 1997 (the “lockup agreement”). e-Net also engaged ²⁰² AST as its transfer agent to implement any applicable restrictions and to maintain stop transfer orders on restricted e-Net shares. From April 1997 to March 1998, Prousalis’s shares were evidenced by a single certificate on which AST had affixed two restrictive legends.

The first legend reflected a restriction imposed by securities law (“1993 Securities Act” restriction), while the second restriction reflected Prousalis’s lockup agreement. 1 This certificate was held in account with Dean Witter Reynolds, Inc. (“Dean Witter”). Prousalis’s broker was Mark A. Rodgers, and the account was maintained in Clearwater, Florida. In March 1998, e-Net authorized AST to remove the 1933 Securities Act restriction from Prousalis’s certificate. e-Net also instructed AST to maintain stop transfer orders on all restricted shares, including those of Prousalis. AST thereafter reissued Prousalis’s certificates in new denominations, giving him four stock certificates representing 100,000 shares each and one certificate representing 50,000 shares.

Rather than excluding only the 1993 Securities Act restriction from the face of the certificate, it excluded the lockup restrictions on the shares as well. In addition, AST failed to indicate within its system that the shares were still subject to the lockup agreement. Prousalis deposited four reissued, unlegended e-Net certificates into his brokerage account with Dean Witter. These certificates represented 400,000 of Prousalis’s 450,000 shares in e-Net. ²⁰³ Prousalis then pledged his e-Net shares to Dean Witter in order to open a margin credit account.

This pledge required that formal ownership of the shares be transferred from his name to the name of a stock clearinghouse called Depository-Trust Company (“DTC”). 2 DTC operated a national depository, which allowed stocks, once entered into their system, to be transferred by book entry within their system. In other words, in the event of a transfer, certificates are not exchanged and no formal transfer of ownership was recorded by e-Net or AST. At oral argument, Prudential’s attorney explained that shares that come through DST are, by definition, unrestricted. Once Prousalis opened the margin account with Dean Witter, he was able to buy additional shares of unrestricted e-Net stock, giving him a total of 698,200 shares.

In early August 1998, Rodgers left Dean Witter and began working for Prudential. On August 7, 1998, Prousalis opened a margin account with Prudential at its Clearwater branch and instructed Dean Witter to transfer all of his e-Net shares to that account. 3 Dean Witter complied with this request, and the transfer was completed through the DTC system. At the same time, Prousalis sought a loan from Prudential for $5,892,200, which represented 50% of the value of the e-Net shares transferred. The loan would be secured by the e-Net shares owned by Prousalis.

Joseph Luino, Prudential’s Senior Vice President of Credit Control Administration, was vested with the authority to decide whether the loan should be made. Concerned that ²⁰⁴ there may be some restriction on the saleability of the pledged e-Net shares, Luino contacted Valerie Kerr of Prudential’s Executive Services and Strategies (“ESS”) department for guidance on the saleability of the stock offered as collateral. Kerr requested that Prudential’s Clearwater branch complete a standard “margin checklist”' document in accordance with Prudential’s internal operation procedures. The margin checklist requests information about the customer and the shares being offered as collateral and is designed to elicit whether there are any restrictions on the transferability of the shares.

It specifically asked whether the shares were subject to any lockup agreement, and if so, when the lockup agreement expired. 4 The Clearwater branch failed to complete the checklist. Although the margin checklist was never completed and Kerr did not render an opinion on the saleability of the shares, Luino, who stated in a deposition that Kerr advised him the shares were not restricted, extended Prousalis the margin loan on the day it was requested, August 7, 1998. The actual transfer of e-Net shares from Dean Witter to appellant occurred the following Monday, August 10, 1998, through the DTC system. Neither AST nor e-Net was made aware of the transfer.

The loan amount was 50% of the market value of Prousalis’s e-Net shares, which at the time, were trading at $17 per share. The e-Net shares thereafter increased in market value, reaching a high of $20 per share on August 18, ²⁰⁵ 1998. This high, however, was short-lived and, on September 3, 1998, e-Net’s stock closed at $7% per share. At this point, Prudential exercised its right to a “margin call” and demanded that Prousalis deposit approximately $3.5 million in additional cash or securities into his margin account pursuant to his margin loan agreement.

The margin account agreement required Prousalis to “maintain such margins as [Prudential] may in [its] discretion require from time to time and [to] pay on demand any debit balance.” Prousalis failed to deposit the requested amount into his account, and, on September 4, 1998, Prudential began selling Prousalis’s e-Net shares to satisfy the debt. Between September 4, 1998, and September 16, 1998, Prudential sold 243,200 shares of e-Net stock at approximately $4.03 per share. The debt was still not satisfied, and, by April 7, 1999, Prudential sold an additional 235,883 of Prousalis’s e-Net shares. By June 24, 1999, Prudential had completed the sale of all of Prousalis’s e-Net shares.

Prudential claims to have lost approximately $3,500,825.12 on the loan. On October 5,1998, Prudential filed suit, asserting: Count I U.C.C. § 8-204 5 and negligence, against both e-Net and AST Count II negligent misrepresentation based on the erroneous removal of the lockup legend on Prousalis’s e-Net shares, against e-Net and AST Count III breach of warranty based on U.C.C. § 8-208, against AST only. Count III was dismissed on February 12, 1999, pursuant to a motion to dismiss filed by AST. 6 e-Net and AST filed cross- ²⁰⁶ claims against each other, and AST brought third party complaints against Dean Witter, Rodgers, Prousalis, and Prousalis’s wife, Gayle. A scheduling order was entered in the case establishing July 19, 1999, as the discovery deadline.

The discovery deadline was extended several times, ultimately to April 14, 2000. The numerous postponements of the discovery deadline were mostly due to difficulties in scheduling the depositions of Rodgers and Prousalis. At the time of the suit, both Rodgers and Prousalis asserted lack of personal jurisdiction and refused to be deposed. Rodgers was deposed on October 26, 1999, on the sole issue of personal jurisdiction, and by order of court dated April 19, 2000, he was dismissed from suit.

The deposition of Thomas Prousalis was completed on March 22, 2000, the same day the court ruled that he was subject to the personal jurisdiction of the court. Rodgers was deposed a second time, as a non-party material witness, on April 29, 2000. On May 3, 2000, the trial court entered an order extending the deadline for filing dispositive motions to May 19, 2000. Both e-Net and AST filed motions for summary judgment. 7 On the last day for filing dispositive motions, and prior to filing an opposition to e-Net’s motion for summary judgment, Prudential filed an Amended Complaint.

The Amended Complaint amended Count III against AST for breach of warranty, this time basing it on U.C.C. §§ 8-109(a) & (b). The Amended Complaint also added Count IV negligence, against AST and e-Net Count V intentional concealment, against e-Net Count VI deceit, against e-Net Count VII negligent hiring and supervision, against e-Net Count VIII constructive fraud, against e-Net ²⁰⁷ Count IX injurious falsehood, against e-Net. Both e-Net and AST moved to strike the Amended Complaint. On June 30, 2000, a hearing was held on appellees’ motions to strike the Amended Complaint and the motions for summary judgment.

The trial court granted both the motions to strike and the motions for summary judgment. The trial court entered a final judgment by written order dated July 11, 2000, which was entered on July 19, 2000. The judgment reads as follows: The Court, having granted the motions of e-Net, Inc. and [AST] to strike the First Amended Complaint and for summary judgment for the reasons stated on the record on June 30, 2000; and having further dismissed the third party claims of [AST] against Dean Witter Reynolds, Inc. and Thomas T. Prousalis, Jr. based on the grant of the aforesaid motion for summary judgment; and now granting the unopposed motion for voluntary dismissal of e-Net, Inc’s counterclaims; and further now dismissing all cross claims between e-Net, Inc. and [AST], now hereby enters this FINAL JUDGMENT pursuant to Md. Rule 2-601 denying all relief and adjudicating all claims by all parties. Appellant filed a timely notice of appeal of this order.

DISCUSSION I. Summary Judgment on Count I Summary Judgment-Standard of Review Prudential makes numerous allegations of error in the trial court’s granting of summary judgment. Although we will discuss each allegation separately, we will first set forth the standard of review and the full text of the trial court’s ruling. “A court should grant a motion for summary judgment when there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law.” Taylor v. NationsBank N.A., 128 Md.App. 414, 417 , 738 A.2d 893 (1999), cert. granted, 357 Md. 481 , 745 A.2d 436 (2000). “In considering a motion for summary judgment, the ²⁰⁸ trial court does not determine any disputed facts, but instead rules on the motion as a matter of law.” Geduldig v. Posner, 129 Md.App. 490, 504 , 743 A.2d 247 (1999). When reviewing a trial court’s grant of a motion for summary judgment, this Court reviews the trial court’s ruling to determine if the trial court was legally correct. Williams v. Mayor & City Council of Baltimore, 359 Md. 101, 113 , 753 A.2d 41 (2000).

The trial court’s “legal determinations are not entitled to a presumption of correctness; this Court must apply the law as it understands the law to be.” Hoffman v. United Iron & Metal Co., 108 Md.App. 117, 132 , 671 A.2d 55 (1996) (citing Rohrbaugh v. Estate of Stern, 305 Md. 443 , 446 n. 2, 505 A.2d 113 (1986)). Trial Court’s Ruling on Summary Judgment The trial court granted summary judgment in favor of appellees, stating: All right. The facts are not in dispute. Preliminarily, I want to say I’ve made some comments about the length of the pleadings and briefs that have been filed, and I do want to say that on all sides they have been well briefed and well prepared and set forth on behalf of all parties the positions [and] the applicable law.

And it does come down to a question of law with respect to the undisputed facts, and taking it in a nutshell it can be viewed in two aspects. One is whether or not there is a violation under U.C.C., specifically section 8-204; and, Secondly, whether there is a cause of action that can be maintained under the traditional negligence cause of actions that have been briefed in the pleadings. There is no doubt that a mistake was made in the removal of the legend, the restrictive legend, and it’s that mistake which has led to the filing of the lawsuit by Prudential. There’s also no dispute that the restrictions that were erroneously removed were never enforced against the Plaintiff and, frankly, it’s that aspect of this case that causes the Plaintiff its biggest hurdle, from my perspective. ²⁰⁹ Normally, proximate cause in the Court of Appeals, the decisions are legion and those are Findings of Fact that need to be made by the trier of fact and the proximate cause is to be liberally interpreted to allow a claim to go forward.

But in this instance, there is absolutely no dispute that the removal of those restrictions led to the injury that was suffered by the Plaintiff, that what caused the injury to the Plaintiff was the drop in stock. The restrictions were [not] enforced, and the removal of that restriction did not proximately cause the damage that Plaintiff is seeking to recover in this case. Based upon my review of the pleadings and the exhibits and the documents that have been filed in this case, I’m satisfied that the undisputed facts in this case establish that the Plaintiff does not have a cause of action against the Defendants for negligence, that the Plaintiff, in essence, assumes the risk of the loss that it suffered, and that the Plaintiff was contributorily negligent in making its loan to Mr. Prousalis, which ultimately resulted in the damages. I am also satisfied that there was no misrepresentation which was made by either of the Defendants; and Finally, that there is no claim that exists under Section 8-204 of the U.C.C., and that there was no breach of any duty, and there was, in fact, no duty owed to the Plaintiff under the facts of this case.

Accordingly, I’ll grant the Motion for Summary Judgment that’s been filed on behalf of AST and e-Net. We find no error in the trial court’s ruling as to the counts before it (counts 1 and 2), and therefore affirm the judgment of the trial court. We explain. U.C.C. § 8-204 Cause of Action for Negligence Prudential argues that the trial court erred in ruling that there is no cause of action for negligence pursuant to U.C.C. § 8-204 and under Maryland common law.

Prudential contends that Neidiger/Tucker/Bruner, Inc. v. SunTrust Bank, ²¹⁰ 242 Ga.App. 369 , 530 S.E.2d 18 (2000), “unequivocally removes any doubt that appellant has a viable cause of action under § 8-204.” A. Cause of Action Under U.C.C. § 8-204 In addressing the issue of whether a cause of action under U.C.C. § 8-204 exists, we begin, as we must, with the plain language of the statute. U.C.C. § 8-204, which is codified in Md.Code Ann. (1975, 1990 Repl.Vol.), § 8-204 of the Commercial Law article, provides: § 8-204. Issuer’s restrictions on transfer A restriction on transfer of a security imposed by the issuer, even if otherwise lawful, is ineffective against a person without knowledge of the restriction unless: (1) The security is certificated and the restriction is noted conspicuously on the security certificate; or (2) The security is uncertificated and the registered owner has been notified of the restriction. On its face, U.C.C. § 8-204 cannot be read to create an express cause of action for damages on behalf of a person against another for failure to note a restriction on the certificate.

As Official Comment 1 states, “[t]his Section deals only with the consequences of failure to note the restriction on a security certificate.” A person who has no knowledge of an unnoted restriction is not bound by it. He is not damaged because the person who fails to note a restriction on a ' certificate is obligated to register the transfer despite the restriction. Citing SunTrust, 242 Ga.App. 369 , 530 S.E.2d 18 , and Dean Witter Reynolds, Inc. v. Selectronics, Inc., 188 A.D.2d 117 , 594 N.Y.S.2d 174 (1993), Prudential argues that the case law has interpreted § 8-204 to provide a cause of action. In Sun-Trust, two companies each purchased 500,000 shares of Allegiant stock using promissory notes that totaled $1 million. 242 Ga.App. at 370 , 530 S.E.2d 18 .

In exchange for the acceptance of the promissory notes as payment, the two companies agreed not to “sell, pledge, or hypothecate” the Allegiant ²¹¹ shares until the notes were paid in full and the shares were registered under the applicable securities laws. Sun Trust, acting as Allegiant’s transfer agent, was aware of these restrictions on the shares. Nevertheless, it prepared the stock certificates without noting the restrictions. The companies then pledged their Allegiant shares to Neidiger/Tucker/Bruner (“NTB”) as collateral for margin trading accounts.

Before accepting the Allegiant shares as collateral, NTB contacted a representative of Sun Trust, who confirmed that there were no restrictions on the shares. SunTrust, 242 Ga.App. at 370 , 530 S.E.2d 18 . Similar to this case, NTB sold 310,000 shares of the Allegiant stock to cover a margin call for the two companies. Sun Trust, however, issued a stop transfer order and informed NTB that the securities were not registered and were restricted.

NTB then had to purchase additional Allegiant shares on the open market to cover the shares it had already contracted to sell at a cost of $508,000. In Selectronics, Dean Witter began selling Selectronics shares in accordance with instructions from BIL Banque Internationale a Luxembourg (Suisse) S.A. 188 A.D.2d at 118 , 594 N.Y.S.2d 174 . The Selectronics shares appeared to be fully negotiable, but when Dean Witter sent them to a securities clearing house for reregistration, the transfer agent refused them and returned them to Dean Witter. When Dean Witter received the shares back from the transfer agents, they contained legends that had not appeared before.

The court found that Dean Witter “ ‘as pledgee was among the persons protected generally by § 8-204 against a restriction not conspicuously noted on the security, except as to a person with actual knowledge. The wrongful refusal to transfer gave rise to a right to sue as for conversion by the ... transferor.’ ” Id., at 121, 594 N.Y.S.2d 174 (quoting Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640, 644 (1973)). Prudential is correct in stating that courts have found a cause of action for negligent misrepresentation and conversion pursuant to U.C.C. § 8-204. SunTrust, 242 Ga.App. at 371-73 , 530 S.E.2d 18 ; Selectronics, 188 A.D.2d at 121 , 594 ²¹² N.Y.S.2d 174.

The difference between SunTrust, Selectronics, and the instant case is that when NTB and Dean Witter sought to sell shares on the market, transfer of the shares was refused by the transfer agent. SunTrust, 242 Ga.App. at 370 , 530 S.E.2d 18 ; Selectronics, 188 A.D.2d at 118-19 , 594 N.Y.S.2d 174 . Sun Trust and Selectronics, therefore, were liable under § 8-204 for their failure to note the restrictions on the shares and for damages arising from their failure to register the transfer. SunTrust, 242 Ga.App. at 372 , 530 S.E.2d 18 ; Selectronics, 188 A.D.2d at 121 , 594 N.Y.S.2d 174 .

In the case of SunTrust , it had represented to NTB that the shares, were unrestricted. Here, neither e-Net nor AST refused to register Prudential’s transfers or attempted to issue a stop transfer order on the sale. Prudential received the benefit provided to a “person without knowledge” by U.C.C. § 8-204 when it was allowed to sell restricted shares of stock to cover its margin call. Further, the damages in SunTrust represented the amount of money NTB had to expend buying shares on the open market in order to cover for those shares subject to Sun Trust’s stop transfer order. 8 In the case at bar, Prudential did not have to purchase additional e-Net shares on the open market to cover the restricted shares; it simply asserts damages in the amount it lost because of the decline in market value of the shares that it sold.

U.C.C. § 8-204 was intended to protect innocent parties from having an unnoted restriction enforced against them, and Prudential reaped the benefit of this provision. See SunTrust, 242 Ga.App. at 372 , 530 S.E.2d 18 ; see also Official Comments to U.C.C. § 8-204. We are not unsympathetic to Prudential’s losses. We agree that AST erred in failing to note the restrictions on the e-Net certificates.

However, appellees did not enforce the restrictions against Prudential, and thus, Prudential is without a cause of action against appellees under U.C.C. § 8-204. . ²¹³ Prudential’s claim under Count 1 of its complaint, which concerns § 8-204, is labeled “§ 8-204 and negligence.” We note that Prudential appeared to argue before the trial court in the alternative. That is, if there was no cause of action arising under the statute in its own right, Prudential appeared to argue that § 8-204 creates a duty that would allow Prudential to claim negligence. 9 We thus turn to whether Prudential could have a valid negligence cause of action based on breach of a duty established by § 8-204. B. Duty Appellees argue that Prudential failed to show that either e-Net or AST owed it a duty. The duty arising out of U.C.C. § 8-204 forms the basis for the negligence claim in Count I of Prudential’s Complaint.

In Maryland, in order to establish a cause of action for negligence, a plaintiff must prove: a duty owed to the plaintiff or to a class of which the plaintiff is a part; a breach of that duty; a causal relationship between the breach and the harm; and damages suffered. See Jacques v. First Nat’l Bank, 307 Md. 527, 531 , 515 A.2d 756, 758 (1986); Cramer v. Housing Opportunities Comm’n, 304 Md. 705, 712 , 501 A.2d 35, 39 (1985); Scott v. Watson, 278 Md. 160, 165, 359 A.2d 548, 552 (1976); Peroti v. Williams, 258 Md. 663, 669 , 267 A.2d 114, 118 (1970). Absent a duty of care, there can be no liability in negligence. See West Va.

Central v. Fuller, 96 Md. 652, 666 , 54 A. 669, 671-72 (1903). There, id. at 666 , 54 A. at 671-72 , we stated: “[T]here can be no negligence where there is no duty that is due; for negligence is the breach of some duty that one person owes to another.... As the duty owed varies with circumstances and with the relation to each other of the individuals concerned, so the alleged negligence varies, and the act complained of never amounts to negligence in law or fact, if there has been no breach of duty.” ²¹⁴ Walpert, Smullian & Blumenthal, P.A. v. Katz, 361 Md. 645, 655 , 762 A.2d 582 (2000). Prudential alleges that it suffered an economic loss as a result of both e-Net and AST’s failure to ensure that Prousalis’s shares carried the proper legend so that Prudential would know they were restricted and, therefore, would refuse to accept the shares as collateral for a margin loan.

It is undisputed that Prudential never contacted either appellees or Prousalis on the day the loan to Prousalis was approved to determine if the shares were subject to restriction. It is also undisputed that e-Net intended Prousalis’s shares to be restricted, that it instructed AST to ensure that they bear a legend, that its internal records reflect the restrictions, and that AST failed to follow e-Net’s instructions. The Court of Appeals has held that, [i]n determining whether a tort duty should be recognized in a particular context, two major considerations are: the nature of the harm likely to result from a failure to exercise due care, and the relationship that exists between the parties. Where the failure to exercise due care creates a risk of economic loss only, courts have generally required an intimate nexus between the parties as a condition to the imposition of tort liability.

This intimate nexus is satisfied by contractual privity or its equivalent. By contrast, where the risk created is one of personal injury, no such direct relationship need be shown, and the principal determinant of duty becomes foreseeability. Jacques, 307 Md. at 535 , 515 A.2d 756 (footnote and citations omitted). Because Prudential suffered purely economic losses in this case, we must look at Prudential’s relationship with both e-Net and AST. “Finding an intimate-nexus requires consideration of numerous factors.” Griesi v. Atlantic General Hosp.

Corp., 360 Md. 1, 13 , 756 A.2d 548 (2000). The Court of Appeals has provided guidance for determining whether privity giving rise to a duty exists between two parties: ²¹⁵ “Liability [for negligent misrepresentation] arises only where there is a duty, if one speaks at all, to give the correct information. And that involves many considerations. There must be knowledge, or its equivalent, that the information is desired for a serious purpose; that he to whom it is given intends to rely and act upon it; that, if false or erroneous, he will because of it be injured in person or property.

Finally, the relationship of the parties, arising out of contract or otherwise, must be such that in morals and good conscience the one has the right to rely upon the other for information, and the other giving the information owes a duty to give it with care. An inquiry made of a stranger is one thing; of a person with whom the inquirer has entered, or is about to enter, into a contract concerning the goods which are, or are to be, its subject, is another.” Weisman v. Connors, 312 Md. 428, 447 , 540 A.2d 783 (1988) (quoting International Products Co. v. Erie R. Co., 244 N.Y. 331 , 155 N.E. 662, 664 (1927)). At the time Prudential made the margin loan to Prousalis, there was no contract between Prudential and either e-Net or AST. We are likewise unconvinced that Prudential was a third-party beneficiary of the contract between e-Net and AST.

Clearly, Prudential was not an identified beneficiary of the contract. Nevertheless, there are situations in which an injured third party may come to be identified as a general class of persons sought to be among the intended beneficiaries of a contract. For example, a tort claimant has been recognized as a third-party beneficiary of a contract of insurance. See Jones v. Hyatt Ins.

Agency, Inc., 356 Md. 639, 658 , 741 A.2d 1099 (1999). The e-Net/AST contract was intended, at least in part, to protect e-Net shares from devaluation by limiting an affiliate’s 10 opportunity to dump restricted shares onto the open ²¹⁶ market. That protection would benefit unrelated third party shareholders. These unrelated third parties may be in the position of Prudential, which extended margin loans on restricted shares, but, more likely, they would be investors purchasing e-Net stock.

A similar situation exists in the insurance context, where the insured and insurer enter into a contract to protect the insured from third-party tort liability in the event of an accident. The third-party tort claimant may benefit from the insurance contract. Even if we were to assume that Prudential was a third-party beneficiary of the e-Net/AST contract, a tort duty still does not automatically arise under this theory. In Jones , the petitioners, the Joneses, had been involved in an automobile accident with a company vehicle driven by Robert Smith and owned by K & D Auto, Inc. K & D believed that it was insured at the time of the accident by respondent Hyatt Insurance Agency, Inc. Their vehicles were not insured by Hyatt, however, until three weeks after the accident.

At the time of the accident, the vehicles were not covered by any insurance policies. When the Joneses discovered that they would be unable to recover from Hyatt, they sued Smith and K & D in circuit court and received a total of $900,000 in damages. K & D subsequently assigned to the Joneses its right to sue Hyatt, and both of them filed suit against Hyatt to recover the damages. The Court of Appeals found that, in the suit against Hyatt, their damages were purely economic.

Jones, at 658, 741 A.2d 1099 . Consequently, the Court looked for an “intimate nexus” or “direct relationship” between the Joneses and Hyatt, finding: Moreover, there was no “intimate nexus” or “direct relationship” between Hyatt and the Joneses. At the time of the contract between Hyatt and K & D, the Joneses were not even identified third-party beneficiaries of that contract. It was not until the motor vehicle accident that the Joneses fell into a class whose members were among the intended beneficiaries of the contract.

See Napier v. Bertram, 191 Ariz. 238 , 954 P.2d 1389 (1998), where the Supreme Court of ²¹⁷ Arizona held that an insurance agent may not be held liable in negligence to a taxicab passenger for failure to procure uninsured motorist coverage for the agent’s client, a taxicab company required by state law to have such coverage on behalf of its passengers. The Arizona court noted that, for it to hold a professional liable for negligence, it traditionally required “a duty of care” founded upon the “relationship between the non-client and professional” that “exceeded mere general foreseeability.” Napier, 191 Ariz. at 242-243 , 954 P.2d at 1393-1394 .11 11 Under certain circumstances a third-party beneficiary of a contract between principal and agent, who is identified when the contract is entered into, may bring a tort action against the agent who has made representations to the beneficiary or otherwise assumed a duty owed to the beneficiary. Flaherty v. Weinberg, 303 Md. 116, 135-137 , 492 A.2d 618, 627-628 (1985) (agent allegedly made negligent representations directly to the plaintiff, who was the identified third-party beneficiary of the agency contract, and who was allegedly not in an adversarial position to the principal, and the agent intended that the plaintiff would act upon the representations). The opinion in Flaherty v. Weinberg, however, clearly leads to the conclusion that the Joneses would not be entitled to bring a direct tort action against Hyatt.

Jones, 356 Md. at 658-59 , 741 A.2d 1099 . The Court of Appeals has recently expanded the concept of duty in cases of pure economic loss. Walpert, 361 Md. 645 , 762 A.2d 582 . Walpert is an accountant liability case but provides guidance.

In many accountant liability cases, a third party has relied on an accountant’s statement to invest money or make a loan. See Willis W. Hagen II, Accountants’ Common Law Negligence Liabilities to Third Parties, 1988 Colum. Bus. L.Rev. 181, 207 (1988); Walpert, 361 Md. 645 , 762 A.2d 582 .

In Walpert , George and Shirley Katz (jointly the “Katzes”) sued their former accountants, Walpert, Smullian & Blumenthal, P.A. (“WS & B”), for negligence, gross negligence, negligent misrepresentation, and breach of contract in connection with loans they had made to Magnetics, Inc. Magnetics was formerly owned by George Katz, who relinquished ownership in 1987 to his wife and two sons. George Katz retained the title of president and remained financially interested, but his son Philip actually controlled the company. After Philip took ²¹⁸ control, he retained WS & B to perform annual audits and prepare unaudited reports every six months.

WS & B also did personal accounting work for the Katzes. Between 1990 and 1992, the Katzes entered into four financial transactions with Magnetics. In June 1993, an independent audit revealed that Magnetics had inflated its inventory and accounts receivable. Consequently, Magnetics’s principal lender, the Bank of Baltimore, called its $2 million loan.

The bank subsequently took possession of Magnetics and liquidated its assets. The Katzes sued WS & B to recover the losses they suffered as a result of the accounting error. WS & B filed for summary judgment, arguing that the Katzes were not an intended beneficiary of the contract between Magnetics and WS & B. The trial court agreed and granted summary judgment for WS & B. This Court reversed the trial court, finding that, although the Katzes were not third-party beneficiaries of the Magnetics/WS & B contract, there was a genuine dispute of material fact as to whether WS & B nevertheless owed the Katzes a duty of care. The Court of Appeals affirmed that decision and engaged in a lengthy discussion of how duty arises in this context.

The Court first noted that three standards of accountant liability have evolved: the privity standard, as first explained in Ultramares Corporation v. Touche, 255 N.Y. 170 , 174 N.E. 441 (1931); the foreseeability standard, as explained in Restatement (Second) Torts § 522; 11 and the “reasonably foresee ²¹⁹ able” standard, adopted by New Jersey, West Virginia, and Wisconsin. 12 Walpert, 361 Md. at 653-54 , 762 A.2d 582 . With respect to accountant liability to a non-contracting third party, courts that have addressed the issue have used one of the three aforementioned theories to determine whether the accountant is liable: A significant number follow the Ultramares formulation, under which a third party will be denied relief for an auditor’s negligence in the absence of a relationship with the auditor that constitutes privity or that is equivalent to privity. The majority of jurisdictions, however, follow the Restatement approach: liability is imposed on suppliers of commercial information to third parties who are actually foreseen as the users of the information for a particular purpose. The third view, followed by a few jurisdictions, allows third parties to recover for auditor negligence when their reliance on the audit report was reasonably foreseeable by the auditor.

Walpert, 361 Md. at 673 ,