A Pennsylvania judge has dismissed a professional malpractice lawsuit against KPMG employees accusing them of breach of contract, negligence, fraud and negligent misrepresentation.

The suit was brought by JoAnn Tredennick, a majority shareholder in Resco Products, who wanted to sell the company and entered into a contract with KPMG for tax advice and recommendations relating to the sale. She controlled approximately 92 percent of Resco's capital stock.

The KPMG employees sued by Tredennick prepared a confidential offering memorandum that Resco could distribute to potential buyers in early 2005. In the memorandum, tax deductions relating to the sale of Resco's stock were estimated to be worth approximately $20 million.

KPMG advised Resco to pay certain liabilities on or after March 16, 2005. However, by paying the liabilities at that time, Resco's shareholders could not deduct the payments. Instead the buyers were able to deduct the payments and realize the tax benefits.

Resco was acquired in September 2005 and was advised to make additional payments of accrued bonuses and deferred compensation. These payments also turned out to be deductible by the buyer and not by the shareholders.

Tredennick complained that the information in the memorandum was inaccurate and incomplete and that as a result she received a lesser price for her stock. She contended that KPMG failed to advise her of the adverse tax consequences of her payments and that she incurred over $900,000 in additional tax liability. She also named Resco's own corporate tax manager in the suit.

The court dismissed the breach of contract claim, noting that Tredennick was not a party in the contract between KPMG and Resco, and that the contract specified that the tax advice was not to be relied upon by a third party. The negligence and negligent misrepresentation claims were also dismissed because Tredennick was not in privity with the KPMG defendants. The fraud claim was dismissed because the court said that Tredennick failed to state the fraud she alleged with sufficient particularity.

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