Federal Deposit Insurance Corporation v. PricewaterhouseCoopers LLP et al
MEMORANDUM OPINION AND ORDER denying 58 & 60 MOTIONS to Dismiss. Signed by Chief Judge William Keith Watkins on 7/15/2014. (Attachments: # 1 Civil Appeals Checklist) (wcl, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
FEDERAL DEPOSIT INSURANCE
and CROWE HORWATH, LLP
) CASE NO. 2:12-CV-957-WKW
MEMORANDUM OPINION AND ORDER
In resolving the defendants’ original motions to dismiss, the court issued a
Memorandum and Order (Doc. #52) allowing the plaintiff Federal Deposit
Insurance Corporation (“FDIC”) the opportunity to amend the complaint to allege
facts connecting the “double- and triple-pledging” fraud to defendants’ auditing
services. The FDIC filed the Second Amendment Complaint with an expanded
paragraph 21 (Doc. #53). Defendants PricewaterhouseCoopers, LLP (“PwC”) and
Crowe Horwath, LLP (“Crowe”) again move to dismiss (Docs. #58 and #60)
FDIC’s claims to the extent that those claims seek recovery of damages from the
double- and triple-pledging fraud scheme alleged in the Second Amended
Complaint. The parties have briefed the issue, and the motions are ripe for
resolution. The motions are due to be denied.
I. JURISDICTION AND VENUE
The court has original jurisdiction over actions brought by the FDIC
pursuant to 12 U.S.C. §§ 1345, 1819(b). The parties do not contest personal
jurisdiction or venue.
II. STANDARD OF REVIEW
A Rule 12(b)(6) motion tests the sufficiency of the complaint against the
legal standard articulated by Rule 8: “a short and plain statement of the claim
showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). To survive a
motion to dismiss under Rule 12(b)(6), a complaint must contain sufficient factual
allegations, “accepted as true, to ‘state a claim to relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). While detailed factual allegations are
unnecessary, the standard demands “more than labels and conclusions,” something
beyond a “formulaic recitation of the elements of a cause of action.” Twombly, 550
U.S. at 555. It is not enough for a plaintiff to allege that it is entitled to relief; it
must plead facts that “permit the court to infer more than the mere possibility of
misconduct.” Iqbal, 556 U.S. at 679.
Defendants previously challenged the notion that their audits were the
proximate cause of damages, and specifically the damages resulting from the
double- and triple-pledging fraud. This court stated:
PwC argues that Colonial has not adequately alleged that
PwC’s audit caused the Bank’s losses. Where reasonable inferences
support a plaintiff’s theory, proximate cause is question for a jury.
Wilbanks v. United Refractories, Inc., 112 So. 3d 472, 475 (Ala. 2012)
(analyzing inadequate proximate cause as a basis for motion for
summary judgment). Taking the FDIC’s allegations as true, as it must
on a Rule 12(b)(6) motion to dismiss, the court finds that the FDIC
has adequately alleged that PwC caused the Bank’s losses. (See, e.g.,
Doc. # 29 ¶¶ 37, 42, 44, 48 (alleging means by which PwC’s audit
should have revealed accounting discrepancies suggestive of fraud).)
With respect to the allegations found in Paragraph 21 of the
FDIC’s Amended Complaint, however, the FDIC must replead. The
allegations are thin and offer no supporting facts connecting the
double- and triple-pledging fraud alleged in Paragraph 21 to PwC’s
audit. The FDIC shall have ten days to amend its complaint and
replead these allegations with supporting facts, if supporting facts
(Doc. #52, p. 17). FDIC filed a Second Amended Complaint, in which it greatly
expanded the factual allegations that support the claim that Defendants’ audits
resulted in double- and triple-pledging as a continuation of the multi-phasic, single
fraud scheme (compare Doc. #53, ¶21(a) through (g), to Doc. #29, ¶21).
Defendants filed the instant motions to dismiss, arguing that the new allegations do
not show that PwC’s 2007 audit (and Crowe’s 2006 and 2007 auditing services)
produced the double- and triple-pledging fraud “in a natural and continuous
sequence.” Gooden v. City of Talladega, 966 So. 2d 232, 239 (Ala. 2007).
The sole issue is whether the Second Amended Complaint alleges facts to
support the allegations that Defendants’ audits were the proximate cause of the
double- and triple-pledging losses suffered by Colonial several months after the
completion of the audits. The defendants argue that, to establish causation,
damages must flow in a “natural and continuous sequence” from the alleged
wrongdoing. Specifically, they claim that the double- and triple-pledging damages
were incurred by Colonial several months after their auditing services; their
auditing services could not have uncovered such fraud; and thus the damages did
not flow continuously from the audits.
In negligence claims, “[p]roximate cause is an act or omission that in a
natural and continuous sequence, unbroken by any new independent causes,
produces the injury and without which the injury would not have occurred.”
Gooden, 966 So. 2d at 239. A “natural and continuous sequence” means “unbroken
by any new independent causes.” Subsequent causes of injury, such as fraudulent
or criminal acts of a third person, are not “new independent causes” that intervene
or break the chain of causation, unless those subsequent causes are unforeseeable
by the defendant. Thetford v. City of Clanton, 605 So. 2d 835, 840 (Ala. 1992).
The notion of foreseeability is key to a proximate cause analysis. Gen. Motors
Corp. v. Edwards, 482 So. 2d 1176, 1194 (Ala. 1985). There can be no liability
where “the resulting injury could not have been reasonably anticipated by the
defendant. Foreseeability does not require that the particular consequence should
have been anticipated, but rather that some general harm or consequence could
have been anticipated.” Thetford, 605 So. 2d at 840 (emphasis added).
FDIC’s theory of negligence is not that the defendants failed to detect the
double- and triple-pledging fraud. Rather, FDIC’s theory is that the defendants
failed to discover existing fraud at the time of their auditing services, which
permitted the continuation of the fraudulent scheme, albeit through different
means. The facts alleged in the Second Amended Complaint support this theory. It
is plausible that the defendant auditors should have reasonably anticipated that a
general fraudulent scheme would continue if their allegedly faulty auditing
services failed to detect existing wrongdoing. See, e.g., In re Gouiran Holdings,
Inc., 165 B.R. 104, 106 (E.D.N.Y. 1994). Negligence law does not require FDIC to
prove that the defendants knew or should have known that the fraud would take the
particular form of double- or triple-pledging. Thetford, 605 So. 2d at 840.
Accordingly, taken as true at this stage of the case, the facts alleged in paragraph
21(a) through (g) now show a plausible connection between the defendants’ audits
and the damages suffered by Colonial Bank as a result of the double- and triplepledging fraud.
Accordingly, it is ORDERED that Defendants’ Motions to Dismiss (Docs.
#58 and #60) are DENIED.
DONE this 15th day of July, 2014.
/s/ W. Keith Watkins
CHIEF UNITED STATES DISTRICT JUDGE
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