BANCROFT LIFE & CASUALTY ICC, LTD v. INTERCONTINENTAL MANAGEMENT LTD. et al

Filing 248

MEMORANDUM AND OPINION re: 213 Motion of Defendants Dernar & Associates, LLC and David K. Dernar, C.P.A., to Dismiss All Claims in the Amended Complaint filed by Plaintiff, Bancroft Life & Casualty ICC, LTD. Signed by Judge William L. Standish on 11/29/2011. (kms)

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVNIA

BANCROFT LIFE & CASUALTY
ICC, LTD.,
Plaintiff,
vs.

Civil Action No. 10-704

INTERCONTINENTAL MANAGEMENT
LTD. d/b/a INTERNCONTINENTAL
CAPTIVE MANAGEMENT COMPANY,
LTD., INTERCONTINENTAL
MANAGEMENT, LTD., THE ROBERTS
AND PATTON LAW FIRM, JOHN R.
PATTON, ESQ., GEORGE THOMAS
ROBERTS, ESQ., NIGEL BAILEY,
CUNNINGHAM HUGHAN & COMPANY,
THOMAS HUGHAN, C.P.A., DERNAR
& ASSOCIATES, LLC, and DAVID
K. DERNAR, C.P.A.,
Defendants.
MEMORANDUM
INTRODUCTION

Before the Court is the motion of Defendants Dernar &
Associates, LLC (individually, "D&A") and David K. Dernar,
C.P.A. (individually, "Dernar")

(collectively, "the Dernar

Defendants"), to dismiss the professional malpractice claim
asserted against them by Plaintiff, Bancroft Life & Casualty
ICC, Ltd. ("Bancroft"), under Fed.R.Civ.P. 12(b) (6).

For the

reasons set forth below, the motion to dismiss will be granted.

1

FACTUAL ALLEGATIONS
The allegations of Bancroft's complaint that are relevant
to the present motion may be summarized as follows:
Bancroft is an insurance company headquartered and licensed
in St. Lucia.

Bancroft offers customized insurance to United

States companies that generally is not available in the
traditional insurance marketplace.

Specifically, Bancroft's

insurance program is a potentially tax advantaged alternative to
self-insuring a company's risk.

(Docket No. 169,

1 1).

On October 15, 2004, Bancroft entered into a management
agreement with Defendant Intercontinental Management, Ltd.,
doing business as Intercontinental Captive Management Company,
Ltd. ("ICMC") , to run its day-to day operations.

Two of ICMC's

principals, John R. Patton, Esquire ("Patton") and George Thomas
Roberts, Esquire ("Roberts"), who held themselves out as
insurance regulatory and tax attorneys, were retained to serve
as Bancroft's outside general counsel.

(Docket No. 169,

1 1).

The principals of Bancroft entrusted ICMC with its day-to­
day business and entrusted Patton and Roberts with all of its
regulatory compliance and tax issues.

Rather than serve

Bancroft's best interests, however, ICMC, Patton, Roberts and
ICMC's other principal, Defendant Nigel Bailey, worked against
Bancroft and elevated their own interests above the interests of
Bancroft.

For example, ICMC billed Bancroft for hundreds of
2

thousands of dollars for services that it either did not
perform, or performed so poorly that it was as if it had not
performed the services at all.

(Docket No. 169,

~

2).

D&A is a limited liability company organized under the laws
of the Commonwealth of Pennsylvania with its principal place of
business in Murrysville, Pennsylvania.

Dernar is a certified

public accountant and an owner/employee of D&A.
169,

~~

11 12).

(Docket No.

The Dernar Defendants were retained to prepare

financial statements and semi-annual reports for Bancroft and
its captive incorporated cells ("rCs") for submission to the St.
Lucia Ministry of Finance, as well as tax returns for Bancroft's
ICS. l

(Docket No. 169,

~

189).

In the performance of their accounting services, the Dernar
Defendants owed Bancroft a duty to use the skill, prudence and
diligence commonly possessed and exercised by members of the
accounting profession.

(Docket No. 169

I

~I

190).

The Dernar

Defendants breached their duty to Bancroft by (a) failing to
prepare timely and accurate semi annual reports on behalf of
Bancroft and its rcs for submission to the St. Lucia Ministry of
Finance, (b) failing to prepare financial statements that
I Companies with special risk insurance needs may elect to have Bancroft form
what is known as a single parent IC.
Under this business model, the client
actually owns the captive insurance company. However, in order to issue an
insurance policy under Bancroft's license, the IC must obtain a certificate
of registration to do international insurance business from the government of
St. Lucia. This license limits the IC's business activities to those of an
IC of Bancroft. The IC also must make an election under 26 U.S.C. § 953(d)
to be taxed as a United States taxpayer. Beginning in 2008, ICMC, on
Bancroft's behalf, purported to form ten ICs.
(Docket No. 169, " 24 25).

3

accurately reflected Bancroft's income, expenses, reserves,
assets and liabilities, and (c) failing to prepare timely and
accurate tax returns for Bancroft's ICs.

Upon information and

belief, the Dernar Defendants prepared financial statements,
semi-annual reports and tax returns from accounts and records
supplied by ICMC which the Dernar Defendants knew, or reasonably
should have known, were inaccurate, incomplete or otherwise
unsatisfactory.

The Dernar Defendants' breaches have caused

Bancroft to be out of compliance with the laws and regulations
governing insurance companies in St. Lucia. 2
"

(Docket No. 169,

193-95).

LEGAL STANDARD

Under Rule 8(a) (2) of the Federal Rules of Civil Procedure,
a pleading that states a claim for relief must contain "a short
and plain statement of the claim showing that the pleader is
entitled to relief."

The purpose of Rule 8(a) (2) is to give the

defendant fair notice of what the claim is and the grounds upon
which it rests.
In Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the
United States Supreme Court abrogated the oft-repeated standard
Pursuant to Pa.R.Civ.P. 1042.3, counsel for Bancroft attached a Certificate
of Merit to the Amended Complaint for each of the Dernar Defendants
certifying that "an appropriate licensed professional has supplied a written
statement to the undersigned that there is a basis to conclude that the care,
skill or knowledge exercised or exhibited by [Dernar and D&A], in the
treatment, practice or work that is the subject of the complaint, fell
outside acceptable professional standards and that such conduct was a cause
in bringing about the harm.
(Docket No. 169, pp. 13-16).

2

4

enunciated in Conley v. Gibson, 355 U.S. 41, 45-46 (1957) for
dismissal of a complaint for failure to state a claim upon which
relief can be granted under Fed.R.Civ.p. 12(b) (6), i.e., that a
complaint cannot be dismissed "unless it appears beyond doubt
that the plaintiff can prove no set of facts in support of his
claim which would entitle him to relief."
plaintiff must "nudge[]

Following Twombly, a

[his or her] claims across the line from

conceivable to plausible" in order to survive a motion to
dismiss.

550 U.S. at 570.

See also Phillips v.

Count~

Allegheny, 515 F.3d 224, 233 (3d Cir.2008) ("After Twombly, it is
no longer sufficient to allege mere elements of a cause of
action; instead 'a complaint must allege facts suggestive of
[the proscribed] conduct. '") .
"Determining whether a complaint states a plausible claim
for relief (is]

... a context-specific task that requires the

reviewing court to draw on its judicial experience and common
sense./I

Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1950

(2009).

Regarding this task, in Fowler v. UPMC Shadyside, 578

F.3d 203 (3d Cir.2009), the Court of Appeals for the Third
Circuit noted that
" ... , after Iqbal, when presented with a motion to dismiss
for failure to state a claim, district courts should
conduct a two-part analysis. First, the factual and legal
elements of a claim should be separated. The District
Court must accept all of the complaint's well-pleaded facts
as true, but may disregard any legal conclusions. Id.
Second, a District Court must then determine whether the
5

facts alleged in the complaint are sufficient to show that
the plaintiff has a -plausible claim for relief. H Id. at
1950. In other words, a complaint must do more than allege
the plaintiff's entitlement to relief. A complaint has to
"showH such an entitlement with its facts. See Phillips,
515 F.3d at 234-35. As the Supreme Court instructed in
Iqbal, -[w]here the well-pleaded facts do not permit the
court to infer more than the mere possibility of
misconduct, the complaint has alleged - but it has not
'show[n], - 'that the pleader is entitled to relief.'H
Iqbal, 129 S .Ct. at 1949 ....
H

*

*

*

578 F.3d at 210-11.
In sum, -Rule 8 marks a notable and generous departure from
the hyper technical, code-pleading regime from a prior era, but
it does not unlock the doors of discovery for a plaintiff armed
with nothing more than conclusions. H

Iqbal, 129 S.Ct. at 1950.

APPLICABLE LAW
Professionals have a duty to perform their services with
the -skill and knowledge normally possessed by members of that
profession or trade in good standing in similar communities. H
Restatement

of Torts

§

299A.

To establish a claim of

professional malpractice under Pennsylvania law, which the
parties agree applies in this case, a plaintiff must establish
that (1) the defendant owed a duty to the plaintiff; (2) the
defendant breached that duty; (3) the plaintiff was actually
harmed; and (4) the defendant's breach caused that harm.
Citx Corp., Inc., 448 F.3d 672, 677 (3d Cir.2006),
v. Evans, 711 A.2d 458, 461 (Pa.1998).
6

In re:

ting Martin

with regard to the level of assurance provided by the
different types of accounting services, in Otto v. Pennsylvania
State Education Ass'n - NEA, 330 F.3d 125 (3d Cir.2003), the
Court of Appeals for the Third Circuit stated:

*

*

*

... Broadly speaking, auditors can provide three different
types of accounting services: compilations, reviews, and
audits. A compilation is the "lowest level of assurance"
regarding an entity's financial statements. Christian
Tregillis, Overview of Services Provided by CPAs, in Basics
of Accounting & Finance: What Every Practicing Lawyer Needs
to Know, 88 (PLI Corp. Law & Practice Course, Handbook
Series No. B-1064, 1998). It expresses "neither an opinion
nor any level of assurance." Id. When performing a
compilation, an accountant need not "verify or corroborate
the financial statement information provided by the
client." Jane Dillard-Eggers, Understanding Compilations,
Reviews, and Audits, at http://www.tscpa.com/public
/smallbusinessarticles/understanding compilations.htm.
A review involves an intermediate level of scrutiny in
which the auditor provides "limited assurance" on the
entity's financial statements. See id. In so doing, the
auditor indicates that he "is not aware of any material
modifications needed to be in conformity with [generally
accepted accounting principles, also known as GAAP.] "
Tregillis, supra, at 88. In order to provide this "limited
assurance," the auditor must make some, but not
comprehensive, inquiry into client management, accounting
practices, internal control structure, and analytical
procedures used by the organization. See Dillard-Eggers,
supra. The scope of the "inquiry and analytical procedures
are the major difference between a review and a
compilation." Larry P. Bailey, GAAS Guide: A Comprehensive
Restatement of Generally Accepted Auditing Standards 16.31
(1994) .
In an audit, which provides "the highest level of
assurance on financial statements," the accountant
"provides verification of the financial statements' claims
7

and assertions" and expresses an opinion on the entity's
financials. Tregillis, supra, at 85 (emphasis added) .
Among other procedures, the accountant "consider[s] and
evaluate[s] ... the internal control system of the [client]
... [and] tests ... the underlying documentation to support
account balances." Dillard-Eggers, supra; Bailey, supra,
at 16.51. ...

*

*

*

330 F.3d at 133.
The specific scope of an accountant's duty to a client is
determined primarily by the terms and conditions of the contract
of employment.

Robert Wooler Co. v. The Fidelity Bank, 479 A.2d

1027, 1031 (Pa.Super.1984), citing O'Neill v. Atlas Automobile
Finance Corp., 11 A.2d 782, 786 (Pa.Super.1940).

In the present

case, the engagement letter prepared by the Dernar Defendants on
December 9, 2008 which was signed by Bancroft's Vice President
on December 15, 2008, states in relevant part: 3

*

*

*

This letter is to confirm our understanding of the terms
and objectives of our engagement and the nature and
limitations of the services we will provide.
Financial Statements
We will compile, from information you provide, the annual
and quarter-end balance sheet of Bancroft Life and
Casualty, LTD, as of December 31, 2008, and the related
statement of income and retained earnings for the year
2008. We will not perform an audit or review of such
3Although the Dernar Defendants' engagement letter dated December 9, 2008 was
not attached as an exhibit to Bancroft's complaint, a court may consider "an
undisputedly authentic document that a defendant attaches as an exhibit to a
motion to dismiss if the plaintiff's claims are based on the document." See
Pension Benefit Guar. Corp. v. White Consolo Indus., 998 F.2d 1192, 1196 (3d
Cir.1993).

8

financial statements. Our report on the financial
statements of (Bancroft Life and Casualty, LTD], is
presently expected to read as follows:
We have compiled the accompanying balance sheet of
Bancroft Life and Casualty, LTD, as of December 31,
2008 and the related statement of income and retained
earnings for the period then ended in accordance with
Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of
financial statements information that is the
representation of management. We have not audited or
reviewed the accompanying financial statements and,
accordingly, do not express an opinion or any other
form of assurance on them.
Management has elected to omit substantially all of
the disclosures and the statement of cash flows
required by generally accepted accounting principles.
If the omitted disclosures and statement of cash flows
were included in the financial statements, they might
influence the user's conclusions about the Company's
financial position and results of operations.
Accordingly, these financial statements are not
designed for those who are not informed about such
matters.

*

*

*

Conclusion
You are responsible for management decisions and functions,
and for designating an individual with suitable skill,
knowledge, or experience to oversee any bookkeeping
services, tax services, or other services we provide. You
are responsible for evaluating the adequacy of the results
of the services performed and accepting responsibility for
such services. You are responsible for establishing and
maintaining internal controls, including monitoring ongoing
activities.
Our engagement cannot be relied upon to disclose errors,
fraud, or illegal acts that may exist. However, we will
inform you of any material errors and any evidence or
9

information that comes to our attention during the
performance of our compilation procedures, that fraud may
have occurred. In addition, we will report to you any
evidence or information that comes to our attention during
the performance of our compilation procedures regarding
illegal acts that may have occurred, unless they are
clearly inconsequential. We have no responsibility to
identify and communicate significant deficiencies or
material weaknesses in your internal control as part of
this engagement. 4

*

*

*

(Docket No. 222-1).
Although the scope of the engagement letter between
Bancroft and the Dernar Defendants was limited to a compilation
of financial statements and other documents which, as noted in
Otto, supra, involves the lowest level of assurance, the Dernar
Defendants could breach their professional duties to Bancroft if
they encountered glaring irregularities or illegal activities in
the information provided for the compilation, i.e., "red flags,"
and failed to disclose them to Bancroft.

Wooler, at 1032; In

re: Citx Corp., Inc., Nos. 03-727, 03-cv-6766, 2005 WL 1388963,
at *6 (E.D.Pa., June 7, 2005); In re: Computer Personalities
Systems, Inc., No. 01-14231 DWS, ADV. 03-0220, 2003 WL 22844863,
at *5 (Bkrtcy.E.D.Pa, Nov. 18, 2003).

The Dernar Defendants attached an identical engagement letter dated April 6,
2010, for accounting services to be performed for rCMC.
The services
involved compilations of the semi-annual and year-end balance sheets of two
of Bancroft's rcs as of December 31, 2010 and the related statements of
income and retained earnings of these rcs for the year 2010.
(Docket No.
222-2) .

4

10

DISCUSSION
After consideration

l

the Court agrees with the Dernar

Defendants that Bancroft/s allegations against them do not meet
the standard for pleading a plausible claim for relief
enunciated in Twombly and elaborated upon in Iqbal.

The Dernar

Defendants acknowledge that despite their limited engagement
i.e'

l

1

to prepare compilations based on the information provided

they owed a duty to Bancroft to bring any "red flags
attention.

However

with specificity.

1

ll

to its

Bancroft fails to allege any "red flag

Instead

l

l

ll

in opposition to the motion to

dismiss, Bancroft argues that "the Amended Complaint does allege
the specific 'red flag' - the knowing use of inaccurate

l

incomplete or otherwise unsatisfactory books and records,
that resulted in inaccurate financial statements.
225 1 p. 6).

1I

(sic)

(Docket No.

Simply put, the foregoing allegation is nothing

more than a "formulaic recitation

ll

of the elements of Bancroft's

professional malpractice claim against the Dernar Defendants.
Twombly

1

550 U.S. at 555.

The allegation does not permit the

11

Court to "infer more than the mere possibility of misconduct." 5
Iqbal, 129 S.Ct. at 1950.

Judge William L. Standish
United States District Judge
Date: November 29, 2011

Court also notes that Bancroft's reliance on Lichtenstein v. Stockton
No. 01 14231DWS, ADV. 03 0220, 2003 WL 22844863 (Bkrtcy.E.D.Pa.,
Nov. 18, 2003), to oppose the Dernar Defendants' motion to dismiss is
misplaced.
(Docket No. 225, pp. 4-5).
Lichtenstein was decided 3~ years
before the Supreme Court's decision in Twombly.
5 The

12