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

Filing 307

MEMORANDUM re: 266 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM (Motion of Dernar Defendants to Dismiss All Claims Against Them in the Second Amended Complaint) filed by DAVID K. DERNAR, and DERNAR & ASSOCIATES, LLC. Signed by Judge William L. Standish on 6/12/2012. (md)

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
In Count VI of its Second Amended Complaint, Plaintiff,
Bancroft Life & Casualty ICC, Ltd.
against Defendants Dernar
Dernar l

C.P.A.

("Dernar ll

)

&

("Bancroft"), asserts a claim

Associates

l

(collectivelYI

LLC ("D&A

11

)

"Dernar Defendants

for professional negligence under Pennsylvania law.
Court

the Dernar Defendants

I

and David K.
ll

)

I

Before the

motion to dismiss the claim

pursuant to Fed.R.Civ.p. 12(b) (6).

For the reasons set forth

below 1 the motion to dismiss will be denied.

1

FACTUAL ALLEGATIONS

The allegations of Bancroft's second amended complaint that
are relevant for purposes of the present motion to dismiss may
be summarized as follows:
Bancroft is an international insurance company
headquartered and licensed to do business in St. Lucia.

On

October 15, 2004, Bancroft entered into a management agreement
with Defendant Intercontinental Management, Ltd., doing business
as Intercontinental Captive Management Company, Ltd.

("ICMC").

Two of ICMC's principals, John R. Patton, Esquire ("Patton") and
George Thomas Roberts, Esquire ("Roberts"), who held themselves
out as experts in insurance regulation and taxation, were
retained to serve as Bancroft's outside general counsel.
Thereafter, the principals of Bancroft entrusted ICMC with its
day-to-day operations and entrusted Patton and Roberts with all
of Bancroft's regulatory compliance and tax issues.

(Docket No.

262, § 1, p. 2).
In 2008, Bancroft began to offer an insurance program that
is a potentially tax advantaged alternative for a company
insuring its own risks.

Under this program, Bancroft's clients/

insureds establish their own insurance companies that are
devoted to handling the clients'/insureds' particular risks.
These insurance companies, known as single parent incorporated
cell captives ("ICs"), operate under Bancroft's insurance
2

license in St. Lucia.

The premiums paid into an IC by the

client/insured are tax deductible and may be invested by the IC
in securities, provided strict corporate and regulatory
requirements are met.

Ultimately, Bancroft is responsible for

ensuring the corporate and regulatory compliance of its ICs,
which includes the filing of semi-annual reports providing a
detailed financial picture of each IC.
10 ICs on Bancroft's behalf.
§

24,

§

ICMC purported to form

(Docket No. 262,

§

I, pp. 2, 4,

32).

Rather than serve Bancroft's best interests while managing
its day-to-day operations, ICMC, Patton, Roberts and ICMC's
other principal, Defendant Nigel Bailey, worked against
Bancroft, elevating their own interests above the interests of
Bancroft.

ICMC billed Bancroft for hundreds of thousands of

dollars for services that either were not performed or performed
so poorly that it was as if the services had not been performed
at all.

In addition, the accounting services provided to

Bancroft by ICMC and its subcontractors were "atrocious,
completely unreliable, and caused Bancroft to suffer increased
regulatory scrutiny from the St. Lucia Ministry of Finance and
the United States Internal Revenue Service."
§

(Docket No. 262,

I, pp. 2 3).

ICMC also failed to fulfill its responsibilities of
managing, controlling and accounting for Bancroft's ICs.

3

Among

other things, ICMC and its principals diverted fee income due to
Bancroft from the ICs and attempted to steal the business of
several of Bancroft's clients/insureds that had opted to insure
their particular risks through the IC model.
§

(Docket No. 262,

1, p. 4}.

In October 2009, following its discovery of how poorly ICMC
and its principals were performing their management services,
Bancroft terminated the management agreement with ICMC.
Bancroft replaced ICMC with CBIZ, an accounting firm, which
currently serves as Bancroft's third party administrator.
(Docket No. 262,

§

1, p. 4).

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

Dernar is a certified public

accountant and an owner/employee of D&A.

The Dernar Defendants

were hired by ICMC to provide accounting services for the
Bancroft account.

In particular, ICMC retained the Dernar

Defendants to prepare:

(1) Bancroft's quarterly and annual

balance sheets and the related statement of income and retained
earnings for 2008;

(2) Bancroft's quarterly statements for 2009;

(3) quarterly and annual balance sheets and the related
statements of income and retained earnings for 2008 for the
following Bancroft ICs: A&B Insurance Co. IC, CDG Ie, Joyce Ie,
West Ie and Nottingham Ie;

(4) quarterly statements for 2009 for
4

A&B Insurance Co. IC, CDG IC, Joyce IC, West IC and Nottingham
ICi and (5)

semi-annual returns as of June 30, 2009 for A&B

Insurance Co. IC, CDG IC, Joyce IC, West IC and Nottingham IC.
(Docket No. 262,

§§

11-12, §§ 62-63, §§ 198-99).

Bancroft is required by law to file an audited financial
statement with the St. Lucia Ministry of Finance on an annual
basis.

BDO Seidman and its affiliates ("BDO Seidman") performed

the annual audits of Bancroft's financial statements.

The

Dernar Defendants, among others, repeatedly failed to provide
BDO Seidman with timely and accurate financial statements for
auditing purposes.

(Docket No. 262,

§

68).

With respect to Bancroft's balance sheet for 2008 that had
been prepared by the Dernar Defendants, there were numerous
material errors in the accounting records supplied by ICMC to

In fact, the 2008 balance sheet

BDO Seidman for the 2008 audit.

submitted to BDO Seidman had to be revised at least 5 times over
a period of more than 4 months during which BDO Seidman was in
constant communication with ICMC and the Dernar Defendants.
ICMC and the Dernar Defendants also did not fully cooperate with
CBIZ, Bancroft's new third-party administrator, and were
exceptionally slow in turning over requested information, data
and records relating to Bancroft.

As of late September 2009,

CBIZ had not received accurate information from ICMC and the
Dernar Defendants to enable BDO Seidman to complete the audit of
5

Bancroft's 2008 financial statement.
§§

(Docket No. 262,

§

75,

99-100).
Because of the time required to correct the errors in

Bancroft's 2008 balance sheet, Bancroft's audited financial
statement for 2008 was not submitted to the St. Lucia Ministry
of Finance in 2009.

The Finance Minister noted not only the

absence of Bancroft's audited financial statement for 2008,
despite several extensions, but also the failure of ICMC and the
Dernar Defendants to prepare and file semi-annual returns for
Bancroft and its ICs for the periods ending June 30, 2009 and
December 31, 2009, and Bancroft was threatened with regulatory
action.

(Docket No. 262,

§ 77, § 81, § 94).

Because of material errors and misstatements by the Dernar
Defendants, among others, Bancroft's accounting records were
unreliable and of no value.

As a result, Bancroft was compelled

to pay CBIZ approximately $240,000 to re-do its 2008 balance
sheet and complete the audit of its 2008 financial statement to
get an accurate picture of its financial condition.
262,

§

(Docket No.

104).

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.

The Dernar Defendants breached their

duty to Bancroft by (1) repeatedly failing to provide BDO

6

Seidman with timely and accurate balance sheets, statements and
reportsi

(2) by preparing quarterly and annual balance sheets

and the related statement of income and retained earnings for
Bancroft for 2008 that contained numerous material errorsi

(3)

by failing to prepare a timely and accurate semi-annual report
for Bancroft as of June 30, 2009i

(4) by failing to prepare

timely and accurate semi-annual reports for Bancroft's rcs as of
June 30, 2009 and December 31, 2009i

(5) by failing to cooperate

with BDO Seidman in its efforts to complete and submit
Bancroft's audited financial statement for 2008 to the St. Lucia
Ministry of Finance;

(6) by failing to comply with requests to

turn over Bancroft's financial information, data and records to
its new third-party administrator, CBrZi and (7) by failing to
comply with Bancroft's requests for the financial information,
data and records relating to its rcs.

(Docket No. 262 1

§§

200­

201) .
The Dernar Defendants also breached their duty to Bancroft
in the following respects:

(1) by failing to alert Bancroft to

the material errors in its 2008 balance sheet and the related
statement of income and retained earnings that BDO Seidman had
brought to their attention over the course of 4 months in 2009;
(2) by failing to inform Bancroft that the 2008 financial
information they had received from rCMC was incorrect,
incomplete and otherwise unsatisfactorYI which they learned from
7

BDO Seidman; and (3) by failing to obtain or demand reliable
information or withdraw from their engagement to perform
accounting work for Bancroft when they learned from BDO Seidman
that the 2008 information provided by ICMC was incorrect,
incomplete and otherwise unsatisfactory.
§§

(Docket No. 262,

202-205).
Upon information and belief, ICMC failed to disclose

critical information to Dernar in 2008 and 2009 concerning the
level of Bancroft's reserves - "an absolutely essential value
necessary for an accurate accounting of the assets side of the
Bancroft balance sheet."

The absence of this information should

have put Dernar on notice of the fact that he was receiving
incomplete information at best or inaccurate information at
worst, thereby triggering an obligation to undertake greater due
diligence rather than merely accepting the data supplied by ICMC
at face value.

(Docket No. 262,

§

206).

The Dernar Defendants' breaches of their duty to Bancroft
have caused Bancroft to suffer actual damages in excess of
$75,000 to be more fully determined at trial, including (1)
causing Bancroft and its ICs to be out of compliance with the
laws and regulations of St. Lucia;

(2) causing Bancroft to incur

the cost and expense of having the inaccurate accounting work
re-done and the accounting work that had not been performed
completed;

(3) causing Bancroft to suffer damages as a result of

8

the delay in discovering ICMC's failure to maintain and provide
accurate financial information for Bancroft and its ICSi and (4)
causing Bancroft to lose credibility with its auditor, the St.
Lucia insurance regulator, its ICs and its other insurance
clients.

(Docket No. 262,

§

207).

LEGAL STANDARDS

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
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. County of

Allegheny, 515 F.3d 224, 233 (3d Cir.2008) ("After Twombly, it is
9

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."

Ashcroft v. Iqbal, 556 U.S. 662, 679 (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
facts alleged in the complaint are sufficient to show that
the plaintiff has a \\plausible claim for relief." Id. at
1950.
In other words, a complaint must do more than allege
the plaintiff's entitlement to relief. A complaint has to
\\show" such an entitlement with its facts.
See Phillips,
515 F.3d at 234-35. As the Supreme Court instructed in
Igbal, \\[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.'11
Igbal, 129 S.Ct. at 1949 .... "

*

*

*

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

10

does not unlock the doors of discovery for a plaintiff armed
with nothing more than conclusions.

II

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.
Restatement (Second) of Torts

§

299A.

II

To establish a claim of

professional negligence under Pennsylvania law, which the
parties agree applies in this case, the plaintiff must establish
that (1) the defendant owed a duty to the plaintiff;
defendant breached that duty;

(2) the

(3) the plaintiff was actually

harmed; and (4) the defendant's breach caused that harm.

In re:

Citx Corp., Inc., 448 F.3d 672, 677 (3d Cir.2006), citing Martin
v. Evans, 551 Pa. 496, 711 A.2d 458 (1998).
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. Fidelity Bank/ 330

Pa.Super. 523, 531, 479 A.2d 1027/ 1031 (1984)/ citing O'Neill
v. Atlas Auto. Finance Corp., 139 Pa.Super. 346, 11 A.2d 782
(1940) .
The three different types of services provided by
accountants, i.e., compilations, reviews and audits, provide
varying levels of assurance.

A compilation is the lowest level

of assurance regarding an entity's financial statements.
11

It

expresses neither an opinion nor any level of assurance by the
accountant.

A review involves an intermediate level of scrutiny

in which the accountant provides limited assurance on the
entity/s financial statements.
assurance

In order to provide this limited

the accountant must make some

I

comprehensive

I

but not a

I

inquiry into client management

I

accounting

practices l internal control structure and analytical procedures
used by the client.

FinallYI an audit provides the highest

level of assurance on financial statements.

The accountant

provides verification of a financial statement/s claims and
assertions and expresses an opinion on the client/s financials.
Among other things

I

during an audit

the accountant considers

I

and evaluates the client/s internal control systems and tests
the underlying documentation to support account balances.

Otto

v. Pennsylvania State Education Ass/n - NEAl 330 F.3d 125 1 133
(3d Cir.2003) .
Despite the level of assurance applicable to the service
for which an accountant is engaged

the accountant can breach

I

his or her professional duties to the client if he or she
encounters suspicious circumstances

I

fails to disclose them to the client.
Citx Corp.

I

Inc' l Nos. 03-727

1

i.e'

l

"red flags

Wooler

03 CV-6766

1

l

ll
l

and

at 1032; In re

2005 WL 1388963

1

*6 (E.D.Pa., 6/7/2005); In re Computer Personalities Systems

12

at
I

Inc"

No. 01-14231DWS , ADV. 03-0220 1 2003 WL 22844863 1 at *5

(Bkrtcy.E.D.Pa , 11/18/2003).
DISCUSSION
I

The Dernar Defendants initially seek dismissal of
Bancroft/s professional negligence claim against them for lack
of standing.

Relying on the district courts

Williams Controls
Assocs"

I

Inc. v. Parente

I

Randolph

I

decisions in

I

Orlando

I

Carey &

39 F.Supp.2d 517 (M.D.Pa.1999), and Steinbrink v.

Rothstein , Kass & CO'

P,C'

I

LEXIS 21527 (W.D.Pa"

I

No. 01-382 Erie , 2008 U.S.Dist.

3/19/2008)1 the Dernar Defendants argue

Pennsylvania law requires strict privity of contract between a
plaintiff and a defendant for the plaintiff to maintain a claim
of professional negligence against the defendant; the
allegations of Bancroft/s second amended complaint show that
their agreements to perform the accounting services at issue
were made with ICMC , rather than Bancroft; and

I

therefore ,

strict privity of contract is lacking and Bancroft does not have
standing to maintain a professional negligence claim against
them.

(Docket No. 270

1

pp. 31-32).

The Court does not agree.

In Guy v. Liederbach , 501 Pa. 471 459 A.2d 744 (1983), a
question of first impression was presented to the Pennsylvania
Supreme Courti that is , whether a named beneficiary of a will
who is also named executrix has a cause of action against the
13

attorney who drafted the will and directed her to witness it
where the fact that she witnessed the will voided her entire
legacy and her appointment as executrix.

The trial court

dismissed the case based on Lawall v. Groman, 180 Pa. 532, 37 A.
98 (1897), and two Federal cases which found Pennsylvania to be
a "strict privityH state requiring an attorney-client
relationship to exist before there could be a malpractice
action.

On appeal, by divided vote, the Superior Court of

Pennsylvania reversed the trial court's decision, holding that
the plaintiff could proceed under either a negligence or a
contract theory.

In holding that the plaintiff could proceed

under a negligence theory, the Superior Court sought to adopt
the California rule for professional negligence claims
enunciated in Lucas v. Hamm, 56 Cal.2d 583, 364 P.2d 685 (1961),

cert. denied, 368 U.S. 987 (1962), i.e., the lack of privity
between a plaintiff and a defendant does not preclude the
plaintiff from maintaining a professional negligence claim
against the defendant.

Because the Superior Court's holdings

entailed, among other things, a change in the law of
Pennsylvania in the area of professional negligence, the
Pennsylvania Supreme Court granted the attorney's request for
review.

In analyzing the plaintiff's professional negligence

claim against the attorney who drafted the will at issue, the
Pennsylvania Supreme Court stated:
14

*

*

*

Under present Pennsylvania law, an individual who has
an attorney-client relationship may sue his attorney for
malpractice under either a trespass or assumpsit theory.
See 1 Standard Pennsylvania Practice 2d § 4:66 and cases
therein.
In dicta, Lawall v. Groman, supra, relying on the
principle that one who undertakes to perform a service for
another, even without reward, is bound to exercise
reasonable care and can be held responsible for
misfeasance, though not for nonfeasance, stated that a
third party could bring suit against an attorney in a
negligence action if the attorney knew that the third party
"was relying on him in his professional capacity." 180 Pa.
at 540, 37 A. 98. Despite this language, Federal courts
interpreting Pennsylvania law have held that mere
negligence of an attorney toward someone other than a
client is not actionable. Sachs v. Levy, suprai Connelly
v. Wolf, Block, Schorr & Solis-Cohen, supra. Thus we have
in the past adhered to the rule followed by the
overwhelming majority of states requiring the privity of an
attorney-client relationship in order to maintain a cause
of action .... At the very least, Lawall would require a
specific undertaking on the attorney's part to perform a
specific service for a third party, coupled with the
reliance of the third party and the attorney's knowledge of
that reliance in order for the third party to bring suit.

*

*

*

If the beneficiary has a cause of action it will be
either in trespass or assumpsit. Appellants have argued
persuasively that the rule of Lucas v. Hamm which allows
for suits in trespass has proved unworkable, and has led to
ad hoc determinations and inconsistent results as the
California courts have attempted to refine the broad Lucas
rule. (citations omitted).
Particularly troublesome in any
negligence action is the standard to be applied. The
California courts have not adopted a simple negligence
standard, but beginning with Biakanja v. Irving, 49 Cal.2d
647, 320 P.2d 16 (1958), have applied a six part balancing
test on a case-by-case basis.
(footnote omitted). Of
special relevance to cases such as the present one is what
the attorney "knew or should have known," a task made all
the more difficult by the fact that the testator, whose
intentions and estate the attorney is to have knowledge of,
will not be present to testify.
15

Superior Court stated that it believed the Lucas test
represented the "better view." Guy v. Liederbach, 279
Pa.Super.Ct. at 548, 421 A.2d at 335. We do not agree ....
We find that the policy concerns expressed in Ultramares
Corp. v. Touche, supra/ l and the history in California/
following its abolition of the privity requirement in
negligence suits arising out of agreements to furnish
lIn Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), the
defendants, public accountants, were employed by Fred Stern & Company, Inc.
("Stern"), a business engaged in the importation and sale of rubber, to
prepare and certify multiple copies of a balance sheet showing the condition
of Stern's business as of December 31, 1923. To finance its operations,
Stern required extensive credit and borrowed large sums of money from banks
and other lenders.
In March 1924, the plaintiff was approached by Stern with
a request for loans of money to finance sales of rubber. As a condition of
any loans, the plaintiff insisted that it receive a balance sheet certified
by a public accountant/ and, in response, the plaintiff was given one of the
certified balance sheets that had been prepared and signed by the defendants.
On the basis of that balance sheet, the plaintiff loaned money to Stern.
Subsequently, Stern defaulted on the loans
The defendants in Ultramares knew that in the usual course of business,
Stern provided the certified balance sheets to, among others, banks,
creditors and stockholders as the basis of financial dealings.
Nothing was
said as to the persons to whom the certified balance sheets would be shown or
the extent or number of the transactions in which they would be used.
In
particular, there was no mention of the plaintiff, a corporation which until
then had never made advances to Stern.
In dismissing the plaintiff's
professional negligence claim, Justice Cardozo noted that the range of
transactions in which a balance sheet certified by the defendants might play
a part "was as indefinite and wide as the possibilities of the business that
was mirrored in the summary," and that "[iJf liability for negligence exists,
a thoughtless slip or blunder, the failure to detect a theft or forgery
beneath the cover of deceptive entries, may expose accountants to liability
in an indeterminate amount for an indeterminate time to an indeterminate
class." Simply put, the foregoing concerns expressed by Justice Cardoza in
Ultramares are not implicated in the present case.
Significantly, in an earlier case also decided by Justice Cardozo,
Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922), the seller of beans
requested the defendant, a public weigher, to make return of the weight and
furnish the buyer with a copy. The defendant complied, providing duplicate
returns - one to the seller and the other to the buyer. The return
specifically stated that it was made by order of the former for the use of
the latter. The buyer paid the seller on the faith of the certificate which
turned out to be erroneous. Based on these facts, Justice Cardoza held that
the weigher was liable to the buyer for the moneys overpaid as a result of
its negligence, noting that "the service rendered by the defendant was
primarily for the information of a third person, in effect, if not in name, a
party to the contract, and only incidentally for that of the formal
promisee." This is precisely the case presented here.
The financial
documents at issue were prepared specifically for Bancroft at the request of
its management company.
In fact, the circumstances of this case are even
more compelling. Unlike the buyer of the beans in Glanzer, Bancroft paid for
the professional services provided by the Dernar Defendants.

16

professional services, persuade us we should not eliminate
the privity requirement in malpractice actions based on
negligence. Thus we retain the requirement that plaintiff
must show an attorney-client relationship or a specific
undertaking by the attorney furnishing professional
services, as in Lawall, as a necessary prerequisite for
maintaining such suits in trespass on a theory of
negligence. (emphasis added).

*

*

*

501 Pa. at 57-58, 459 A.2d at 749-50. 2
In light of the above-emphasized language in Guy, the Court
is compelled to conclude that Bancroft has standing to maintain
a claim for professional negligence against the Dernar
Defendants. 3

Among other things, the second amended complaint

alleges that the Dernar Defendants were "specifically hired by
ICMC to handle the Bancroft account"

(Docket No. 262,

~

12);

that the Dernar Defendants were specifically hired to prepare
various financial documents for Bancroft and its ICs (Docket No.
262, ~~ 62-63)

i

that ICMC retained the Dernar Defendants on

Bancroft's behalf to prepare the financial documents which were

2 In Guy, the Pennsylvania Supreme Court noted that the plaintiff could not
maintain a negligence claim against the attorney who drafted the will based
on "a specific undertaking lf by the attorney to furnish services for her as
discussed in Lawall because the plaintiff could not have an attorney
specifically undertake for her the writing of a testator's will which made
her the residuary beneficiary of that will. However, as a person named a
beneficiary under a will who lost the intended legacy due to the failure of
the attorney to properly draft the instrument, the plaintiff could bring a
claim in assumpsit against the attorney as a third-party beneficiary of the
agreement between the testator and the attorney to draft the will.
501 Pa.
at 59, 459 A.2d at 751. Unlike the situation presented in Guy, there was
nothing to prevent the Dernar Defendants from specifically undertaking to
perform the accounting services for Bancroft that are alleged to have been
deficient.
3Whether Bancroft can prove the professional negligence claim against the
Dernar Defendants remains to be seen.

17

required to be audited prior to submission to the St. Lucia
Ministry of Finance (Docket No. 262,

~~

198-99) i and that the

2008 balance sheet prepared by the Dernar Defendants to be
submitted to Bancroft's auditor had to be revised at least five
times over a period of four months during which the auditor was
in "constant communication, by telephone and email, with ...
D&A"

(Docket No. 262, ~ 75).
With regard to the Dernar Defendants' reliance on the

district court's decision in Williams Controls Inc., supra, to
support their standing argument, the Court finds such reliance
misplaced.

In Williams Controls Inc., the buyer of a corporate

division sued the seller's accountant for, among other things,
professional negligence based on the accountant's preparation of
financial statements in connection with the transaction.

At the

time of the closing, the buyer had not yet received any audited
material from the seller's accountant.

At some point

thereafter, the seller provided the buyer with a final closing
balance sheet that had been audited by its accountant.

Despite

the fact the accountant had notice that its work product would
be used to determine the final adjusted purchase price for the
corporate division, the district court granted the accountant's
motion for summary judgment on the professional negligence claim
based on the lack of privity between the buyer and the
accountant and the buyer's failure to show a specific

18

undertaking by the seller's accountant to perform services for
the buyer.

In so holding, the district court noted: "In this

case, it cannot reasonably be maintained that [the seller's
accountant] was representing both [the seller] and [the buyer]
In fact, the record demonstrates that [the buyer] retained its
own accountant to review [the seller's accountant's] work."
F.Supp.2d at 524 fn. 7.

39

Unlike the seller's accountant in

Williams Controls Inc., the Dernar Defendants were specifically
engaged to perform accounting services for Bancroft.

Thus,

Williams Controls Inc. is distinguishable and does not provide
support for the dismissal of Bancroft's professional negligence
claim for lack of standing under Pennsylvania law.
The Dernar Defendants' reliance on the district court's
decision in Steinbrink, supra, to support their standing
argument also is misplaced.

In Steinbrink, the plaintiffs were

investors in two funds that were managed by B. Hauptman &
Associates, LLC ("BHA").
P.C.

Defendant Rothstein, Kass & Company,

("RKC") was retained by BHA to conduct annual audits of the

funds.

Because of the lack of performance of the first fund in

which they invested, the plaintiffs informed BHA that they
wanted to withdraw from the fund.

In response, BHA suggested

that the plaintiffs transfer their investments in the first fund
to a new fund, and annual audit reports of both funds by RKC
were provided to the plaintiffs by BHA.
19

Following receipt of

the annual audit reports, the plaintiffs transferred their
investments in the first fund to the second fund.
the plaintiffs lost their investments.

Subsequently,

The plaintiffs'

professional negligence claim against RKC was dismissed by the
district court under Pennsylvania law for lack of privity.

As

noted by Bancroft, however, the circumstances presented in
Steinbrink are distinguishable from the present case.
No. 276, p. 21).

(Docket

The accounting firm in Steinbrink had been

retained to prepare, among other things, annual audit reports by
the funds' partners.
the funds.

The plaintiffs were merely investors in

Under the circumstances, there was no basis for a

finding that the accounting firm had engaged in a specific
undertaking to perform a specific service for the plaintiffs. 4
II

Alternatively, the Dernar Defendants assert that Bancroft
has failed to state a claim for professional negligence against
them under the Twombly standard.

After consideration, the Court

finds this argument unpersuasive.
Considering the allegations pertaining to the Dernar
Defendants in the second amended complaint in their entirety,
Bancroft has adequately stated a plausible claim for
4It should be emphasized that, contrary to the argument of the Dernar
Defendants, the district courts in both Williams Controls Inc. and Steinbrink
interpreted Pennsylvania law as allowing a professional negligence claim by a
plaintiff who established either strict privity of contract with the
professional or a specific undertaking by the professional to perform a
specific service for the plaintiff.

20

professional negligence. s

Specifically, Bancroft alleges the

Dernar Defendants owed it a duty to perform the accounting
services for which they were engaged with the skill, prudence
and diligence commonly possessed by members of the accounting
profession (Docket No. 262,

~

200) i the Dernar Defendants

breached that duty by, among other things, preparing inaccurate
balance sheets (Docket No. 262, ~~ 201 06)

i

and Bancroft

sustained damages as a result of the deficient accounting
services performed by the Dernar Defendants because it was
required to pay another entity to correct the inaccuracies in
the balance sheets (Docket No. 262,

~~

104, 207).

With regard to their alternative argument in support of the
dismissal of Bancroft's professional negligence claim, the
Dernar Defendants assert that the accounting services which they
were engaged by ICMC to perform for Bancroft were limited to
compilations, which, as noted above, provide a client with the
lowest level of assurance.

Assuming the extent of the Dernar

Defendants' engagement by ICMC was limited to compilations,6 the

The Dernar Defendants support their Twombly argument by analyzing the
allegations of the second amended complaint on a sentence-by-sentence basis,
rather than considering the allegations as a whole.
In so doing, the Court
finds the Dernar Defendants erred.
See Tellabs, Inc. v. Makor Issues &
Rights Ltd., 551 U.S. 308, 322-23 (2007).
6 In support of their motion to dismiss, the Dernar Defendants submitted,
among other things, (a) a letter addressed to Bancroft dated December 9,
2008, proposing to prepare a compilation of Bancroft's annual and quarter-end
balance sheets and the related statement of income and retained earnings for
the year 2008, which was signed by Stuart Schwab, a vice president of ICMCi
and (b) a letter addressed to ICMC dated April 6, 2010, proposing to prepare
a compilation of the semi-annual and year-end balance sheets and the related

5

21

Dernar Defendants nevertheless remained liable for reporting any
"red flags" encountered in preparing financial documents for
Bancroft.

See Wooler, supra.

In this connection

amended complaint alleges such "red flags."

l

the second

SpecificallYI it is

alleged that the levels of Bancroft/s reserves in 2008 and 2009
were essential for the preparation of accurate balance sheets by
the Dernar Defendants

1 ,

and the failure of ICMC to provide

Bancroft/s reserve levels for 2008 and 2009 should have put the
Dernar Defendants on notice that they were receiving incomplete
information at best

l

triggering an obligation to notify Bancroft

and inquire further into the information being provided by ICMC.
(Docket No. 262

1

~

206) .

It is further alleged that the Dernar

Defendants failed to alert Bancroft to the material errors in
its 2008 balance sheet which had been brought to their attention
by Bancroft/s auditors.

(Docket No. 262, ~~ 202-03) .

statements of income and retained earnings for Joyce IC and CDG IC for the
year 2009, which is unsigned. Bancroft disputes the authenticity of these
documents.
(Docket No. 276, pp. 11-12). Thus, they may not be considered in
connection with the Dernar Defendants' motion to dismiss.
May v.
Bel
605 F.3d 223, 230 (3d Cir.2010),
Pension Benefit Guar.
Cg:rp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.1993) (In
deciding a motion to dismiss for failure to state a claim, a court must
consider only the complaint, exhibits attached to the complaint, matters of
public record, and undispu
authentic documents if the complainant's
claims are based upon these documents) .
7Whether this allegation is true is not before the Court at this time.

22

Based on the foregoing,
to dismiss

the motion of the Dernar Defendants

Count VI of Bancroft's second amended complaint

denied.

Judge William L. Standish
United States District Judge
Date: June I~, 2012

23

is