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

Filing 310

MEMORANDUM re: 268 MOTION to Dismiss the Second Amended Complaint filed by THOMAS HUGHAN, C.P.A. Signed by Judge William L. Standish on 06/14/2012. (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 FIRMI 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'I
I

I

Defendants.
MEMORANDUM
INTRODUCTION

In Count V of its Second Amended Complaint, Plaintiff,
Bancroft Life & Casualty ICC

I

Ltd.

(uBancroft"), asserts a claim

against Defendants Cunningham Hughan & Company ("CHC") and
Thomas Hughan, C.P.A.

("Hughan") (collectivelYI "the Hughan

Defendants"), for professional negligence under Pennsylvania
law.

Before the Court is the Hughan Defendants' motion to

dismiss the claim pursuant to Fed.R.Civ.P. 12(b} (6).

For the

reasons set forth below, 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, Defendants 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).

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
2

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."
§ I,

(Docket No. 262,

pp. 2 - 3) .
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,

§

I, p. 4).

CHC is a professional accounting corporation with a
principal place of business in Carnegie, Pennsylvania.

Hughan

is a certified public accountant and an owner/employee of CHC.
Hughan was hired by ICMC to prepare Bancroft's 2007 and 2008
federal tax returns.

(Docket No. 262, ~~ 9-10, ~ 192).

Bancroft's federal tax return for 2008, which was due March
15, 2009, was not shown to Bancroft's principals prior to
filing.

Roberts signed the 2008 tax return as vice president of

Bancroft, which he was not, on September 15, 2009.

There is no

evidence indicating that a request for extension of the filing
deadline was made by ICMC or the Hughan Defendants.
262,

~

82).

(Docket No.

The deductions in Bancroft's 2008 tax return do not
3

correlate with its financial statements, causing the accuracy of
the tax return to be called into question by the Internal
Revenue Service.

(Docket No. 262,

~

83).

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

The Hughan Defendants breached their

duty to Bancroft by failing to prepare Bancroft's tax returns in
a timely fashion and by preparing tax returns that did not
accurately reflect Bancroft's income, expenses and reserves.
The Hughan Defendants' breaches of their duty to Bancroft have
resulted in the Internal Revenue Service questioning Bancroft's
tax return for 2008 and have caused Bancroft to be out of
compliance with the laws and regulations governing insurance
companies in St. Lucia.

(Docket No. 262,

§§

193-95) .

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
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 []
conceivable to plausible
dismiss.

1I

Following Twombly, a

[his or her] claims across the line from
ll

in order to survive a motion to

550 U.S. at 570.

See also Phillips v. County of

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.' If) •
"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. If

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

this task, in Fowler v. UPMC Shadyside, 578 F.3d 203

Regarding
(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

5

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

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.

To establish a claim of

professional negligence 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;
defendant breached that duty;

(2) the

(3) the plaintiff was actually

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

In re:

, 448 F.3d 672, 677 (3d Cir.2006), citing Martin

v. Evans, 551 Pa. 496, 711 A.2d 458 (1998).

6

The specific scope of an accountant's duty to a client is
determined primarily by the terms and conditions of the contract
of employment. 1

Robert Wooler Co. v. Fidelity Bank, 330

Pa.Super. 523, 531, 479 A.2d 1027, 1031 (1984),

ting O'Neill

v. Atlas Auto. Finance Corp., 139 Pa.Super. 346, 11 A.2d 782
(1940).

Although the scope of an accountant's duties are

defined by contract, an accountant can breach his professional
duties to a client if he encounters glaring irregularities or
illegal activities
the client.

-

"red flags" - and fails to disclose them to

Seitz v. Detweiler, Hershey and Associates, P.C. ,

Misc. No. 03-cv-6766, 2005 U.S. Dist. LEXIS 11374, at *11 (June
7, 2005) , citing Wooler, sUEra, 479 A.2d at 1032 (holding that
accountant's contract disclaimers did not shield it from
liability if it ignored "suspicious circumstances which would
have raised a 'red flag' for a reasonably skilled and
knowledgeable accountant.") .
DISCUSSION
I

Defendant Dernar & Associates, LLC ("D&A"), an accounting
firm, and Defendant David K. Dernar, C.P.A., an owner/employee
of D&A (collectively, "the Dernar Defendants"), were retained by
ICMC to prepare financial statements and semi-annual reports for

lIn the present case, the Hughan Defendants assert, and Bancroft does not
dispute, that they were retained by ICMC to prepare Bancroft's 2007 and 2008
federal tax returns pursuant to oral agreements.

7

Bancroft and affiliated entities.

In Count VI of the Second

Amended Complaint, Bancroft asserts a claim of professional
negligence arising out of the accounting services provided by
the Dernar Defendants.
The Dernar Defendants moved to dismiss Count VI arguing,
among other things, that (a) 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; (b) 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
(c) therefore, Bancroft does not have standing to maintain a
professional negligence claim against them.

(Docket No. 270,

pp. 31-32).
In a Memorandum Opinion filed June 12, 2012, the Court
rejected the Dernar Defendants' standing argument based on Guy
v. Liederbach, 501 Pa. 47, 459 A.2d 744 (1983).

Specifically,

the Court interpreted the Pennsylvania Supreme Court's decision
in Guy as permitting a professional negligence claim in the
absence of strict privity of contract where the professional
specifically undertook to furnish services for the plaintiff.
Because the second amended complaint alleges the Dernar
Defendants were retained by ICMC to perform specific services
for Bancroft and Bancroft paid for those services, the Court
8

concluded that Bancroft has standing to maintain a professional
negligence claim against the Dernar Defendants.

(Docket No.

307, pp. 13 - 20) .
The Hughan Defendants raise the identical argument in
support of their motion to dismiss the professional negligence
claim in Count V of Bancroft's Second Amended Complaint.

For

the reasons set forth in the Court's June 12, 2012 Memorandum
Opinion rejecting this argument by the Dernar Defendants, the
Hughan Defendants' standing argument also is rejected.

•

In sum,

Bancroft's Second Amended Complaint alleges that the Hughan
Defendants were retained by ICMC to perform specific accounting
services for Bancroft, i.e., the preparation of federal tax
returns for 2007 and 2008, and that Bancroft paid for such
services.

Thus, under Guy, Bancroft has standing to assert a

professional negligence claim against the Hughan Defendants.
II

The Hughan Defendants also assert that Bancroft has failed
to state a claim for professional negligence against them under
the Twombly standard.

After consideration, the Court is

compelled to disagree.
Although not a model of clarity, the Second Amended
Complaint can be read as alleging the Hughan Defendants failed
to complete Bancroft's 2008 federal tax return in time for
filing by its due date, and failed to file a request for an
9

extension of the due date.

(Docket No. 262, ~ 82).

In

addition, the Second Amended Complaint alleges that the 2008
federal tax return prepared by the Hughan Defendants for
Bancroft was inaccurate in various respects.
~

83).

(Docket No. 262,

Assuming the foregoing facts to be true, as the Court

must do in ruling on a motion to dismiss, a plausible claim of
professional negligence is stated in Count V of the Second
Amended Complaint. 2
The Hughan Defendants also contend that Bancroft has

led

to state a claim for professional negligence against them
because Bancroft's alleged damages "are speculative and, at
best, nominal."

(Docket No. 285, p. 10).

Although Bancroft

does assert "vague claims of damages because the Internal
Revenue Service purportedly questioned its tax returns, and
because Bancroft is allegedly out of compliance with St. Lucia
laws and regulations"

(Docket No. 285, p. 11), the Court is

nevertheless compelled to conclude that it has adequately set
forth the fact of damages.

As noted by Bancroft, the Hughan

Defendants were paid to prepare its 2007 and 2008 federal tax
returns and did not perform the work in a timely or accurate

In support of their motion to dismiss Count V of the Second Amended
Complaint, the Hughan Defendants argue that the federal tax returns prepared
for Bancroft were based on the information provided to them by ICMC, and that
they cannot be liable for malpractice if Roberts chose to hold the 2008 tax
return past the filing deadline.
(Docket No. 285, p. 9). The Court agrees
with Bancroft that the foregoing arguments raise issues of fact and,
therefore, cannot be considered on a motion to dismiss under Fed.R.Civ.p.
12 (b) (6) .
(Docket No. 277, p. ll).
2

10

manner.

If established, Bancroft did not receive the value of

the professional services for which it paid, and, therefore,
Bancroft sustained damages.

(Docket No. 277, p. 12).

Based on the foregoing, the motion of the Hughan Defendants
to dismiss Count V of the Second Amended Complaint is denied.

/ltfl1£t

rn

;i 1Jfaa1l/t4i;:

Judge William L. Standish
United States District Judge

Date: June

111,

2012

11