FDIC v. Deloitte & Touche

Decision Date01 October 1992
Docket NumberNo. LR-C-90-520.,LR-C-90-520.
Citation834 F. Supp. 1129
PartiesFEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for FirstSouth, F.A. v. DELOITTE & TOUCHE, a Partnership, and Deloitte Haskins & Sells, a Partnership.
CourtU.S. District Court — Eastern District of Arkansas



Peter B. Heister, Martha Jett McAlister, Eichenbaum, Scott, Miller, Liles & Heister, P.A., Little Rock, AR, John L. Conlon, Hopkins & Sutter, Chicago, IL, David B. Joeckel, Jr, Hopkins & Sutter, Dallas, TX, Stephen Novack, Marilyn Klawiter, Eric N. Macey, Novack & Macey, Chicago, IL, for F.D.I.C.

Overton S. Anderson, Anderson & Kilpatrick, Little Rock, AR, David C. Wade, Martin, Tate, Morow & Marston, P.C., Memphis, TN, Richard D. Bernstein, Robert D. McLean, Sidley & Austin, Washington, DC, for Deloitte & Touche and Deloitte, Haskins & Sells.

Peter G. Kumpe, Williams & Anderson, Little Rock, AR, for Henry F. Trotter, Jr., FirstSouth F.A.


EISELE, District Judge.

The defendant's motion to dismiss is presently before the Court. The motion has been briefed, supplementally briefed, rebriefed and letter briefed by both sides, and is now more than ready for disposition. For the reasons set forth below, the motion will be granted in part and denied in part.


Beneath its legal and factual complexity, this is a relatively straightforward professional negligence case.

FirstSouth, F.A. used to be a federally chartered and insured, publicly held savings and loan association.1 On December 4, 1986, the Federal Home Loan Bank Board declared that FirstSouth was insolvent and appointed the Federal Savings and Loan Insurance Corporation (FSLIC) as the failed thrift's sole receiver.2 Upon enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), FSLIC was dissolved, and all of its assets, including the FirstSouth receivership, were transferred to the FSLIC Resolution Fund. As the appointed manager of that Fund, the Federal Deposit Insurance Corporation (FDIC) succeeds FSLIC as the receiver for FirstSouth.

FirstSouth hired the national accounting firm of Deloitte Haskins & Sells (DH & S) to perform independent audits of the thrift for three fiscal years preceding FirstSouth's failure (fiscal 1983, 1984, and 1985). In 1989, DH & S merged with Touche Ross, another national accounting firm, creating a single general partnership under the name of Deloitte & Touche. Deloitte & Touche is the legal successor to DH & S.

The FDIC now brings this professional malpractice case against Deloitte & Touche and Deloitte Haskins & Sells (collectively, "Deloitte") to recover "damages in excess of $400 million arising from DH & S's negligent performance of audits at FirstSouth." First Amended Complaint ("Comp.") at ¶ 1. The FDIC summarizes its claim as follows:

If DH & S had conducted competent audits of FirstSouth and had submitted proper reports, the institution's outside directors and regulators would have been informed of FirstSouth's serious problems and could have taken timely remedial action. DH & S deprived FirstSouth and federal regulators of material information thereby permitting imprudent transactions to continue unchecked and losses from them to mount. The defendants are liable for losses arising from transactions which FirstSouth would not have engaged in if DH & S had done its job right.

Comp. at ¶ 3. The Complaint then goes on, at considerable length, to describe particular transactions that demonstrate Deloitte's negligence. The FDIC explains, however, that the events it mentions in its Complaint do not comprise an exhaustive list, but merely represent examples of the kind of malpractice that DH & S committed in providing accounting services to FirstSouth.

Deloitte's position, in essence, is that the FDIC's Complaint pleads facts which, if accepted as true, conclusively demonstrate that FirstSouth's own conduct, and not that of its professional advisors, caused the thrift's losses. According to Deloitte, it cannot, as a matter of law, be held liable for failing to tell FirstSouth what FirstSouth already knew, or for the results of actions that FirstSouth would have taken regardless of, or even in spite of, what its accountants said. From that simple and sensible premise, Deloitte fashions a proximate cause argument and a comparative fault argument. Whichever principle of tort law the defendant invokes, however, its arguments follow from the same basic idea: the FDIC — which, as FirstSouth's receiver, can only bring claims that would be available to the thrift — cannot show that Deloitte is legally responsible for the losses described in the Complaint, because the facts the Complaint alleges show that FirstSouth deserves all, or at least most, of the credit for causing its own problems. The defendant also argues that the plaintiff's claims based on work performed for the 1983 audit are barred by the applicable statute of limitations.


Deloitte has moved for dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that the FDIC has failed to state a claim for which relief may be granted. In considering this motion, the Court will construe the Complaint favorably to the plaintiff and accept its allegations as true. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). "A complaint should not be dismissed for failure to state a claim 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." Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 101, 2 L.Ed.2d 80 (1957).


The first question that the Court must address is always important but rarely so difficult: who, or what, exactly, is the plaintiff?

According to the FDIC, it "brings this action as Receiver for FirstSouth for the benefit of FirstSouth and its depositors and creditors." Comp. at ¶ 10. Thus, the FDIC purports to represent a collection of interests and entities. Deloitte has objected to this multiple personality approach, arguing that the FDIC is nothing more than the thrift's receiver, and cannot represent anyone or anything other than the legal interests of FirstSouth. The import of this dispute is plain. If the FDIC can take the form of creditors and depositors, it might be able to distance itself from any misconduct of FirstSouth's management that may have at least contributed to the losses for which it is trying to hold Deloitte responsible.

In its recent decision FDIC v. Ernst & Young, 967 F.2d 166 (5th Cir. Aug. 3, 1992), the U.S. Court of Appeals for the Fifth Circuit recognized the significance of this question of plaintiff identity. In Ernst & Young, the FDIC, as receiver for a failed savings and loan association (Western Savings Association), sued the S & L's accountants — Arthur Young & Company and its successor, Ernst & Young ("EY") — for negligence and breach of contract. The theory of the complaint was very similar to the one the FDIC has presented here. As the Fifth Circuit described it: "The FDIC alleges that Western suffered $560 million in damages resulting from Arthur Young's audits because if the audits had been accurate, Western's board of directors or government regulators would have prevented further losses." Ernst & Young, 967 F.2d at 169. In concluding its summary of the case, the Fifth Circuit commented:

Critically important to the ultimate resolution of the case is the FDIC's decision to bring this suit only as assignee of a claim by Western against the auditors. The FDIC has authority to sue EY in its own behalf or on behalf of Western's creditors, but it chose not to do so.

Id. Here, like in Ernst & Young, it is "critically important" to determine who and what the FDIC represents in this case. The FDIC is not attempting to bring this action on its own behalf as a government agency; it does not claim to represent the legal interests of regulators, insurers, or the American public. Unlike its posture in Ernst & Young, however, the FDIC has asserted that it is suing on behalf of an S & L's creditors, as well as its depositors.

The parties have confined their arguments addressing this issue to the question of whether the FDIC possesses the statutory power to bring this action on behalf of FirstSouth's depositors and creditors. Deloitte contends that FSLIC had no such authority, and that the FDIC, because it inherited an existing, pre-FIRREA receivership, cannot claim new powers — such as an ability to represent creditors and depositors — that it only acquired from the enactment of the 1989 legislation. The FDIC has responded that under 12 C.F.R. §§ 548.2(f) and 549.3(a), regulations that were in effect when FirstSouth went into receivership, FSLIC did in fact have the power to "institute ... any legal proceeding ... and in every way to represent the association, its members and creditors." Sup.Res. at 21 n. 7. FIRREA, the FDIC argues, only provided statutory affirmation of a power that had already been exercised pursuant to valid, existing regulations.

The regulations the FDIC cites do in fact authorize receivers (and conservators) of federal associations to represent the associations' creditors and members. However, even given the authority to do so, the Court has concluded that under Arkansas law,3 the FDIC has not stated a viable claim on behalf of creditors or depositors in this case. In Robertson v. White, 633 F.Supp. 954 (W.D.Ark.1986), a district court applying Arkansas law noted that "as a general rule, an accountant is liable to persons not in privity with him only for fraudulent misrepresentations, not for negligent ones." Id. at 970. Under this general rule — which is sometimes referred to as the "Ultramares exception" because of its creation by Chief Judge Cardozo in Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931)4 — third parties to a client-accountant relationship cannot sue the accountant for negligence, even if they have...

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