Christians v. Grant Thornton, Llp

• Decision Date: 03 July 2007
• Docket Number: No. A06-1309.,A06-1309.
• Citation: 733 N.W.2d 803
• Parties: Julia A. CHRISTIANS, Trustee for the Bankruptcy Estate of Technimar Industries, Inc., Appellant, v. GRANT THORNTON, LLP, Respondent.
• Court: Minnesota Court of Appeals

733 N.W.2d 803

Julia A. CHRISTIANS, Trustee for the Bankruptcy Estate of Technimar Industries, Inc., Appellant, v. GRANT THORNTON, LLP, Respondent.

No. A06-1309.

Court of Appeals of Minnesota.

July 3, 2007.

Gordon B. Conn, Jr., Kalina, Wills, Gisvold & Clark, P.L.L.P., Minneapolis, MN, for appellant.

Michael E. Keyes, Katherine M. Wilhoit, Heidi A.O. Fisher, Mark P. Schneebeck, Oppenheimer Wolff & Donnelly LLP, Minneapolis, MN, for respondent.

Considered and decided by LANSING, Presiding Judge; HALBROOKS, Judge; and HUDSON, Judge.

OPINION

LANSING, Judge.

Julia Christians, in her capacity as the bankruptcy trustee for Technimar Industries, Inc., appeals the district court's summary judgment dismissing her auditor-malpractice and breach-of-contract claims against Grant Thornton, LLP. The district court based its order on the trustee's failure to provide sufficient evidence of causation, the trustee's failure to demonstrate that the damages were sustained by the corporation rather than the corporation's creditors, and the application of the equitable doctrine of in pari delicto. Although we conclude that the record contains sufficient evidence to show that Grant Thornton caused a fractional amount of the claimed damages, we also conclude that the district court acted within its discretion by applying the in pari delicto doctrine to bar the trustee's claims because Technimar bears at least substantially equal responsibility for the injury that its trustee in bankruptcy seeks to remedy. Therefore, we affirm.

FACTS

Technimar Industries, Inc., is a defunct Delaware corporation that was organized by Roberto Contreras, Sr., and his sons Roberto Contreras, Jr., and Luis Contreras. The elder Contreras acted as Chairman of the Board of Directors, President, and Chief Executive Officer. The junior Contreras acted as the Vice President of Operations and served on the board. Luis Contreras acted as Treasurer, Secretary, Administrative Vice President, and also served on the board.

In July 1994 Technimar entered into an exclusive license agreement with an Italian company, Breton S.p.A., to purchase, for $16 million, equipment necessary for the manufacture of an agglomerated stone product known as "Stonite." To raise the necessary capital Technimar retained the services of David Welliver and Rothschild Capital Corporation. Welliver raised approximately $13 million through private debt and security offerings in early 1996, which Technimar used to begin construction of a manufacturing plant in Cohasset, Minnesota, and also used to make payments on the Breton contract. The Minneapolis police and firemen's pension funds were substantial investors.

Welliver made arrangements for a bond issuance in 1996 because Technimar needed additional capital to pay $8.4 million remaining on the Breton contract. The City of Cohasset agreed to issue a $12 million industrial-revenue bond on Technimar's behalf and to assign the bond to Heller Financial. Heller required a guaranty for the bond. Cohasset agreed to provide $2.4 million, and the Iron Range Resources Rehabilitation Board agreed to provide $2 million. Through a complex financing arrangement devised in Italy in September 1996, Rothschild Venture & Growth, L.P. (RVG) (previously known as Valent Venture & Growth, L.P.) agreed to provide the remaining $7.6 million. Breton essentially underwrote RVG's commitment by agreeing to wire RVG $7.6 million of the $8.4 million it would receive from Technimar, in exchange for a corresponding amount of shares in the Valent Fund. Immediately thereafter, Technimar was to purchase $4 million of Breton's position in the Valent Fund, and RVG was to redeem Breton's remaining $3.6 million investment in the Valent Fund over a period of several months.

The Technimar board ratified the September 1996 agreement in a meeting that same month. Before the bond closing, however, Breton, RVG, and Contreras, Sr., entered into a separate agreement restructuring the buyout of Breton's Valent Fund investment. In this December 1996 agreement, Technimar agreed to redeem Breton's entire Valent Fund investment over a period of several months. Shipment of the equipment was divided into phases corresponding with these payments. Technimar's board did not ratify this separate agreement. The bond sale closed at the end of December 1996.

Technimar retained Grant Thornton to audit its 1996 financial statements. As part of its preparation for the audit, Grant Thornton requested all relevant documents relating to the equipment-purchase agreement. Contreras, Sr., executed a letter attesting to Technimar's full delivery of all "[f]inancial records and related data" requested by Grant Thornton. Grant Thornton's audit file included the minutes for the September 1996 Technimar board meeting but did not contain either the September or the December agreements with Breton and RVG. Nonetheless, Grant Thornton's work papers reflected its awareness that Technimar was making payments to Breton. Grant Thornton asked Luis Contreras about the payments and was told that Technimar was replacing Breton as guarantor on the bond. As a result of these and other representations, Grant Thornton produced, in April 1997, audited financial statements that showed a $16 million deposit on the Breton equipment. The financial statements did not reflect Technimar's obligation to purchase the Valent Fund investment from Breton and replace Breton as guarantor. Consequently, Technimar appeared solvent when it was, in fact, not.

Between April 1997 and December 1997, the Minneapolis Police Relief Association lent Technimar an additional $8 million. Technimar used this money to continue its operations, including construction of the Cohasset plant, and to purchase Breton's Valent Fund shares. Technimar defaulted on the Heller bonds in December 1997, and Heller foreclosed. In July 1998 Technimar filed for Chapter 11 bankruptcy protection. In March 1999 the Chapter 11 reorganization was converted to a Chapter 7 liquidation.

The trustee brought this action against Grant Thornton in March 2003, alleging, primarily, auditor malpractice and breach of contract. Among the claimed damages, the trustee asserted that Technimar was harmed by the deepening insolvency that resulted from Grant Thornton's erroneous audited financial statements. Grant Thornton moved for summary judgment, and the district court granted the motion. In relevant part, the court found that a claim for deepening-insolvency damages belongs to a corporation's creditors rather than its bankruptcy trustee and that the trustee did not sufficiently demonstrate that any claimed loss was caused by Grant Thornton's conduct. The court also found that the trustee's claims were barred under the doctrine of in pari delicto because Technimar was at least equally at fault for the misleading financial statements. This appeal follows.

ISSUES

I. Did the district court properly grant summary judgment on the trustee's claims in favor of Grant Thornton?

A. Did the trustee support her claims with sufficient damages evidence?

B. Did the trustee support her claims with sufficient causation evidence?

II. Did the district court abuse its discretion in holding that the trustee's claims were barred by the equitable doctrine of in pari delicto?

ANALYSIS

I

Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that either party is entitled to judgment as a matter of law." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn.1993). To raise a genuine issue of material fact the nonmoving party need not introduce substantial evidence; sufficient evidence is all that is required. Schroeder v. St. Louis County, 708 N.W.2d 497, 507 (Minn.2006). But evidence that only raises "a metaphysical doubt as to a factual issue and that is not sufficiently probative with respect to an essential element of [the nonmoving party's] case to permit reasonable people to draw different conclusions" will not meet this standard. State Farm Fire & Cas. v. Aquila Inc., 718 N.W.2d 879, 886-87 (Minn.2006). On review we evaluate whether the evidence, taken in a light most favorable to the nonmoving party and with all factual inferences drawn in favor of the nonmoving party, presents a genuine issue of material fact. Wartnick v. Moss & Barnett, 490 N.W.2d 108, 112 (Minn.1992). We also independently determine whether the district court properly applied the law. Id.

To prevail in an action for auditor malpractice or breach of contract, the plaintiff must prove the existence of a duty or contract, breach of that duty or contract, factual and proximate causation, and damages. Vernon J. Rockler & Co. v. Glickman, Isenberg, Lurie & Co., 273 N.W.2d 647, 650 (Minn.1978) (setting forth elements for auditor-malpractice claim); Rubbelke v. Mabley, 410 N.W.2d 880, 883 (Minn.App.1987) (combining elements of legal-malpractice and breach-of-contract claims).

In granting summary judgment against the trustee's claims, the district court concluded that the trustee had presented sufficient evidence on the elements of duty and breach but failed to provide adequate evidence on the elements of damages and causation. The trustee disputes this conclusion and contends that she has provided adequate evidence in the form of affidavits, depositions, and answers to interrogatories and that the evidence supports her theory of "deepening-insolvency" damages. We turn first to the issue of damages and then to the issue of causation.

A. Evidence of Damages

The district court held that the trustee's claim was flawed because she did not present any evidence of damage to Technimar. Because Technimar was insolvent at the time of the alleged wrongdoing, the court reasoned that "[t]he creditors suffered the injury, not Technimar," therefore the claim "more appropriately belonged to [Techn...