Curiale v. Peat, Marwick, Mitchell & Co.

• Decision Date: 24 August 1995
• Citation: Curiale v. Peat, Marwick, Mitchell & Co., 630 N.Y.S.2d 996, 214 A.D.2d 16 (N.Y. App. Div. 1995)
• Court: New York Supreme Court — Appellate Division
• Parties: Salvatore CURIALE, Superintendent of Insurance of the State of New York as Liquidator of American Fidelity Fire Insurance Company and American Consumer Insurance Company, Plaintiff-Appellant, v. PEAT, MARWICK, MITCHELL & CO., Defendant-Respondent. PEAT, MARWICK, MITCHELL & CO., Third-Party Plaintiff, v. AMERICAN PLAN CORPORATION, Abe Lieber, Marcia Lieber and Marc Lieber, Third-Party Defendants.

Page 996

630 N.Y.S.2d 996

214 A.D.2d 16

Salvatore CURIALE, Superintendent of Insurance of the State

of New York as Liquidator of American Fidelity

Fire Insurance Company and American

Consumer Insurance Company,Plaintiff-Appellant, v.PEAT, MARWICK, MITCHELL & CO., Defendant-Respondent.

PEAT, MARWICK, MITCHELL & CO., Third-Party Plaintiff, v.AMERICAN PLAN CORPORATION, Abe Lieber, Marcia Lieber andMarc Lieber, Third-Party Defendants.

Supreme Court, Appellate Division First Department.

Aug. 24, 1995.

John M. Nonna, of counsel(Michael A. Knoerzer and Tracy A. Stein, on the brief, Werner & Kennedy, attorneys), for plaintiff-appellant.

Sidney Davis, of counsel(Dennis H. Tracey, III, Mark J. Schirmer and Edwin D. Scott, on the brief, Davis, Scott, Weber & Edwards, P.C.), for defendant-respondent.

Before SULLIVAN, J.P., and KUPFERMAN, NARDELLI and TOM, JJ.

NARDELLI, Justice.

As stated by the trial judge, the claim here is that as the result of accounting malpractice the insurance department was induced to enter into a settlement of a rehabilitation proceeding in August of 1984, which settlement delayed the rehabilitation of the insurance company sought to be rehabilitated for a period of approximately 13 months.

The Trial Court found that, although there was "enough evidence in the record for the jury to conclude that some delay perhaps was occasioned as a result of the defendant's malpractice," the length of the delay caused by the tortious conduct was not shown with sufficient precision.It therefore set aside the jury's verdict.The evidence before the jury, however, amply supported its verdict, and Trial Term was in error when it granted judgment to defendant notwithstanding the jury verdict for plaintiff.Further, the IAS court directed a verdict against the plaintiff Superintendent on the fraud claim against defendant and the claim that it aided and abetted American Plan Corporation(American Plan) in committing a fraud.This was erroneous, since factual issues existed which should have been submitted to the jury on these causes of action.

"On a challenge to the sufficiency of a verdict in favor of a plaintiff, the evidence in support thereof must be accepted as true and viewed in the light most favorable to the plaintiff[Alexander v. Eldred, 63 N.Y.2d 460, 464, 483 N.Y.S.2d 168, 472 N.E.2d 996]"(Mirand v. City of New York, 190 A.D.2d 282, 287, 598 N.Y.S.2d 464, affd.84 N.Y.2d 44, 614 N.Y.S.2d 372, 637 N.E.2d 263).Accordingly, the following factual presentation resolves, as the jury found, all issues in favor of the ultimate verdict for plaintiff.

American Fidelity Fire Insurance Company(American Fidelity) and American Consumer Insurance Company(American Consumer) became insolvent and were placed in liquidation with the plaintiff, Superintendent of Insurance, as the Liquidator.Both American Fidelity and American Consumer were owned by American Plan, which itself was owned and controlled by Abe Lieber.American Plan caused the two corporations to pay illegal fees for management services.These fees were the major source of income for American Plan and were supposed to be equal to "actual" operating costs of American Plan.However, Murray Lemonik, the former president of all three corporations, testified that after Lieber gained control of American Plan, the management fees were doubled even though American Fidelity and American Consumer received no significant benefits from the increase.Furthermore, Richard Pluschau, a former member of the Board of Directors and senior Vice-President of American Plan, questioned Lieber's acquisition of an insurer, Life of Montana (LOM) by the two insurers since they did not have "adequate surplus" to finance the LOM acquisition.He also questioned the fact that American Plan sought to acquire properties owned by Lieber, acquisition of which would relieve Lieber of personal obligations.Pluschau also discovered improprieties in American Plan's 1983 financial statements, which, as chief financial officer, he refused to permit to be filed.These and other officers of American Plan, American Fidelity and American Consumer who complained about the illegal and improper activities were either fired by Lieber or forced to resign.Alexander Grant & Company(Grant), the auditors for American Plan, initially retained to audit the 1983 consolidated financial statements, questioned the legality of American Plan's activities and acquisitions including LOM by American Fidelity, the excessive charges for management fees, the loans taken by American Plan for management fees to be earned in the future (advance management fees), and American Plan's financial viability.American Plan, i.e., Lieber, subsequently terminated Grant, after Grant proposed significant adjustments to the financial statements and said that, without such adjustments, it would render an adverse opinion.Despite this, American Plan filed an "8-K" letter with the Securities and Exchange Commission, dated April 9, 1984 asserting that Grant had not proposed any audit adjustments to the financial statements and issued a false press release that Grant had not proposed any audit adjustments at the time of its termination.Grant promptly filed a letter with the SEC setting forth the true facts.

On April 9, 1984, American Plan hired defendantPeat, Marwick, Mitchell & Co.(Peat Marwick) to perform an audit of American Plan's consolidated financial statements as of and for the year ended December 31, 1983, i.e., to prepare and certify the accuracy and fairness of American Plan's, American Fidelity's and American Consumer's financial statements.American Plan's management met with Peat Marwick's audit partners and provided them with the "complete picture" of the financial state of the corporation.Peat Marwick was informed of the warnings of Pluschau and another officer, Rowan, concerning the legality of the acquisitions and the activities and financial viability of American Fidelity and American Consumer.While American Plan told Peat Marwick that there were no problems with Grant and that Grant had not proposed any adjustments to the financial statements, Peat Marwick, pursuant to the Generally Accepted Accounting Standards, asked Grant about its termination and was informed by Grant that it had proposed substantial adjustments to the financial statements.Significantly, Peat Marwick conceded knowledge of American Plan's misrepresentations by the receipt of such information from Grant and by the receipt and review of Grant's response to American Plan's 8-K letter, which specifically stated that Grant had proposed "significant" adjustments.Moreover, Peat Marwick learned that the FBI and various news media had implicated American Plan in questionable business practices and that Lieber was a defendant in a lawsuit alleging that as a member of the Board of Directors of another insurance company he had participated in "upstreaming" money from its subsidiary insurance companies, allegations very similar to some of the charges herein, of which Peat Marwick was aware.There was no investigation by Peat Marwick of these allegations, nor did they raise a "red flag" concerning the allegations with respect to American Plan.

Accepting the assignment to perform the 1983 audit, Peat Marwick had to assess the financial viability of American Fidelity and American Consumer to be able to arrive at the true financial picture of American Plan.The evidence at trial established, however, that Peat Marwick had departed from Generally Accepted Accounting Standards in its treatment of American Plan's valuation of American Consumer's LOM stock at $1.6 million, American Plan's excessive management charges to American Fidelity and American Consumer, and the ability of American Fidelity and American Consumer to recover these management fees.There was evidence that Peat Marwick knew that LOM had received an audit report stating that it was in danger of going out of business and that its stock was almost worthless.Even discounting this audit report, Insurance Law § 91 mandates valuation of the stock at its book value, not its market value.The book value of the stock at the time was about half of the $1.6 million valuation of the stock.According to plaintiff's expert at trial, had Peat Marwick properly valued LOM, it would have known of American Consumer's insolvency.Vincent Laurenzano, Chief Examiner of the Insurance Department, expressed the concern of that Department over the financial liability of LOM at a meeting with Paul Zucconi, audit partner of Peat Marwick.Zucconi admitted in testimony that his firm knew at that time that the auditors of Life of Montana believed that LOM was in danger of going out of business but that he did not inform Laurenzano of this concern.

Peat Marwick was aware of the provisions of Sections 86and91 of the New York Insurance Law which govern the valuation of the LOM stock, i.e., that § 86 provides that an insurer may not acquire an interest in another insurer which exceeds 50% of its surplus, and § 91, in pertinent part, that the stock of an insurance company acquired by another insurer must be valued at the lesser of its market value or its book value.It did not perform audit tests to determine compliance on the part of American Plan with the statutes.There was expert testimony that this also constituted a departure from the Generally Accepted Accounting Standards.

Insurance examiner Donald Reichenbach testified that he informed Bruce Milligan, another Peat Marwick audit partner on the American Plan account, that pursuant to § 91, American Consumer could carry only the lesser of the book value or the market value of LOM on its books.At the trial, Milligan admitted that even though Peat Marwick should have valued the stock at book value, the workpapers were not corrected to include this legal, lower value.Reichenbach also informed Milligan of the relevancy of § 86 but Milligan...