In re Gouiran Holdings, Inc.

• Decision Date: 16 August 1993
• Docket Number: Adv. No. 191-1271-353 (JF).,Bankruptcy No. 188-82686-353 (JF)
• Parties: In re GOUIRAN HOLDINGS, INC., Debtor. GOUIRAN HOLDINGS, INC., d/b/a GHI, by its Official Committee of General Unsecured Creditors, Plaintiff, v. DeSANTIS, PRINZI, SPRINGER, KIEFER & SHALL, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

158 B.R. 3 (1993)

In re GOUIRAN HOLDINGS, INC., Debtor.

GOUIRAN HOLDINGS, INC., d/b/a GHI, by its Official Committee of General Unsecured Creditors, Plaintiff, v. DeSANTIS, PRINZI, SPRINGER, KIEFER & SHALL, Defendant.

Bankruptcy No. 188-82686-353 (JF), Adv. No. 191-1271-353 (JF).

United States Bankruptcy Court, E.D. New York.

August 16, 1993.

COPYRIGHT MATERIAL OMITTED

Shaw, Licitra, Esernio & Schwartz, P.C. by Alan E. Marder, Garden City, for plaintiff.

Wilson, Elser, Moskowitz, Edelman & Dicker by Thomas R. Manisero, Michael Schwartzberg, New York City, for defendant.

Phillips, Nizer, Benjamin, Krim & Ballon by Colleen E. Mack, Garden City, for trustee.

DECISION ON MOTION TO DISMISS AMENDED COMPLAINT FOR FAILURE TO STATE A CLAIM

JEROME FELLER, Bankruptcy Judge.

DeSantis, Prinzi, Springer, Kiefer & Shall ("Defendant"), a firm of certified public accountants, moves to dismiss the amended complaint ("Complaint") filed in this adversary proceeding by the official committee of unsecured creditors ("Plaintiff") on behalf of the Debtor, Gouiran Holdings, Inc. The Complaint charges Defendant, former accountant and auditor of Gouiran Holdings, Inc. (hereinafter "GHI"), with negligence in GHI financial reporting and that such alleged negligence lead to the demise of the enterprise. Defendant responds by way of motion pursuant to Fed.R.Civ.P. 12(b)(6), made applicable to bankruptcy adversary proceedings by Fed.R.Bankr.P. 7012(b), seeking dismissal, with prejudice, of the Complaint for failure to state a claim upon which relief can be granted. It is this motion to dismiss which is before the Court for adjudication. Plaintiff and Defendant, by stipulation dated August 20, 1991, have consented to a full and final adjudication by the bankruptcy court of this non-core litigation pursuant to 28 U.S.C. § 157(c)(2).

Upon review, consideration and analysis of the Complaint, all papers submitted by the parties, the overall record of these proceedings and our own independent legal research, we conclude that the Complaint fails to sufficiently plead the required element of causation necessary to sustain a cause of action sounding in negligence. We therefore grant Defendant's motion to dismiss. Two essentially identical earlier pleadings filed by Plaintiff against Defendant charging accountant negligence were similarly defective. Accordingly, the Complaint is dismissed, with prejudice.

I.

GHI is a Staten Island based closely held New York Corporation. Prior to the inception of its Chapter 11 case, GHI was engaged in the business of, inter alia, mortgage banking and servicing, commercial portfolio and investment lending, and commercial leasing and brokerage. GHI's license to engage in residential mortgage lending and servicing was revoked on June 23, 1988 by the New York State Banking Department following a lengthy administrative hearing. On August 1, 1988, the State of New York commenced an action against GHI, and certain insiders, affiliates and related entities, charging illegal and fraudulent conduct violative of the New York State banking, securities and consumer protection laws. State of New York v. Gouiran Holdings, Inc., Index No. 1458 (N.Y.Sup.Ct., Richmond Co.1988). On August 3, 1988, "in order to protect GHI's assets from further dissipation", an order was entered by the state court appointing a temporary receiver for all the assets of GHI, and GHI was restrained from transferring any of its assets, except as directed by the receiver.

On September 28, 1988, GHI filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York. The status of GHI as a debtor in possession was short lived. On or about October 11, 1988, the State of New York moved for, inter alia, the appointment of a Chapter 11 trustee pursuant to 11 U.S.C. § 1104. By order dated October 25, 1988, Louis A. Scarcella, Esq. was appointed Chapter 11 trustee. On December 16, 1988, Plaintiff was appointed by the United States Trustee to serve as the official committee of unsecured creditors in the Chapter 11 case of GHI. By order dated October 17, 1990 and with the assent of the Chapter 11 trustee, the Court empowered the official committee of unsecured creditors to commence and prosecute litigation on behalf of GHI.

II.

Preliminary to consideration of Defendant's motion to dismiss, we necessarily must examine the contents of the Complaint. Defendant, according to the Complaint, represents itself to the public as a competent, qualified firm of accountants and auditors able to prepare and furnish financial statements and reports showing the financial condition of a business enterprise, all in a prudent and skillful manner in accordance with generally accepted accounting principles and generally accepted auditing standards. Complaint at ¶ 8. Defendant had served as GHI's accountant, performing various accounting services for the company since in or about 1973 and had prepared financial statements and issued reports for GHI since at least 1983. Complaint ¶¶ 9 and 11.

The Complaint charges Defendant with negligence in i) certifying the veracity of financial information regarding GHI, ii) failing to disclose information relevant to GHI's financial posture, and iii) failing to correct such alleged misinformation and omissions. Complaint ¶¶ 7, 11, 13-15. As a result of Defendant's alleged negligence, GHI's financial posture was not fairly portrayed; instead, GHI's financial condition was materially and substantially overstated. Complaint ¶¶ 7 and 17. And, paragraph 16 of the Complaint contains specific charges of assets and income allegedly overstated, liabilities and expenses allegedly understated and alleged nondisclosures of material information.

The centerpiece of the Complaint's negligence allegations is a GHI Accountants' Report for the year ended December 31, 1987, issued on or about March 11, 1988, wherein Defendant reports on GHI's financial statements and position at December 31, 1987 and December 31, 1986 ("1987 Report"). The 1987 Report is annexed to the Complaint as Exhibit A. It is asserted that the 1987 Report includes material errors and omissions and that, contrary to representations contained therein, Defendant failed to comply with generally accepted auditing standards and generally accepted accounting principles in the preparation of the 1987 Report.¹ Complaint ¶¶ 11-12, 14-16.

The financial reporting misrepresentations of GHI's fiscal soundness arising out of Defendant's alleged negligence, it is asserted, were used by certain principals of GHI to perpetrate a fraud on holders of GHI debenture accounts and potential holders of such accounts ("Investor/Creditors") by i) causing existing Investor/Creditors to maintain or increase their debenture accounts, and ii) inducing prospective Investor/Creditors to open such accounts. Complaint ¶¶ 18, 21, 22 and 23. And, these certain principals of GHI then misappropriated the funds generated by the debenture sales, rather than using such funds for legitimate business reasons. Complaint ¶¶ 18, 19 and 20. As a proximate cause of Defendant's claimed negligence, GHI was allegedly injured in that certain of GHI's insiders were able to misappropriate monies which would have been otherwise unavailable to them and GHI assumed debts which it was unable to service. Complaint ¶ 24. For these reasons, according to the Complaint, GHI was forced into bankruptcy and suffered substantial damages. Complaint ¶¶ 25 and 26.²

III.

Fed.R.Civ.P. 12(b)(6) provides for dismissal of a complaint "for failure to state a claim upon which relief can be granted." The task of a federal court on a motion to dismiss is to determine the legal sufficiency of a complaint and not to assay the factual basis of a claim for relief. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). The complaint need only satisfy the liberal notice requirement set forth in Fed. R.Civ.P. 8(a)(2), made applicable to bankruptcy adversary proceedings by Fed. R.Bankr.P. 7008(a), which rule calls for "a short and plain statement of the claim" showing that the pleader is entitled to relief. Conley v. Gibson, 355 U.S. at 47, 78 S.Ct. at 103; Sinclair v. Kleindienst, 711 F.2d 291, 293 (D.C.Cir.1983). In appraising the sufficiency of a complaint on a motion to dismiss, the complaint is to be given a receptive construction such that all material allegations are considered true and all reasonable inferences are to be drawn in favor of the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984); Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 1849, 23 L.Ed.2d 404 (1969); Rauch v. RCA Corp., 861 F.2d 29, 30 (2d Cir.1988). The liberal thrust of our simplified federal rules of civil procedure requires that a motion such as one to dismiss under Fed. R.Civ.P. 12(b)(6) that "would summarily extinguish litigation at the threshold and foreclose the opportunity for discovery and factual presentation, should be treated with the greatest of care." Haynesworth v. Miller, 820 F.2d 1245, 1254 (D.C.Cir.1987).

Although the threshold pleading requirements to overcome a Rule 12(b)(6) motion to dismiss are low, the deference accorded a plaintiff is not without limitation. Minimal requirements are not tantamount to nonexistent requirements. A defendant is entitled to fair notice of a plaintiff's claim and the grounds upon which it rests so as to prepare an appropriate defense. See Allard v. Weitzman (In re Delorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir.1993); Ostrer v. Aronwald, 567 F.2d 551, 553 (2d Cir.1977). Accordingly, to withstand a Rule 12(b)(6) motion to dismiss, a complaint must be "well pleaded" and contain more than bald, conclusory or overly generalized...