In Re Nm Holdings Company

Decision Date30 September 2010
Docket NumberNo. 09-1870.,09-1870.
Citation622 F.3d 613
PartiesIn re NM HOLDINGS COMPANY, LLC et al., Debtors. Stuart A. Gold, Chapter 7 Trustee of NM Holdings Company LLC (f/k/a Venture Holdings Company, LLC), NM EMCO, Inc., NM Industries Corporation, NM Mold & Engineering Corporation, NM Old Leasing Company, NM NEMCO Leasing, Inc., NM Holdings Corporation, NM Service Company, NM EXP LLC, and NM EU Corporation, Plaintiffs-Appellants, v. Deloitte & Touche LLP, Defendant-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

OPINION TEXT STARTS HERE

ARGUED: Gregory D. Hanley, Kickham Hanley PLLC, Royal Oak, Michigan, for Appellants. John F. Hartmann, P.C., Kirkland & Ellis LLP, Chicago, Illinois, for Appellee. ON BRIEF: Gregory D. Hanley, Timothy O. McMahon, Kickham Hanley PLLC, Royal Oak, Michigan, for Appellants. John F. Hartmann, P.C., Mark S. Hamill, Kirkland & Ellis LLP, Chicago, Illinois, for Appellee.

Before: GILMAN and WHITE, Circuit Judges; WATSON, District Judge. *

OPINION

RONALD LEE GILMAN, Circuit Judge.

Stuart Gold, as the trustee in bankruptcy for a group of companies collectively known as Venture, sued Deloitte & Touche LLP, Venture's former auditor, alleging that Deloitte (1) negligently performed its audits by failing to uncover and report unsound related-party transactions entered into by Venture's sole shareholder and CEO, and (2) aided and abetted the CEO's breach of his fiduciary duty to Venture. Deloitte filed a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on the basis that Gold had failed to state a claim upon which relief can be granted.

The district court granted Deloitte's motion. It held that Gold's claim against Deloitte for professional negligence failed because Michigan's “sole-actor rule” prevented Gold from establishing that Venture relied on Deloitte's audits. In addition, the court held that Gold's claim that Deloitte aided and abetted the CEO's breach of his fiduciary duty to Venture was barred by Michigan's three-year statute of limitations applicable to such claims. For the reasons set forth below, we AFFIRM the judgment of the district court.

I. BACKGROUND
A. Factual background

The following facts are taken primarily from Gold's first amended complaint. Venture was an automotive-parts supplier that filed for Chapter 11 bankruptcy in March 2003. In January 2006, its bankruptcy proceeding was converted into a Chapter 7 liquidation. Gold was appointed as the Chapter 7 trustee for Venture later that same month.

All of the equity interest in Venture was held by Venture Holdings Trust, with Larry Winget being the Trust's sole beneficiary. Winget was also the CEO and a director of Venture. (Although the complaint states that Winget was “a” director of Venture rather than the sole director, there is nothing in the complaint, the parties' briefs, or the district court's opinion that makes any reference to the existence or authority of any other Venture directors.)

For a number of years before Venture filed for bankruptcy, Winget allegedly caused Venture to enter into a series of transactions with companies that were wholly owned or controlled by Winget. According to the complaint, “Venture received little or no consideration and/or less than reasonably equivalent value in these related party transactions.” The complaint also alleged that Venture's public financial statements “contained false and materially misleading statements and information about the numerous related party transactions.... Many of the related party transactions were not disclosed at all, and, as to those that were partially disclosed, the financial statements falsely stated that the transactions were fair to Venture from a financial standpoint.”

Beginning in 1987, Deloitte was retained by Venture to conduct annual audits and quarterly reviews of Venture's financial statements. In conducting its audits, Deloitte allegedly violated Generally Accepted Auditing Standards (GAAS) by failing (1) to properly design its audits in order to determine whether Venture's financial statements contained false statements, (2) to utilize appropriate procedures for analyzing related-party transactions, and (3) to properly qualify its opinions on Venture's financial statements from 1995 until 2001. Deloitte had repeatedly issued unqualified opinions stating that Venture's public financial statements fairly presented the financial condition of the company. Venture's statements in fact contained false and misleading information regarding the related-party transactions.

Gold also alleged that Deloitte knew of Winget's impropriety in entering into the related-party transactions. For example, an internal Deloitte memorandum purportedly acknowledged that a transaction between Venture and a related company was not a “commission agreement,” even though that is how the transaction was characterized in Venture's financial statements.

Finally, Gold claimed that Deloitte's auditing failures were the proximate cause of Venture's precarious financial situation and ultimate bankruptcy. Venture had entered into several loan agreements that by their terms restricted Venture's ability to engage in related-party transactions and required the company to comply with various financial-reporting obligations. According to Gold, if Deloitte had properly performed its function, then Venture's creditors would have known about the related-party transactions and would have forced Venture to cure the default, thus compelling Winget to stop engaging in the harmful transactions. If Winget had done so, “Venture's financial condition would have been more favorable than it actually was, even if it still had entered bankruptcy.”

Gold also alleged that Venture's independent Fairness Committee,” which was established pursuant to one or more of the loan agreements, was similarly unaware of the harmful transactions and would have acted to stop Winget had it been informed of them. The Fairness Committee consisted of a “sole and independent member” who had the authority to prevent Winget from entering into any related-party transactions.

If Venture had fired this committee member, it would have been in breach of the loan agreements.

B. Procedural history

In March 2006, Gold filed suit against Deloitte in a Michigan state court. Deloitte then removed the case to the United States Bankruptcy Court for the Eastern District of Michigan. Gold's first amended complaint was filed in August 2007. He asserted four claims against Deloitte. In Count I, Gold claimed that Deloitte committed professional negligence by failing to properly conduct its audits. Specifically, Gold alleged that Deloitte breached its duty to Venture to conduct the audits in accordance with GAAS and that this breach directly and proximately injured Venture.

Gold claimed in Count II that Deloitte, by failing to disclose related-party transactions that it had knowledge of, aided and abetted Winget in breaching the fiduciary duty that Winget owed to Venture. Count III, which was titled “Disgorgement of Fees,” alleged that Deloitte was unjustly enriched by collecting fees for its services and that it should have to disgorge all fees that it received for performing the audits.

Finally, in Count IV, Gold alleged that any payments transferred to Deloitte once Venture became insolvent were fraudulent and thus recoverable by Gold. This last claim was brought pursuant to both § 548 of the Bankruptcy Code, 11 U.S.C. § 548, and Michigan's fraudulent-transfer statute, Mich. Comp. Laws. Ann. § 566.31 et seq. Gold's first three claims were brought solely under Michigan common law.

Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Deloitte filed a motion in September 2007 to dismiss Gold's first amended complaint for failure to state a claim upon which relief can be granted. Deloitte argued that (1) Gold's claims could not succeed as a matter of law because the complaint alleged reliance only by Venture's creditors, not Venture itself, (2) Gold's recovery was barred by Michigan's wrongful-conduct rule, (3) all of Gold's claims were barred by the applicable statute of limitations, and (4) Gold's aiding-and-abetting claim failed because the complaint did not contain facts establishing that Deloitte knowingly provided substantial assistance to Winget.

After a hearing, the bankruptcy judge issued a recommendation that the district court dismiss Counts I through III. He did so pursuant to 28 U.S.C. § 157(c)(1), which provides as follows:

A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

The bankruptcy judge recommended that the district court dismiss Count I because Gold did not allege that Venture relied on Deloitte's opinions, which is a necessary component of the causation element in a professional-negligence claim. Next, the bankruptcy judge recommended that the district court find that Count II was time-barred by the three-year statute of limitations found in Mich. Comp. Laws Ann. § 600.5805(10).

As to Count III, the bankruptcy judge recommended dismissal because the disgorgement of fees is simply a remedy, not a separate claim for relief. Gold did not object to the dismissal of Count III so long as disgorgement remained a potential remedy against Deloitte if liability was established.

Count III was thus not at issue before the district court.

Finally, the bankruptcy judge granted Deloitte's motion as to Count IV (fraudulent transfers) after it found the claim to be time-barred. The judge was able to enter...

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