In re Sunrise Securities Litigation, MDL No. 655.

• Decision Date: 13 April 1993
• Docket Number: MDL No. 655.
• Citation: In re Sunrise Securities Litigation, 818 F.Supp. 830 (E.D. Pa. 1993)
• Parties: In re SUNRISE SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

818 F. Supp. 830

In re SUNRISE SECURITIES LITIGATION.

MDL No. 655.

United States District Court, E.D. Pennsylvania.

April 13, 1993.

COPYRIGHT MATERIAL OMITTED

Squire, Sanders & Dempsey, Donald T. Bucklin, Scott T. Kragie, John B. Bulgozdy, Washington, DC, for plaintiff F.D.I.C.

Ballard, Spahr, Andrews & Ingersoll, Alan J. Davis, Robert McL. Boote, Donald P. Alexander, Philadelphia, PA, for defendant Deloitte, Haskins & Sells.

MEMORANDUM

O'NEILL, District Judge.

I. Introduction

In 1986, the Federal Savings and Loan Insurance Corporation ("FSLIC") in its corporate capacity brought this action against the former attorneys and former officers and directors of the Old Sunrise Savings and Loan Corporation.¹ In January, 1989, FSLIC amended its complaint and added Old Sunrise's former independent auditors, Deloitte, Haskins & Sells, as a defendant.² Deloitte filed an Answer, Affirmative Defenses and Counterclaims. The FSLIC, now the Federal Deposit Insurance Corporation ("FDIC"),³ has moved to dismiss Deloitte's Counterclaims and to strike certain of its Affirmative Defenses. For the reasons that follow, I will grant FDIC's motion.

II. Background

Old Sunrise was a Florida corporation chartered as a capital stock savings and loan association on March 10, 1980. On July 18, 1985, the Federal Home Loan Bank Board ("FHLBB") determined that Old Sunrise was insolvent and appointed the FSLIC as receiver. That same day, FSLIC as receiver organized a new federal savings and loan association, New Sunrise, and transferred substantially all of the Old Sunrise assets and liabilities to New Sunrise. By the Assignment and Agreement of January 2, 1986, New Sunrise assigned to FSLIC-Corporate Old Sunrise's causes of action against its officers, directors, attorneys, accountants and appraisers. On September 12, 1986, the FHLBB declared New Sunrise insolvent and appointed FSLIC as receiver. See In re Sunrise Securities Litigation, 131 F.R.D. 450, 452-53 (E.D.Pa.1990).

On September 2, 1986, FSLIC in its corporate capacity filed suit against Old Sunrise's former officers and directors and its former attorneys, Blank, Rome, Comisky & McCauley.⁴ On January 19, 1989, after terminating an existing standstill agreement, FSLIC served an Amended Complaint and added Deloitte as a defendant.

A. FDIC's claims against Deloitte

FDIC's claims against Deloitte are contained in Counts IX and X of its Amended Complaint. Count IX alleges that Deloitte breached its engagements to perform audits of Sunrise's financial statements for the years ending June 30, 1983 and June 30, 1984 and to prepare other financial reports relating to these time periods. FDIC alleges that Sunrise's financial statements were not prepared in accordance with generally accepted accounting principles and did not present fairly the financial condition of Sunrise. Amended Complaint at ¶ 285. FDIC contends that Deloitte's audits did not disclose that Sunrise's revenues were overstated; that its income relating to ADC loans was overstated; that its loan loss reserve was understated; and that Sunrise failed to account adequately for the speculative nature of its ADC loan portfolio. Id. Count X asserts that these alleged failings amounted to professional negligence. Id. at ¶ 295.

B. Deloitte's Counterclaims

In its First Counterclaim, Deloitte asserts claims for intentional misrepresentation, negligent misrepresentation and tortious interference by FSLIC in August and September, 1984 which, according to Deloitte, directly affected the issuance by Deloitte in September, 1984 of its audit report on Sunrise's financial statements for the year ended June 30, 1984.⁵

Deloitte alleges that, at the time it was performing its audit of Sunrise in the spring of 1984, a team of examiners from FSLIC and the State of Florida were conducting an independent regulatory examination on the premises of Sunrise. According to the Counterclaim, the examination focused on Sunrise's financial condition and lending practices, including but not limited to the adequacy of appraisals and the sufficiency of Sunrise's loan loss reserve. Deloitte's First Counterclaim for Recoupment, at ¶¶ 7-8. As part of their examination, the examiners ordered reappraisals of thirteen major Sunrise loan properties. Id. at ¶ 9.

The First Counterclaim alleges that because of the contemporaneous FSLIC examination Deloitte decided, as part of its audit procedures, to make inquiry of the examiners regarding the status of the re-appraisals and the results of the examination. Id. at ¶ 10. In September, 1984, prior to the issuance of its audit report on the June 30, 1994 financial statements of Sunrise, Deloitte asked FSLIC whether the results of the examination and the re-appraisals would result in material adjustments to Sunrise's financial statements. Id. at ¶ 11. According to the Counterclaim, in response to Deloitte's inquiry, FSLIC represented that:

(a) the second i.e., the May, 1984 examination of Sunrise was not complete;

(b) the examination report and re-appraisals had not yet been received; and

(c) FSLIC was unaware of any adjustments in the financial statements of Sunrise which would result from the second examination or the re-appraisals.

Id. at 12.

Sunrise made similar inquiries of FSLIC and the responses to those inquiries — that no material adjustments in Sunrise's net worth would occur as a result of the FSLIC examination — were incorporated in Footnote 15 of Sunrise's financial statements as of June 30, 1984. Id. at ¶ 13. Relying on this information, Deloitte then issued its audit report. Id. at ¶ 16.

Deloitte alleges that FSLIC knew these affirmative statements were false in that reappraisals had indicated an increase in loan loss reserve which mandated adjustments in Sunrise's financial statements. Id. at ¶¶ 14-15.⁶ Deloitte further claims that FSLIC knew or should have known that Deloitte would rely on those statements. Id. at ¶ 15. Deloitte alleges that the affirmative misrepresentations by FSLIC "substantially impeded or interfered with Deloitte's audit of Sunrise's financial statements" for the year ended June 30, 1984. Id. at ¶ 22.

According to the Counterclaim, when the examination report was finally released in 1985, the information resulted in (a) the removal of Sunrise's senior management; (b) a material reduction in Sunrise's net worth; and (c) a Second Supervisory Agreement. Id. at ¶ 17.

Deloitte argues that the Second Counterclaim arises from FSLIC's de facto takeover of Old Sunrise in April, 1985 as a result of the Second Supervisory Agreement, prior to FSLIC's appointment as receiver.⁷ Among other things, Deloitte charges that FSLIC: caused the resignations of the president, chief lending officer and chief compliance officer of Sunrise; caused the resignation of senior experienced lending personnel of Sunrise; caused the resignation of most of Sunrise's experienced "work-out" personnel; and completely disabled Sunrise management from prudently administering Sunrise's loan portfolio. Deloitte's Second Counterclaim in Recoupment, at ¶¶ 5-10.

In addition, the Counterclaim alleges that FSLIC took over day-to-day control of such administration and managed Sunrise in a reckless, arbitrary and imprudent manner. Id. at ¶¶ 11-12. Deloitte claims that by superseding the remaining management of Sunrise and taking over its operations no later than June, 1985, FSLIC caused a cessation of all attempts to work out loans and all loan disbursements. Id. at ¶ 14. Allegedly, FSLIC caused the shutdown of virtually every major Sunrise construction project, triggered defaults by borrowers and caused a run by Sunrise depositors. Id. at ¶ 15.

The Second Counterclaim concludes that as a foreseeable result of the FSLIC takeover "FSLIC caused or substantially contributed to the insolvency of Sunrise. Said wrongful conduct proximately resulted in injury to Deloitte." Id. at ¶ 16.

Deloitte asserts the Third Counterclaim against FDIC as successor-in-interest to Sunrise. Based on the allegations of the indictment of United States v. Jacoby, Crim. No. 87-6034, in the United States District Court for the Southern District of Florida, and the subsequent convictions of Robert C. Jacoby, the president of Old Sunrise, and Thomas Skubal, the vice president of Sunrise Mortgage Corporation, a wholly-owned subsidiary of Sunrise, Deloitte alleges that Jacoby, Skubal and William Frame committed intentional and negligent acts of fraud and deceit on behalf of Sunrise, which acts were intended to, and had the effect of, impeding, frustrating and interfering with Deloitte's audit of Sunrise. Deloitte's Third Counterclaim, at ¶ 3.⁸ This Counterclaim seeks an affirmative recovery against FDIC as successor-in-interest to Sunrise for all damages inflicted upon Deloitte by the criminal and negligent acts committed by the senior management of Sunrise on behalf of the institution.

C. Deloitte's Affirmative Defenses

FDIC also moves to strike certain of the affirmative defenses asserted by Deloitte. The affirmative defenses at issue, which essentially fall into four groups, are as follows:

1. Deloitte's Sixth Affirmative Defense, which is based on the comparative negligence of Old Sunrise's management, and the Twenty-First Affirmative Defense, which enumerates various defenses against FDIC as successor-in-interest to Sunrise.

2. Deloitte's Seventh and Tenth Affirmative Defenses, which, in effect, allege that FDIC is "equitably estopped" from suing Deloitte by reason of the conduct charged in Deloitte's First Counterclaim.

3. Deloitte's Fourth, Eleventh, Thirteenth and Seventeenth Affirmative Defenses, which are based on the imputation to FDIC's predecessor-in-interest, i.e., Old Sunrise, of the criminal and negligent acts of former senior Sunrise management.

4. Deloitte's Twentieth Affirmative Defense, which incorporates by reference defenses asserted by Deloitte's co-defendants, some of which were stricken by this Court in a July,...