Seidman & Seidman v. Gee

• Decision Date: 14 April 1992
• Docket Number: Nos. 91-345,91-1479,s. 91-345
• Citation: 625 So.2d 1
• Parties: 17 Fla. L. Weekly D973 SEIDMAN & SEIDMAN and Binder Dijke Otte & Co., Appellants, v. Allan GEE, as Official Liquidator of Universal Casualty & Surety Company, Ltd. (in Liquidation), Appellee.
• Court: Florida District Court of Appeals

Page 1

625 So.2d 1

17 Fla. L. Weekly D973

SEIDMAN & SEIDMAN and Binder Dijke Otte & Co., Appellants, v. Allan GEE, as Official Liquidator of Universal Casualty &amp Surety Company, Ltd. (in Liquidation), Appellee.

Nos. 91-345, 91-1479.

District Court of Appeal of Florida Third District.

April 14, 1992.

Opinion Denying Rehearing Aug. 17, 1993.

Holland & Knight, and Daniel S. Pearson and Lenore C. Smith, Miami, for appellants.

Anderson, Moss, Parks, Meyers & Sherouse, and Elizabeth K. Russo, Miami, for appellee.

Dennis K. Threadgill, Helen Ann Hauser, for Florida Department of Insurance, as amici curiae.

Michael R. Young, for American Institute of Certified Public Accountants, as amicus curiae.

Susan E. Martin, Michael Berry, for National Assoc. of Ins. Commissioners, as amici curiae.

Dittmar & Hauser and Helen Ann Hauser, for National Society of Ins. Receivers, as amicus curiae.

Before NESBITT, FERGUSON and LEVY, JJ.

PER CURIAM.

BDO Seidman, an accounting firm, contends, in this appeal from a $16 million adverse judgment, that it was entitled to a judgment as a matter of law in the client's action based on a theory of artificial prolongation of corporate life owing to auditing negligence, where the event that it should have, but failed to discover, was a fraud perpetrated by the corporate-client's controlling officer acting in furtherance of the corporation's purposes. We agree and reverse the judgment entered on a jury verdict.

Universal Casualty & Surety Co., Ltd., is an insurance and reinsurance company created in 1977 in the Cayman Islands. From 1978 until just prior to its liquidation in 1984, Universal was under the management and control of Vishwa Shah. In a scheme to inflate artificially the worth of the corporation, Vishwa Shah fraudulently represented that Universal was backed by a $10 million certificate of deposit. BDO Seidman, the accounting firm hired by Universal to provide audited financial reports for dissemination to prospective policy holders, negligently failed to discover that the $10 million CD was nonexistent. On the basis of Seidman's financial reports reflecting the $10 million asset, Universal obtained the licensing required for operation in the Caymans, ¹ and solicited customers internationally.

In 1984, Universal collapsed following a market slump. The Cayman Superintendent of Insurance suspended Universal's license and appointed Allan Gee, as liquidator, to wind up the corporation's affairs. Gee, unable to locate Universal's chief asset, the $10 million CD, concluded that its existence was a fraud perpetrated by Vishwa Shah. Gee filed a lawsuit against BDO Seidman alleging that the accounting firm was negligent in failing to discover Shah's fraud. As damages, Gee sought $16,236,969--the value of all claims made against Universal in the liquidation proceedings. The essence of Gee's claim is that Seidman's negligent audit artificially prolonged Universal's corporate life past the point of insolvency, thereby allowing Universal to incur $16 million in debt to policyholders and creditors.

As authority for its position that it should prevail on the facts of this case, appellant relies on the leading case of Cenco Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.1982), cert. denied, 459 U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145 (1982). The central issue in Cenco was whether Seidman was entitled to use, through imputation, the fraud of Cenco's managers as a defense to an action against the corporation's auditors for failure to discover the wrongdoing of the corporation's managers. Cenco's management had fraudulently inflated the value of the corporation's inventories. Concluding that the corporation was estopped from bringing a claim against its auditors, the Cenco court held that an auditor may raise an imputation defense only where the fraud perpetrated by the management was committed on behalf of the corporation rather than in furtherance of the managers' own interests. The rationale is that the corporation is precluded from recovering on a claim for fraud where the corporation actually benefitted from the fraud. Rejecting the "extreme position" that an employee's fraud is always imputed to the corporation, the court held that the misconduct of the corporation's managers should be imputed to the corporation only where the acts are performed on behalf of the corporation.

Fraud on behalf of the corporation is not the same thing as fraud against it. Fraud against the corporation usually hurts just the corporation; the stockholders are the principal if not the only victims; their equities vis-a-vis a careless or reckless auditor are therefore strong. But the stockholders of a corporation whose officers commit fraud for the benefit of the corporation are beneficiaries of the fraud.

Cenco, 686 F.2d at 456. Because the misconduct of the managers was performed on Cenco's behalf, the corporation was barred from shifting the responsibility for the fraud to the auditors.

A similar result was reached recently in Federal Deposit Ins. Corp. v. Ernst & Young, No. Civ A. 3-90-0490-H, 60 U.S.L.W. 2235, 1991 WL 197111 (N.D.Tex. Sept. 30, 1991), which based its holding on the long-established rule that the knowledge of individuals who exercise substantial control over a corporation's affairs is imputable to the corporation. On behalf of a corporation in receivership, Western Savings Association, the FDIC, filed a lawsuit against the corporation's former auditors for negligent failure to discover the questionable lending practices of Western's chief officer. The gravamen of the FDIC's negligence claim was that if the audits had been accurate, Western would have ceased making the high-risk loans that caused it to accumulate $560 million in losses. Summary judgment was granted the defendant accounting firm on the ground that the misconduct of the managing officer was imputed to the corporation. Two key factual determinations made were (1) fraudulent transactions conducted by the managing director created an appearance of rapid growth and significant gain in the corporation's net worth, and (2) victims of the fraud were outsiders to the corporation--its depositors and creditors--whose losses, essentially, were the corporation's gains. Because the corporation had knowledge of and benefitted from the fraud, the court reasoned, it could not claim to have relied on the auditor's reports. Without proof that the corporation relied on the audit report to its detriment, the FDIC was unable to establish that the accountant's negligence caused a corporate injury.

The Ernst & Young court acknowledged, however, that an exception to the imputation rule exists where an individual is acting adversely to the corporation. In that situation, the officer's knowledge and conduct are not imputed to the corporation. See also In re Investors Funding Corp., 523 F.Supp. 533 (S.D.N.Y.1980) (knowledge of corporate agent is imputed to his principal except where the agent is acting adversely to the principal).

We, similarly, distinguish this case from Schacht v. Brown, 711 F.2d 1343 (1983), relied on by the appellee. In Schacht the liquidator of an insurance company brought suit against the officers and directors of a parent corporation who looted the insurer of its most profitable business and whose fraudulent acts caused the insurer to continue in business past the point of insolvency. The Schacht court specifically declined to apply a Cenco-type analysis writing that, "The Cenco court limited its estoppel analysis to cases where 'the managers are not stealing ......