Tsg Water Resources v. D'Alba & Donovan Certified, CV 402-258.

CourtUnited States District Courts. 11th Circuit. United States District Court (Southern District of Georgia)
Citation366 F.Supp.2d 1212
Docket NumberNo. CV 402-258.,CV 402-258.
Decision Date10 May 2004

Inman Gregory Hodges, Oliver, Maner & Gray, LLP, Savannah, GA, Brent J. Savage, C. Dorian Britt, Savage & Turner, PC, Savannah, GA, for TSG Water Resources, Inc., (TSG), TSG Technologies, Inc., Donald L Mayer, Paul S. Steward, Jonathan D. Sprague, Robert M. Bolz, John A. Bolz, William Roger Holden, OGM Family Limited Partnership, plaintiffs.

John Colquitt Rogers, Johannes S. Kingma, Carlock, Copeland, Semler & Stair, LLP, Atlanta, GA, Thomas A. Withers, Gillen, Cromwell, Parker & Withers, LLC, Savannah, GA, Charles C. Ritter, Jr., Duke, Holzman, Yaeger & Photiadis, LLP, Buffalo, NY, for D'Alba & Donovan Certified Public Accountants, P.C., Morris Bencini, defendants.


NANGLE, District Judge.

In this diversity case, Plaintiffs are suing Morris Bencini ("Bencini") and D'Alba & Donovan Certified Public Accountants, P.C. ("D & D") on numerous claims arising from an audit of the TSG corporations for the year 2000. Plaintiffs have asserted claims of fraud and securities fraud against both Bencini and D & D (Count V), claims of breach of fiduciary duty against both Bencini and D & D (Counts II & III), claims for negligence against D & D (Counts I & IV), claims of breach of contract and negligent retention and supervision against D & D (Counts VI & VII), and claims for punitive damages and attorneys' fees against both Bencini and D & D (Counts VIII & IX).

Plaintiffs can be placed into three groups. The first group includes TSG Water Resources, Inc. and its wholly-owned subsidiary, TSG Technologies, Inc. (collectively, "TSG"). Defendant Bencini is a former vice-president and chief financial officer ("CFO") of TSG and held those positions from around July 1999 until June 2001. The second group of plaintiffs ("Inside Investors") consists of Donald Mayer,1 Paul Steward,2 and Jonathan Sprague.3 These individuals were all Directors of TSG during the time at issue in this suit and are all currently Directors. The third group ("Outside Investors") consists of Robert Bolz,4 John Bolz,5 William Holden,6 and OGM Family Limited Partnership ("OGM").7 These investors were friends and family members of Mayer.

Before the Court are Defendant Bencini's Motion for Summary Judgment (Doc. 93), Defendant D & D's Motion for Summary Judgment (Doc. 71), and Defendant Bencini's Motion for Advance of Legal Fees and Expenses (Doc. 66). Also before the Court are Plaintiffs' Motion for Oral Argument (Doc. 118) and Motion for Reconsideration (Doc. 124).


The submissions of the parties, including the Statements of Undisputed Facts of Bencini (Doc. 96) and D & D (Doc. 73), Plaintiffs' Responses to both (Docs. 108 & 110), exhibits, and deposition testimony, establish the following facts.

TSG is a relatively small Savannah-based company that designs and builds waste water treatment facilities and desalination plants in the southeastern United States and Caribbean. In addition to designing and building plants, TSG generates recurring monthly revenue from the operation of some of those facilities. Because this recurring revenue is not enough to cover its operating expenses, TSG depends on major design-build projects to produce revenue. Since its founding in 1993, TSG has had difficulty turning a profit. TSG lost approximately $404,000 in 1996; $613,000 in 1997; $1,118,000 in 1998; and $855,138 in 1999. As far back as 1998, TSG received capital from various Plaintiffs to cover its losses. In addition to these cash infusions, TSG has also depended on a $1.5 million credit line from Darby Bank in Savannah ("Darby credit line") along with other financing. TSG's reliance on financial support from insiders continued throughout 2001, 2002, and 2003.

Year 2000 audit

TSG hired D & D, a New York-based accounting firm, to review and audit TSG's financial statements for the year ending December 2000 and to file certain tax returns.8 To carry out the audit, D & D was given access to TSG's books and records. Plaintiffs admit that TSG provided the auditors with "full, complete and accurate information concerning all aspects of the company's finances and status of various projects," and the "core financial information from the [year 2000] general ledger" prepared while Bencini was CFO was accurate. See Doc. 96, ¶¶ 18, 50. On April 27, 2001, D & D issued its Report of Independent Accountants and Consolidated Financial Statements for the year 2000 ("Financial Statements").

The Financial Statements showed that, in 2000, TSG and its subsidiaries had a pre-tax loss of $122,074. However, TSG recognized a gross deferred tax asset of about $680,000, accounting for the possibility that at some point in the future, TSG would be able to use its losses in past years to offset an income tax liability incurred on future profits. After discussions with TSG management, D & D agreed to reduce the $680,000 to a $191,000 net deferred tax asset and add it to the company's $122,074 loss, yielding a net income of $68,926. Despite this apparent net income, the Financial Statements were clear: TSG had a year 2000 deficit of $2,984,511.

TSG's financial crisis

By January 2001, TSG had created a new subsidiary called Progressive Composite Technologies ("PCT"), and the TSG Board of Directors ("Board") raised $200,000 in loans and also opened an additional $1 million line of credit for PCT. TSG had projected positive cash flows for PCT in 2001, but PCT turned out to be a cash drain, requiring numerous infusions of cash. Not unexpectedly, PCT's cash flow troubles affected TSG.

During the first half of 2001, it became apparent that TSG was suffering financially. According to internal financial statements, through May 31, 2001, TSG registered a net loss of $782,171. TSG's troublesome financial situation was largely caused by two things: its unusually high operating costs and a dearth of large projects under contract. The "burn rate"-fixed non-project related costs such as salaries, rents, utilities, employee benefits-in the year 2000 was approximately $330,000 per month.9 Absent large contracts, TSG lacked the cash to cover its "burn rate." By summer 2001, most of TSG's monthly expenses consisted of paying salaries and servicing its debt.

As June 2001 approached, the Burnt Store project,10 TSG's sole project during the first half of 2001,11 had almost been completed, and the $200,000 in loans raised for PCT and the $1.5 million Darby credit line were coming due. TSG's accounts payable continued to grow, and a subcontractor was threatening to place a lien on the Burnt Store project. Bencini reported TSG's impending financial crisis to James Walker, who was President, Chairman of the Board, and majority and controlling shareholder of TSG, and Sprague. Bencini also prepared various cash flow projections and financial reports ("Reports") regarding TSG's operations to analyze the problem. Bencini provided these Reports to Sprague in his capacity as Vice-President, General Counsel, and Director of TSG. One report was a Consolidated TSG Financial Statement showing a net loss of $644,361 for the period ended March 31, 2001. Another report was a Cash Forecast through June 30, 2001, showing a deficit of $770,149. Bencini also created a Cash Forecast through the end of 2001 showing an ending cash balance of $1,995,878 on June 15, 2001, and the need for an immediate infusion of $500,000 to continue operations. All of these Reports provided a gloomy outlook ahead for TSG.

In addition to preparing the Reports showing TSG's distressed financial condition, Bencini proposed cost-cutting measures, including salary reductions for both Walker and Sprague. Bencini also advised Walker that he was resigning to take a long-standing job offer from another company, explaining that TSG could not afford or justify a CFO.

The emergency board meeting

Because TSG was facing a severe financial crisis, an emergency board meeting was called for June 15, 2001 ("June 15 meeting"). In preparation for the meeting, Mayer and Steward made arrangements for an immediate loan to TSG in the aggregate amount of $500,000, Sprague undertook responsibility to prepare a memorandum outlining the causes and possible remedies for the financial crisis, and Walker undertook to prepare a cash flow projection to demonstrate TSG was still viable if the loans were approved by the Board. Plaintiffs Mayer, Steward, and Sprague were all present at the June 15 meeting. Bencini, who was not invited, did not attend that meeting.

The Inside Investors admit they were "shocked" and "horrified" at the June 15 meeting when they learned the financial condition of TSG. The Board was told that TSG was "up-side-down"-that its accounts payable had reached an extremely high level. TSG was looking at a negative cash balance of almost $2 million for the week of June 22, 2001. An internal TSG document shows that the Board identified and discussed as reasons for this severe cash crunch (1) the loss of the Kiawah project, (2) the absence of any major projects under contract other than Burnt Store in the first half of 2001,12 (3) the cash required by PCT, and (4) investments in an additional winder and mandrels for PCT. At the June 15 meeting, the Board did not review D & D's audit report or the Financial Statements but instead focused on "the existing and future situation, rather than the historical one." See Doc. 73, ¶ 16.

The Board and Walker were hoping for contracts for the Marco Shores and Frenchman's Reef projects to help TSG get out of the financial crunch it was in. At the June 15 meeting, Walker presented a "Cash Flow Forecast"13 which indicated that if TSG could borrow $500,000 and obtain the Marco Shores and Frenchman's...

To continue reading

Request your trial
3 cases
  • Saye v. Deloitte & Touche, Llp, A08A1172.
    • United States
    • United States Court of Appeals (Georgia)
    • 25 Noviembre 2008
    ...a client has a distinct duty to remain independent of the client. TSG Water Resources v. D'Alba & Donovan Certified Public Accountants, 366 F.Supp.2d 1212, 1227(IV) (S.D.Ga.2004), overruled on other grounds, 260 Fed.Appx. 191 (11th Cir. 2007). As the United States Supreme Court has observed......
  • Powell Company v. McGarey Group, LLC, Civil Action No. 1:05-CV-2614-JEC.
    • United States
    • United States District Courts. 11th Circuit. United States District Courts. 11th Circuit. Northern District of Georgia
    • 28 Marzo 2007
    ...of known duty through some motive of interest of ill will." TSG Water Res., Inc. v. D'Alba & Donovan Certified Public Accountants, 366 F.Supp.2d 1212, 1231 (Ga.2004). Plaintiff must show that defendants refused to fulfill their professional duties "out of some interested or sinister motive,......
    • United States
    • United States District Courts. 4th Circuit. Southern District of West Virginia
    • 29 Marzo 2011
    ...LLP, 2007 WL 30836, *1 (11th Cir. 2007) (quoting TSG Water Resources, Inc. v. D'Alba & Donovan Certified Public Accountants, P.C., 366 F. Supp.2d 1212, 1227 (S.D. Ga. 2004)); see also Resolution Trust Corp. v. KPMG Peat Marwick, 844 F.Supp. 431, 436 (N.D. Ill. 1994) (holding independent aud......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT