Opinion
Case No. 01-1027, Adversary Case No. 02-1179, SIPA Liquidation
July 21, 2003
MEMORANDUM OF DECISION GRANTING IN PART AND DENYING IN PART THE MOTION TO DISMISS
Plaintiffs, the Securities Investor Protection Corporation ("SIPC") and Douglas L. Lutz, trustee for debtors' estate ("Trustee") seek monetary relief in the amount of $6,000,000 from an accounting firm and one of its principals for alleged negligence and negligent misrepresentations related to various audits of the now defunct Donahue Securities, Inc. ("DSI"), a securities broker-dealer firm formerly doing business in Cincinnati, Ohio. Defendants, Munninghoff, Lange Co. and Douglas B. Lange (hereinafter referred to collectively as "Munninghoff Lange" or the "Defendants"), filed a motion to dismiss ("Motion") (Doc. 7) pursuant to Fed.R.Civ.P. 12(b)(6). The Motion is presently before the Court for decision. After carefully considering the oral arguments and briefs of the parties, and after a thorough review of the law and record in this case, the Court concludes that the Motion shall be granted, in part, and denied, in part.
PROCEDURAL HISTORY
This action arises in the context of the liquidation of a brokerage firm under the Securities Investor Protection Act of 1970 ("SIPA"). See 15 U.S.C. § 78aaa et seq. Finding that the customers of DSI were in need of the protections provided by SIPA, the District Court entered a protective decree. Thereafter, the SIPA liquidation of DSI was removed to the bankruptcy court. In a separate action, the District Court also entered an order appointing a receiver for S.G. Donahue Company, Inc. ("SGDC") and Stephen G. Donahue ("Donahue"). Because funds were extensively commingled and the separate legal identities of Donahue, DSI and SGDC were largely disregarded, the estates of the firms were substantively consolidated by order of this Court (Doc. 56).
SIPC and the Trustee seek to recover against Munninghoff Lange under separate legal theories. Under the first, the Trustee asserts a claim for professional malpractice/negligence against Munninghoff Lange, on behalf of the estate of DSI. The Trustee also asserts a claim against Munninghoff Lange for negligent misrepresentation, as bailee for customers of DSI, and in regard to SIPC, as subrogee of customer claims that have been paid from the SIPC Fund and in its own right for losses incurred paying customer claims and for unreimbursed administrative expenses paid to professionals employed by the estate.
A negligence claim is also asserted by the Trustee, as bailee of property of the customers of DSI, and SIPC, on its own behalf and as subrogee with respect to customer claims. Munninghoff Lange argues that these parties cannot assert a negligence claim because the amended complaint fails to allege contractual privity between these parties and DSI. See Laurent v. Flood Data Servs., Inc. 146 Ohio App.3d 392, 401 (Ohio Ct.App. 2001) (contractual privity is required to assert a cause of action in negligence for purely economic damages). The Plaintiffs did not contest this argument in their response to the Motion or in oral argument. Accordingly, the Court will grant the Motion as to these actions.
A negligent misrepresentation claim is also asserted by the Trustee, on behalf of the estate of DSI. Munninghoff Lange argues that the Trustee, on behalf of the estate of DSI, is limited to a negligence action instead of both a negligence action and a negligent misrepresentation action. The Trustee did not contest this argument in his response to the Motion or in oral argument. Accordingly, the Court will grant the Motion as to this claim.
The amended complaint also contains claims for relief asserted by the Trustee, on behalf of the estate of DSI, for breach of contract and breach of warranty. By their Motion, Munninghoff Lange contends that these actions are really nothing more than disguised negligence actions. In support of this position, Munninghoff Lange cites Fronczak v. Arthur Andersen, L.L.P., 124 Ohio App.3d 240, 245 (Ohio Ct.App. 1997) (where it is evident from face of complaint that facts supporting breach of contract action are same facts supporting professional negligence action, breach of contract action is simply a restatement of the negligence action). The Trustee did not contest this argument in his response to the Motion or in oral argument. Accordingly, the Court will likewise grant the Motion as to these claims.
LEGAL STANDARD UNDER RULE 12(b)(6)
When a defendant seeks dismissal under Rule 12(b)(6), the standard is very liberal and favors the plaintiff, on whose behalf each of the allegations of the complaint must be construed and accepted as true. Blakely v. United States, 276 F.3d 853, 863 (6th Cir. 2002); Herrada v. City of Detroit, 275 F.3d 553, 556 (6th Cir. 2001). "The purpose of Rule 12(b)(6) is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993). A motion to dismiss for failure to state a claim may be granted only if the court has no doubt that relief cannot be granted under any set of facts that could be proved consistent with the allegations set forth in the complaint. Hartford Fire Ins. Co. v. California, 113 S.Ct. 2891, 2917 (1993); Hishon v. King Spalding, 104 S.Ct. 2229, 2232 (1984); Conley v. Gibson, 78 S.Ct. 99, 102 (1957). In essence, the complaint need only contain either direct or inferential allegations with respect to all material elements of a viable legal theory. Varljen v. Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001); Glassner v. R.J. Reynolds Tobacco Co., 223 F.3d 343, 346 (6th Cir. 2000).
ALLEGED FACTS
According to the Plaintiffs' amended complaint, Donahue was the sole shareholder of DSI and SGDC. (Doc. 5 at ¶¶ 7 9.) DSI operated as a broker with respect to the purchase and sale of mutual funds, stocks and bonds. (Doc. 5 at ¶ 8.) Donahue used SGDC to provide services that would introduce customers to DSI, such as pension administration, cafeteria plan administration and general financial management. (Doc. 5 at ¶ 9.) Beginning in 1989, Donahue began to misappropriate funds entrusted to DSI and SGDC for investment. (Doc. 5 at ¶ 11.) Donahue would tell clients that he would invest some of their money in a DSI money market fund or DSI tax-free bond fund. (Doc. 5 at. ¶¶ 12-13.) In reality, these alleged funds did not exist. (Doc. 5 at ¶¶ 12-13.) Instead of investing the money in the funds as promised, Donahue used the money to pay for personal expenses and expenses incurred by DSI and SGDC. (Doc. 5 at ¶ 11-13.)
Munninghoff Lange provided accounting services for DSI from 1991 to 2000. (Doc. 5 at ¶ 19.) During these years, Munninghoff Lange rendered unqualified opinions on DSI's financial statements and prepared DSI's federal and state income tax returns. (Doc. 5 at ¶ 19.) Lange was the senior auditor on the DSI account, overseeing the services being provided by that firm. (Doc. 5 at ¶ 20.)
ANALYSIS
I. Professional Negligence Claim of Trustee on Behalf of Estate of DSI
The Trustee contends that the Defendants breached a duty of care owed to DSI. Specifically, the Trustee alleges that Munninghoff Lange failed to perform its duties in compliance with generally accepted accounting principles, generally accepted auditing standards and SEC Rule 17a-5.
A. In Pari Delicto Defense
Munninghoff Lange argues that DSI's negligence claim is barred by the doctrine of in pari delicto. In pari delicto is an equitable defense whereby a plaintiff is barred from asserting a claim if the plaintiff bears fault for the claim. See Terlecky v. Hurd (In re Dublin Securities, Inc.), 133 F.3d 377, 380 (6th Cir. 1997). Munninghoff Lange takes the position that Donahue's misconduct is imputed to DSI. Because the Trustee stands in the shoes of DSI, Munninghoff Lange contends that in pari delicto bars the Trustee from asserting any claim belonging to DSI.
The Trustee raises both procedural and substantive counter-arguments. After considering these arguments, the Court agrees with Munninghoff Lange's contention that the doctrine of in pari delicto bars the Trustee's professional negligence claim.
1. Trustee's Procedural Arguments Against Application of In Pari Delicto Defense
The Trustee argues that in pari delicto is an affirmative defense that cannot be raised in the context of a motion to dismiss under Rule 12(b)(6). Munninghoff Lange counters by pointing to Dublin Securities, wherein the Sixth Circuit affirmed the district court's decision to grant a motion to dismiss on the basis of in pari delicto. In view of this decision, Munninghoff Lange contends that the Trustee's procedural argument is without merit.
Dublin Securities involved the chapter 7 bankruptcy of three corporations that devised and carried out fraudulent initial public stock offerings. All of the principals of the three corporations were convicted on various criminal charges as a result of their participation in the fraud. The chapter 7 trustee brought an action against two law firms that represented the debtor corporations and against individual attorneys in those firms in relation to the sale of securities by those corporations. Among other claims, the trustee advanced a claim for professional negligence. The defendants moved to dismiss the complaint, arguing that the trustee's claims were barred by the doctrine of in pari delicto. Later, the district court dismissed the complaint. On appeal, the Sixth Circuit affirmed. The trustee argued that in pari delicto is a fact-specific defense that requires an evidentiary hearing to determine its applicability. Dublin Securities, 133 F.3d at 380. On review, the Sixth Circuit found that an evidentiary hearing was unnecessary where the trustee's complaint contained allegations sufficient to establish the substantive applicability of the defense. Id.
Because the Trustee's amended complaint contains allegations sufficient to apply the in pari delicto defense substantively, the Court concludes that the defense is properly addressed at this time.
2. Trustee's Substantive Arguments Against Application of In Pari Delicto Defense
The Trustee raises separate substantive objections to the application of the in pari delicto defense in this proceeding. The Trustee argues that the malfeasance by Donahue cannot be imputed to DSI, and, in the alternative, he contends that the actions of DSI cannot be imputed to the Trustee, as an innocent successor in interest. These contentions will be addressed in order.
a. Actions of Donahue Cannot Be Imputed to DSI
As noted, Munninghoff Lange's in pari delicto defense is predicated upon the proposition that Donahue's misconduct is imputed to DSI. The general rule of agency law holds that "[t]he principal is chargeable with and bound by the knowledge of or notice to his agent received by the agent in due course of his employment, with reference to matters to which his authority extends." See State ex rel. Nicodemus v. Industrial Comm'n, 5 Ohio St.3d 58, 60 (1983). In this instance, the Trustee contends that the acts of an agent cannot be imputed to the principal when the agent acts adversely to the principal. Ohio courts recognize an exception to the general rule of agency law: "[T]here is an exception to [the general] rule when the agent is engaged in committing an independent fraudulent act on his own account, and the facts to be imputed relate to this fraudulent act." American Export Inland Coal Corp. v. Matthew Addy Co., 112 Ohio St. 186, 198 (1925). This exception is sometimes referred to as the "adverse interest exception." See Peter J. Anderson Lawrence A. Danny, III, Accountants' Liability After Enron: Bankruptcy, 1309 PLI/Corp 549, 593-95 (2002).
Here, Munninghoff Lange contends that allegations in the amended complaint give rise to an exception to the adverse interest exception. We take as true from the allegations in the amended complaint that Donahue is the sole shareholder of DSI. (See Doc. 5 at ¶ 7.) Munninghoff Lange relies heavily upon Fed. Deposit Ins. Corp. v. Ernst Young, No. 3-90-0490-H, 1991 WL 197111 (N.D.Tex. Sept. 30, 1991), aff'd, 967 F.2d 166 (5th Cir. 1992) for the proposition that the misconduct of an agent acting adversely to the principal is nevertheless imputed to the principal when the agent is also the sole shareholder of the corporation.
In Ernst Young, the Federal Deposit Insurance Corporation ("FDIC") alleged that two accounting firms were negligent in their audits of Western Savings Association ("Western"), a savings and loan. Western was wholly owned by Jarrett E. Woods, Jr. ("Woods") who, by separate legal action, had been indicted for fraudulent operation of Western. The accounting firms argued that the FDIC, standing in the shoes of Western, was barred from recovery by the fact that Woods' knowledge was imputed to Western. The FDIC advanced the adverse interest exception. The court concluded that Woods' knowledge could be imputed to Western, notwithstanding the adverse interest exception, where Woods was also the sole shareholder and thus "the beneficiary of his own fraudulent activity." Id. at *5.
This exception to the adverse interest exception has been referred to as the "sole actor" or "sole representative" exception. See Peter J. Anderson Lawrence A. Danny, III, Accountants' Liability After Enron: Bankruptcy, 1309 PLI/Corp 549, 593-95 (2002). According to the commentators, "[e]ven where the agent has acted exclusively for his or her own benefit and has totally abandoned the principal's interest, the adverse interest exception will not apply if the agent is the `sole representative' or `sole actor' of the corporation with regard to the business or transaction that was the subject of the fraud or misconduct." Id. Neither of the parties have cited any Ohio cases addressing the sole actor exception. Nonetheless, the Court is aware of at least one decision that addresses this exception. See Empire Sec. Corp. v. Travelers Indemnity Co., No. 74AP-328, 1974 Ohio App. LEXIS 3423 (Ohio Ct.App. Dec. 24, 1974).
In Empire, the corporation ("Empire") assigned to its vice president ("Davies") the duty to obtain a new fidelity bond. Towards that end, Davies entered into negotiations with Insurance Company of North America ("INA"). The negotiations concluded with Davies signing an application on behalf of Empire. That application contained a representation that Empire was not aware of any defalcations. By then, however, Davies had already embezzled $18,578 from Empire. The day after negotiations with INA were completed, Davies' misconduct was discovered by Empire. Empire sought to recover its loss by filing suit against INA to collect on the fidelity bond. The trial court rendered judgment in favor of Empire. INA appealed, arguing that the representations made in the application by Davies constituted false warranties that should have been imputed to Empire.
After reviewing the general rule concerning the imputation of an agent's knowledge to his principal and the adverse interest exception, the court stated:
The pattern of applicable law is further complicated by an exception to the exception to the well-established rule.
. . . "A qualification of the rule that the knowledge of an agent engaged in an independent fraudulent act on his own account is not the knowledge of the principal has been made where the agent, although engaged in perpetrating such an act on his own account, is the sole representative of the principal. In such case, if the principal asserts or stands on the transaction, either affirmatively or defensively, or seeks to retain the benefits of the transaction, he is charged with the agent's knowledge. In such circumstances, the agent is said to be the alter ego of his principal, since he is merely the agency through whom the principal himself acted; and this `sole actor' or `alter ego' principle has been characterized as an exception to an exception — that is, it is an exception to the `independent fraudulent act' exception to the general rule that the agent's knowledge will be imputed to the principal — and it brings the governing principle back, full circle, to the imputation of knowledge to the principal."
Id. at *11-12 (quoting 3 Am. Jur.2d 647, ¶ 284). Based upon the sole actor exception the appellate court reversed, concluding that Davies' knowledge should have been imputed to Empire, thus precluding any recovery from the insurer.
Typically, there are two types of situations where the sole actor exception is applicable: (1) where the agent is given exclusive authority to act for the principal in a particular situation, as in Empire; and (2) where the principal and the agent are one and the same. "The sole actor rule applies where the corporate principal and its agent are indistinguishable, such as where the agent is a corporation's sole shareholder . . . or where the corporation bestows upon its agent unfettered control and allows the agent to operate without meaningful supervision with respect to a particular type of transaction." Breeden v. Kirkpatrick Lockhart, LLP., 268 B.R. 704, 709 (S.D.N.Y. 2001). The Court is unaware of any Ohio decisions analyzing the sole actor exception where the principal and the agent are indistinguishable. However, in light of Empire and decisions from other jurisdictions applying the sole actor exception in the context of a sole shareholder, see Official Committee of the Unsecured Creditors of Color Tile, Inc. v. Coopers Lybrand, LLP, 322 F.3d 147 (2d Cir. 2003); In re Mediators, Inc., 105 F.3d 822 (2d Cir. 1997); Fed. Deposit Ins. Corp. v. Ernst Young, 967 F.2d 166 (5th Cir. 1992); Official Committee of Unsecured Creditors v. Shapiro (In re Walnut Leasing Co., Inc.), No. 99-526, 1999 WL 729267, 1999 U.S. Dist. LEXIS 14517 (E.D.Pa. Sept. 8, 1999), this Court is persuaded that an Ohio court if confronted with this question would apply the sole actor exception in similar manner.
The Trustee cites Appleton v. First Nat'l Bank, 62 F.3d 791 (6th Cir. 1995) for the proposition that courts should not apply the "alter ego" or "corporate veil piercing" doctrine as a defense to liability. Courts applying the sole actor exception have done no such thing. Instead, these courts simply apply a well-established principle of agency law that arises in instances where the relationship between the principal and the agent has been analogized to an "alter ego" relationship. See Empire, 1974 Ohio App. LEXIS 3423 at *11-12. Moreover, Appleton does not say that the "alter ego" doctrine cannot ever be applied defensively. It simply states that the doctrine is usually, but not always, applied as a means of providing a remedy. Appleton, 62 F.3d at 797.
Because Donahue is the sole shareholder of DSI, the Court concludes that the misconduct of Donahue is properly imputed to DSI under the sole actor exception.
It is important to note that the sole actor exception, when applied to situations where the agent and the principal are one and the same, does not require an act by the principal that somehow affirms the misconduct or accepts the benefits thereof. See Official Committee of the Unsecured Creditors of Color Tile, Inc. v. Coopers Lybrand, LLP, 322 F.3d 147 (2d Cir. 2003); In re Mediators, Inc., 105 F.3d 822 (2d Cir. 1997); Fed. Deposit Ins. Corp. v. Ernst Young, 967 F.2d 166 (5th Cir. 1992); Official Committee of Unsecured Creditors v. Shapiro (In re Walnut Leasing Co., Inc.), No. 99-526, 1999 WL 729267, 1999 U.S. Dist. LEXIS 14517 (E.D.Pa. Sept. 8, 1999).
b. Actions of DSI Cannot Be Imputed to Trustee
Next, the Trustee argues that, even if Donahue's misconduct can be imputed to DSI, the misconduct cannot be imputed to an innocent successor in interest such a bankruptcy trustee. The Trustee cites Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) and Fed. Deposit Ins. Corp. v. O'Melveny Myers, 61 F.3d 17 (9th Cir. 1995) in support of this position. Both Scholes and O'Melveny involved actions by receivers that were not barred by the in pari delicto defense notwithstanding misconduct on the part of the entities in receivership. From a policy standpoint, these courts did not think it would be equitable to impute misconduct to an innocent receiver. The Trustee argues that his role in this proceeding is analogous to that of the receivers in Scholes and O'Melveny.
This proceeding is easily distinguishable from Scholes and O'Melveny because of the applicability of 11 U.S.C. § 541. A trustee in a SIPA liquidation possesses the same rights as a trustee in bankruptcy. See 15 U.S.C. § 78fff-1(a). A bankruptcy trustee succeeds to "all legal or equitable interests of the debtor in property as of the commencement of the case[.]" See § 541(a)(1) (emphasis added). Because a trustee's rights are limited to those enjoyed by the debtor "as of the commencement of the case," courts have been unpersuaded by the argument that postpetition appointment of a trustee somehow renders the doctrine of in pari delicto inapplicable. See Official Committee of Unsecured Creditors v. R.F. Lafferty Co., Inc., 267 F.3d 340, 355-58 (3rd Cir. 2001) (distinguishing Scholes and O'Melveny from bankruptcy proceedings); Sender v. Buchanan (In re Hedged-Investments Assocs., Inc.), 84 F.3d 1281, 1284-85 (10th Cir. 1996). In addition to the Third and Tenth circuits, at least two other circuits have applied the doctrine of in pari delicto to preclude an action brought by a bankruptcy trustee. See Dublin Securities, 133 F.3d 377; Mediators, 105 F.3d 822. Given that Dublin Securities is a Sixth Circuit decision applying Ohio law, and therefore controlling on this Court, we reject the Trustee's argument that the misconduct of DSI cannot be imputed to an innocent successor in interest such as himself.
Section 78fff-1(a) provides:
A trustee shall be vested with the same powers and title with respect to the debtor and the property of the debtor, including the same rights to avoid preferences, as a trustee in a case under title 11.
II. Negligent Misrepresentation
Under Ohio law, accountants are not liable to third parties (i.e. parties not in privity) for negligent misrepresentation unless the third party is "a member of a limited class whose reliance on the accountant's representation is specifically foreseen." Haddon View Investment Co. v. Coopers Lybrand, 70 Ohio St.2d 154 at syllabus (1982). Munninghoff Lange argues that the negligent misrepresentation claims asserted by the Trustee and SIPC must be dismissed because: (1) the Plaintiffs are not members of a "limited class"; and (2) the Plaintiffs' reliance upon Munninghoff Lange's representations was not "specifically foreseen" by them. With the exception of the claims being asserted by SIPC on its own behalf, the Court agrees with Munninghoff Lange.
A. Negligent Misrepresentation Claim of the Trustee, as Bailee of Property of the Customers of DSI, and SIPC, as Subrogee of Customer Claims
The Trustee, as bailee for customers of DSI, and SIPC, as subrogee of customer claims, are not members of the limited class of third parties that can recover against accountants for negligent misrepresentation.
1. Members of Limited Class
This very issue was decided in Securities Investor Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir. 2000). In BDO Seidman, the Second Circuit held that a SIPA trustee, as bailee of customer property, and SIPC, as subrogee to customer claims, are not members of the limited class of third parties entitled to bring a negligent misrepresentation claim against accountants. Id. at 74-75. Although decided under New York law, the law of Ohio is identical on the "limited class" issue. The Ohio law, like New York law, finds its roots in the decision of White v. Guarente, 372 N.E.2d 315 (N.Y. 1977).
In Haddon View, the Supreme Court of Ohio liberalized the strict privity standard as an essential predicate to recovery from accountants for negligent misrepresentation. Beginning with Ultramares Corp. v. Touch, Niven Co., 174 N.E. 441 (N.Y. 1931), the court noted that strict privity used to be the prevailing rule. However, with a growing number of courts no longer requiring strict privity, Haddon View adopted its "limited class" exception to the strict privity requirement. "In so holding, the Ohio Supreme Court relied upon White v. Guarente." Bancohio Nat'l Bank v. Schiesswohl, 33 Ohio App.3d 329 (Ohio Ct.App. 1986). In White, the Court of Appeals of New York rejected the strict privity rule created by its Ultramares decision.
Significantly, Haddon View embraced the following language from White:
"Here, the services of the accountant were not extended to a faceless or unresolved class of persons, but rather to a known group possessed of vested rights, marked by a definable limit and made up of certain components. . . . In such circumstances, assumption of the task of auditing and preparing the returns was the assumption of a duty to audit and prepare carefully for the benefit of those in the fixed, definable and contemplated group whose conduct was to be governed since, given the contract and the relation, the duty is imposed by law and it is not necessary to state the duty in terms of contract or privity."
Haddon View, 70 Ohio St.2d at 156 (emphasis added). Immediately thereafter, the Ohio Supreme Court concluded: "[w]e find the interpretation of Ultramares set forth in White v. Guarente to accord with reason and justice." Id. Therefore, the "limited class" rule adopted by Haddon View is the same rule set forth in White. Ohio appellate courts interpreting this ruling have drawn the same conclusion. See Federated Management Co. v. Coopers Lybrand, 137 Ohio App.3d 366, 385 (Ohio Ct. App. 2000) ("Appellants were not a known group possessed of vested rights and marked by a definable limit.") (emphasis added); Second Nat'l Bank v. Demshar, 124 Ohio App.3d 645 652-53 (Ohio Ct.App. 1997) ("Thus, Watkins did not offer any expert testimony that would explain why the bank fell within a definable and contemplated class[.]") (emphasis added); Wagenheim v. Alexander Grant Co., 19 Ohio App.3d 7, 14 (Ohio Ct.App. 1983) ("Haddon View . . . emphasized the fact that the plaintiffs were members of a definable and contemplated group[.]") (emphasis added).
Having concluded that Ohio's standard on this question is identical to New York's, this Court must now examine BDO Seidman to determine its application to the present proceedings. In that case, SIPC and the SIPA trustee commenced an action against BDO Seidman ("Seidman"), the certified public accountant and auditor for A.R. Baron Co. ("Baron"). Baron was a securities broker-dealer that collapsed as a result of the criminal misconduct of several members of its management. SIPC and the trustee sought recovery from Seidman under the theory of negligent misrepresentation. Like the allegations in this action, the complaint asserted that Seidman: (1) failed to follow proper audit procedures; (2) failed to comply with SEC rules and regulations; and (3) misrepresented Baron's financial condition in audit reports. The district court granted Seidman's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and (6). On appeal, the Second Circuit affirmed the dismissal of the negligent misrepresentation claims asserted by the trustee, as bailee of customer property, and SIPC, as subrogee of customer claims. This holding was based upon the court's conclusion that the plaintiffs did not constitute a "known group possessed of vested rights, marked by a definable limit and made up of certain components" under White v. Guarente. See BDO Seidman, 222 F.3d at 74-75. The Court elaborated as follows:
Even if Baron's customers relied indirectly on the material contained in [the audit] reports . . . the complaint does not allege that Seidman ever knew those investors' identities, or even of the number of customers Baron had at any one time. At best, therefore, the plaintiffs can establish that Baron's customers constitute an unknown class of investors, each of whom potentially would rely on Seidman's representations. These circumstances are insufficient to render the customers "known parties" under [White].
Id. at 75.
Similar to the complaint in BDO Seidman, the amended complaint here does not allege that Munninghoff Lange knew the identity of DSI's customers or even the number of customers DSI had at any given time. Taking the allegations contained in the amended complaint as true, this Court holds that the Trustee, as bailee of customer property, and SIPC, as subrogee to customer claims, are not members of the limited class of third parties to whom the accountants may be held liable under Haddon View.
B. Negligent Misrepresentation Claim of SIPC, on its Own Behalf
1. Member of Limited Class
In BDO Seidman, the Second Circuit concluded that SIPC, in its own right, was a member of the limited class to whom Seidman owed a duty. The court explained:
[T]here is little doubt that the SIPC was "known" to Seidman for purposes of this analysis, as the SIPC is not a member of the "indeterminate class of persons" whom the court in Ultramares deemed improper plaintiffs in a negligence action. . . . Rather, as one of the regulatory bodies designated by the federal securities laws, the SIPC is part of "a known group possessed of vested rights, marked by a definable limit and made up of certain components."
BDO Seidman, 222 F.3d at 79 (quoting White v. Guarente, 372 N.E.2d 315). This Court agrees and concludes, therefore, that SIPC is a member of a "limited class" of plaintiffs under Haddon View.
2. Reliance
As noted, Haddon View provides also that accountants are not liable for negligent misrepresentation unless the plaintiff "is a member of a limited class whose reliance on the accountant's representation is specifically foreseen." Haddon View, 70 Ohio St.2d at syllabus (emphasis added). Seizing upon the highlighted language, Munninghoff Lange argues that the amended complaint fails to allege: (1) actual reliance by SIPC; and (2) that Munninghoff Lange specifically foresaw such reliance by SIPC. The Court disagrees.
As to actual reliance by SIPC, the amended complaint contains the following allegations:
99. MLC represented that the financial statements for fiscal years 1991-2000 fairly presented, in all material respects, the financial position of DSI. Such representations constitute false representations provided by MLC to DSI's customers and others relying on the audit opinion, including SIPC. . . .
100. The breaches by MLC of the duty it owed to DSI's customers and others relying on the audit opinion of MLC, including SIPC, were committed willfully, wantonly and with reckless disregard of DSI's customers and others relying on the audit opinion, including SIPC. . . .
(Doc. 5 at ¶¶ 99-100) (emphasis added). As to the issue of whether Munninghoff Lange specifically foresaw reliance by SIPC, the amended complaint provides:
71. MLC . . . knew . . . that . . . SIPC would rely on MLC's 1991-2000 audit opinion letters and the accompanying financial statements. . . .
In support of their position that they did not specifically foresee reliance by SIPC, Munninghoff Lange relies upon the following language contained in the engagement letter that the Plaintiffs attached to the amended complaint:
You further agree that [MLC] will not be liable for any lost profits, or any claim or demand against you by any other party. In no event will we be liable for incidental or consequential damages even if we have been advised of the possibility of such damages.
(Ex. A to Doc. 5 at 3.) At best, this language creates a conflict of fact with paragraph 71 of the amended complaint. Such a factual dispute cannot be resolved on a motion to dismiss and the Court elects here not to convert the Motion to one for summary judgment. At worst, it could be argued that the foregoing language demonstrates that Munninghoff Lange did foresee that third parties would rely on its work product and sought to limit its liability in this regard.
(Doc. 5 at ¶ 71) (footnote added). Thus, construing the allegations of the amended complaint in a light most favorable to SIPC, the Court is satisfied that SIPC's claim, on its own behalf, for negligent misrepresentation complies with the liberal pleading standard under Fed.R.Civ.P. 12(b)(6).
In BDO Seidman II, the Second Circuit affirmed the dismissal of SIPC's negligent misrepresentation claim on its own behalf because SIPC, as a matter of law, did not rely on the alleged representations. BDO Seidman II is distinguishable from the present case, however, because: (1) in that case SIPC conceded that it never received any of the financial statements certified by Seidman; and (2) the issue turned on a question of New York law that was certified to the New York Court of Appeals. See Securities Investor Protection Corporation v. BDO Seidman, LLP, 245 F.3d 174 (2d Cir. 2001). In this case, which would turn on Ohio law, SIPC has made no similar concession regarding its receipt or actual use of financial statements of DSI certified by Munninghoff Lange.
CONCLUSION
For the foregoing reasons, the Motion will be GRANTED as to all counts of the amended complaint with the exception of SIPC's claim, on its own behalf, of negligent misrepresentation. As to SIPC's claim for negligent misrepresentation, the Motion will be DENIED. An order to this effect will be entered.