Even the Biggest Plaintiffs Must Show Proximate Cause

It's shocking to look at the list of banks which made an unsuccessful claim for professional malpractice in RGH Liquidating Trust v Deloitte & Touche LLP  2013 NY Slip Op 31224(U)
June 6, 2013  Sup Ct, New York County  Docket Number: 600057/06  Judge: Eileen Bransten and to realize that they were unable to recoup about a Billion (that's 1000 Million) dollars in lost loans, all of which they allege were caused by accounting malpractice.  Today, we'll look at the first of two issues:  standing.

In legal and professional malpractice plaintiff must have a relationship with the attorney.  Primarily this is to keep losing litigants from suing their opponent's lawyers.  Here, based upon Delaware law, it plays out somewhat differently, in the stockholder/corporation model.

"This action is based upon Defendants' allegedly improper performance of actuarial and accounting services for Reliance Group Holdings, Inc. ("Reliance Group Holdings" or "RGH"), Reliance Financial Services Corp. ("Reliance Financial Services" or "RFS"), and Reliance Insurance Company ('~RIC") (together, "Reliance"). Plaintiff RGH Liquidating Trust commenced this action, asserting fraud claims on behalf of the general unsecured creditors of RGH and RFS, including: a syndicate of 15 banks that collectively loaned RFS $237.5 million (Banks");! the Pension Benefit Guaranty Corporation (HPBGC"); and two former employees of RGH and RFS, David Woodward ("Woodward") and Christine Howard ("Howard").

Plaintiff s fraud claims are based upon financial reports prepared by Defendants for the year ending December 31, 1999, including Deloitte's audit and financial statements, issued on May 30, 2000, and Lommele's statement of actuarial opinion, issued on February 25,2000. Plaintiff claims that these financial reports overstated Reliance's surplus by $500 million and under reported its loss reserves by $500 million, resulting in a total misrepresentation of $1 billion. These misstatements allegedly caused Reliance to make improper distributions, incur additional liabilities, and forestall regulatory action.

It is undisputed that Reliance's financial condition was deteriorating by the end of 1999, prior to the issuance of Defendants' reports. RGH suffered an operating loss of $318.3 million in 1999, and, in February 2000, announced that it was suspending quarterly dividends and extending the maturity of its bank loans. In May 2000, RGH reported a $36.5 million operating loss for the first quarter 0[2000. By June 2000, RIC stopped underwriting property and casualty insurance. In July, a deal for an outside company to acquire RGH collapsed, and various ratings agencies downgraded Reliance's rating. By December 2000, RGH's stock traded at less than $1.00 per share, and the New York Stock Exchange suspended trading of RGH's securities.

Defendants seek summary judgment dismissing the Amended Complaint, arguing that Plaintiff lacks standing and that the claims are barred by res judicata. On the merits, Defendants argue that Plaintiffs fraud claims should be dismissed for failure to establish proximate cause and reasonable reliance.

Defendants argue that the Banks lack standing, because any injury to the Banks is derivative of harm to Reliance Financial Services ("RFS"), the entity to which the Banks made their loans. Defendants argue that the Pension Benefit Guaranty Corporation ("PBGC"), Woodward, and Howard lack standing for the same reason, incorporating by reference the standing arguments contained in the Banks' opening brief.

Under Delaware law, in order to determine whether Plaintiffs claims are derivative or individual, the
court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The
stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation. Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004). The court must consider "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)." Id. at 1033; Yudell v. Gilbert,, 99 A.D.3d 108, 114 (1st Dep't 2012) (adopting the Tooley test for distinguishing between direct and derivative claims). "[T]he direct/derivative distinction [does] not vary because the claim was asserted by a creditor instead of a stockholder." North Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 2006 WL 2588971, * 11 n.lOO,2006 Del. Ch. LEXIS 164, *50 n.100 (Del. Ch. 2006), aff'd 930 A.2d 92 (Del. 2007).

As stated by the Court of Appeals, the Liquidating Trust "is the successor of RGH," and "the assets of RGH's bankruptcy estate vested in the Trust," including the "claims of the bankruptcy estate's creditors, who are the beneficiaries of any recoveries from [defendants]." RGH Liquidating Trust, 17 N.Y.3d at 407. In short, the creditor claims were assigned to RGH. RGH, in turn, assigned those claims to Plaintiff, and Plaintiff now asserts them directly. Thus, there are no derivative claims, and Defendants fail to make a prima facie showing that Plaintiff lacks standing. Condren, Walker & Co.,
Inc. v. Portnoy, 48 A.D.3d 331,331 (1st Dep't 2008) ("[a]n assignee stands in the shoes of its assignor, subject to all the equities and burdens attached to the property acquired"). "

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