Seidman & Seidman v. Gee

Citations: 625 So. 2d 1; 1992 WL 73759Docket: 91-345, 91-1479

Court: District Court of Appeal of Florida; August 17, 1993; Florida; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

BDO Seidman, an accounting firm, appealed a $16 million judgment in a negligence lawsuit brought by Allan Gee, the official liquidator of Universal Casualty Surety Company, Ltd., which was liquidated in 1984. The case centered on BDO Seidman's alleged failure to detect a fraud orchestrated by Vishwa Shah, the controlling officer of Universal, who falsely claimed the company was backed by a nonexistent $10 million certificate of deposit (CD). This misrepresentation allowed Universal to secure necessary licensing and solicit business internationally. After Universal's collapse, Gee, appointed to manage the liquidation, filed suit against BDO Seidman, arguing that the firm’s negligent auditing prolonged the company's viability beyond insolvency, resulting in substantial debts to policyholders and creditors.

Gee sought damages equivalent to the total claims against Universal, contending that BDO's negligence enabled the company to incur these liabilities. BDO Seidman referenced the precedent set in Cenco Inc. v. Seidman, which involved an auditor's defense against claims based on management fraud, asserting that such fraud must be committed for the corporation’s benefit, not for personal gain. The court agreed with BDO Seidman, reversing the jury verdict and ruling that the firm was entitled to judgment as a matter of law, thus rejecting Gee's claim.

A corporation cannot recover on a fraud claim if it benefited from the fraud, as established by case law. The court rejected the notion that an employee’s fraud is automatically attributed to the corporation, ruling that misconduct by corporate managers is only imputed if performed on the corporation's behalf. Fraud that benefits the corporation primarily harms shareholders, who become the main victims, while fraud against the corporation harms it directly. In the case of Cenco, the misconduct of managers was deemed to benefit the corporation, preventing it from shifting liability to auditors. Similarly, in Federal Deposit Ins. Corp. v. Ernst & Young, the FDIC was denied recovery because the corporation, aware of and benefiting from the fraud, could not claim detrimental reliance on the auditors' reports. The court noted that knowledge from individuals with substantial control is imputed to the corporation unless they act adversely to it. The distinction between beneficial fraud and damaging fraud was further illustrated through the case of Schacht v. Brown, where the fraudulent actions of directors caused real harm to the corporation, thus their misconduct was not imputed to the corporation. Unlike in Cenco and Ernst & Young, where the fraud was aimed at outsiders, Schacht involved direct harm to the corporation itself, leading to different legal implications regarding liability.

A Cenco estoppel applies, as Vishwa Shah misrepresented Universal as having a $10 million certificate of deposit, enabling the company to secure a license to operate as an insurance provider. It is established that Universal solicited policyholders based on this fraudulent assertion. Shah's fraudulent actions were intended to benefit the corporation, despite Universal's claim that his misconduct ultimately harmed the corporation due to its liquidation. Previous case law, specifically Security America Corp. v. Schacht, supports that corporate fraud benefits are imputed to the corporation, regardless of later adverse outcomes. Thus, Shah’s misrepresentation was critical for Universal's operational approval and marketing strategy. Consequently, this fraud serves as a defense against Universal's negligence claim against its accounting firm, BDO Seidman, for failing to detect the fraud. The court reversed a $16 million judgment against BDO, concluding the action was improperly based on the corporation's interests, with the liquidator’s attempt to reargue the case being denied. Additionally, arguments from the Florida Department of Insurance emphasized that the liquidator's role extends beyond the corporation’s interests and should not be tainted by the corporation's fraudulent knowledge.

The liquidator asserted that the corporation is a separate entity from its former officer, arguing that claims belong solely to Universal and not to the creditors. During the trial, the liquidator clarified that it was pursuing only Universal's claims and not those of its creditors. On appeal, the liquidator emphasized that the cause of action for artificial prolongation is distinct from any creditor claims, asserting that Universal's insolvency does not transform its actions against its accountants into claims on behalf of creditors. The liquidator's strategy was deliberate, aimed at circumventing potential barriers to recovery that might arise if the action were framed as representing creditor interests. Accepting arguments from amicus after the fact would alter the foundation of the case as it was presented, which would be unfair. The argument from amicus was acknowledged but deemed irrelevant to this case. Consequently, motions for rehearing and those from amicus were denied. Additionally, it was noted that when Universal commenced operations in 1977, it was not required to have a license for insurance transactions until 1981.