Pereira v. EisnerAmper LLP (In re Waterford Wedgwood USA, Inc.)

Citations: 529 B.R. 599; 2015 Bankr. LEXIS 1343; 60 Bankr. Ct. Dec. (CRR) 252Docket: Case No. 09-12512 (SHL) (Jointly Administered); Adv. Proc. No. 14-02010 (SHL)

Court: United States Bankruptcy Court, S.D. New York; April 17, 2015; Us Bankruptcy; United States Bankruptcy Court

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EisnerAmper, LLP, along with its predecessor, filed a motion to dismiss the first two counts of a complaint by John S. Pereira, the Chapter 7 Trustee for Waterford Wedgwood USA, Inc. The complaint alleges malpractice in the auditing of the debtor's retirement plan, specifically regarding an underestimation of required employer contributions. EisnerAmper contends that the Trustee lacks standing to pursue these claims, arguing that any injury was suffered by the plan participants, and the debtor has not contributed the missing funds to the retirement plan. The Court concurs with EisnerAmper's position, determining that the Chapter 7 Trustee does indeed lack standing to bring these claims.

The Debtor was part of an international enterprise engaged in the production and sale of glassware and ceramics, focusing on the U.S. market. Despite operating at a loss, its parent company provided funds to meet obligations to employees and vendors. The Debtor sponsored a Retirement Plan requiring annual contributions based on employee "Compensation," defined as total remuneration. However, from 2002 to 2009, the Debtor contributed only three percent of base salaries, leading to an underfunding of at least $1,300,000. The Retirement Plan, classified as an "employee pension benefit plan" under ERISA, was required to file annual paperwork, which was managed by accounting firm EisnerAmper from 2004 to 2007. EisnerAmper failed to identify the underfunding issue. After the Debtor filed for Chapter 7 bankruptcy in April 2009, the Court appointed Robert Carroll as the Retirement Plan administrator in November 2009. Prior to April 2011, Carroll noted potential asset deficiencies, prompting the Chapter 7 Trustee to seek limited liability for Carroll concerning issues arising before his appointment. The Court subsequently insulated Carroll from personal liability. The deadline for filing claims passed in January 2010, yet in April 2014, the Retirement Plan's administrator filed a claim for $2,505,637 due to the underfunding, leading to the Chapter 7 Trustee initiating this action shortly thereafter.

Counts I and II filed by the Chapter 7 Trustee allege that the Defendant was grossly negligent, reckless, or engaged in willful misconduct during the audit of the Retirement Plan, seeking damages for injuries to the Debtor and its estate due to underfunding. The Defendant argues that the Trustee lacks standing as he has not claimed a personal injury and seeks dismissal of the counts for not meeting the heightened pleading standard for such claims against an auditor. In response, the Trustee contends that the Defendant's malpractice harmed the Debtor at the bankruptcy petition date, resulting in a missed opportunity to secure funds to address the Retirement Plan shortfall and incurring additional costs for the Trustee.

The discussion highlights the legal standards regarding standing in federal jurisdiction. The plaintiff must demonstrate standing, which includes showing a personal injury that is directly traceable to the defendant's conduct and can be redressed by the court. This personal injury must be concrete, particularized, and not speculative. Furthermore, the Supreme Court has specified that any alleged injury must be imminent and not merely possible. The burden to prove standing lies with the party asserting it, and challenges to standing can be raised through a motion to dismiss for lack of subject matter jurisdiction.

A bankruptcy trustee can only assert claims that the debtor could have pursued before filing for bankruptcy, meaning they stand in the debtor’s shoes. Creditors with specific injury claims retain exclusive rights to pursue those claims, limiting the trustee's standing to claims held by the bankrupt entity itself. This framework aims to protect the debtor's assets from being depleted by a trustee's actions regarding third-party rights and to prevent duplicative recoveries for defendants.

In assessing whether an injury pertains to the corporation or its creditors, courts may consider factors such as the party owed a duty, the nature of the injury, who suffered it, and who would benefit from any recovery.

The Chapter 7 Trustee's allegations of injury from the defendant's malpractice—missing funding opportunities, unpaid employer contributions totaling at least $1.3 million, and associated costs—do not establish standing. The first claim lacks clarity on how missing the funding opportunity harmed the debtor, as it appears to merely shift potential funds to another party (the Retirement Plan) without demonstrating direct harm to the debtor. The trustee's failure to show distinct injuries or benefits to the debtor from the alleged wrongdoing means that standing is not conferred based on these claims.

The Chapter 7 Trustee's argument is flawed as the Debtor has not made the $1.3 million payment to the Retirement Plan. Citing Hirsch I, the Trustee cannot claim injuries on behalf of creditors when only the creditors are affected. The Trustee claims damages related to unpaid obligations but fails to show how these constitute a constitutional injury since no payments were made by the bankruptcy estate. Although a claim was filed by the Plan Administrator for the shortfall, the Trustee does not use this claim for standing, highlighting that standing is determined at the time of the bankruptcy filing, not by subsequent claims. The Plan Administrator's claim was filed late, exceeding the four-year limit set by the bar date, and it is uncertain how it could be paid given that unsecured creditors are not fully compensated. Current distributions to unsecured creditors are only 7.5% of their claims, indicating insufficient funds for the late claim by the Plan Administrator.

The Trustee claims "lost earnings" related to an unpaid contribution but fails to specify the nature or source of these earnings, leaving ambiguity as to whether they would have come from the Retirement Plan or from income generated while holding the funds. The Trustee must provide factual support for all damage claims, including the timing of fund transfers, to establish plausible damage to the Debtor. Additionally, the Trustee's claim of "additional costs and expenses" incurred lacks detail on the basis or amount of these expenses, failing to meet the necessary pleading standards. The Trustee asserts standing to pursue professional malpractice claims against the Defendant, arguing these claims are property of the estate under Section 541 of the Bankruptcy Code, which encompasses all legal interests of the debtor. However, a debtor cannot bring such claims without proper standing. Consequently, the Court concludes that the Chapter 7 Trustee lacks standing to pursue Counts I and II of the Complaint, leading to their dismissal. The Defendant is instructed to prepare an order on three days' notice. The Complaint also outlines that WWUSA's estate was harmed by EisnerAmper's failure to fully advise on employer contributions to the Retirement Plan, potentially exposing the estate to claims and regulatory sanctions, with unpaid contributions totaling at least $1,300,000.

EisnerAmper's failures have resulted in additional costs to the Trustee representing WWUSA. The Defendant disputes the Chapter 7 Trustee's claim that PLC could have covered the Retirement Plan shortfall, pointing out that PLC's receivership since January 2009 raises doubts about its financial capacity to do so. The Trustee's assertion lacks explanation regarding PLC's potential payment capability based on prior contributions or dealings. Legal precedents emphasize that complaints must present sufficient factual matter to support a plausible claim. However, the Court finds it unnecessary to assess the plausibility of the Trustee's allegations concerning PLC's financial obligations due to its prior conclusions on standing. There are no claims from employees against the Debtor regarding the Retirement Plan shortfall, which aligns with the Trustee's standing limitations; as a representative of the Debtor, the Trustee can only pursue actions that the Debtor could have initiated pre-bankruptcy. While the Complaint mentions potential regulatory sanctions from the IRS, it fails to detail any actual IRS actions against the Debtor or Trustee. The Plaintiff does not assert standing based on potential third-party claims, allowing the Court to bypass this issue. Ultimately, the Court concludes that the Chapter 7 Trustee lacks standing to pursue Counts I and II, thereby rendering the Defendant's other defenses under Federal Rule of Civil Procedure 12(b)(6) unnecessary to consider.