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COA allows accountant malpractice claim to continue

March 8, 2017

The Indiana Court of Appeals has allowed an accountant malpractice claim to continue after holding that the economic loss rule and provisions with a contract do not bar a tort complaint.

When the Magic Circle Corp., also known as Dixie Chopper, began experiencing business and financial difficulty in 2008, it hired Crowe Horwath LLP to provide audit services through 2013. That year, Crowe’s year-end audit of the company’s 2012 financial records disclosed a $14 million loss for Magic Circle, a loss that had gone undiscovered in part due to inaccurate information provided to the company by two men hired to help it through a business turnaround effort.

Magic Circle subsequently hired another auditing firm, who confirmed that the two men had given the company inaccurate information but also found that Crowe’s audit reports were incorrect and that the auditors had not discovered the financial problems until 2013. Magic Circle and its shareholders filed suit against Crowe and the two men. The St. Joseph Circuit Court dismissed the complaints not relating to Crowe.

Crowe then filed a motion to dismiss to Magic Circle’s claims that Crowe aided and abetted fraud and committed malpractice. The St. Joseph Circuit Court granted the motion to dismiss the account malpractice claim for failure to state a claim under Trial Rule 12(B)(6), prompting the instant appeal.

The Indiana Court of Appeals reversed the trial court’s dismissal of Magic Circle’s case Wednesday, with Judge L. Mark Bailey, writing for the panel, first finding the economic loss rule does not have the effect of barring the accountant malpractice claim at tort.

The Indiana Supreme Court has held that “the economic loss rule reflects that the resolution of liability for purely economic loss caused by negligence is more appropriately determined by commercial rather than tort law,” Bailey wrote. However, the judge noted that the Supreme Court has further held that the economic loss rule is a general rule with exceptions.

Drawing on precedent from the Illinois case of Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., 636 N.E.2d 503 (Ill. 1994), the appellant panel held that Magic Circle’s case could be considered an exception and, thus, was not barred by the economic loss rule.

Further, Bailey wrote that the allegations Magic Circle brought against Crowe – including assigning auditors who lacked expertise with Magic Circle’s accounting system, failing to apprise the board of questionable transactions, failing to inquire into backup data and failure to undertake an independent analysis – if true, fall outside of the scope of an exculpatory clause in Crowe’s contract, which, thus, would not have the effect of barring the tort claim.

Similarly, the panel held that a limitation of liability clause within the contract also did not preclude Magic Circle’s claim because “the facts Magic Circle pled do not exclude the possibility of gross negligence in hiring or assigning employees or of failing to report known irregularities to the company’s board,” so “it is not possible to say that there is no set of facts under which a recovery might be possible.”

The case of Magic Circle Corp., D/B/A Dixie Chopper, Arthur Evans, Wesley Evans, and Jeffrey Haltom v. Crowe Horwath, LLP, 71A03-1607-PL-1520, was remanded to the St. Joseph Circuit Court.
 

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