Gold v. Deloitte & Touche LLP

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 10a0321p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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Debtors. -

In re: NM HOLDINGS COMPANY, LLC et al.,

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No. 09-1870

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STUART A. GOLD, Chapter 7 Trustee of NM

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Holdings Company LLC (f/k/a Venture

NM INDUSTRIES CORPORATION, NM MOLD & --

Holdings Company, LLC), NM EMCO, INC.,

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ENGINEERING CORPORATION, NM OLD

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LEASING COMPANY, NM NEMCO LEASING,

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INC., NM HOLDINGS CORPORATION, NM

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SERVICE COMPANY, NM EXP LLC, and NM

EU CORPORATION, -

Plaintiffs-Appellants, -

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v.

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DELOITTE & TOUCHE LLP,

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of Michigan at Detroit.

No. 08-15283—Marianne O. Battani, District Judge.

Argued: July 29, 2010

Decided and Filed: September 30, 2010

Before: GILMAN and WHITE, Circuit Judges; WATSON, District Judge.*

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COUNSEL

ARGUED: Gregory D. Hanley, KICKHAM HANLEY PLLC, Royal Oak, Michigan,

for Appellants. John F. Hartmann, P.C., KIRKLAND & ELLIS LLP, Chicago, Illinois,

for Appellee. ON BRIEF: Gregory D. Hanley, Timothy O. McMahon, KICKHAM

*

The Honorable Michael H. Watson, United States District Judge for the Southern District of

Ohio, sitting by designation.

1

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HANLEY PLLC, Royal Oak, Michigan, for Appellants. John F. Hartmann, P.C., Mark

S. Hamill, KIRKLAND & ELLIS LLP, Chicago, Illinois, for Appellee.

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OPINION

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RONALD LEE GILMAN, Circuit Judge. Stuart Gold, as the trustee in

bankruptcy for a group of companies collectively known as Venture, sued Deloitte &

Touche LLP, Venture’s former auditor, alleging that Deloitte (1) negligently performed

its audits by failing to uncover and report unsound related-party transactions entered into

by Venture’s sole shareholder and CEO, and (2) aided and abetted the CEO’s breach of

his fiduciary duty to Venture. Deloitte filed a motion to dismiss pursuant to Rule

12(b)(6) of the Federal Rules of Civil Procedure on the basis that Gold had failed to state

a claim upon which relief can be granted.

The district court granted Deloitte’s motion. It held that Gold’s claim against

Deloitte for professional negligence failed because Michigan’s “sole-actor rule”

prevented Gold from establishing that Venture relied on Deloitte’s audits. In addition,

the court held that Gold’s claim that Deloitte aided and abetted the CEO’s breach of his

fiduciary duty to Venture was barred by Michigan’s three-year statute of limitations

applicable to such claims. For the reasons set forth below, we AFFIRM the judgment

of the district court.

I. BACKGROUND

A. Factual background

The following facts are taken primarily from Gold’s first amended complaint.

Venture was an automotive-parts supplier that filed for Chapter 11 bankruptcy in March

2003. In January 2006, its bankruptcy proceeding was converted into a Chapter 7

liquidation. Gold was appointed as the Chapter 7 trustee for Venture later that same

month.

No. 09-1870 In re NM Holdings Co. et al. Page 3

All of the equity interest in Venture was held by Venture Holdings Trust, with

Larry Winget being the Trust’s sole beneficiary. Winget was also the CEO and a

director of Venture. (Although the complaint states that Winget was “a” director of

Venture rather than the sole director, there is nothing in the complaint, the parties’ briefs,

or the district court’s opinion that makes any reference to the existence or authority of

any other Venture directors.)

For a number of years before Venture filed for bankruptcy, Winget allegedly

caused Venture to enter into a series of transactions with companies that were wholly

owned or controlled by Winget. According to the complaint, “Venture received little or

no consideration and/or less than reasonably equivalent value in these related party

transactions.” The complaint also alleged that Venture’s public financial statements

“contained false and materially misleading statements and information about the

numerous related party transactions . . . . Many of the related party transactions were not

disclosed at all, and, as to those that were partially disclosed, the financial statements

falsely stated that the transactions were fair to Venture from a financial standpoint.”

Beginning in 1987, Deloitte was retained by Venture to conduct annual audits

and quarterly reviews of Venture’s financial statements. In conducting its audits,

Deloitte allegedly violated Generally Accepted Auditing Standards (GAAS) by failing

(1) to properly design its audits in order to determine whether Venture’s financial

statements contained false statements, (2) to utilize appropriate procedures for analyzing

related-party transactions, and (3) to properly qualify its opinions on Venture’s financial

statements from 1995 until 2001. Deloitte had repeatedly issued unqualified opinions

stating that Venture’s public financial statements fairly presented the financial condition

of the company. Venture’s statements in fact contained false and misleading information

regarding the related-party transactions.

Gold also alleged that Deloitte knew of Winget’s impropriety in entering into

the related-party transactions. For example, an internal Deloitte memorandum

purportedly acknowledged that a transaction between Venture and a related company

No. 09-1870 In re NM Holdings Co. et al. Page 4

was not a “commission agreement,” even though that is how the transaction was

characterized in Venture’s financial statements.

Finally, Gold claimed that Deloitte’s auditing failures were the proximate cause

of Venture’s precarious financial situation and ultimate bankruptcy. Venture had entered

into several loan agreements that by their terms restricted Venture’s ability to engage in

related-party transactions and required the company to comply with various financial-

reporting obligations. According to Gold, if Deloitte had properly performed its

function, then Venture’s creditors would have known about the related-party transactions

and would have forced Venture to cure the default, thus compelling Winget to stop

engaging in the harmful transactions. If Winget had done so, “Venture’s financial

condition would have been more favorable than it actually was, even if it still had

entered bankruptcy.”

Gold also alleged that Venture’s independent “Fairness Committee,” which was

established pursuant to one or more of the loan agreements, was similarly unaware of the

harmful transactions and would have acted to stop Winget had it been informed of them.

The Fairness Committee consisted of a “sole and independent member” who had the

authority to prevent Winget from entering into any related-party transactions. If Venture

had fired this committee member, it would have been in breach of the loan agreements.

B. Procedural history

In March 2006, Gold filed suit against Deloitte in a Michigan state court.

Deloitte then removed the case to the United States Bankruptcy Court for the Eastern

District of Michigan. Gold’s first amended complaint was filed in August 2007. He

asserted four claims against Deloitte. In Count I, Gold claimed that Deloitte committed

professional negligence by failing to properly conduct its audits. Specifically, Gold

alleged that Deloitte breached its duty to Venture to conduct the audits in accordance

with GAAS and that this breach directly and proximately injured Venture.

Gold claimed in Count II that Deloitte, by failing to disclose related-party

transactions that it had knowledge of, aided and abetted Winget in breaching the

No. 09-1870 In re NM Holdings Co. et al. Page 5

fiduciary duty that Winget owed to Venture. Count III, which was titled “Disgorgement

of Fees,” alleged that Deloitte was unjustly enriched by collecting fees for its services

and that it should have to disgorge all fees that it received for performing the audits.

Finally, in Count IV, Gold alleged that any payments transferred to Deloitte once

Venture became insolvent were fraudulent and thus recoverable by Gold. This last claim

was brought pursuant to both § 548 of the Bankruptcy Code, 11 U.S.C. § 548, and

Michigan’s fraudulent-transfer statute, Mich. Comp. Laws. Ann. § 566.31 et seq. Gold’s

first three claims were brought solely under Michigan common law.

Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Deloitte filed

a motion in September 2007 to dismiss Gold’s first amended complaint for failure to

state a claim upon which relief can be granted. Deloitte argued that (1) Gold’s claims

could not succeed as a matter of law because the complaint alleged reliance only by

Venture’s creditors, not Venture itself, (2) Gold’s recovery was barred by Michigan’s

wrongful-conduct rule, (3) all of Gold’s claims were barred by the applicable statute of

limitations, and (4) Gold’s aiding-and-abetting claim failed because the complaint did

not contain facts establishing that Deloitte knowingly provided substantial assistance to

Winget.

After a hearing, the bankruptcy judge issued a recommendation that the district

court dismiss Counts I through III. He did so pursuant to 28 U.S.C. § 157(c)(1), which

provides as follows:

A bankruptcy judge may hear a proceeding that is not a core proceeding

but that is otherwise related to a case under title 11. In such proceeding,

the bankruptcy judge shall submit proposed findings of fact and

conclusions of law to the district court, and any final order or judgment

shall be entered by the district judge after considering the bankruptcy

judge’s proposed findings and conclusions and after reviewing de novo

those matters to which any party has timely and specifically objected.

The bankruptcy judge recommended that the district court dismiss Count I

because Gold did not allege that Venture relied on Deloitte’s opinions, which is a

necessary component of the causation element in a professional-negligence claim. Next,

No. 09-1870 In re NM Holdings Co. et al. Page 6

the bankruptcy judge recommended that the district court find that Count II was time-

barred by the three-year statute of limitations found in Mich. Comp. Laws Ann.

§ 600.5805(10).

As to Count III, the bankruptcy judge recommended dismissal because the

disgorgement of fees is simply a remedy, not a separate claim for relief. Gold did not

object to the dismissal of Count III so long as disgorgement remained a potential remedy

against Deloitte if liability was established. Count III was thus not at issue before the

district court.

Finally, the bankruptcy judge granted Deloitte’s motion as to Count IV

(fraudulent transfers) after it found the claim to be time-barred. The judge was able to

enter a final order on Count IV because it was a “core proceeding” under 28 U.S.C.

§ 157(b)(2)(H), which provides that “proceedings to . . . recover fraudulent

conveyances” are core proceedings and thus may be determined by a bankruptcy judge.

This dismissal was challenged in a separate proceeding before the district court, which

affirmed the bankruptcy judge’s dismissal. Gold has not appealed the dismissal of Count

IV, leaving Counts I (professional negligence) and II (aiding and abetting) as those still

in contention.

The district court accepted the bankruptcy judge’s recommendations on Counts

I and II, entering an order that dismissed these counts in June 2009. This timely appeal

followed.

II. ANALYSIS

A. Standard of review and applicable substantive law

We review de novo a district court’s dismissal of a complaint pursuant to Rule

12(b)(6) of the Federal Rules of Civil Procedure. Lambert v. Hartman, 517 F.3d 433,

438-39 (6th Cir. 2008). When deciding such a motion, we must construe the complaint

in the light most favorable to the plaintiff and must accept all of the factual allegations

contained in the complaint as true. Id. at 439. The complaint must show legal

entitlement to relief in order to survive a Rule 12(b)(6) motion to dismiss. Id. This

No. 09-1870 In re NM Holdings Co. et al. Page 7

standard is met where the complaint contains “enough facts to state a claim to relief that

is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

Although Venture’s bankruptcy proceeding establishes federal jurisdiction in this

case, see 28 U.S.C. § 1334(b), Gold’s remaining claims—Count I and Count II—are

brought pursuant to state law. The parties agree that Michigan law is controlling as to

both of these counts.

B. Count I: Professional negligence

In Count I, Gold alleged that Deloitte committed professional negligence by

failing to properly conduct its audits of Venture. In order to succeed on a professional-

negligence claim, Gold must satisfy four elements: (1) a duty owed by Deloitte to

Venture, (2) a breach of that duty, (3) causation, and (4) damages. See Haliw v. Sterling

Heights, 627 N.W.2d 581, 588 (Mich. 2001). The causation element is the source of the

instant dispute between the parties. Following the recommendation of the bankruptcy

judge, the district court held that Gold’s claim failed as a matter of law because Venture

could not have relied on Deloitte’s audits where the actions of Winget are imputed to

Venture by way of Michigan’s sole-actor rule. Without reliance, Deloitte’s alleged

inadequate performance could not have caused the harm to Venture.

Gold argues that this holding is erroneous because (1) reliance is not an element

of a professional-negligence claim under Michigan law, (2) even if reliance is required,

Venture’s Fairness Committee relied on the audits, and (3) Venture’s creditors also

relied on the audits. Each argument is addressed in turn below.

1. Reliance as a component of causation

In a professional-negligence case,

[p]roof of causation requires both cause in fact and legal, or proximate,

cause. Cause in fact requires that the harmful result would not have

come about but for the defendant’s negligent conduct. On the other hand,

legal cause or “proximate cause” normally involves examining the

foreseeability of consequences, and whether a defendant should be held

legally responsible for such consequences.

No. 09-1870 In re NM Holdings Co. et al. Page 8

Haliw, 627 N.W.2d at 588 (citations and internal quotation marks omitted). Although

Gold is correct in pointing out that reliance is not per se an element of professional

negligence, proof of reliance is necessary here in order to show that Deloitte’s allegedly

deficient audits were the cause in fact of Venture’s tenuous financial position and

resulting bankruptcy. If no Venture insider was lulled by the audits in failing to detect

the related-party transactions, then the harm to Venture would have come about even in

the absence of Deloitte’s conduct. See FDIC v. Ernst & Young, 967 F.2d 166, 170 (5th

Cir. 1992) (holding that “if nobody relied upon the audit, then the audit could not have

been” the cause in fact of the harm).

This conclusion is consistent with the holdings of many other courts that have

examined the issue. See id. (stating that, in a professional-negligence action against an

auditor, “a claim that reliance is not a component of causation strains credulity”); Smolen

v. Deloitte, Haskins & Sells, 921 F.2d 959, 964 (9th Cir. 1990) (affirming a grant of

summary judgment in favor of the auditor in a professional-negligence case, stating that

the plaintiffs “must present some evidence establishing the element of causation, in the

sense of actual and justifiable reliance upon misrepresentations or omissions of material

fact, to avoid summary judgment”); Branch v. Ernst & Young U.S., 311 F. Supp. 2d 179,

184 (D. Mass. 2004) (stating that “reliance is a necessary element of [the plaintiff’s]

negligence and malpractice counts” against an auditor); Resolution Trust Corp. v.

Coopers & Lybrand, 915 F. Supp. 584, 588 (S.D.N.Y. 1996) (“If no one relies on an

audit, then presumably it could not be a substantial factor in causing an injury.”); PNC

Bank, Ky., Inc. v. Hous. Mortgage Corp., 899 F. Supp. 1399, 1403 (W.D. Pa. 1994)

(“Thus, if [the accounting firm] can establish, based upon the pleadings and admissions

on file, that [the plaintiff] did not rely upon the audits in conducting its affairs, then it

will be entitled to dismissal of [the plaintiff’s] claims for negligence.”).

In response, Gold cites Allard v. Arthur Andersen & Co., 924 F. Supp 488

(S.D.N.Y. 1996), for the proposition that Michigan law does not require proof of reliance

in a professional-negligence claim. There, the district court in New York applied

Michigan law to analyze a motion for summary judgment in a professional-negligence

No. 09-1870 In re NM Holdings Co. et al. Page 9

action brought by a corporation’s trustee in bankruptcy against the corporation’s

auditors. The auditor argued that the corporation was barred from recovering on its

malpractice claim because the intentional conduct of the corporation’s CEO in siphoning

money from the corporation should be imputed to the corporation. Id. at 494. In

denying summary judgment because questions of fact remained as to whether the CEO’s

actions were wholly adverse to the company, the court held that the issue of imputation

should be decided at trial:

Generally, under both New York and Michigan law, the

knowledge and conduct of corporate officials acting within the scope of

their duties are imputed to the corporation. However, when a corporate

agent has totally abandoned his principal’s interests and [acts] entirely

for his own or another’s purposes, there is no imputation under the

adverse interest exception to the general rule.

The court continued:

If it is determined at trial that imputation is appropriate here

notwithstanding the adverse interest exception, that imputation will bar

recovery by the Trustee on his fraud claims because access to the truth

renders reliance on representations to the contrary unreasonable as a

matter of law. However, imputation would not necessarily operate as a

complete bar to the Trustee’s negligence and malpractice claims, because

both New York and Michigan are comparative negligence jurisdictions.

Id. at 494-95 (citations and internal quotation marks omitted).

Gold contends that this last paragraph by the court in Allard recognizes that

negligence and malpractice claims do not require a showing of reliance by the plaintiff.

We respectfully disagree. Concluding that “access to the truth renders reliance on

representations to the contrary unreasonable” is hardly a repudiation of reliance as an

element of causation. And the second sentence of the paragraph addresses comparative

negligence rather than causation. The quoted language does not negate that some type

of innocent reliance is necessary to establish causation in fact; it simply observes that,

due to comparative negligence, imputed knowledge may not be a complete bar to

recovery. Imputed knowledge and innocent reliance are not necessarily mutually

exclusive. Moreover, these brief statements are dicta because the Allard court’s holding

No. 09-1870 In re NM Holdings Co. et al. Page 10

turned on the factual question of whether the CEO’s actions were wholly adverse to the

company, not on whether the trustee’s complaint adequately alleged causation. In sum,

we conclude that Allard is not persuasive for the point argued. The district court

therefore did not err in holding that reliance is a critical part of establishing causation in

this professional-negligence action.

2. Imputation analysis

Under Michigan law, the knowledge of a corporate agent can be imputed to the

entire corporation:

A corporation can only act through its employees and, consequently, the

acts of its employees, within the scope of their employment, constitute

the acts of the corporation. Likewise, knowledge acquired by employees

within the scope of their employment is imputed to the corporation. In

consequence, a corporation cannot plead innocence by asserting that the

information obtained by several employees was not acquired by any one

individual employee who then would have comprehended its full import.

Rather, the corporation is considered to have acquired the collective

knowledge of its employees and is held responsible for their failure to act

accordingly.

Upjohn Co. v. N.H. Ins. Co., 476 N.W.2d 392, 400 (Mich. 1991) (citation omitted). This

general imputation rule applies where the corporate officer acts in the course of his or

her employment and for the benefit of the corporation. MCA Fin. Corp. v. Grant

Thornton, L.L.P., 687 N.W.2d 850, 857 (Mich. Ct. App. 2004).

An exception to the imputation rule, however, provides that “the corporate

officer’s actions will not be deemed to have been done for the benefit of the corporation

if the actions were adverse to the corporation’s interests.” Id.; see also New Properties,

Inc. v. George D. Newpower, Jr., Inc., 762 N.W.2d 178, 188 (Mich. Ct. App. 2009)

(“The general rule which imputes an agent’s knowledge to his principal is subject to an

exception where the agent acts in his own interest, adversely to his principal.” (citation

omitted)). The adverse-interest exception, however, itself has an exception:

The sole actor rule is an exception to the adverse interest exception . . . .

The sole actor rule comes into play where the wrongdoer is, in essence,

No. 09-1870 In re NM Holdings Co. et al. Page 11

the corporation (the “sole actor”). Indeed, it has its roots in cases where

the agent and the principal are literally the same person (literally a “sole

actor”) and thus information obtained by a person in his role as an agent

is treated as also being obtained in his role as principal, even if his

activities as agent are contrary to his interests as a principal. Therefore,

where the wrongdoer acts contrary to the interests of the corporation,

under the adverse interest exception the wrongdoer’s conduct would not

ordinarily be imputed to the corporation. But where the wrongdoer is a

sole actor, the adverse interest exception is not applied and his

wrongdoing is nevertheless imputed to the corporation.

MCA Fin. Corp., 687 N.W.2d at 860. Thus, for example, “where a sole shareholder loots

the corporation of its assets[,] the adverse interest exception will not apply.” Id.

We pause to note Gold’s argument that a court cannot undertake the imputation

analysis without first applying Michigan’s wrongful-conduct rule, which “precludes a

plaintiff from recovering on a claim that is based on the plaintiff's own wrongdoing.”

Id. at 853. In other words, Gold claims that the only actions that can be imputed to a

corporation are those that are deemed wrongful by this common law rule. He then

proceeds to argue that the wrongful-conduct rule does not apply to bar Venture’s

recovery because, among other things, Winget’s conduct was not “prohibited or almost

entirely prohibited under a penal or criminal statute.” See Orzel v. Scott Drugs Co., 537

N.W.2d 208, 214 (Mich. 1995) (holding that a plaintiff’s claim that a pharmacy

negligently supplied him with a controlled substance was barred because the harm was

caused, at least in part, by the plaintiff’s illegal conduct).

This argument is contradicted by the caselaw cited above that explicitly

acknowledges that courts can impute a corporate agent’s knowledge in addition to an

agent’s wrongful conduct. And the only case cited by Gold to support his argument

regarding the proper order of analysis, MCA Financial, is distinguishable. In that case,

the Michigan Court of Appeals first held that the wrongful-conduct rule applied to the

actions of individual officers of the corporation. Next, the court went on to hold that the

wrongful conduct of these officers would be imputed to the entire corporation, thus

barring the corporation from recovering on its claims against its former auditor. MCA

Fin. Corp., 687 N.W.2d at 857-61.

No. 09-1870 In re NM Holdings Co. et al. Page 12

To argue, however, that MCA Financial stands for the proposition that

imputation can occur only if the wrongful-conduct rule applies is inaccurate. Indeed, the

Michigan Supreme Court has applied the imputation rule without undertaking a

wrongful-conduct analysis. In National Turners Building & Loan Ass’n v.

Schreitmueller, 285 N.W. 497 (Mich. 1939), which appears to be the earliest Michigan

case applying the sole-actor rule, the Court held that a corporate agent’s knowledge

should be imputed to the corporation where the agent issued a fraudulent stock

certificate to an investor. The corporation thus could not seek to cancel the stock

certificate because “[i]f a corporation is so lax as to trust the whole of a transaction to

one officer, it should suffer the consequences of his misfeasance as an officer.” Id. at

499. Importantly, the Court undertook the imputation analysis, see id. at 499-500,

without any mention of the wrongful-conduct rule, which was solidly in place in

Michigan at the time of the Court’s decision. See, e.g., Garwols v. Bankers’ Trust Co.,

232 N.W. 239, 240-42 (Mich. 1930); McDonald v. Hall, 159 N.W. 358, 362 (Mich.

1916). Gold’s argument that imputation can occur only where the wrongful-conduct rule

applies is thus without merit.

Returning now to the imputation analysis, we note that Gold alleges that Winget

used his power as CEO to cause Venture to enter into the related-party transactions.

This allegation meets the threshold requirement for the imputation rule. But Gold also

alleges that Winget’s transactions were “solely in his own interest and entirely against

the interests of Venture,” which implicates the adverse-interest exception. Deloitte

responds by arguing that Winget was clearly the sole actor because he was the CEO and

sole shareholder of Venture. See In re Mediators, Inc., 105 F.3d 822, 827 (2d Cir. 1997)

(“Where, as here, a sole shareholder is alleged to have stripped the corporation of assets,

the adverse interest exception to the presumption of knowledge cannot apply.”), cited

in MCA Fin. Corp., 687 N.W.2d at 860 n.28.

And Gold does not seriously dispute that Winget was the sole actor through this

point in the imputation analysis. Indeed, at oral argument, Gold’s counsel conceded that

the sole-actor rule would be applicable but for the “innocent-decisionmaker exception”

No. 09-1870 In re NM Holdings Co. et al. Page 13

to the sole-actor rule. This exception was most clearly articulated in In re Sharp

International Corp., 278 B.R. 28, 39 (Bankr. E.D.N.Y. 2002), where the court declined

to apply the sole-actor rule to impute the knowledge of Sharp’s CEO in perpetrating a

fraud to the corporation because the complaint alleged “the presence of a person with the

ability to bring an end to the fraudulent activity at issue.” Id. That is, there was “an

innocent 13% shareholder who served on Sharp’s board of directors, served as a

consultant to Sharp, regularly visited Sharp’s offices, and regularly received and

reviewed financial statements,” and who “could or would have prevented the fraud had

he known about it.” Id. at 37, 39. These allegations were deemed sufficient to defeat

the applicability of the sole-actor exception.

Here, Gold contends that Venture’s creditors and the Fairness Committee were

innocent decision-makers because they had the authority to stop Winget from entering

into the related-party transactions. He argues that given the presence of these innocent

parties, Winget cannot be considered to be Venture’s sole actor, meaning that Winget’s

knowledge should not be imputed to Venture so as to bar any recovery by Venture.

We first note that no Michigan court has thus far adopted the innocent-decision-

maker exception. See MCA Fin. Corp., 687 N.W.2d at 861 (stating that the court “need

not consider whether to apply the Sharp exception to the sole actor rule”). Nonetheless,

as explained below, Gold still fails to state a claim for relief even if the Michigan courts

would apply the innocent-decision-maker exception in the imputation context.

3. Alleged reliance by the Fairness Committee

The relevant allegations in the first amended complaint regarding Venture’s

Fairness Committee are as follows:

312. Section 4.12 of [the NBD loan indenture agreement] . . . required

the formation of a “Fairness Committee” to review related party

transactions. The Indentures required at least one member of the

Fairness Committee to be independent of Venture and its principals,

which independent member effectively wielded veto power over related

party transactions.

...

No. 09-1870 In re NM Holdings Co. et al. Page 14

320. Not only would timely and proper disclosure of these transactions

have caused NBD, the noteholders and indenture trustees to force Winget

to cease the unfair related party transactions, but . . . such disclosures

would have caused the independent member of the Fairness Committee

to act to avoid or at the very least reduce the corporate injury suffered by

Venture as a result of Winget’s improper related party transactions.

321. As required under certain of its indentures and loan agreements

. . . , Venture maintained a Fairness Committee, which had a sole and

independent member, Maurice Williams, who was empowered to

evaluate and approve or disapprove of any related party transactions

undertaken by Winget. Because Venture was required to retain an

independent member of the Fairness Committee, Mr. Williams . . . could

not be terminated at the whim of Winget without placing Venture in

default under various agreements. In this capacity, Mr. Williams

possessed greater corporate power than an officer or director of Venture,

because he had the unilateral and absolute authority to prevent Winget

from undertaking or continuing any unfair related party transactions. On

information and belief, Mr. Williams was innocent of Winget’s

misconduct . . . , and was able to prevent it had the misconduct been

known.

322. Deloitte was fully aware of the existence and powers of the

Fairness Committee. Deloitte obtained minutes of the meetings of the

Fairness Committee, knew of Mr. Williams’ identity and role, and was

fully able to communicate with Mr. Williams about the related party

transactions it was auditing.

Even assuming (without deciding) that these allegations are enough to state a claim that

Williams was an innocent decision-maker who could prevent Winget’s knowledge from

being imputed to Venture, the allegations are insufficient in a critical way: They contain

no statement that Williams actually relied on Deloittes’s audits in choosing not to act.

Even more fundamental, there is no allegation that Williams ever saw the audits.

The amended complaint does allege that properly conducted audits “would have

caused the independent member of the Fairness Committee to act,” but this statement is,

at most, a mere “formulaic recitation” of the causation element of a professional-

negligence claim and is not sufficient to state a claim for relief. See Ashcroft v. Iqbal,

129 S. Ct. 1937, 1949 (2009) (citation omitted) (holding that the plaintiff’s complaint

failed to state a claim for relief because it contained conclusory allegations that were not

No. 09-1870 In re NM Holdings Co. et al. Page 15

entitled to the assumption of truth). An allegation that Williams in fact saw and relied

on the audits would be the “further factual enhancement” that is needed to support this

“naked assertion.” See id. (citation omitted). In sum, Gold’s amended complaint can

hardly “contain sufficient factual matter, accepted as true, to state a claim to relief that

is plausible on its face” if it does not even allege that Williams saw the audits. See id.

(citation and internal quotation marks omitted).

This deficiency is especially glaring in comparison to the explicit statements

regarding creditor reliance. The amended complaint, for example, alleged that Deloitte

“issued certain opinions directly to NBD Bank and to the noteholders,” that “Venture

was obligated to supply audited financial statements to the noteholders,” and that

Deloitte “directly reported” to Venture’s creditors. In addition, the amended complaint

alleged that Deloitte specifically represented to the creditors “that it was not aware of

any violation of applicable covenants, including covenants prohibiting Venture from

making distributions to Winget.” Most importantly, the amended complaint alleged that

“the noteholders relied upon Deloitte’s representations in determining whether Venture

was in compliance with the covenants set forth in the indenture.” These specific

allegations of creditor reliance are in sharp contrast to the allegations regarding the

Fairness Committee.

Particularly striking is the fact that Gold amended his complaint to add specific

examples of creditor reliance. In Gold’s original complaint, there were no allegations

of reliance on the audits by anyone. Deloitte subsequently filed a motion to dismiss

Gold’s original complaint, arguing that because the complaint did not (and could not)

allege that Venture itself relied on the audits, Gold had failed to state a claim.

Presumably in response to this contention, Gold amended his complaint to add

allegations of reliance. These new allegations, however, related only to reliance by

Venture creditors, not by Williams as the sole member of the Fairness Committee.

Williams, in other words, might or might not be considered an innocent decision-

maker within Venture for the purpose of overcoming the sole-actor rule. But without

any allegations that Williams relied on Deloitte’s audits, Gold has failed to satisfy the

No. 09-1870 In re NM Holdings Co. et al. Page 16

causation element for a professional-negligence claim even if Williams were so

considered.

4. Alleged reliance by creditors

Gold’s final argument related to Count I is that the amended complaint alleges

reliance on the audits by Venture’s creditors. According to Gold, this reliance would

establish causation. He also claims that the creditors acted as innocent decision-makers,

thus keeping Winget’s knowledge from being imputed to Venture. In analyzing this

third-party reliance argument, we must bear in mind Gold’s role as the trustee in

bankruptcy for Venture. The key point is that “a bankruptcy trustee has no standing

generally to sue third parties on behalf of the estate’s creditors, but may only assert

claims held by the bankrupt corporation itself.” Shearson Lehman Hutton, Inc. v.

Wagoner, 944 F.2d 114, 118 (2d Cir. 1991). Gold, in other words, represents Venture,

not Venture’s creditors.

The Fifth Circuit directly faced the issue of third-party reliance in FDIC v. Ernst

& Young, 967 F.2d 166 (5th Cir. 1992). In that case, Western Savings Association was

in a precarious financial condition because its sole shareholder, Jarrett Woods, had

entered into “unsafe and unsound” ventures. Id. at 168. As a result, federal regulators

required Western to undergo an outside review of its financial condition. Ernst & Young

(EY) subsequently certified that Western was in a strong financial condition when, in

fact, it was insolvent. The FDIC was the assignee of Western after the latter’s assets

were placed in the Federal Savings and Loan Insurance Corporation Resolution Fund.

As assignee, the FDIC sued EY, alleging professional negligence.

After noting that reliance is a necessary element for such a claim, the court stated

that the issue before it was “whether either Woods or Western relied upon [EY’s] audit

to cause injury to Western.” Id. at 170. The court held that, under the imputation rule,

Woods’s knowledge was imputable to Western, so neither could have relied on the audit.

Id. at 171.

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The court then rejected the FDIC’s alleged cause of action based on the argument

that third parties had relied on the audits:

The FDIC argues that even if neither Woods nor Western relied

upon the audit, [EY’s] alleged negligence caused the losses because had

the audits been accurate, someone, such as Western’s creditors or

government regulators, would have “rescued” Western. This argument

is flawed because it is not an appropriate argument for Western, or its

assignee, to make. Western cannot claim it should recover from EY for

not being rescued by a third party for something Western was already

aware of and chose to ignore. Neither can Western’s assignee make the

claim. The FDIC in its own capacity or Western’s creditors might be

able to make this claim, but the FDIC brought this suit only on Western’s

behalf.

Assuming, for the sake of argument, that [EY] negligently audited

Western’s books, we do not hold that EY can never be held liable for its

negligence. Either Western’s creditors or the FDIC on its own behalf

may have a cause of action against EY. Moreover, we are not holding

that an auditor is never liable to a corporation when a corporation’s

employee or agent acts fraudulently on the corporation’s behalf. We limit

our holding narrowly to the facts of this case under Texas law—i.e. the

FDIC, as assignee of a corporation with a dominating sole owner, sues

an auditor for negligently performing an audit upon which neither the

owner nor the corporation relied.

Id. at 171-72; see also Official Comm. of Unsecured Creditors of Color Tile, Inc. v.

Coopers & Lyrband, LLP, 322 F.3d 147, 165-66 (2d Cir. 2003) (rejecting an argument

that the corporation’s creditors or underwriter could have acted as innocent insiders and

could have rescued the company from the fraudulent transaction, reasoning that such

third-party reliance is “legally irrelevant” to a claim by the trustee in bankruptcy).

The argument that Gold makes in the present case is essentially the same as that

made by EY. Perhaps Venture’s creditors could have prevented Winget from continuing

to enter into related-party transactions had they known about them. But this is not an

appropriate claim for Gold (who stands in the shoes of Venture) to make. As Deloitte

points out, Gold is attempting to combine reliance by the creditors with the harm

suffered by Venture to establish a claim brought by Venture against Deloitte. We

conclude that the reasoning of the Fifth Circuit in Ernst & Young is sound, and hold that

No. 09-1870 In re NM Holdings Co. et al. Page 18

third-party reliance of this type is insufficient to establish causation in a professional-

negligence action.

In sum, Gold’s amended complaint does not allege reliance by Venture or by

Venture’s Fairness Committee. And the alleged reliance by Venture’s creditors cannot

support a claim brought by Gold on behalf of Venture. The district court thus did not

err in dismissing Count I of Gold’s amended complaint for failure to state a claim.

C. Count II: Aiding and abetting the breach of a fiduciary duty

Turning now to Count II, Gold alleged that by “knowingly failing to disclose”

the nature of the related-party transactions and by improperly issuing unqualified

opinions, Deloitte aided and abetted Winget in his breach of his fiduciary duty owed to

Venture. The district court held that this claim was covered by the residual three-year

statute of limitations for tort claims contained in Mich. Comp. Laws Ann.

§ 600.5805(10), which states that “[t]he period of limitations is 3 years after the time of

the death or injury for all other actions to recover damages for the death of a person, or

for injury to a person or property.” It further concluded that the claim accrued when

Venture filed for bankruptcy on March 28, 2003. Because Gold did not file suit against

Deloitte until March 31, 2006, the claim was held to be time-barred. In so holding, the

court reasoned that the statute of limitations for professional-negligence actions did not

apply because the type of interest harmed in such an action was different:

[I]n Gold’s claim that Deloitte aided and abetted Winget’s breach . . . ,

the interest harmed was Venture’s interest in Winget’s performance of

his fiduciary duties. . . . Gold is not claiming that it was harmed due to

Deloitte violating some duty it owed to Venture itself, which would be

required for a negligence or malpractice claim.

Gold contends that this conclusion is erroneous. He argues instead that the two-

year statute of limitations in Mich. Comp. Laws Ann. § 600.5805(6), which applies to

“an action charging malpractice,” governs Count II. Although the statute of limitations

period is shorter for a malpractice claim, the action would not accrue until Deloitte

“discontinue[d] serving [Venture] in a professional . . . capacity.” See Mich. Comp.

No. 09-1870 In re NM Holdings Co. et al. Page 19

Laws Ann. § 600.5838(1). Gold contends that because Deloitte did not discontinue its

service to Venture until May 4, 2004 (at the earliest), his aiding-and-abetting claim is

not time-barred. He reasons that the aiding-and-abetting claim “sounds in malpractice

regardless of the label attached to the claim,” and that “Deloitte’s duty to not aid and

abet Winget[] . . . [is] the subject of the aiding and abetting claim. Winget’s breaches of

his duties are not the source of Deloitte’s liability.”

Deloitte, on the other hand, contends that the district court was correct in its

application of the three-year statute of limitations to Count II. It reasons that the

elements of an aiding-and-abetting claim “go well beyond” the elements of a

professional-negligence claim, making the two claims separate and distinct.

In Michigan, “[t]he type of interest allegedly harmed is the focal point in

determining which limitation period controls.” Aldred v. O’Hara-Bruce, 458 N.W.2d

671, 672 (Mich. Ct. App. 1990); see id. at 673 (holding that the plaintiff’s claim was one

of attorney malpractice, not breach of contract, because “damages flowed not from

defendant’s failure to represent their son, but from her failure to do so adequately”).

There are at least two potential interests that could have been harmed if Deloitte aided

and abetted Winget. First, Venture had an interest in having Deloitte adequately perform

the audits. Venture had a second interest in having Winget properly perform his

fiduciary duty by not looting the company. The interest that was ultimately harmed by

Deloitte’s alleged aiding and abetting was the interest that Venture had in having Winget

properly perform his fiduciary duties. This is different from the interest harmed in a

professional-negligence claim—the interest that a client has in receiving adequate

performance by the outside professional.

Moreover, the nature of an aiding-and-abetting claim is different. See Tenneco

Inc. v. Amerisure Mut. Ins. Co., 761 N.W.2d 846, 864 (Mich. Ct. App. 2008) (“The true

nature of a plaintiff’s claim must be examined to determine the applicable statute of

limitations.”). In an aiding-and-abetting claim, the defendant is helping someone else

commit the primary wrong. This is fundamentally different from a malpractice claim,

in which the primary wrong is committed by the defendant itself.

No. 09-1870 In re NM Holdings Co. et al. Page 20

The elements of the cause of action are also different. In order to establish a

claim of aiding and abetting the breach of a fiduciary duty, Gold would need to prove

that (1) Winget breached his duty to Venture, (2) Deloitte knew that Winget’s conduct

constituted a breach of his duty to Venture, and (3) Deloitte gave “substantial assistance

or encouragement” to Winget “so to conduct himself.” See Restatement (Second) of

Torts § 876(b), cited in Carson Fischer, PLC v. Standard Fed. Bank, Nos. 248125,

248167, 2005 WL 292343, at *6 (Mich. Ct. App. 2005), reversed on other grounds by

713 N.W.2d 265 (Mich. 2006).

The differences between an aiding-and-abetting claim and a professional-

negligence claim are thus substantial. For the former cause of action, there is no

requirement that Deloitte owed any duty to Venture. But Gold would need to establish

that Deloitte provided substantial assistance or encouragement to Winget in breaching

the latter’s fiduciary duty to the company. Most importantly, an aiding-and-abetting

claim requires proof that Deloitte acted knowingly, whereas a professional-negligence

claim requires proof of only negligent behavior. Given the differences in the interests

harmed, as well as the differences in the nature and elements of these two types of

claims, the district court did not err in holding that the residual statute of limitations

applied to Gold’s aiding-and-abetting claim.

Gold has also failed to cite a single case where a Michigan court has applied the

professional-negligence statute of limitations to an aiding-and-abetting claim. The

primary case cited by Gold on this issue, Alken-Ziegler, Inc. v. George Bearup, Smith,

Haughey, Rice & Roegge, P.C., No. 264513, 2006 WL 572571 (Mich. Ct. App. 2006),

is easily distinguishable. The corporate plaintiff in Alken-Ziegler filed suit against its

former attorneys, arguing that they committed malpractice by failing to appeal an order

and committed breach of contract where the contract provided that the attorneys would

appeal. Id. at *1. The court first concluded that the corporation’s malpractice claim

was time-barred. Id. at *2. Although the corporation then argued that its breach-of-

contract claim was distinct from its malpractice claim, and thus subject to a separate

statute of limitations, the court disagreed:

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[C]laims against attorneys brought on the basis of inadequate

representation sound in tort and are governed by the malpractice statute

of limitations, even though a plaintiff may assert that the attorney’s

actions breached a contract. Attorneys may be held liable under a

contract theory, but only when it is shown that the attorney breached a

special agreement rather than a general agreement to provide requisite

skill or adequate legal services. A special agreement is a contract to

perform a specific act, as opposed to a general agreement to exercise

appropriate legal skill in providing representation in a lawsuit.

Id. at *3 (citations and internal quotation marks omitted).

Alken-Ziegler does not support Gold’s argument. The primary thrust behind the

court’s opinion in Alken-Ziegler was that both of the corporation’s claims were based

on allegations of inadequate representation. Id. Both were deemed similar enough to

fall within the malpractice statute of limitations. Here, Gold’s aiding-and-abetting claim

is not based on an allegation that Deloitte breached its duty to Venture, but rather that

Winget breached his duty to Venture and that Deloitte knowingly provided substantial

assistance to help him do so. Gold’s claim of aiding and abetting is therefore

significantly different from his claim of professional negligence, thus warranting the

application of a different statute of limitations.

III. CONCLUSION

For all of the reasons set forth above, we AFFIRM the judgment of district court.