Magic Circle Corp., D/B/A Dixie Chopper, Arthur Evans, Wesley Evans, and Jeffrey Haltom v. Crowe Horwath, LLP
2017 Ind. App. LEXIS 101
| Ind. Ct. App. | 2017Background
- Magic Circle (d/b/a Dixie Chopper) sued former auditors Crowe Horwath LLP and others after a 2012 audit revealed a $14 million loss and the company was later sold at a substantial loss.
- Magic Circle alleged Crowe committed accountant malpractice and aided-and-abetted fraud; earlier fraud claims against managers were dismissed with prejudice.
- Crowe moved to dismiss the remaining claims under Trial Rule 12(B)(6), arguing the economic loss rule barred tort recovery and engagement letters contained exculpatory and liability-limitation clauses.
- The trial court granted dismissal, finding the economic loss rule applied and the exculpatory/limitation clauses insulated Crowe; Magic Circle appealed.
- The Court of Appeals accepted Magic Circle’s pleaded facts as true for Rule 12(B)(6) review and considered whether tort recovery for accountant malpractice is barred and whether contract clauses preclude recovery.
- The court reversed, holding the economic loss rule did not bar the malpractice tort claim and that the engagement letters did not mandate dismissal given pleaded allegations (including gross negligence and independent failures not attributable to management misrepresentations).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the economic loss rule bars a tort (accountant malpractice) claim | Accountant malpractice is an exception to the economic loss rule because auditors owe duties independent of the engagement contract | Economic loss rule bars tort recovery for purely economic harms arising from services; claim should be contract-based only | Reversed: economic loss rule does not bar auditor malpractice here—auditors exercise independent professional judgment and duties arise outside the contract |
| Whether engagement letters' exculpatory and liability-limitation clauses preclude tort recovery or cap damages | Engagement clauses do not absolve Crowe of independent tort duties; complaint alleges independent acts of negligence and alleges gross negligence/willful misconduct | Clauses release Crowe from liability for harms attributable to management misrepresentations and cap damages to fees (unless gross negligence/willful misconduct) | Reversed: pleaded facts include independent auditor failures and allegations of gross negligence/willful misconduct, so clauses do not compel dismissal at pleading stage |
Key Cases Cited
- Indianapolis–Marion Cnty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010) (explaining the economic loss rule and its exceptions)
- City of E. Chicago v. E. Chicago Second Century, Inc., 908 N.E.2d 611 (Ind. 2009) (standard for Rule 12(B)(6) review and favoring non-dismissal when recovery is possible)
- Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., 636 N.E.2d 503 (Ill. 1994) (auditor malpractice not barred by economic loss rule where duties arise independent of contract)
- Charter One Mortgage Corp. v. Condra, 865 N.E.2d 602 (Ind. 2007) (de novo review of Rule 12(B)(6) motions)