Fehribach v. Ernst & Young LLP

§ the Title VII or either the on FEHRIBACH, Gregory S. jury’s

claims, not know that we do Plaintiff-Appellant, a single claim on each rested verdict Huff failed demon- that Ms. conclusion work environment. hostile strate LLP, ERNST YOUNG concluded, within may operating jury Defendant-Appellee. working given, that instructions No. 06-3366. Huff was sub- to which Ms. environment hostile, actionably but that the jected Appeals, United States Court not liable under defendants were individual Seventh Circuit. acted with § because had not 24, 2007. Argued May Accordingly, we discriminatory intent. on the jury’s verdict cannot read the July Decided embodying a conclusion § claim as There- Ms. Huff was not harassed.

fore, Title determining VII Sheriffs jury may have reached and

liability, the affirmative defense. on the Sheriffs

relied noted, defense, was not as we have

That proved Huff if Ms.

available the Sheriff her culminated

her claims that harassment tangible employment action.

in a issue submitting

The error in predicate

jury accompanying without the a tangible of whether there was

inquiry action, therefore, preju- did

employment Ms. Huffs claims.

dice

Conclusion that the

Because have concluded dis- we error in court committed reversible

trict

instructing jury on the affirmative de- claim, Ms. Title VII portion

fense Huffs judgment of the district

we reverse proceedings and for further

court remand Ms. Huff opinion. this

consistent with costs this court.

may recover her Remanded

Reversed and jury to a interrogatories. Special claims are submitted upon special inter- interrelated rogatories particularly in cases advisable week after a five trial. this, complicated multiple where such Levin, Levin, Elliott D. Rubin & India- (ar- IN, napolis, Byrne A. Christopher DC, gued), Washington, Trustee-Ap- for pellant. Schroeder, Stanley J. Parzen

James C. Brown, Maw, (argued), Mayer, Rowe & IL, Chicago, Appellee. POSNER, KANNE, and

Before ROVNER, Judges. Circuit POSNER, Judge. Circuit The of Taurus plaintiff is the trustee Foods, Inc., engaged in company a small of meats and other distribution frozen foods, bankruptcy into which was forced of Chapter Bankruptcy under Code charges The suit by three of its creditors. auditor, & Young, Ernst of negligence breach contract qualifica- failing going-concern to include a report. The charges tion an audit Accountancy Act of by Indiana’s governed agree- out of an 2001 because arise professional accounting provide ment § The case Ind.Code 25-2.1-1-1. services. appeal from is before us on trustee’s summary judgment to the grant defendant.

In Ernst & issued October year for Taurus’s fiscal report audit January 1994 to Jan- which ran not uary The did indicate about the enti managed company doubt have real- [audited] “substantial —would ability to continue concern ty’s ized that had no future and time, period reasonable not to for a immediately would avert- liquidated, beyond year one the date of the exceed ing of some the com- costs million that $3 being statements audited.” financial pany incurred as a result of its continued Public Ac Institute Certified American operation under the imposed restrictions countants, Auditing Stan Statement by Bank One’s Milwaukee office and other (1988); Bank v. dards No. 59 see Johnson adversities. Korbakes & George damages trustee’s claim thus is (7th Cir.2006); Copy-Data Systems, Inc. the theory “deepening based on insol America, Inc., F.2d Toshiba vency.” (see, theory This controversial (2d Cir.1985); 299 Drabkin v. Alexander LLC, e.g., In re Global Group, Service 316 (D.C.Cir. 453, & 905 F.2d 456 Grant (Bankr.S.D.N.Y.2004)) 451, B.R. 456-59 al 1990). January That date was 1995. So damages lows sometimes to awarded to report the indicated no “substantial doubt” bankrupt a corporation by delaying that that Taurus would as a continue ran liquidation up additional that it debts January until at least 1996. In concern plug would not have incurred had the been bankruptcy fact Taurus didn’t declare until formulated, pulled originally sooner. As years two later. theory premised the was on the notion that principal Taurus’s banker was Bank borrowing after a becomes insol 1996, May One. In some months after Tau vent “ineluctably” would hurt the share the audit report rus received from Ernst & Brown, 1343, Schacht v. holders. 711 F.2d by the bank became Young, alarmed the (7th Cir.1983). 1350 That puzzling was a in Taurus’s financial condi deterioration suggestion by a hypothesis compa because handed the its tion and account to Milwau ny insolvency harmed deepening was office, specialized in handling kee which spree, insolvent before the borrowing so That risky imposed loans. office restric what the had shareholders to But a lose? Taurus that tions on exacerbated com corporation can be insolvent in sense pany’s attempt business troubles. In an to being to pay unable come bills as disaster, Corry, compa stave off Lisa due, Jeffrey Lipshaw, M. “Law as Ration (and ny’s chief financial the daugh officer Getting Beyond alization: Reason to Busi owners), one of company’s ter of two Ethics,” 959, ness 37 U. Toledo L.Rev. defrauding by inflating started Bank One (2006) (“equity” 1016 insolvency), yet be sales and accounts receiv liquidated worth more than the of its sum daily reports able in that was Taurus re something liabilities so be worth to the quired to make to the bank. She was shareholders; this was to be a assumed eventually caught, prosecuted, convicted, Schacht, in possibility 711 at F.2d prison. and sent to v. United States Cor (7th Cir.2000). ry, 206 F.3d 748 The bank theory could in a also be invoked ruptcy closely exposure followed upon the management case which in cahoots with of her fraud. or an auditor other outsider concealed the state, corporation’s perilous if which dis- presented

The trustee expert evidence closed earlier would have the cor- that enabled Ernst in fail- negligent poration to ing reorganized survive form. going-concern qualification to include a Willet, year, Deepening its audit for fiscal Sabin “The the 1995 Shallows of 549, and that if it had Insolvency,” done so owners of 60 Bus. Law. 565-66 absentees, (2005). However, Taurus —who were not but explained in Tren-

909 1996)), a approximation adheres to Litigation Trust v. Ernst close wick America (Del.Ch. L.L.P., Touche, A.2d 204 v. Corp. 255 N.Y. Young, Ultramares theory (1931) C.J.). makes sense when 2006), (Cardozo, no 174 N.E. And a to create substantive invoked doctrine, or under the Ultramares what that cor punish would prompt liquidation version, we have taken be its Indiana for in the exer management trying porate position in the Taurus’s creditors credi judgment to stave off cise of its business tors, having a contractual relation not bankruptcy, even if there declaration of auditor, have no claim it. De fraud, of fidu were no indication breach Ventures, Daniel, v. 485 F.3d catur LLC ciary wrongdo duty, or other conventional (7th Cir.2007) (Indiana law); Ack liability it do to fix ing. Nor would Schwartz, 846-47 erman lending or invest party third otherwise (7th Cir.1991) (same); see Pricewaterhou it keeping and as a ing in a firm result Massey, LLP v. seCoopers, N.E.2d “management ... misused the going, when (Ind.App.2007). 1259-60 invest opportunity created Taurus had the contractual rela [management] [T]hey ment. ... could tion, sue, though could because and thus it turn the opportunity used that instead liquidated in bankruptcy is and has been it into a company around and transform creditors; really suit is on of the the behalf not, and profitable They business. did liquidation anything that reduces the value company].” therein lies the harm [the (3d 672, corporation 448 678 hurts them. That Corp., In F.3d of the re CitX .2006). Cir impermissible make the an doesn’t suit run around Indiana’s limitation of end case different from present The is (or shareholder) suits au creditor any that we cited. The of the cases have Realistically, corporation is a ditors. a lost invest owners of Taurus their entire stakeholders, but conduit for its that does insolvent. ment the became when corporation’s rights. legal not affect the only They nothing more to lose. The had solvent, yet Taurus were still had Suppose from possible prolongation losers the injured by alleged the negli been auditor’s were corporation’s the miserable existence that The ultimate beneficiaries the gence. the creditors. In a state corporation’s shareholders) (or shareholders, of the allows creditors but suit would be Taurus’s negli to sue the audited firm auditor suppose anomalous even no one would this the gent that misrepresentation, provided themselves —the though the shareholders report reliance on auditor’s creditors’ example not stakeholders this —could foreseeable, e.g., Bank was Citizens State the auditor. Remember that have sued 376, Timm, Co., v. Schmidt & 113 Wis.2d (or law what we as under Indiana (1983) or, in some 335 366 N.W.2d — law), & Young to be Indiana Ernst sumed foreseen, states, actually Island Rhode duty of care to the creditors. But has no Swartz, Bre Hospital Trust Nat’l Bank v. of course have such its it does Jacobs, Yavner & F.2d 851 senoff, Taurus, client, duty, and on which this that (4th Kanne, Cir.1972); Ryan v. founded, just evaporate not is does suit (Iowa 1969) 395, 401-03 N.W.2d —Taurus’s bankrupt any client and is because could sue Ernst & direct creditors suing to its credi will accrue benefits (albeit Indiana, we ly. But have held tors. law, only support case tenuous Indiana claim fails never The trustee’s Community Bank pointed out in First facts, theless, though but fails on the not Kelley, Hardesty, v. Smith & Trust 218, 219-20, for more than a (Ind.App. Taurus survived 223-24 because N.E.2d (in years) three after the audit cies. And no information that year report fact qualification period. going-concern A is contained or should have contained if the if it should have just prediction; been carefully audit was done that indicated report audit and re included harm limp through Taurus couldn’t another consequence of sulted as a foreseeable year report positive though revealed —the omission, firm the auditor is liable to the slight net income in the most recent fiscal Bank audited for that harm. Johnson v. year and obligations no would mature Co., supra, 472 F.3d at George Korbakes year by doing in the next might and so Inc., 443; Int’l see Ziemba Cascade 256 drive the firm under. (11th Cir.2001). Such F.3d 1208-11 report It is true that the failed to cases are rare because it is unusual for the warn Taurus of ominous trends in the plausible firm to able to make a audited frozen-meat distribution business. Inten contention that it could not have been ex competition sified from national firms was pected recognize peril its financial on its causing customers, Taurus to lose thus though supplied own even it the financial revenues; depressing the firm’s at information which the audit was based. time, company’s same rising costs were Chester, Devaney v. No. 83 CIV. higher because of compensation workers’ (S.D.N.Y. 1989). May 1989 WL 52375 premiums and other untoward develop purpose of an audit is to make predicting ments. But Taurus’s future sure the audited financial state any cash flow on basis other than the prepared compa ments-—which are auditor, Feinman, ny, Jay not M. financial year statements for the audit (which “Liability Negligent of Accountants for example would for reveal existing Doctrine, Auditing: Policy, Ideology,” loan-repayment obligations) was not the (2003)— 17, 21-22 31 Fla. St. U.L. Rev. function of the report. audit Ernst & correspond reality, to lest either have Young provide had not contracted to Tau defalcating employee been doctored rus with management-consulting services. innocently or misrepresent company’s auditor’s give “[A]n is not to business financial situation. The auditor is there advice; merely paint it is to an accurate whether, required fore “to state in his picture of the audited firm’s financial con opinion, pre the financial statements are dition, insofar as that condition is revealed in conformity generally accept sented with company’s books and inventory and accounting, identify ed and to principles other sources of an opinion.” auditor’s those circumstances in such princi which Co., Johnson Bank George v. Korbakes & ples consistently have not been in observed supra, 472 F.3d at 443. the preparation of financial statements But qualify there is need to what we period of the current in relation to those of just said. The requirement that the preceding period.” American Institute report any auditor disclose in its substan- Accountants, of “Respon Public Certified tial doubt it has that firm will still be a Independent sibilities and Functions of the going year expands concern in a the audi- Auditor,” in Statements on Codification of duty beyond verifying tor’s that of Standards, (2007); Accounting § 110.01 accuracy of the company’s financial state- Bily see Young Arthur 3 Cal.4th accounting ments. The (1992). require standards 370, 11 Cal.Rptr.2d 834 P.2d 745 the auditor to be on the lookout for “cer- There is Young no contention that Ernst & that, tain conditions or events failed to notice when con- discrepancies between the aggregate, statements and actual sidered finan indicate there cial situation. There were no discrepan- could be substantial doubt about the enti- Id., §§ 314.01-.02 environment.” concern and its as a ability to continue ty’s added). (emphasis of time.... period for a reasonable of such conditions examples are following auditor Yet nowhere is the re and events”: matters, investigate external see quired n re- example, trends —tor Negative 314.01-17, id., “discov §§ as distinct from losses, working curring operating engagement.” ering during the them] deficiencies, cash negative capital Venuti, Going-Concern Elizabeth K. “The activities, ad- operating flows Assessing a Com Assumption Revisited: ratios key financial verse Viability,” CPA Journal pany’s Future n possible indications Other finan- 2004), www.nysscpa.org/ (May de- example, cial (visit difficulties —for printversions/cpaj/2004/504/p40.htm agreements, or similar fault on loan 2007). accounting An firm ed June dividends, denial arrearages audit of a multi that conducts an annual suppliers, trade credit from usual in a multitude of of unrelated firms tude debt, noncompliance restructuring of expected to industries cannot be different statutory capital requirements, environ in the firms’ business expert or meth- to seek new sources need accounting firms like Ernst Large ments. dispose financing or ods in into practice do divide their assets substantial accountants as groups, and the dustry n example, matters —for Internal particular group doubtless signed to labor diffi- stoppages or other work But the companies. know a lot about the culties, dependence on substantial supply to assess the auditor is not hired project, particular of a the success facing the audited demand conditions commitments, long-term uneconomic by the firm or If the auditor is told firm. opera- revise significantly need information that learns from the otherwise tions that the conducting the audit it collects n have oc- matters that External endangered prospects firm’s near-term proceed- example, legal curred —for a cus the loss of by pending legislation, matters or similar ings, legislation, events,” tomer, “conditions or or other entity’s jeopardize an might into its factor the information then it must key fran- operate; loss of a ability to un risk of of the firm’s assessment chise, license, of a patent; or loss expected year. a But it is not within der supplier; customer or principal to re expertise assumed duplicate the to underinsured catastro- uninsured or in man in the firms themselves side earthquake, drought, as a phe such in the specializing consultants agement or flood. Young could not industry. Ernst & firm’s Public Ac- Institute of Certified American more about expected to know have been countants, “The Auditor’s Consideration busi frozen-meat distribution trends in the Going a Ability to as Entity’s an Continue Taurus, in that which had been than ness Concern,” § It is the last supra, 341.06. years. for more than business mat- referring to “external point, bullet no claim has the trustee’s So ters,” duty— auditor’s that stretches the by the one- it is also barred merit —and case, this far as bears on especially, so Accoun in the of limitations year statute customer principal to “loss of a reference “the Act, begins to run when tancy which the standards Elsewhere supplier.” or omission, act, neglect is discov or alleged “an must have that the auditor emphasize by discovered have been entity ered or should understanding of the appropriate Taurus) diligence.” the exercise of reasonable Ind. when she embarked on her parties § Code 25-2.1-15-2. The assumed course of fraud year more than a before only in if the district court that the date of bankruptcy. The trustee argues that discovery year was more than a before the Corry thought Taurus could weather the filed, bankruptcy was which was in Janu- storm—which is possible explana- indeed a ary than year rather more than a tion of her decision commit fraud on the against before the action Young Ernst & company’s behalf. If Taurus would indeed by the brought (originally was trustee have been better off liquidating earlier action, adversary an but later moved to the later, Corry than would not have been 157(d)), § court under district 28 U.S.C. motivated to commit a fraud intended to would the suit be time-barred. Bank- delay liquidation. Yet the critical ruptcy Code extends the statute of limita- event that doomed the company, according filing adversary tions for the actions trustee, to the was Bank imposition One’s years the trustee to two after the declara- May restrictions on Taurus in of 1996. 108(a). bankruptcy. § tion of 11 U.S.C. argument So the has to be that had Ernst years The suit was filed more than three & going-concern included the quali- bankruptcy, after the declaration of but fication in its audit of October Ernst Young point failed to raise the sooner, Bank One would have precip- acted court, the district so it is forfeited this itating an liquidation. earlier possi- This court. bility fully was known Corry by the fall found, however, judge The district of 1996. The effect of the restrictions year the fall of more than a imposed by Bank amplified One was when Corry before the bankruptcy, Lisa knew plummeted Taurus’s sales during the sum- everything she had to know in order to mer of Corry but knew all about this determine company whether the had been too, yet it didn’t deflect trying her from injured by Young’s Ernst & failure to have liquidation. avert included going-concern qualification So the suit correctly dis the audit report for Taurus’s 1995 fiscal missed. But that, the trustee argues even year. Her knowledge of a senior —that so, if that is the district court should not responsible officer for the fi have taxed him costs to because Taurus is nances—is company. treated as that of the indigent. The indigent It idea that an would not should be had she stealing been from costs, not be company, taxed though crops up it Cenco Inc. v. Seidman Seidman, (not (7th Cir.1982), bar, time to time as an absolute but as since as we mentioned earlier one task factor for consider, the district court to an protect auditor is to e.g., In re Paoli R.R. Litiga Yard PCB employees. dishonest But tion, she was 449, (3d 221 F.3d Cir.2000); 462-64 stealing the company. precisely, More (4th Haynes, Flint v. for 973-74 owners, she was stealing for the id. at 454- Cir.1981)), peculiar, is since if a defendant 55; know, for all may we she have been (or it) truly is indigent, pay he can’t costs. hurting the creditors. But remember that However, “indigency” rarely connotes ab the auditor had no legally enforceable poverty, solute for think of the require of care to the creditors. prisoners ment that pay portion of their parlous filing

The fees even if pay state of Taurus’s can’t finances the whole (a fully by Corry C.P.A., up §§ known amount 1915(b)(1), front. 28 U.S.C (2). though she had allowed her C.P.A. license And when “indigent” is a bank to expire working since she was exclusively rupt, be, usually the issue will as in this bankrupt pay can case, not whether SALAS, Plaintiff-Appellant, Francisco to allo- required it should

but whether to a victo- remaining assets part cate litigation rather than opponent rious DEPARTMENT OF COR WISCONSIN its creditors. RECTIONS, Raemisch, Richard F. any reason cannot think of We Grosshans, Sym A. Denise A. William of a over the winner prefer the creditors Moberly, don, and Leann Defendants- against him. brought on their behalf suit Appellees. moreover, are not allowed Corporations, No. 06-2483. Rowland v.

proceed pauperis, in forma Colony, Men’s U.S. California Appeals, Court of United States 201-06, 716, 121 L.Ed.2d 656 113 S.Ct. Seventh Circuit. (1993), escape paying them to and to allow 3,May Argued 2007. costs, indigency, would blur grounds and between individuals the distinction July 2007. Decided reasons, it is in corporations. For these Rehearing Aug. Denied of course’ “better to award costs ‘as deed 54(d) (which says) ] is what [Fed.R.Civ.P. question bankruptcy

and leave to possible. is Discretion

whether collection an award when

may be exercised otherwise up

the victor has run costs or par judicial process, but the

abused good is not a reason to

ties’ relative wealth winner, any more than a

deny costs to the good

losing litigant’s indigence would be damages to withhold an award of

reason theft, contract.” battery, or breach of City Chicago, 469 F.3d

Rivera v. (7th Cir.2006) (concurring opinion). award of costs judgment and the

Affirmed.

ROVNER, concurring. Judge, Circuit is barred agree

I that this action limitations, would limit the

statute of to that issue alone.

decision

Case Details

Case Name: Fehribach v. Ernst & Young LLP

Court Name: Court of Appeals for the Seventh Circuit

Date Published: Jul 17, 2007

Citation: 493 F.3d 905

Docket Number: 06-3366

Court Abbreviation: 7th Cir.