Title: Coleman, et al. v. Pricewaterhousecoopers, Inc.

State: delaware

Issuer: Delaware Supreme Court

Document:

IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
RICHARD COLEMAN, CARL  
§ 
SLEDZ, MARIETTA DENNIS, 
§ 
STEVEN COLEMAN and SHANE 
§ 
LYNAGH, 
 
§ 
 
 
§ 
No. 589, 2003     
 
Plaintiffs Below, 
§ 
 
Appellants, 
 
§ 
Court Below:  Superior Court  
 
 
§ 
of the State of Delaware in and  
               v. 
 
§ 
for New Castle County 
 
 
§ 
PRICEWATERHOUSECOOPERS, § 
LLC, 
 
§ 
 
 
§ 
 
Defendant Below, 
§ 
 
Appellee. 
§ 
 
 
Submitted: April 7, 2004 
 
Decided: 
July 16, 2004 
 
Before STEELE, Chief Justice, BERGER and JACOBS, Justices. 
 
Upon appeal from Superior Court.  REVERSED. 
 
 
 
Kevin William Gibson, Esquire, of Gibson & Perkins P.C., 
Wilmington, Delaware; Attorneys for Appellants. 
 
 
Gregory V. Varallo, Esquire, and Lisa M. Zwally, Esquire, of 
Richards, Layton & Finger, Wilmington, Delaware; Of Counsel:  Martin  L. 
Perschetz, Esquire, and Joanna Goldenstein, Esquire, of Schulte Roth & 
Zabel, New York, New York; Attorneys for Appellee. 
 
 
 
 
JACOBS, Justice:
The plaintiffs, who are former owners of Digital Imaging & 
Technologies, Inc. ("DIT"), sold that firm to Lason, Inc. ("Lason"), a 
company later found to have engaged in fraudulent accounting practices.  At 
the closing of the sale of DIT, Lason paid only a portion of the purchase 
price.  Because Lason thereafter filed for bankruptcy, it became unable to 
pay the balance of the purchase price.  Accordingly, the plaintiffs sued 
Lason’s public accounting firm, defendant PricewaterhouseCoopers, LLC 
("PWC"), in the Superior Court on February 21, 2003.   
The plaintiffs claimed that PWC had negligently failed to uncover the 
fraud during its audit of Lason’s financial statements, upon which the 
plaintiffs had relied before agreeing to the sale of DIT.  The defendant, 
PWC, defended on the ground that the accounting malpractice claim was 
barred by the three-year statute of limitations.  The basis for that defense 
was an e-mail sent to the plaintiffs on January 6, 1999.  That e-mail (PWC 
claimed) put the plaintiffs on inquiry notice of a possible claim against 
PWC, and that as a consequence, the statute of limitations began to run on 
January 6, 1999.  The Superior Court accepted this argument and granted 
PWC's motion for summary judgment on limitations grounds.  We conclude 
that the Superior Court erred and that its grant of summary judgment must 
be reversed. 
 
2
I.  Facts 
The plaintiffs below-appellants, Richard Coleman, Carl Sledz, 
Marietta Dennis, Steven Coleman, and Shane Lynagh (the “plaintiffs”), 
incorporated DIT in 1990 to engage in the business of providing data/image 
capture for customers.  During the 1990s, Lason also developed a data/image 
capture capability; and between 1996 and 1999, Lason acquired numerous 
independent data/image capture companies in an effort to compete 
successfully in that market.  In 1998, the plaintiffs, as owners of DIT, were 
approached by Lason executives, who proposed that Lason acquire DIT.  
After negotiations, the parties signed a letter of intent and began their due 
diligence investigation.   
Defendant below-appellee PWC, a public accounting firm, had 
performed the due diligence work for Lason in most of Lason’s acquisitions.  
Moreover, PWC had prepared Lason’s Annual Report, SEC forms 10-K and 
10-Q, and Lason's audited and unaudited financial statements for the periods 
ending December 31, 1997 and September 30, 1998.  The plaintiffs 
reviewed, and relied upon, those financial statements before deciding to go 
forward with the sale of DIT to Lason.  In addition, before finalizing the 
acquisition, the plaintiffs met personally with PWC representative, Timothy 
Molnar, CPA, to review the financial documents.  At that meeting, the 
 
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plaintiffs specifically asked Molnar whether there was “anything else” they 
should know about the financial condition of Lason.  Molner reassured them 
that the documents they had been furnished presented an accurate picture of 
Lason’s financial condition. 
The parties' letter of intent, which was signed during the summer of 
1998, recited that the base purchase price to be paid for one hundred percent 
(100%) of DIT's outstanding stock would be $18 million, less existing debt, 
plus an "earn out" formula tied to DIT's future EBITDA.  The base purchase 
price was to be paid eighty-five percent (85%) in cash and fifteen percent 
(15%) in Lason stock.1  The merger was consummated on November 25, 
1998.  On that date, the plaintiffs received $6.5 million, with the balance to 
be paid over three years.  
Shortly before the merger closed, DIT renegotiated the terms of an 
outstanding $1.9 million loan.  As renegotiated, that debt would be satisfied 
by DIT paying a lump sum of $1.1 million out of the proceeds of the merger.  
The result was an $800,000 forgiveness of debt.  That amount was 
accounted for as an “accrued expense” on DIT’s records. 
   
                                                 
1 According to the complaint, after PWC completed its due diligence, that purchase price 
was renegotiated down to $13 million, with “earn-out” potential (structured as a 
repurchase of the former DIT owners' Lason stock by Lason) of $25 million over the 
three-year period following the merger.  Appellants' Appendix, at A000013, ¶ 55.  
Whether or not that in fact occurred is not material to our disposition of this appeal.   
 
4
After the closing, there were communications between DIT and Lason 
executives, including several e-mails that were sent in connection with 
making the opening balance sheet adjustments.  In one of those e-mails, 
Lason’s assistant comptroller, Robert Bassman, wrote to DIT’s Chief 
Financial Officer, Al Lydon, on January 6, 1999.  Bassman's January 6, 
1999 e-mail stated, in relevant part: 
[N]ote the $800,000 posted to “accrued expenses”.  this is the 
extraordinary gain relating to the forgiveness of a portion of the 
OPIC note payable.  proper GAAP would be to record the 
entire amount as reduction of goodwill. however, i have elected 
an aggressive accounting approach in order to create more tail 
wind and cushion for 1999. 
 
take $400,000 of the $800,000 and record into income in 
December.  i don’t really care where you put it so long as it is 
not obvious to the auditors should they look at your numbers.  
the remainder we will save for a rainy day in 1999.  
 
Upon receiving that e-mail, Mr. Lydon became concerned about the 
propriety of Bassman's instruction.  Lydon notified plaintiff Coleman, who 
in turn contacted Lason’s Chief Executive Officer, Gary Monroe, and asked 
for an explanation.  Responding to Coleman, Monroe apologized for the 
wording of the e-mail, and assured Coleman that the accounting for the 
transaction would have PWC’s blessing.  Having been thus reassured, 
Coleman told Mr. Lydon to make the accounting adjustment as instructed in 
the January 6, 1999 e-mail. 
 
5
By December 1999, Lason’s stock price had significantly fallen.  On 
December 9, 1999, Monroe issued a public announcement which stated that 
“[w]e are not aware of any reason for Lason’s share price decline.”  On 
December 17, 1999, Monroe initiated a conference call with the plaintiffs 
and others who had sold their businesses to Lason.  In that conference call, 
Monroe assured them that despite the decline in Lason's share price, Lason's 
financial condition was strong.  By the next trading day, however, Lason’s 
common stock had fallen from a high (for that year) of $64.94 per share on 
February 1, 1999, down to $11.88 per share on December 20, 1999. 
In May 2000, Lason informed the plaintiffs and the other persons who 
had sold their businesses to Lason, that Lason was reviewing the “current 
circumstances of each [earn out] agreement and relationship.”  By June 
2000, Coleman and Lydon became so concerned about Lason's “troubling” 
business practices that they flew to Detroit from San Diego to meet with a 
newly-appointed, independent Lason director, Bill Brooks.  Mr. Brooks 
advised the plaintiffs that he would “check things out” and get back to them, 
but he never did.   
In July 2000, Lason’s board of directors commenced an internal 
investigation into possible accounting irregularities at Lason.  The Lason 
board appointed a “Special Committee,” which retained legal counsel and 
 
6
initially retained PWC to investigate the irregularities.  After eight months of 
investigation, on March 23, 2001, the Special Committee caused a Form 8K 
to be filed with the Securities and Exchange Commission (“SEC”).  The 
Form 8K disclosed significant accounting irregularities in earlier Lason 
financial statements. 
On December 5, 2001, Lason filed a voluntary petition under Chapter 
11 of the United States Bankruptcy Code.  Later, Lason’s Chief Executive, 
Financial and Operating Officers were all indicted for securities fraud. 
The plaintiffs filed this action against PWC on February 21, 2003, 
claiming accounting malpractice and negligent misrepresentation.  Their 
specific claim was that if PWC had audited Lason's financial statements 
properly, Lason’s accounting irregularities and its nonconformity with 
generally accepted accounting principles (GAAP) would have been 
discovered, and no sale of DIT to Lason would ever have occurred. 
In granting PWC’s motion for summary judgment, the Superior Court 
held that the January 6, 1999 e-mail directing Lydon to make the $800,000 
adjustment was sufficient to put the plaintiffs on notice of potential problems 
between Lason and its auditor, PWC.  As a consequence, the Court held, the 
plaintiffs should have investigated the matter further with PWC 
representatives; and had they done so, plaintiffs would have uncovered the 
 
7
facts underlying their claim before the three year limitations period expired 
on or about January 6, 2002.2  Because the complaint was not filed until 
February 2003, the claim was time-barred. 
II.  Analysis 
This Court reviews a trial court’s grant of summary judgment de 
novo.3  Summary judgment is to be granted only when there is no genuine 
issue as to any material fact and the moving party is entitled to judgment as a 
matter of law.4 
The sole issue is whether the trial court properly determined, as a 
summary judgment matter, that this action was barred by the statute of 
limitations found at 10 Del. C. § 8106.  Section 8106 pertinently provides 
that no action "shall be brought after the expiration of 3 years from the 
accruing of the cause of such action."  Generally, a cause of action arising in 
tort "accrues" at the time the tort is committed.  Under Section 8106, the 
period of limitations normally begins to run at the time of the wrongful act.  
Ignorance of the cause of action will not toll the statute, absent concealment 
or fraud, or unless the injury is inherently unknowable and the claimant is 
                                                 
2 Coleman v. PriceWaterhouseCoopers, LLP, C.A. No. 03C-02-137, at 19-20 (Del. 
Super. Ct. Nov. 18, 2003). 
 
3 Kaufman v. C.L. McCabe & Sons, Inc., 603 A. 2d 831, 833 (Del. 1992). 
 
4 Super. Ct. Civ. R. 56(c), Burkhart v. Davies, 602 A. 2d 56, 59 (Del. 1991). 
 
 
8
blamelessly ignorant of the wrongful act and the injury complained of.5  In 
the latter circumstance, the statute of limitations begins to run upon the 
discovery of facts “constituting the basis of the cause of action or the 
existence of facts sufficient to put a person of ordinary intelligence and 
prudence on inquiry which, if pursued, would lead to the discovery” of such 
facts.6    
This Court has applied the above-described “discovery rule” in cases 
claiming accounting7 and attorney8 malpractice, because of the special 
character of the relationship between the professional and the client, and the 
inability of a layperson to detect the professional’s negligence.9  The 
application of that rule is necessarily based on the facts of each case.10  No 
party disputes that this case implicates the discovery rule.  The professional 
nature of the relationship between PWC and the plaintiffs; the plaintiffs' 
inability to acquire by other means, information about the accounting 
                                                 
5 Isaacson, Stolper & Co. v. Artisan's Sav. Bank, 330 A.2d 130, 132-33 (Del. 1974) 
(citing Mastellone v. Argo Oil Corp., 82 A.2d 379 (Del. 1951), and Layton v. Allen, 246 
A.2d 794 (Del. 1968)). 
 
6 Becker v. Hamada, Inc., 455 A. 2d 353, 356 (Del. 1982). 
 
7 Isaacson, 330 A.2d 130. 
 
8 Child, Inc. v. Rodgers, 377 A.2d 374 (Del. Super. Ct. 1977), aff’d Pioneer Nat'l Title 
Ins. Co. v. Child, Inc., 401 A.2d 68, 72 (Del. 1979). 
 
9 Isaacson, supra, at 133. 
 
10 Id. 
 
9
treatment of Lason's financial statements upon which the plaintiffs relied 
when DIT was acquired; and the need for persons in the plaintiffs' position 
to rely upon the accounting work performed by PWC, permit no other 
conclusion. 
The question presented on this appeal is whether the January 6, 1999 
e-mail was sufficient, as a matter of law, to put plaintiffs on inquiry notice of 
a potential claim that PWC had negligently failed to uncover Lason’s 
improper accounting practices during its audit of Lason's 1997 and 1998 
financial statements.  This Court concludes that that question must be no, for 
two reasons.  First, it is unclear, as a factual matter, whether or not the 1999 
e-mail should have aroused the plaintiffs’ suspicions to a degree sufficient to 
impose upon the plaintiffs a duty of further inquiry.  Second, it is impossible 
to determine from the present record whether a more diligent investigation, 
even if pursued, would have uncovered facts sufficient to enable the 
plaintiffs to discover the basis of their accounting malpractice claim. 
With regard to the first issue, this Court cannot hold, as a matter of 
law, that the January 6, 1999 e-mail, by itself and without more, was 
sufficient to impose upon the plaintiffs a duty to conduct a further 
investigation.  A person of ordinary intelligence and prudence could draw 
competing inferences from the statements made in that e-mail and from the 
 
10
response of Lason’s CEO, Mr. Monroe, to the plaintiffs' follow-up inquiry.  
The plaintiffs testified that Monroe led them to believe that PWC would be 
informed of the e-mail, and that PWC would approve of the accounting 
treatment described therein.  Moreover, Messrs. Coleman and Lydon (both 
of whom were certified as accountants), and expert witness William N. 
Easton, III, CPA, all testified that the entries were in the “gray area” of 
accounting and were not per se forbidden under GAAP.  Additionally, Mr. 
Easton’s affidavit states that the January 6, 1999 e-mail would not, “in and 
of itself” arouse him “to be suspicious of the accounting practices of Lason.”  
Thus, there was no “red flag” that clearly and unmistakably would 
have led a prudent person of ordinary intelligence to inquire whether PWC 
had negligently failed to determine that Lason’s pre-acquisition accounting 
practices violated GAAP.  To be sure, an inference to that effect could be 
drawn; however, opposite inferences could be drawn as well.  The issue, 
therefore, is clearly one of disputed fact, the resolution of which requires a 
trial.  The trial court erred in concluding, as a matter of law, that the 
plaintiffs' receipt of the January 6, 1999 e-mail placed them on inquiry 
notice.        
The trial court also erred in granting summary judgment to PWC for a 
second reason.  Assuming without deciding that the plaintiffs were on 
 
11
inquiry notice, it cannot be determined, on the present record, whether a 
diligent inquiry by plaintiffs would have uncovered facts sufficient for them 
to assert an accounting malpractice claim.  Upon receiving the January 6, 
1999 e-mail, the plaintiffs did, in fact, immediately inquire into its contents.  
DIT's CEO contacted Lason's CEO, Mr. Monroe, and expressed to him their 
concerns.  Monroe, however, gave the plaintiffs false reassurances, and 
misleadingly failed to give them accurate information regarding the much-
later-discovered accounting irregularities at Lason.  Indeed, even the Special 
Committee of the Lason board, which (unlike the plaintiffs) had full access 
to Lason’s books and records, required eight months to uncover the 
accounting irregularities after commencing its internal investigation.  Insofar 
as the record discloses, the plaintiffs' access to information was limited to 
those Lason executives who were later indicted for securities fraud.   
Those facts alone preclude a determination as a matter of law that a 
more diligent inquiry by plaintiffs would have enabled them to uncover the 
irregularities between January 1999 and January 2002.  Thus, it was error to 
conclude, as a matter of law, that a diligent inquiry by these plaintiffs, 
beginning in 1999, would have revealed facts that would have enabled them 
to bring their malpractice cause of action within the three year limitations 
period.  That issue must also be resolved at trial. 
 
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For these reasons, the order of the Superior Court granting summary 
judgment to PWC is reversed.