Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almd-2_11-cv-00746/USCOURTS-almd-2_11-cv-00746-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1452 Removal of claims related to bankruptcy case

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IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF ALABAMA

NORTHERN DIVISION

THE COLONIAL BANCGROUP, INC., )

and KEVIN O’HALLORAN, )

)

Plaintiffs, )

)

v. ) CASE NO. 2:11-CV-746-WKW

) [WO]

PRICEWATERHOUSECOOPERS, LLP, )

and CROWE HORWATH, LLP, )

)

Defendants. )

MEMORANDUM OPINION AND ORDER

This case is before the court on the motions to dismiss (Docs. # 34 & 35) 

filed by Defendant PricewaterhouseCoopers, LLP (“PwC”), and Defendant Crowe 

Horwarth, LLP (“Crowe”). Defendants seek dismissal of the breach of contract 

and professional malpractice claims brought against them in the Amended 

Complaint (Doc. # 28) filed by Plaintiffs The Colonial BancGroup, Inc. (“CBG”), 

as post-confirmation debtor, and Kevin O’Halloran, as plan trustee acting for and 

on behalf of the debtor (collectively, “the Trustee”).1The parties have fully 

briefed the issues and provided the contracts and other documentation underlying 

the claims. The motions are due to be denied.

 

1 A similar suit against Defendants was initiated by FDIC as Receiver of Colonial Bank. 

FDIC v. PricewaterhouseCoopers, LLP, 2:12-CV-957-WKW. 

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I. JURISDICTION AND VENUE

The Trustee commenced this suit in the Circuit Court of Montgomery 

County, Alabama, and it was removed by Crowe to this court. Removal to the 

district court of civil proceedings arising in or related to bankruptcy cases is 

authorized. See 28 U.S.C. § 1334(b) and § 1452(a). Because this action relates to 

CBG’s bankruptcy, the court has jurisdiction. Venue is also proper, as the Circuit 

Court of Montgomery County lies within this district and division. See 28 U.S.C. 

§ 1441(a) and § 1452(a). Personal jurisdiction is not contested.

II. STANDARD OF REVIEW

A Rule 12(b)(6) motion tests the sufficiency of the complaint against the 

legal standard articulated by Rule 8: “a short and plain statement of the claim 

showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). To survive a 

motion to dismiss under Rule 12(b)(6), a complaint must contain sufficient factual 

allegations, “accepted as true, to ‘state a claim to relief that is plausible on its 

face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. 

Twombly, 550 U.S. 544, 570 (2007)). While detailed factual allegations are 

unnecessary, the standard demands “more than labels and conclusions,” something 

beyond a “formulaic recitation of the elements of a cause of action.” Twombly, 

550 U.S. at 555. It is not enough for a plaintiff to allege that it is entitled to relief; 

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it must plead facts that “permit the court to infer more than the mere possibility of 

misconduct.” Iqbal, 556 U.S. at 679.

III. BACKGROUND

The allegations of the Amended Complaint (Doc. # 28) are briefly 

summarized here. Additional allegations will be cited as necessary throughout the 

opinion.

The Trustee alleges that CBG, a bank holding company, and its wholly

owned subsidiary, Colonial Bank, were victimized by a massive fraud from 

approximately 2002 to 2009. The fraud was perpetrated by two Colonial Bank 

employees, Catherine Kissick and Teresa Kelly, who conspired with employees of 

Taylor Bean & Whitaker Mortgage Corporation (“TBW”), Colonial Bank’s 

mortgage warehouse lending division’s (“MWLD”) largest customer, and TBW’s 

president, Lee Farkas. The fraud primarily consisted of TBW selling to CBG 

interests in qualifying pools of mortgages that did not exist. When the fraud was 

finally detected, the FDIC closed and sold Colonial Bank; CBG filed for 

bankruptcy; and the fraudsters were convicted for their crimes. Defendants are the 

accounting firms retained by CBG to serve as Colonial Bank’s auditors during the 

relevant time period. Crowe provided internal auditing services, and PwC served 

as outside independent auditor. The Trustee alleges that both PwC and Crowe

failed to detect the fraud, which caused financial injury to CBG. This failure gives 

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rise to CBG’s claims against Crowe and PwC for breach of contract and 

professional negligence.

IV. DISCUSSION

A. Breach of Contract Claims

1. Crowe

Crowe argues that CBG does not allege facts that plausibly support CBG’s 

substantial performance of its own obligations under the contract. Specifically, 

Crowe complains that CBG has not alleged – and indeed cannot allege – facts to 

support the inference that CBG “ensure[d] that all information provided to [Crowe] 

is accurate and complete in all material respects, contains no material omissions, 

and is updated on a prompt and continuous basis,” one of “The Bank’s 

Responsibilities” contained in their engagement letters. (Doc. # 34-1, 4/17/2007 

Engagement Letter, at 4.) CBG counters that Crowe merely assumes that the 

criminal fraud perpetrated by Colonial Bank employees is conclusive proof that 

CBG could not have provided accurate information as required by the contract, but 

that it is a factual issue not appropriate for resolution at the motion to dismiss 

stage. CBG argues that its substantial performance of all material contract terms is 

sufficiently alleged to survive a motion to dismiss.

The parties agree that, based on their engagement letters’ choice-of-law 

provision, the breach of contract claim is governed by Illinois law. To properly 

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plead a breach of contract claim, a plaintiff must allege the existence of a valid and 

enforceable contract, performance by the plaintiff, defendant’s failure to comply 

with a duty imposed by the contract, and a resultant injury to the plaintiff. 

Van der Molen v. Wash. Mut. Fin., Inc., 835 N.E.2d 61, 69 (Ill. App. Ct. 2005); 

Gallagher Corp. v. Russ, 721 N.E.2d 605, 611 (Ill. App. Ct. 1999). To survive a 

motion to dismiss, the plaintiff must have alleged his own substantial compliance 

with all material terms of the agreement. George F. Mueller & Sons, Inc. v. N. Ill.

Gas Co., 336 N.E.2d 185, 188 (Ill. App. Ct. 1975); see also InsureOne Indep. Ins.

Agency, LLC v. Hallberg, 976 N.E.2d 1014, 1025 (Ill. App. Ct. 2012). “Whether a 

contract has been performed according to its terms is a question of fact,” George F. 

Mueller & Sons, 336 N.E.2d at 188, to be decided by the jury. Ralph v. Karr Mfg. 

Co., 314 N.E.2d 219 (Ill. App. Ct. 1974). 

CBG adequately alleges substantial performance of its duties under the 

engagement letters:

At all relevant times, [CBG] performed, or substantially performed, its 

material obligations under the engagement letters, including, without 

limitation, the payment of millions of dollars in fees and expenses to 

Crowe for services rendered, the arrangement of onsite workspace for 

the conduct of the audit services as and when requested by Crowe and 

the provision of access to books and records of [CBG] and its 

subsidiaries to the extent and in accordance with Crowe’s request. At 

no time during the course of the engagements did Crowe ever provide 

notice to [CBG] of any failure to perform its obligations under any of 

the engagement letters.

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(Am. Compl. ¶ 180.) The factual allegations of the Amended Complaint are 

incorporated into Count IV, the breach of contract claim against Crowe. Whether 

the parties performed their contractual obligations are questions of fact that cannot 

be decided at least until after discovery, and probably not until trial. Moreover, it 

needs to be determined whether the provision at issue is a material contract term (if 

not, then performance need not be pleaded at all) or a condition precedent (if so, 

then performance may be pleaded generally under Rule 9(c) of the Federal Rules 

of Civil Procedure). Crowe does not address these legal issues, perhaps because 

CBG’s characterization of “The Bank’s Responsibilities” in the engagement letters 

as a general obligation on the part of CBG to cooperate with Crowe’s auditing 

services is a fair interpretation of the contract. In any event, the pleading is 

sufficient to state the element of the claim requiring the plaintiff’s performance. 

Twombly and Iqbal do not require CBG to prove the breach of contract, only to 

assert its plausibility. CBG has met this burden. Crowe’s motion to dismiss on 

this ground is due to be denied.

2. PwC

PwC makes similar arguments in support of dismissal of CBG’s breach of 

contract claim against PwC. PwC asserts that CBG has not alleged its own 

performance under the engagement letters and that the alleged facts documenting 

the fraud by Colonial Bank employees show that CBG did not, and could not have, 

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performed its contract obligations. The contracts between CBG and PwC do not 

contain a choice of law provision, but the parties agree that the contract is 

governed by Alabama law. To plead a breach of contract claim, a plaintiff must 

allege the existence of a valid and binding contract, performance under the contract 

by the plaintiff, the defendant’s nonperformance, and damages. See Jones v. Alfa 

Mut. Ins. Co., 875 So. 2d 1189, 1195 (Ala. 2003); Winkleback v. Murphy, 811 

So. 2d 521, 529 (Ala. 2001).

CBG adequately alleges substantial performance of its duties under the 

contracts with PwC. (Am. Compl. ¶ 169.) The factual allegations of the Amended 

Complaint are incorporated into Count II, the breach of contract claim against 

PwC. Both CBG’s and PwC’s performances under the contracts are questions of 

fact that cannot be decided at the motion to dismiss stage, where the breach of 

contract is plausibly alleged. PwC’s motion to dismiss on this ground is due to be 

denied.

B. Professional Negligence Claims

1. Crowe

While Crowe asserts that Alabama law governs the negligence claim, CBG 

asserts that Florida law may ultimately govern due to where the injury took place. 

Crowe’s arguments at this stage will be addressed under the assumption that 

Alabama law applies.

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Crowe argues that CBG’s professional negligence claim should be dismissed 

for two reasons. First, Crowe argues that, because the alleged injury occurred in 

relation to Crowe’s contractual duties, CBG cannot allege a negligence claim in 

addition to a breach of contract claim. This argument misstates indisputably clear 

Alabama law on professional malpractice. Alabama law imposes on accountants a 

“duty to exercise reasonable professional care,” regardless of the existence of a 

valid contract between accountant and client. Blumberg v. Touche Ross & Co., 

514 So. 2d 922, 925 (Ala. 1987). Where a valid contract does exist, plaintiffs 

injured by their accountant’s misconduct are not precluded from bringing an action 

in either contract or tort:

In Alabama, one who contracts with another and expressly promises 

to use due care is undoubtedly liable in both tort and contract when 

his negligence results in injury to the other party. He is liable in 

contract for breaching an express promise to use care. He is liable in 

tort for violating the duty imposed by law on all people not to injure 

others by negligent conduct. The injured party has the choice of 

remedies when a contract contains an express promise to use due care.

Id. at 927. CBG alleges that Crowe contracted with CBG to perform accounting 

services and promised to comply with particular accounting standards when 

providing those services. (Am. Compl. ¶¶ 119–160.) Therefore, CBG may 

maintain both causes of action against Crowe.

Crowe’s second argument for dismissal is that, although it provided internal 

auditing services to CBG, it was not CBG’s internal auditor, and thus it had no 

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professional duty of care to CBG. The distinction between “provider of outsourced 

internal audit services” and “internal auditor” is reed thin, and it makes no 

difference with regard to an accountant’s duty to exercise reasonable professional 

care. The allegations, taken as true, establish that Crowe engaged in auditing 

services and thus had a duty of professional care.

2. PwC

PwC argues that CBG’s professional negligence claim against PwC must be 

dismissed because the Amended Complaint alleges contributory negligence on the 

part of CBG and CBG’s agent, Crowe. The parties disagree as to which state’s law 

governs the negligence claim. Again, assuming without deciding, the court will 

address the arguments at this stage under Alabama law.

Under Alabama law, “[c]ontributory negligence is an affirmative and 

complete defense to a claim based on negligence.” Serio v. Merrell, Inc., 941 

So. 2d 960, 964 (Ala. 2006) (quotation marks and citation omitted). That is, even 

if PwC is found to be negligent, CBG would not be able to recover if CBG’s own 

negligence is found to have proximately contributed to its damages. However, 

contributory negligence is a question of fact for the jury. Id. Although the issue 

may be decided as a matter of law in rare circumstances, the allegations of the 

Amended Complaint do not establish the contributory negligence of CBG any 

more conclusively than they establish the negligence of PwC and Crowe. For this 

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reason, the motion is due to be denied. Still, the court briefly addresses the 

substance of PwC’s arguments.

PwC’s contributory negligence defense fails under both of its agency 

theories.

2

PwC proposes two theories under which wrongful conduct of others

may be imputed to CBG. First, PwC argues for the imputation of Kissick’s and 

Kelly’s fraud to CBG, characterizing those Colonial Bank employees as members 

of CBG’s management or at least as agents of CBG. Even if those allegations 

were made in the Amended Complaint, which they are not, the theory fails because 

Kissick and Kelly are alleged to have defrauded CBG. CBG cannot be charged 

with the knowledge of Kissick and Kelly where those Colonial Bank employees 

were scheming to defraud CBG or at a minimum were acting adversely to CBG’s 

interests. See Florence v. Carr, 148 So. 148, 149 (Ala. 1933). Second, PwC 

argues for the imputation of Crowe’s alleged wrongful conduct to CBG, 

characterizing Crowe as CBG’s agent. Taken as true, the allegations of the 

Amended Complaint (as well as the engagement letters between CBG and Crowe 

and the professional standards for auditors) do not establish that Crowe was an 

agent of CBG, as CBG did not retain the right of control over what Crowe’s 

auditing services entailed and how Crowe conducted those services. Brown v. 

 

2

To the extent that PwC argues an in pari delicto defense, its applicability in this case is 

questionable. Nevertheless, the defense fails at the motion to dismiss stage because the alleged 

facts do not support a conclusion that CBG was equally at fault with the defendants.

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Commercial Dispatch Publ’g Co., 504 So. 2d 245, 246 (Ala. 1987). In any event, 

agency generally is a question for the trier of fact. Id.

C. Damages

1. Proximate Causation

Crowe makes an argument, in which PwC joins, that the Amended 

Complaint does not properly allege that Defendants’ misconduct was the 

proximate cause of CBG’s damages.

3

Under Alabama law, “[p]roximate cause is an act or omission that in a 

natural and continuous sequence, unbroken by any new independent causes, 

produces the injury and without which the injury would not have occurred.” 

Gooden v. City of Talladega, 966 So. 2d 232, 239 (Ala. 2007). A “natural and 

continuous sequence” means “unbroken by any new independent causes.” 

Subsequent causes of injury, such as fraudulent or criminal acts of a third person, 

are not “new independent causes” that intervene or break the chain of causation, 

unless those subsequent causes are unforeseeable by the defendant. Thetford v. 

City of Clanton, 605 So. 2d 835, 840 (Ala. 1992). The notion of foreseeability is 

key to a proximate cause analysis. Gen. Motors Corp. v. Edwards, 482 So. 2d 

1176, 1194 (Ala. 1985). If the defendant could have reasonably anticipated the 

 

3 Crowe refers to proximate causation as “loss causation.” Although loss causation is

comparable to proximate causation in the context of securities fraud, the label is inappropriate 

here.

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plaintiff’s injury as a result of the defendant’s actions or omissions, then the 

defendant may be liable. Thetford, 605 So. 2d at 840. 

Proximate cause is a question to be determined by the trier of fact. Gooden, 

966 So. 2d at 239. At this stage, the Amended Complaint adequately alleges that 

the actions or inactions of Crowe and PwC resulted in foreseeable injuries to CBG.

(Am. Compl. ¶¶ 37, 47–49.)

2. Consequential Damages

Crowe argues that its engagement letters with CBG preclude consequential 

damages. Taken as true, the allegations of the Amended Complaint state a claim 

for direct damages proximately caused by Crowe’s alleged breach and negligence. 

Should CBG ultimately prevail in its breach of contract claim against Crowe, the 

court will revisit the issue of which damages are allowable under the contracts.

V. CONCLUSION

The court does not, at least on the pleadings, buy into PwC’s express and 

Crowe’s implied arguments that they are fraud victims here. Such arguments 

fundamentally misstate the professional role of auditors in the banking business. 

The court appreciates the vigor with which all parties are litigating their respective 

cases. That being said, all parties are cautioned to stay in bounds. Some 

characterizations of the alleged facts and citations to case law were misleading and 

perilously close to constituting dishonesty toward the court.

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For the reasons stated above, it is ORDERED that Defendants’ Motions to 

Dismiss (Docs. # 34 and 35) are DENIED.

DONE this 9th day of September, 2014.

 /s/ W. Keith Watkins 

CHIEF UNITED STATES DISTRICT JUDGE

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