Opinion ID: 176236
Heading Depth: 4
Heading Rank: 4

Heading: Alleged reliance by creditors

Text: 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. 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 & Lybrand, 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 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.