Opinion ID: 3035486
Heading Depth: 2
Heading Rank: 1

Heading: Substantial Factor Test

Text: Under New Jersey law, when “multiple factors contribut[e] to the cause of the accident,” a defendant in a negligence action is not liable if his conduct was “too remotely or insignificantly related” to the injury. Brown v. U.S. Stove Co., 484 A.2d 1234, 1243 (N.J. 1984). To incur liability, the defendant’s negligence must be “a substantial factor in bringing about the injuries.” Id. (quotations omitted). PwC argues that the District Court should have entered summary judgment in favor of PwC as a matter of law because PwC’s negligence was remote and insignificant. PwC asserts that its audits of Ambassador were not a substantial factor in the Commissioner’s failure to intervene earlier because the Commissioner did not rely on PwC’s audit opinions but, rather, relied on numerous third parties, including its own examiners, who did not undercover Ambassador’s insolvency. The District Court determined that the questions of 16 proximate and intervening causes were to be left to the jury for its factual determination. In denying PwC’s motion for summary judgment, the District Court properly recognized that the issue of proximate cause could be addressed as a matter of law “only where the outcome is clear or when highly extraordinary events or conduct takes place.” (App. 138.) The District Court found that PwC failed to provide evidence that intervening events were “sufficiently extraordinary or so clearly unrelated to the antecedent negligence that imposition of liability would be unreasonable.” (App. 144 (citation omitted).) The District Court also found that PwC disputed the facts regarding proximate cause, and thus, summary judgment was inappropriate. PwC relies on FDIC v. Ernst & Young, 967 F.2d 166, 169 (5th Cir. 1992), in which the Federal Deposit Insurance Company (“FDIC”), as receiver for the failed Western Savings Association (“Western”), filed negligence and breach of contract claims against Western’s auditors, Ernst & Young. In the district court the FDIC argued that “if the audits had been accurate, . . . government regulators would have prevented further losses.” Id. The district court granted summary judgment in favor of the auditors observing that the FDIC, as assignee, stood in the shoes of Western and because Western already had knowledge of its precarious financial condition neither it nor the FDIC could have relied on the allegedly negligent audits. The Fifth Circuit affirmed, noting that “[i]f nobody relied on the audit, then the audit could not have been a substantial factor in bringing about the injury.” Id. at 170 (quotation omitted). The Fifth Circuit found that the sole owner of Western, Jarrett E. Woods, did not rely on the audits because it was his risky lending practices that created Western’s precarious financial condition. The court held that Woods’s fraudulent activities were on behalf of Western and thus his knowledge and conduct was imputable to Western. The Fifth Circuit concluded that the FDIC could not maintain a suit “for a negligently performed audit upon which neither the owner nor the corporation relied.” Id. at 172. We believe FDIC to be inapposite. The Fifth Circuit, found that the FDIC had not relied on the audits on the basis that the sole owner’s knowledge and fraudulent conduct were imputable to 17 Western. Unlike in FDIC, we will not impute Chait’s conduct or knowledge to Ambassador, as discussed later. See infra Part IV.B. Thus, Ambassador did not have knowledge of Chait’s negligent conduct nor of Chait’s breach of fiduciary duty as the CEO, and did not know that PwC negligently audited it. Furthermore, the record in the instant case establishes that Ambassador relied on PwC’s financial statements. Ambassador incorporated PwC’s loss reserves calculations from the audited annual SEC statements into the annual Vermont statements Ambassador filed with the Insurance Department. The Commissioner’s independent examiners relied on these same loss reserve calculations. Finally, Ambassador relied on the PwC’s loss reserves calculations from the audited annual SEC statements to continue writing insurance policies. PwC also relies on Muhl v. Ambassador Group, Inc., No. 28414/85 (N.Y. Sup. Ct. Sept. 3, 1996), aff’d mem. sub. nom. Muhl v. Coopers & Lybrand, 660 N.Y.S.2d 969 (App. Div. 1997), a case that involves Ambassador’s subsidiary, Horizon. In Muhl, the New York Superintendent of Insurance brought an action on behalf of Horizon Insurance Company against PwC, alleging negligence based on the same audits as the ones at issue in the instant case. The New York Superintendent, similar to the Commissioner, alleged that he would have intervened earlier had he known Horizon’s true financial condition. The New York Supreme Court granted summary judgment to PwC on the basis that the New York Insurance regulator did not rely PwC’s audit of Ambassador. The Court also emphasized that the New York insurance regulators usually relied on their “own independent examinations.” Id. at 16. In contrast here, the annual Vermont statements that Ambassador filed with the Insurance Department incorporated PwC’s loss reserves calculations from the audited annual SEC statements. Thus the Commissioner did rely on those loss reserve calculations, unlike the New York Superintendent, who disregarded the reports of outside auditors. Accordingly, we believe that the District Court correctly concluded that the record contained factual disputes as to proximate cause and whether any intervening events cut off PwC’s liability. These questions were properly submitted for the jury’s 18 determination. Viewing the evidence in the light most favorable to the Commissioner, the Court did not err in denying PwC’s motions for judgment as a matter of law.