A federal appeals court has upheld a judgment of more than $182 million against PricewaterhouseCoopers in an auditing malpractice suit brought by the receiver for bankrupt Ambassador Insurance Co.
The suit, brought by the Vermont regulators who seized control of Ambassador, accused PwC of negligence in its accounting procedures that caused the insurer's debts to continue to swell long after it should have been declared insolvent.
Significantly, the unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals rejected PwC's argument that the New Jersey courts wouldn't recognize a cause of action for "deepening insolvency."
"Although neither the New Jersey legislature nor the New Jersey Supreme Court has authorized a ‘deepening insolvency' cause of action, contrary to PwC's assertion, there has been a trend among the state's courts toward recognizing ‘deepening insolvency' damages," U.S. Circuit Judge Julio M. Fuentes wrote in his 40-page opinion in Thabault v. Chait.
The decision, which was joined by 3rd Circuit Chief Judge Anthony J. Scirica and Judge Marjorie O. Rendell, upholds a jury's July 2005 verdict of more than $119 million and the trial judge's decision to add $63 million in prejudgment interest.
The suit, filed in 1985, was the oldest federal tort case in New Jersey at the time it went to trial.
In its verdict, the jury found that PwC breached standards of care in its audit of Ambassador's 1981 financial statement. The jury assigned 40 percent of the blame to PwC and the other 60 percent to Arnold Chait, Ambassador's president.
Chait died in 1997 and his estate presented no defense, having defaulted before the trial because it couldn't pay its legal fees.
Because PwC was deemed jointly and severally liable under New Jersey's then-applicable law, it is now liable for the entire $182.9 million judgment.
In the nine-week trial, Vermont's lawyers presented evidence that the state would have seized Ambassador in 1982 if what was then the Coopers & Lybrand accounting firm had reported the insurer was nearly insolvent. PwC is the successor-in-interest to Coopers & Lybrand.
Vermont's lead counsel, Richard B. Whitney of Jones Day in Cleveland, argued that, as a result of the audit, Ambassador kept operating and piled up nearly $120 million in losses between the time of the audit and the company's eventual seizure in November 1983.
Lawyers for PwC argued at trial that the accounting firm's evidence showed its audit was accurate, and that market conditions hurting many carriers at the time were responsible for Ambassador's demise.
Lead trial attorney Jay Kelly Wright of Arnold & Porter in Washington, D.C., argued that the losses that occurred between the 1982 audit and the seizure 19 months later were the result of decisions by Ambassador to write certain risky policies and by re-insurers.
The jury deliberated for a day and awarded $119.9 million -- every dollar the receivers requested.
U.S. District Judge Harold Ackerman of the District of New Jersey later ruled that PwC was jointly and severally liable for the verdict and added $63 million in interest, for a total judgment of $182.9 million.
On appeal, PwC hired attorney Evan R. Chesler of Cravath Swaine & Moore, who argued that Ackerman had committed a series of errors.
Chesler argued that Ackerman should have dismissed all claims against PwC because there was no compensable injury.
Under the Vermont regulators' theory of the case, Chesler argued, the alleged damages were calculated on the basis of an increase in Ambassador's liabilities and losses to Ambassador's policyholders.
But Chesler argued that such damages were not a distinct injury to Ambassador because once the insurer reached the point of insolvency, it could not be harmed any further, and the regulators, standing in Ambassador's shoes, cannot recover for losses to Ambassador's creditors who have no standing to sue the auditors.
Fuentes disagreed, saying, "Today we hold that an increase in liabilities is a harm to the company and the law provides a remedy when a plaintiff proves a negligence cause of action."
Although the term "deepening insolvency" was used throughout the litigation, Fuentes emphasized that the term referred only to "a measure of damages" and not a separate cause of action, and that the case was presented to the jury "based on traditional New Jersey tort damages."
Under New Jersey law, Fuentes said, "the measure of damages for a negligence action are the damages proximately caused by defendant's conduct."
Fuentes also rejected PwC's argument that the jury was presented with nothing more than a comparison of Ambassador's balance sheets at the point of PwC's alleged wrongdoing and at the point of insolvency.
Instead, Fuentes found that Vermont regulators "proved actual damages: itemized, specific, and avoidable losses that Ambassador incurred by continuing its operations beyond the date of PwC's negligent audits."
Chesler, who argued the appeal for PwC, could not be reached for comment, and his partner, Antony L. Ryan, did not return a call seeking comment.