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Colonial Bancgroup, Inc. v. Pricewaterhousecoopers, LLP

United States District Court, M.D. Alabama, Northern Division

September 9, 2014



W. KEITH WATKINS, Chief District Judge.

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").[1] The parties have fully briefed the issues and provided the contracts and other documentation underlying the claims. The motions are due to be denied.


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.


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; it must plead facts that "permit the court to infer more than the mere possibility of misconduct." Iqbal, 556 U.S. at 679.


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 rise to CBG's claims against Crowe and PwC for breach of contract and professional negligence.


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 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). ...

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