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    GH&C Successfully Represents New Jersey Accounting Firm Before The Third Circuit And Obtains Dismissal Of Case With Prejudice Based On Plaintiff's Failure To File An Affidavit of Merit

    May 19, 2014

    Giordano, Halleran & Ciesla, on behalf of its client, a New Jersey accounting firm, was recently successful in obtaining the affirmance of the dismissal of a complex professional malpractice action from the United States Court of Appeals for the Third Circuit. The litigation stemmed from a lender's issuance of a $10 million loan to a New Jersey hospital. Prior to the closing of the loan, the hospital provided the plaintiff with a copy of an audit report prepared by the accounting firm for the hospital without the consent or the knowledge of the accounting firm. Shortly after the loan was issued, the hospital filed a Chapter 11 bankruptcy petition. In addition to asserting a claim against the hospital in the bankruptcy proceedings, in December 2008 the lender commenced an action against the accounting firm, claiming that there were misrepresentations in the audit report, which was allegedly relied upon by the plaintiff when it provided the loan. The lender filed its lawsuit in the United States District Court for the District of New Jersey based on diversity of citizenship of the parties.

    In New Jersey, the Accountant Shield Statute, N.J.S.A. 2A:53-25 protects accountants from lawsuits by any non-client claiming negligence in the performance of any professional accounting service unless certain stringent requirements are met. Fully aware of the limitations of the Accountant Shield Statute and its inability to pursue a professional malpractice claim, the lender asserted claims against the accounting firm for negligent misrepresentation, common law fraud, and aiding and abetting common law fraud. However, the lender specifically alleged that the material misrepresentations in the audit report were the result of deviations from Generally Accepted Auditing Standards ("GAAS") and Generally Accepted Accounting Principles ("GAAP"), the professional standards applicable to accountants.

    Accordingly, GH&C argued that the lender was required to comply with New Jersey's Affidavit of Merit Statute, which requires the plaintiff in any professional malpractice action to provide the defendant with an affidavit from an appropriate licensed person stating "that there exists a reasonable probability that the care, skill or knowledge exercised or exhibited in the treatment, practice or work that is the subject of the complaint, fell outside the acceptable professional or occupational standards of treatment practices." N.J.S.A. 2A:53A-27. Although there are certain limited exceptions to the affidavit of merit requirement, the result of a plaintiff's failure to file an affidavit of merit within 120 days following service of the defendant's answer is dismissal of the complaint with prejudice.

    Because the lender failed to timely provide the accounting firm with an affidavit of merit, GH&C filed a motion to dismiss the lender's complaint with prejudice. Relying on New Jersey Supreme Court precedent set forth in Couri v. Gardner, 173 N.J. 328 (2002), GH&C argued that regardless of the lender's characterization of its claims as based in fraud, it was evident from the lender's allegations that it would not be able to prove its claims without establishing that the accounting firm deviated from GAAP and GAAS, and therefore, an affidavit of merit was required. The lender refuted this argument and further argued, among other things, that its claimed damages were not "property damages" within the meaning of the affidavit of merit statute. The District Court rejected all of the lender's arguments, and in October 2009, dismissed the complaint with prejudice.

    The lender appealed this decision to the Third Circuit. After the appeal was fully briefed and shortly before oral argument, the lender alerted the Third Circuit to case law, which, it claimed, established that the federal courts did not have subject matter jurisdiction over the dispute based on diversity, and requested that the action be dismissed without prejudice. Such a result would have permitted the lender to re-file its lawsuit in New Jersey state court. The Third Circuit remanded the case to the District Court for a determination regarding the court's subject matter jurisdiction. In supplemental briefing, GH&C argued on behalf of the accounting firm that regardless of whether the District Court had diversity jurisdiction, the court nonetheless had subject matter jurisdiction under 28 U.S.C. § 1334(b) as the dispute was "related to" a bankruptcy proceeding. The District Court agreed, and in November 2010, dismissed the lender's complaint with prejudice.

    The lender appealed again, raising both the jurisdictional and affidavit of merit issues. In August 2012, the Third Circuit issued a precedential opinion and ruled in favor of the accounting firm on a majority of the issues raised in the appeal. See 692 F.3d 283. However, although the Third Circuit agreed that the failure to provide an affidavit of merit would call for the action's dismissal with prejudice, the Third Circuit questioned whether the action was subject to the statute's requirements, and in a rare move, certified two questions of law to the New Jersey Supreme Court under New Jersey Court Rule 2:12A. Specifically, the Third Circuit was unsure whether the lender's claimed damages constituted "property damages" within the meaning of the Affidavit of Merit Statute and whether the lender's intentional tort claims of fraud and aiding and abetting common law fraud were subject to the statute. In January 2013, the New Jersey Supreme Court denied the Third Circuit's petition for certification. Thereafter, GH&C submitted a short supplemental brief addressing additional New Jersey state law and reiterating the argument than an affidavit of merit was required.

    On May 14, 2014, the Third Circuit issued a second precedential opinion in which it held that the lender was required to provide the accounting firm with an affidavit of merit and affirmed the District Court's dismissal of the lender's action with prejudice. The Third Circuit's opinion confirms that a claim for unspecified money damages falls within the "property damage" requirement of the Affidavit of Merit Statute. Further, the decision clarifies that fraud claims will be subject to the affidavit of merit requirement where the claim requires proof of a deviation from the applicable standard of care.

    GH&C's legal team included Bernard J. Berry, Jr., Michael J. Canning, Donald F. Campbell, Jr., Catherine J. Bick, and Jaclyn B. Kass.