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.