RGH Liquidating Trust v Deloitte & Touche LLP

[*1] RGH Liquidating Trust v Deloitte & Touche LLP 2007 NY Slip Op 52181(U) [17 Misc 3d 1128(A)] Decided on November 7, 2007 Supreme Court, New York County Moskowitz, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 7, 2007
Supreme Court, New York County

The RGH Liquidating Trust, on behalf of Reliance Group Holdings, Inc.; the General Unsecured Creditors of Reliance Group Holdings, Inc.; Reliance Financial Services Corp. (n/k/a Reorganized RFS Corporation) and the General Unsecured Creditors of Reliance Financial Services Corp., Plaintiffs,

against

Deloitte & Touche LLP and Jan A. Lommele, Defendants.



600057/2006

Karla Moskowitz, J.

In this action, plaintiffs seek damages resulting from defendants' allegedly fraudulent conduct in connection with their performance of actuarial and accounting services. The amended complaint asserts one cause of action for actuarial fraud and one cause of action for accounting and auditing fraud. Pursuant to CPLR 3211 and 3016 (b), defendants now move to dismiss the complaint as preempted under 15 USC § 78bb (f) (1) of the Securities Litigation Uniform Standards Act ("SLUSA").

This court's decision in RGH Liquidating Trust ex rel. Reliance Group Holdings, Inc. v Deloitte & Touche LLP, ("Decision") (13 Misc 3d 1219[A], 2006 WL 2872525 [Sup Ct, NY County 2006]) stated the facts of this case in detail. Therefore, the court presumes familiarity with the facts and refers the parties to the Decision. Defined terms in the Decision have the same meaning here. To the extent that plaintiffs allege new relevant facts in the amended complaint, this decision discusses those facts.

Discussion

Preemption Under SLUSA

SLUSA bars state law claims based upon a misrepresentation or omission of fact. Defendants argue that SLUSA preempts the claims of the plaintiff bondholders and former RGH and RFS employees relating to covered securities. Plaintiffs counter that the Trust constitutes a single entity that is not preempted under SLUSA.

SLUSA, 15 USC § 78bb (f) (1) provides that "[n]o covered class action based upon the statutory or common law of any State . . . may be maintained in any State or Federal court by any private party alleging — (A) a misrepresentation or omission of a material fact in connection [*2]with the purchase or sale of a covered security . . . ." A "covered class action," as defendants seek to apply the definition, requires a showing that "damages are sought on behalf of more than 50 persons or prospective class members . . . ." (Id., § [f][5][B][i][I]). However, "a corporation, investment company, pension plan, partnership, or other entity, shall be treated as one person or prospective class member, but only if the entity is not established for the purpose of participating in the action." (Id., § [f][5][D]).

As a preliminary matter, it is not clear to the court that plaintiffs seek damages on behalf of more than 50 people. Defendants themselves affirmatively argue that the amended complaint identifies only 25 creditors. Defendants refer to a federal securities class action complaint filed in the United States District Court for the Southern District of New York in 2001 that states that RGH stockholders and bondholders numbered in the "hundreds, if not thousands" and were "so numerous that joinder of all members is impracticable." (Dell Aff., Ex. 6, ¶ 27). However, RGH's plan of reorganization established the Trust in this action in 2005, Deloitte and Lommele were not defendants in that action and the definition of "Settled Claims" in that action exempted Deloitte and Lommele. (Id., Ex. 7, ¶ 8). Therefore, neither the amended complaint in this action nor the federal class action complaint establish that plaintiffs seek damages on behalf of more than 50 persons or prospective class members.

In any event, a trustee qualifies as a single entity under SLUSA in circumstances where the trustee's appointment is not for the "primary purpose" of pursuing causes of action. (Smith v Arthur Andersen LLP, 421 F3d 989, 1007 [9th Cir 2005], citing Cape Ann Investors LLC v Lepone, 296 F Supp 2d 4, 10 [D Mass 2003]; see also Lee v Marsh & McLennan Cos., 2007 WL 704033, *4 [SD NY, March 7, 2007] ["typical Chapter 11 trust established to represent a bankrupt estate for all purposes, including the litigation of outstanding causes of action, is entitled to entity treatment"]). A contrary interpretation "could potentially deprive many bankruptcy trustees of the ability to pursue state-law securities fraud claims on behalf of an estate." (Smith, 421 F3d at 1008).

In Smith, the court looked to the language of the "Debtors' Plan, under which the Trustee was appointed," whereby "the Trustee [was to] act as the Estates' representative for all purposes," including managing and monetizing "Retained Assets," "filing, prosecuting and settling claim objections," "administering the disputed claim reserve," "prosecuting and settling Estate causes of asction," "making distributions in accordance with the terms of the Plan," and "winding-up and closing the Estates." (Id.). The Court held that, "[b]ecause the Trustee is to act as the Estates' representative for all purposes,' and not just for the purpose of pursuing causes of action, the Trustee is one person, and the Trustee's Action is not a single lawsuit' barred by SLUSA." (Id.).

Similarly, here, under the First Amended Plan of Reorganization of Reliance Group Holdings, Inc. under Chapter 11 of the Bankruptcy Code ("Plan"), the Liquidating Trust was

established as a grantor trust pursuant to the Liquidating Trust Agreement for the purposes of receiving the Trust Property and assuming the Assumed Liabilities, and liquidating and distributing the Trust Property for the benefit of the Trust Beneficiaries, in accordance with the provisions of the Plan and the Liquidating Trust Agreement as promptly and efficiently as is reasonably possible. The Liquidating Trust shall be a liquidating trust whose primary purpose shall be the liquidation of the assets transferred to it with no objective to continue or engage in the conduct of a trade or business except to the extent reasonably necessary to, and consistent [*3]with, the liquidating purpose of the Liquidating Trust.

(Goodman Aff., Ex. B, § 6.1 [emphasis added]). Thus, the primary purpose of the Trust is to receive and liquidate assets, not participation in this action.

This is also consistent with the affidavit of James A. Goodman ("Goodman"), the Trustee for the RGH Liquidating Trust. Goodman states that the Trust has spent significant time and effort preserving and maximizing the value of the Trust Property, including bringing in tens of millions of dollars in cash; making distributions to Trust beneficiaries; managing Trust assets; complying with assumed liabilities of the Trust, such as contractual and legal obligations; liquidating and monetizing non-cash assets to make distributions to Trust beneficiaries; reviewing claims against the debtor's estate and objecting to and resolving disputed claims to preserve Trust assets and complying with applicable taxation and regulatory requirements.

Defendants argue that the amended complaint avers that "the RGH Liquidating Trust has been established to pursue the claims of RFS, RGH and their respective creditors" (Amended Complaint, ¶ 32) and that the Plan demonstrates that formation of the Trust was "for the purpose of participating in the action." (Defendants' Reply Mem. of Law, at 1). However, the Plan itself makes clear that the Trust's primary purpose is significantly broader than merely "participating in the action," and defendants fail to cite any portion of the Plan that states this as the Trust's primary purpose. Among the assets that the Plan transferred to the Trust were "Causes of Action held by the Debtor, the Estate or either Committee" (Plan, §§ 6.3 [vii] and 10.6), but nothing contained in the Plan limits the Trust's assets to causes of action or identifies the pursuit of those causes of action as the Trust's primary purpose. For the foregoing reasons, the Trust is a single entity under SLUSA and its claims are not preempted. Therefore, the court denies defendants' motion to dismiss the amended complaint as preempted by SLUSA.

Fraud

Detrimental Reliance

Defendants next argue that the court should dismiss the fraud claims, because the amended complaint does not allege facts showing that any creditor reasonably relied to its detriment on any representation by defendants. Specifically, defendants argue that the court must dismiss for failure to allege reasonable reliance all of the claims that plaintiffs assert on behalf of the unidentified creditors, the lender banks, the bondholders, the Pension Benefit Guaranty Corporation ("PBGC") and two former employees.

"In order to recover for fraud, plaintiffs must show a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury." (Pope v Saget, 29 AD3d 437, 441 [1st Dept 2006]). "To show reliance, [the plaintiff] must demonstrate that [it] was induced to act [or] refrain from acting to [its] detriment by virtue of the alleged misrepresentation or omission." (Shea v Hambros PLC, 244 AD2d 39, 46-47 [1st Dept 1998] [internal quotation marks and citation omitted]). The reliance must also be reasonable. (J.A.O. Acquisition Corp. v Stavitsky, 18 AD3d 389 [1st Dept 2005]). Moreover, under CPLR 3013, "[s]tatements in a pleading shall be sufficiently particular to give the court and parties notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved . . . ." CPLR 3016 (b) requires that the plaintiff state in detail the circumstances constituting the fraud.

Unidentified Creditors [*4]

Defendants argue that the court should dismiss the claims that plaintiffs asserted on behalf of unidentified creditors because defendants cannot respond to allegations concerning how they defrauded these plaintiffs. Plaintiffs do not dispute that the amended complaint fails to identify various creditors on whose behalf they sue. Instead, plaintiffs argue that they need not do so because it is sufficient to plead the manner in which "the various creditors' groups" relied upon defendants' misrepresentations. (Plaintiffs' Opp. Mem. of Law, at 8-9).

Here, the amended complaint identifies various individual creditors and creditor groups that defendants, by their conduct, allegedly defrauded. However, the amended complaint also purports to pursue claims "on behalf of the general unsecured creditors of RGH and the general unsecured creditors of RFS for the benefit of those creditors" without identifying who those creditors are or how defendants defrauded them. Thus, with respect to these unidentified creditors, it is impossible for defendants to respond to plaintiffs' allegations because defendants do not know which creditors are asserting claims or the factual basis of those claims. Nor can defendants discern what each of these creditors did or refrained from doing by virtue of defendants' alleged misrepresentations. (Shea, 244 AD2d at 46-47). Therefore, defendants do not have "notice of the transactions or occurrences" that gave rise to the alleged fraud (CPLR 3013), and plaintiffs have not stated in detail "the circumstances constituting the fraud" with respect to these unidentified creditors. (CPLR 3016).

Moreover, even assuming for the moment that defendants know the identity of each creditor, as plaintiffs argue, knowledge of the identity of certain creditors does not indicate which of those creditors are alleging that their losses resulted from reliance upon defendants' audit and actuarial reports or how those losses caused them damages. For the foregoing reasons, to the extent that plaintiffs assert fraud claims on behalf of unidentified creditors whose reliance is not specifically pleaded, the court dismisses those claims. The court notes that it is limiting this holding to unidentified creditors whose reliance is not specifically pleaded, and this holding does not apply to any of the creditors or creditor groups discussed below.

Lender Banks

The amended complaint alleges that 15 creditor banks of RGH and RFS loaned RFS $237.5 million pursuant to a Credit Agreement dated November 1, 1993 ("Credit Agreement"). As a condition to receiving the loans, RFS also allegedly entered into a Pledge Agreement on November 1, 1993 granting the lender banks a perfected security interest in shares of RIC stock to secure credit obligations RFS owed to the banks. The loans were allegedly due March 31, 2000, but the parties amended them on February 1, 2000 to become due on August 31, 2000.

Defendants allegedly knew that, pursuant to the Credit Agreement, the lender banks reviewed and relied upon defendants' accounting and actuarial reports. The Credit Agreement allegedly empowered lender banks, upon an event of default, to declare all or any portion of the outstanding loans and other obligations due and payable and to terminate all loan commitments.

Plaintiffs claim that the lender banks relied upon defendants' misrepresentations in the February 25, 2000 Actuarial Opinion and February 29, 2000 Audit Report for the year ending December 31, 1999 (together, "Reports") and that misrepresentations in these Reports disguised and concealed multiple events of default under the Credit Agreement. According to the pleading, defendants' misrepresentations in those Reports, including overstating RGH, RFS and RIC's (together, "Reliance") financial condition by $1 billion, lulled and deceived the lender banks into believing that specific events of default had not occurred. Plaintiffs claim that, as a result, the lender banks did not declare the loans due and payable or terminate all loan commitments, and they did not sell the collateral that they had received in exchange for granting the loans. Relying upon defendants' Reports, the lender banks also allegedly did not take steps to prevent the unnecessary depletion and devaluation of assets, such as contacting the companies' independent audit committee or state insurance regulators that could have (1) assisted in stopping RIC's accumulation of liabilities and expenditures and (2) forced a sale of assets that would have applied to the [*5]lender banks' outstanding loans. The lender banks also claim that they would not have extended the loan due dates. These allegations, if proven, would show that the lender banks were "induced to act [or] refrain from acting to [their] detriment by virtue of [defendants'] misrepresentation or omission." (Shea, 244 AD2d 46-47).

Defendants make four arguments in support of their motion to dismiss. They first argue that the lender banks could not have relied upon the Reports when they entered into the Credit Agreement in 1993 and amended the agreement on February 1, 2000 because both events occurred before defendants issued the Reports. It is irrelevant, however, that the Credit Agreement and amendment pre-date defendants' Reports. What is relevant is the allegation that, in reliance upon defendants' Reports, the lender banks forewent the above-described protective action in reliance upon the Reports.

Defendants' second argument is that the lender banks could not have relied upon the Reports to extend the maturity date of the loans under the Credit Agreement because the amendment that extended the maturity date pre-dated the Reports. The amended complaint alleges that the lender banks extended the maturity date from August 17 to August 31, 2000. Defendants submit documentary evidence of a subsequent extension on August 23 that extends the maturity date to November 30, 2000. Both of these extensions took place after the above-referenced February 1, 2000 amendment to the Credit Agreement and after defendants issued the Reports. Therefore, this argument is unpersuasive.

Defendants' third argument relies heavily upon disclosures made in RGH's publicly filed documents. For example, RGH's Form 10-Q, filed August 14, 2000 for the period ending June 30, 2000 disclosed that:

[t]he Company is in discussions with its creditors and regulators to develop a comprehensive plan to restructure its outstanding debt. However, there can be no assurance that its efforts will be successful. The Company is exploring a full range of alternatives to restructure its debt, among which would be to seek protection under the Federal Bankruptcy Code . . . .

(Dell Aff., Ex. 9, at 20). Defendants also refer to RGH's Form 10-Q filed May 15, 2000 and its Form 10-K filed March 30, 2000, where RGH announced the suspension of quarterly dividends and bank loans and stated its dissatisfaction with its 1999 performance. The May 15th 10-Q also reported that RGH had an operating loss of $36.5 million in the first quarter of 2000, that it agreed to sell its surety operations and that Standard & Poor's, Moody's Investor Services and A.M. Best & Co. placed its bond ratings on credit watch and under review with negative implications.

However, none of these public filings disclosed defendants' alleged $1 billion misrepresentation in the Reports. Moreover, the May 15th 10-Q also indicates initiatives "designed to strengthen [RGH's] capital and improve its credit rating." (Dell Aff., Ex. 8, at 13). Further, as discussed above, the August 14th 10-Q indicates that RGH was exploring alternatives to restructure its debt. Thus, while the publicly filed documents indicated that RGH's performance was declining, other statements in these documents indicate that RGH was attempting to pull itself out of debt so that it could continue its operations. Moreover, while the essence of defendants' argument is that the public filings "revealed the extent of [RGH's] financial problems" (Defendants' Mem. of Law, at 14), the lender banks could not have known the true extent of the company's financial problems without defendants' disclosure of the $1 billion overstatement.

Nothing contained in the public filings that RGH filed after defendants' alleged misrepresentation corrects the failure to disclose a $1 billion overstatement. This failure is allegedly a breach under the Credit Agreement that entitled the lender banks to call their loans immediately, terminate loan commitments and sell collateral. In other words, even if the lender banks relied upon the public filings, the documentary evidence that defendants submitted fails to explain why the lender banks could not also rely upon defendants' representation in the Reports that there was a $500 million reserve surplus, when in fact there was an alleged $500 million deficit. Moreover, the reasonableness of the lender banks' reliance [*6]upon the Reports, both before and after the public filings, is a question of fact that would be premature to resolve on a motion to dismiss. (Knight Sec. L.P. v Fiduciary Trust Co., 5 AD3d 172, 173 [1st Dept 2004] ["[O]n a motion to dismiss for failure to state a cause of action, a plaintiff . . . need only plead that he relied on misrepresentations made by the defendant . . . since the reasonableness of his reliance [generally] implicates factual issues whose resolution would be inappropriate at this early stage' [citations omitted]."]).

Defendants' fourth argument is that the lender banks' refraining from taking certain actions based upon the Reports cannot establish detrimental reliance because plaintiffs fail to identify any improper distributions, liabilities incurred or regulatory actions not taken that should have been taken. However, as discussed above, the amended complaint now provides specific details about what actions the lender banks would have taken upon learning about the events of default in the Credit Agreement if the Reports or public filings had disclosed the alleged $1 billion overstatement. (Foothill Capital Corp. v Grant Thornton LLP, 276 AD2d 437, 438 [1st Dept 2000] [plaintiff "sufficiently pleaded its reliance on the 1997 report in alleging that, in reliance on that report, it refrained from taking steps to collect funds already advanced or to protect its interests by other means'"]). Moreover, "[w]hether or not earlier efforts to collect the debt would have had greater success than the collection efforts plaintiff actually made after learning of the inaccuracy of the relevant financial statements is an issue of fact to be determined at trial or on a motion for summary judgment." (Id.). For the foregoing reasons, the court denies defendants' motion to dismiss the amended complaint as to the plaintiff bank lenders.

Bondholders

Defendants next argue that plaintiffs fail to allege reasonable detrimental reliance by the following five bondholders named in the amended complaint: PIMCO, Conseco, Wexford Capital LLC ("Wexford"), Mariner Investment Group and Richard Meltzer ("Meltzer"). Defendants also argue that the bond trustees have no fraud claim.

Defendants cite Morin v Trupin (747 F Supp 1051, 1062 [SD NY 1990]) in support of their argument. In Morin, the court dismissed securities fraud claims for failure to plead with sufficient particularity under Rule 9 (b) of the Federal Rules of Civil Procedure. Specifically, the court found that the claims lacked particularity because the pleading failed to plead the investors' "dates of . . . purchase," "how much each plaintiff has paid," or "the amounts actually lost." (Id.). Defendants base their reliance on Morin upon a statement by a court of concurrent jurisdiction in Joel v Weber (1990 NY Misc LEXIS 691, *5 [Sup Ct, NY County 1990]) that CPLR 3016 (b) and Rule 9 (b) of the Federal Rules of Civil Procedure "have received similar interpretations." However, the First Department "unanimously reversed [Joel], on the law, on the facts, and in the exercise of discretion." (166 AD2d 130, 139 [1st Dept 1991]). Thus, defendants' reliance upon Morin, and other cases imposing the pleading requirements of a federal securities action, fail to address the pleading requirements of plaintiffs' New York State common law fraud claims.

Under New York law,

[i]n a fraud case against an auditor, a showing of gross negligence or recklessness will permit the trier of fact to draw the inference that a fraud was in fact perpetrated. However, the showing need not be of an evidentiary nature; CPLR 3016 (b) requires only that a claim of fraud be pleaded in sufficient detail to give adequate notice . . . .

(DaPuzzo v Reznick Fedder & Silverman, 14 AD3d 302 [1st Dept 2005]).

Here, the amended complaint alleges that, in reliance upon the Reports and public filings, PIMCO and Conseco did not sell their bond investments in Reliance and suffered substantial losses when the bonds became due but PIMCO and Conseco could not redeem them. Wexford allegedly made its decision to purchase Reliance bonds based upon the Reports and public filings but would not have done so if Reliance's true financial condition had been disclosed. Mariner and Meltzer allegedly purchased and [*7]held bonds in reliance upon the Reports and public filings. Thus, the plaintiff bondholders have set forth sufficient allegations for the court to glean reliance. They are not required at this juncture, on a pre-answer motion to dismiss, to "establish" reliance. (Id. at 303 [emphasis added]). And, as discussed above, the reasonableness of that reliance is a question of fact, the resolution of which would be premature on a motion to dismiss. (Knight Sec. L.P., 5 AD3d at 173). For the foregoing reasons, the court denies defendants' motion to dismiss the amended complaint as to the plaintiff bondholders.

Defendants next argue that the bond trustees do not have a fraud claim against defendants because plaintiffs do not allege that the bond trustees purchased bonds or suffered damages. However, the amended complaint alleges that the bond trustees received and reviewed the Reports. Pursuant to their Trust Indenture Agreements, the bond trustees allegedly would have reported events of default and accelerated the bonds, declaring them due and payable to the individual bondholders. The pleading alleges that, as a result, the bondholders held onto their bond investments and lost hundreds of millions of dollars. Therefore, defendants' argument is unpersuasive.

Defendants cite Securities Investor Protection Corp. v BDO Seidman, L.L.P. (95 NY2d 702 [2001]), arguing that the bondholders cannot base their fraud claim upon their reliance on the trustees' silence. The plaintiff in that case was an entity that the Securities Investor Protection Act of 1970 established to protect customers of broker-dealers. However, the plaintiff conceded that it never received the accountant's statements that contained the purported misrepresentations but rather, relied upon a third party's report on the accountant's work. Therefore, the Court held that the plaintiff could not rely upon those misrepresentations in order to maintain a fraud claim against the accountants. Here, conversely, the amended complaint alleges that the bond trustees received and reviewed the Reports pursuant to their Trust Indenture Agreements and based upon defendants' alleged misrepresentations in those reports, did not exercise specific contractual rights on behalf of the bondholders. Therefore, Securities Investor Protection Corp. is distinguishable on its facts. For the foregoing reasons, the court denies defendants' motion to dismiss the amended complaint as to the plaintiff bond trustees.

PBGC

Defendants argue that the PBGC could not have relied to its detriment on the Reports in the spring of 2000 because RGH's public filings mentioned a possible bankruptcy, making any subsequent reliance unreasonable. This argument is unpersuasive for the same reasons discussed above with respect to defendants' motion to dismiss the claims of the lender banks.

Defendants' argument also assumes that RGH had issued its May 15, 2000 Form10-Q by the time that the PBGC had received and reviewed the annual reports in the spring of 2000. However, the court must "accord plaintiffs the benefit of every possible favorable inference" on a motion to dismiss. (Leon v Martinez, 84 NY2d 83, 87 [1994]). Therefore, defendants' argument is unpersuasive for the additional reason that it requests the court to draw an impermissible inference.

Two Former Employees

Defendants also seek dismissal of claims for pension and employee benefits that two former employees of RGH and RFS, David C. Woodward ("Woodward") and Christine Howard ("Howard") asserted, arguing that the pleading fails to allege detrimental reliance.

As documentary evidence, defendants submit a press release stating that, in 1988, Woodward resigned from Reliance Insurance but remained a director of the parent company. According to defendants, this evidence refutes plaintiffs' claim that Woodward "stayed with the company," as is alleged in the amended complaint, because he left the company more than 10 years before defendants issued the Reports. (Amended Complaint, ¶ 99). However, plaintiffs' statement that Woodward "stayed with the company" clearly refers to the fact that he elected "not to cash out [his] pension and employee benefits" (id.), benefits that presumably survived Woodward's employment. Therefore, this argument is unpersuasive.

Defendants also submit as documentary evidence Howard's proof of claim that identifies [*8]"severance pay after 25 years [of] service" as the basis of her claim for "wages, salaries, and compensation." (Dell Aff., Ex. 15). Here again, the pleading avers that Howard was "persuaded not to cash out [her] . . . employee benefits and instead stayed with the company." (Amended Complaint, ¶ 99). As discussed above, the court must "accord plaintiffs the benefit of every possible favorable inference" on a motion to dismiss. (Leon, 84 NY2d at 87). Thus, plaintiffs are not required at this juncture to prove that Howard could have cashed out those benefits but rather, are merely required to plead, as plaintiffs have done, that Howard relied upon the Reports in electing not to cash out the benefits. Therefore, the court denies defendants' motion to dismiss these claims.

Loss Causation

Defendants next argue that any of their purported misrepresentations or omissions could not have proximately caused the unsecured creditors' losses because the pleading alleges that "Reliance was on the brink of insolvency" by the end of 1999, several months before defendants issued the Reports. (Amended Complaint, ¶ 23). The pleading also avers that, as a result of their fraud, defendants "provided financial life to a group of companies that were essentially insolvent." (Id., ¶ 10).

Defendants' argument is belied by the allegations of the amended complaint. The pleading does not conclusively state that Reliance was insolvent in 1999. To the contrary, the allegations of the amended complaint and the documentary evidence that defendants submitted describe the company's decline. According to the amended complaint, defendants' concealment of Reliance's financial problems caused the creditors' losses because the creditors relied upon the Reports in electing to hold onto their investments, and in some instances, to make additional investments in the company.

Moreover, "[w]hether or not earlier efforts to collect the debt would have had greater success than the collection efforts . . . actually made after learning of the inaccuracy of the relevant financial statements is an issue of fact to be determined at trial or on a motion for summary judgment." (Foothill Capital Corp., 276 AD2d at 438). In addition, "[t]he representations need not have been the exclusive cause of plaintiff's action . . . ; it is sufficient that they were a substantial factor in inducing the plaintiff to act the way it did." (Curiale v Peat, Marwick, Mitchell & Co., 214 AD2d 16, 27-28 [1st Dept 1995]).

Negligence Claims

Defendants argue that the fraud claims are, in substance, negligence claims that the court should dismiss as time-barred and for lack of privity. Specifically, defendants argue that the pleading fails to allege scienter and that defendants' alleged desire to continue collecting professional fees is an insufficient motive to sustain the element of intent.

"In order to show an intent to deceive, plaintiffs must establish that defendant knew, at the time they were made, that the representations were false." (Abrahami v UPC Constr. Co., 224 AD2d 231, 233 [1st Dept 1996]). "An auditor's failure to independently verify financial statements may give rise to a claim for fraud, especially where the auditor had notice of particular circumstances raising doubts as to the veracity of the [sic] such information.'" (Houbigant, Inc. v Deloitte & Touche LLP, 303 AD2d 92, 100 [1st Dept 2003], quoting Foothill Capital Corp., 276 AD2d 437).

Here, the amended complaint alleges that, in February 2000, at the same time that defendants were completing their analysis of the adequacy of RIC's loss reserves, another entity, Kohlberg Kravitz Roberts & Co. ("KKR"), was undertaking due diligence activities in connection with a potential capital investment of $400 million into RGH and RIC. KKR allegedly engaged Deloitte and Am-Re Consultants, Inc. ("Am-Re"), and Deloitte allegedly accepted the engagement despite a purported conflict of interest due to its representation of RGH, RFS and RIC. In mid-February, Deloitte allegedly completed its analysis for KKR and concluded that RIC's loss reserves were deficient by at least $350 million as of December 31, 1999. Deloitte also allegedly identified accounting deficiencies in RIC totaling hundreds of millions of dollars that affected the financial condition of RGH. Am-Re also allegedly concluded that RIC's loss reserves were deficient by as much as $500 million as of December 31, 1999, and Deloitte allegedly had knowledge of Am-Re's contemporaneous reserve analysis and [*9]conclusion. Less than one week later, Deloitte allegedly concluded on behalf of KKR that RIC's loss reserves were deficient by at least $350 million for the year 1999. Yet, at the same time, defendants publicly certified in the Reports that RIC's loss reserves were adequate, in compliance with state law and free of material misstatement. At this time, defendants also allegedly made representations to Reliance's Audit Committee that led to defendants' continued representation of the company.

For the foregoing reasons, plaintiffs have alleged that defendants knew that they reported an overstatement of approximately $1 billion, thereby distinguishing plaintiffs' fraud claim from a negligence claim by alleging the additional element of scienter. Therefore, the court denies defendants' motion to dismiss the fraud claims as negligence claims that are time-barred and fail for lack of privity.

Accordingly, it is hereby

ORDERED that the court grants the motion to dismiss to the extent that the court dismisses the amended complaint with respect to plaintiffs' fraud claims that they assert on behalf of unidentified creditors, as discussed in this decision, and the motion is otherwise denied; and it is further

ORDERED that the court directs defendants to serve an answer to the amended complaint within 10 days after service of a copy of this order with notice of entry.

Dated:October __, 2007

ENTER:

_________________________

J.S.C.