Shareholders may sue firm for constructive fraud.A North Carolina court of appeals The North Carolina Court of Appeals is the only intermediate appellate court in the state of North Carolina. It is composed of fifteen members who sit in rotating groups of three. Judges serve eight-year terms and are elected in statewide non-partisan elections. ruled that shareholders of a corporation could maintain a constructive fraud constructive fraud n. when the circumstances show that someone's actions gives him/her an unfair advantage over another by unfair means (lying or not telling a buyer about defects in a product, for example), the court may decide from the methods used and the result action against an accounting firm. Fraud claims are not covered not covered Health care adjective Referring to a procedure, test or other health service to which a policy holder or insurance beneficiary is not entitled under the terms of the policy or payment system–eg, Medicare. Cf Covered. in most professional liability policies. This case was significant because it established that an accounting firm could be liable for a claim outside the scope of it's professional liability policy. This case began when the corporation employed the accounting firm McCoy, Hillard and Parks to provide it with accounting services and advice. In the process of rendering these services, the firm allegedly committed an error that resulted in understatement of the corporation's liabilities and overstatement o·ver·state tr.v. o·ver·stat·ed, o·ver·stat·ing, o·ver·states To state in exaggerated terms. See Synonyms at exaggerate. o of sales. The company had wanted to expand its operations and the firm had advised it that debt incurred to finance this expansion would have to be guaranteed personally by the shareholders. The firm also had advised that this debt could be amortized if projected revenue targets were achieved. In their suit in a North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures Area, 52,586 sq mi (136,198 sq km). Pop. circuit court, the plaintiffs, shareholders in the corporation, alleged that they had relied on this advice in assuming personal guarantees for the debt. Despite reported sales that exceeded projections, the corporation experienced severe cash flow problems, which the firm said were temporary. The shareholders claimed they had relied on this advice in deciding to guarantee a further line of credit to alleviate the company's cash flow problems. Some time after this second guarantee, the plaintiffs decided to sell the corporation. An independent audit by another firm detected the understatement of liabilities and overstatement of sales. The sale did not proceed and the corporation filed for bankruptcy. The plaintiffs then sued the accounting firm alleging negligence, breach of contract and constructive fraud. The basis of their complaint was that the firm's accounting error led to termination of the sale, liquidation of the company and the shareholders' required payment of personal guarantees on the debt they had incurred to finance the expansion. The firm filed a motion for summary judgment motion for summary judgment n. a written request for a judgment in the moving party's favor before a lawsuit goes to trial and based on recorded (testimony outside court) affidavits (or declarations under penalty of perjury), depositions, admissions of fact, answers , contending that its advice had been given solely for the benefit of the company and, therefore, the shareholders had not suffered damage as a result of this advice. The trial court ruled in the firm's favor. The shareholders appealed the case; the appellate court A court having jurisdiction to review decisions of a trial-level or other lower court. An unsuccessful party in a lawsuit must file an appeal with an appellate court in order to have the decision reviewed. concurred in the dismissal of the negligence and bleach-of-contract claims. However, the appellate court reversed the trial court's decision and ruled that the plaintiffs could maintain a constructive fraud claim. It reasoned that the plaintiffi and the firm had a relationship of trust and the firm knew that the plaintiffs would rely on its advice in deciding to make the personal guarantees. (Barger v. McCoy, Hillard and Parks, N.C. App. Ct. #COA (Certificate Of Authenticity) A document that accompanies software which states that it is an original package from the manufacturer. It generally includes a seal with a difficult-to-copy emblem such as a holographic image. 94-876,10/3/95) |
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