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Magic Circle Corp. v. Crowe Horwath, LLP

Court of Appeals of Indiana

March 8, 2017

Magic Circle Corp., D/B/A Dixie Chopper, Arthur Evans, Wesley Evans, and Jeffrey Haltom, Appellants-Plaintiffs,
v.
Crowe Horwath, LLP, Appellee-Defendant.

         Appeal from the St. Joseph Circuit Court The Honorable Michael G. Gotsch, Sr., Judge Trial Court Cause No. 71C01-1404-PL-93

          Attorney for Appellant R. William Jonas, Jr. Hammerschmidt, Amaral, & Jonas

          Attorneys for Appellee Caesar A. Tabet Mark H. Horwitch John M. Fitzgerald Tabet DiVito & Rothstein LLC Chicago, Illinois Michael A. Trippel Phillip A. Garrett Thorne Grodnik, LLP

          Bailey, Judge.

         Case Summary

         [¶1] Magic Circle Corporation d/b/a Dixie Chopper ("Magic Circle") and several of its shareholders filed a multi-count complaint against numerous parties, including Magic Circle's former auditing firm, Crowe Horwath LLP ("Crowe"). The trial court dismissed several counts, and this Court affirmed that decision on appeal, leaving only two counts against Crowe. Subsequent to the appeal, Crowe filed a motion to dismiss the remaining counts against it, and the trial court granted Crowe's motion on the grounds that the claims were barred by the economic loss rule and several exculpatory provisions. Magic Circle now appeals the trial court's order.

         [¶2] We reverse and remand for further proceedings.

         Issues

         [¶3] Magic Circle raises two issues for our review, which we restate as whether the trial court erred when it dismissed the complaint because:

1. The economic loss rule is inapplicable in this case; and
2. The exculpatory provisions in the engagement agreements between Magic Circle and Crowe do not operate to relieve Crowe of all liability for the professional malpractice as alleged in the Second Amended Complaint.[1]

         Facts and Procedural History

         [¶4] Consonant with the standard of review, we take as true the facts as alleged in Magic Circle's second amended complaint.

         [¶5] Magic Circle was experiencing business and financial difficulty in late 2008 and 2009, and it hired Simon Wilson ("Wilson") and Gary Morgan ("Morgan") to lead the business through a turnaround effort. In 2008, Crowe was retained to provide auditing services for Magic Circle. Crowe continued in this role until 2013. Wilson and Morgan provided Crowe with inaccurate financial information, and did not accurately represent the company's financial condition to the board and shareholders.[2] Though Morgan departed Magic Circle in 2011, the financial problems went largely undiscovered until 2013, when Crowe's year-end audit of 2012's financial records disclosed a $14 million loss for Magic Circle.

         [¶6] Subsequent to this discovery, Magic Circle retained another auditing firm, which confirmed that Morgan and Wilson had not provided proper financial records, that Crowe's audit reports were incorrect, and that Crowe had not discovered these problems until 2013. The financial state of the business was sufficiently dire that a recovery of the business became impossible, and Magic Circle was sold at a substantial loss to a private investment firm.

         [¶7] Magic Circle and three of its shareholders filed suit against Wilson, Morgan, and Crowe. With leave of the trial court, Magic Circle filed its Second Amended Complaint on December 15, 2014. On February 17, 2015, Wilson filed a motion to dismiss the complaint, alleging that Magic Circle had failed to plead fraud with the specificity required by our trial rules. The trial court agreed and, on May 15, 2015, the trial court dismissed with prejudice all of Magic Circle's claims against Wilson and Morgan, as well as those of the three shareholders who had joined the suit. This court affirmed that judgment in an unpublished memorandum opinion on December 30, 2015, Magic Circle Corp. v. Wilson, No. 71A-03-1507-PL-790, Slip op. (Ind.Ct.App. Dec. 30, 2015), and on June 23, 2016, the Indiana Supreme Court denied a petition for transfer.

         [¶8] After this Court's affirmance of the trial court's order of dismissal, on January 19, 2016, Crowe filed a motion to dismiss the remaining claims in the Second Amended Complaint, namely, Magic Circle's claims that Crowe aided and abetted fraud and committed accountant malpractice. After a hearing, on June 6, 2016, the trial court entered its order dismissing all of Magic Circle's remaining claims against Crowe.

         [¶9] ...


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