In re: CitX Corp Inc , 342 F.3d 672 ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
5-26-2006
In re: CitX Corp Inc
Precedential or Non-Precedential: Precedential
Docket No. 05-2760
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 05-2760
In Re: CITX CORPORATION, INC.,
Debtor
GARY SEITZ, Chapter 7 Trustee
for CitX Corporation, Inc.,
Appellant
v.
DETWEILER, HERSHEY AND ASSOCIATES, P.C.;
ROBERT SCHOEN, C.P.A.
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 03-cv-06766)
District Judge: Honorable James T. Giles
Argued April 27, 2006
Before: AMBRO and FUENTES, Circuit Judges,
and IRENAS,* District Judge
(Opinion filed : May 26, 2006)
Neal A. Jacobs, Esquire
Joshua A. Gelman, Esquire
Matthew I. Cohen, Esquire (Argued)
Jacobs Law Group
1800 John F. Kennedy Boulevard, Suite 404
Philadelphia, PA 19103-7405
Counsel for Appellant
Jonathan K. Hollin, Esquire (Argued)
Powell, Trachtman, Logan, Carrle & Lombardo
475 Allendale Road, Suite 200
King of Prussia, PA 19406
Counsel for Appellee
OPINION OF THE COURT
*
Honorable Joseph E. Irenas, Senior District Judge for the
District of New Jersey, sitting by designation.
2
AMBRO, Circuit Judge
An insolvent internet company involved in an illegal
Ponzi scheme used its financial statements, compiled by its
accounting firm, to attract investors. After the company spent
the investors’ money and incurred millions more in debt, it filed
for bankruptcy. A bankruptcy trustee was appointed, and he
sued the accounting firm, along with the partner responsible for
compiling the financial statements, for, among other things,
malpractice and “deepening insolvency.” The District Court
granted summary judgment for the defendants on both claims.
We affirm. The malpractice claim founders on two
grounds: the company was not harmed by its accountants’
actions, and in any event the affidavit submitted to support the
claim was a sham. As for the deepening-insolvency claim,
allegations of negligent conduct do not qualify for consideration.
I. Factual Background and Procedural History
A. CitX becomes insolvent
Bernard Roemmele formed CitX Corporation, Inc. in
1996 as an internet company of sorts. Roemmele took
immediate opportunity to pillage CitX; for starters, he used its
money to license his own intellectual property, to cover one of
3
his debts, and to settle one of his lawsuits.1
In mid-1999, CitX linked up with Professional Resources
Systems International, Inc. (PRSI), ostensibly to create an
internet shopping mall for home-based merchants who would
pay a fee to be featured. CitX used this PRSI relationship—with
the help of a phenomenon called the Internet Bubble—to sell
equity in itself. As it happened, PRSI was a fraudulent
enterprise, and CitX’s stock sales were illegal under federal and
Pennsylvania law. PRSI scammed nearly $18,000,000 from
would-be online merchants, and CitX received approximately
$700,000 of this money. The Florida Attorney General shut
down PRSI in January 2000, and a receiver was appointed for it.
PRSI was CitX’s only significant client, and at the time
PRSI was closed it owed CitX over $2,400,000. In CitX’s
compiled financials, this was all that was keeping the company
theoretically in the black. Because CitX showed a positive
balance sheet, it was able to sell more securities for over
$1,000,000, which it proceeded to burn through in a year and a
half. (CitX apparently spent much of the money in fruitless
litigation against PRSI’s receiver.)
1
CitX was suspect from the start: one of the original
members of CitX’s board, Brian Roemmele, maintains that he
was not involved in the company and that his signatures on
corporate documents were forged.
4
In July 2001, CitX filed a Chapter 11 petition. The case
was later converted to Chapter 7, and Gary Seitz was appointed
as trustee.2
B. Schoen and Detweiler compile the financials
The defendants–appellees in this case are Robert Schoen,
a certified public accountant, and Detweiler, Hershey and
Associates, P.C., Schoen’s employer. In 1997, CitX retained
Detweiler and Schoen to compile3 its financial statements. Seitz
2
For clarity, we will refer to the company as CitX and the
plaintiff–appellant as Seitz, even though as trustee Seitz is
standing in CitX’s shoes for the purposes of this suit.
3
Compilations differ significantly from other forms of
financial-statement preparation—reviews and audits. Among
the three, compilations represent the “‘lowest level of
assurance.’” Otto v. Pa. State Educ. Ass’n–NEA, 330 F.3d 125,
133 (3d Cir. 2003); see also Robert Wooler Co. v. Fid. Bank,
479 A.2d 1027, 1030 (Pa. Super. Ct. 1984) (discussing the
difference between audited and unaudited financials).
A compilation involves “[p]resenting in the form of
financial statements information that is the representation of
management (owners) without undertaking to express any
assurance on the statements” by the accountant. Am. Inst. of
Certified Pub. Accountants, AR § 100.04, at 3313, available at
http://www.aicpa.org/download/members/div/auditstd/AR-00
100.PDF (2004) (emphasis added) (footnote omitted). This
differs from a review, in which accountants give limited
5
alleges that Detweiler4 went beyond its written engagement
agreement and that it missed many “red flags” at CitX. These
alleged red flags included that CitX’s “bookkeeper” was
actually Bernard Roemmele’s girlfriend, and a high school
dropout; CitX was bouncing checks; it was insolvent (i.e.,
without the PRSI receivable, it had virtually no income); PRSI
had been shut down; and yet CitX was selling stock to the
public.
Detweiler prepared CitX’s financial statements for the
assurance based on spot checks of financial information given
to them. See Otto, 330 F.3d at 133. An audit gives the greatest
assurance, as accountants performing one must verify the
financial statements. Id.
Accountants “might consider it necessary to perform
other accounting services to compile the financial statements.”
AR § 100.04, at 3313. For example, “the accountant should
possess a general understanding of the nature of the entity’s
business transactions, the form of its accounting records, the
stated qualifications of its accounting personnel, the accounting
basis on which the financial statements are to be presented, and
the form and content of the financial statements.” Id. § 100.08,
at 3315. But accountants doing a compilation are not under a
duty to verify the information provided by the client; that is,
they are not required to authenticate, or confirm the truth of, that
information. Otto, 330 F.3d at 133–34.
4
In this opinion, we refer to both appellees collectively
as Detweiler.
6
period from July 1, 1997, through December 31, 1999. There
were two sets of statements, both of which were compilations,
as was made plain at the beginning of each statement. The first
statement covered the fiscal years ending June 30, 1998, and
June 30, 1999; the second covered the six-month period ending
December 31, 1999. The second statement included the
$2,400,000 PRSI receivable and was accompanied by a note that
said in full:
In January 2000, the Company, along with
its largest customer and several individuals, were
named as defendants and charged with certain
security violations by the Attorney General’s
Office in Florida. As of the date of these financial
statements, the Company is not sure what impact,
if any, these charges will have on its financial
position. As of December 31, 1999, the financial
statements reflect accounts receivable in the
amount of $2,403,122 from this customer and
related deferred revenues in the amount of
$960,000.5
5
The second financial statement was even less detailed
than the first, and its certification also added a paragraph that
did not appear on the front of the two-year report and is not part
of a standard compilation certification:
Management has elected to omit
substantially all of the disclosures ordinarily
included in the financial statements prepared on
7
This second financial statement, from which stems this suit, was
taken to a February 2000 CitX shareholder meeting. Even with
its weakened financial condition and in suspect circumstances
(at least one shareholder had by this time decided that the
company was a Ponzi scheme), CitX was still able to raise more
than $1,000,000 in equity. The company thereby prolonged its
existence and went on to accrue millions of dollars in debt.
C. Seitz sues Detweiler
Seitz sued Detweiler in July 2003. His complaint
contained four causes of action: (1) malpractice; (2) “deepening
insolvency”;6 (3) breach of fiduciary duty; and (4) negligent
the income tax basis of accounting. If the omitted
disclosures were included in the financial
statements, they might influence the user’s
conclusions about the Company’s assets,
liabilities, equity, revenue, and expenses.
Accordingly, these financial statements are not
designed for those who are not informed about
such matters.
6
We note in passing that, although Seitz was never able
to make up his mind which section of the Bankruptcy Code
purportedly allowed his claim—suggesting in his opening brief
that he was proceeding under 11 U.S.C. § 544 and claiming at
oral argument that he was not proceeding under § 544—we
agree with the District Court for the District of Delaware that
deepening insolvency is not a § 544 claim. See Stanziale v.
8
misrepresentation. The Bankruptcy Court dismissed Seitz’s
fiduciary duty claim. Later, after withdrawing the reference to
the Bankruptcy Court of this adversary proceeding, the District
Court granted summary judgment to Detweiler on the negligent
misrepresentation claim. Finally, the District Court granted
summary judgment to Detweiler on Seitz’s malpractice and
deepening-insolvency claims. Seitz appeals only the ruling on
the latter two claims.
II. Jurisdiction and Standard of Review
The District Court had jurisdiction over this case under
28 U.S.C. §§ 157 and 1334. We have jurisdiction under 28
U.S.C. § 1291 because this is an appeal from a final order.
We exercise plenary review of a District Court’s grant of
Pepper Hamilton LLP (In re Student Fin. Corp.), 335 B.R. 539,
548–89 (D. Del. 2005).
Because deepening-insolvency claims are brought on
behalf of the debtor corporation, Official Comm. of Unsecured
Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 354, 356 (3d
Cir. 2001), deepening insolvency can only be a claim under
Bankruptcy Code § 541 (which deals with property of the
debtor’s estate). Section 544 implicates instead the trustee’s
powers to avoid, by stepping into the shoes of certain creditors
and purchasers, prepetition transfers of property by the debtor.
Therefore, as Stanziale held, § 544 does not authorize a
deepening-insolvency tort claim. 335 B.R. at 548–49.
9
summary judgment. Huu Nam Tran v. Metro. Life Ins. Co., 408
F.3d 130, 135 (3d Cir. 2005). In so doing, we apply the same
test as the District Court: we therefore decide “whether there is
a genuine issue of material fact and, if not, whether the moving
party is entitled to judgment as a matter of law.” Id. (internal
quotation marks omitted). We also view the facts “in the light
most favorable to the party against whom summary judgment
was entered.” Id. (internal quotation marks omitted).
III. Discussion
A. Was summary judgment correctly granted on
the malpractice claim?
To survive summary judgment on this claim, Seitz must
present sufficient evidence to allow a reasonable jury to find in
his favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
252 (1986); Fed. R. Civ. P. 56(e). Pennsylvania recognizes
professional malpractice claims on a theory of negligence. See
Guy v. Liederbach, 459 A.2d 744, 750 (Pa. 1983). Thus, Seitz
must establish that (1) Detweiler owed a duty to CitX, (2)
Detweiler breached that duty,7 (3) CitX was actually harmed,
and (4) Detweiler’s breach caused that harm. See Martin v.
7
Although Seitz argues that the District Court incorrectly
found facts by ignoring his evidence that Detweiler breached its
duty, we need not discuss that element or the duty element in
light of our conclusions on the harm and causation elements.
10
Evans, 711 A.2d 458, 461 (Pa. 1998).
1. Harm
Seitz must establish harm to CitX—“actual loss or
damage”—to support a negligence action. Id. He alleges harm
to it in the form of “deepening insolvency”—that Detweiler
“dramatically deepened the insolvency of CitX, and wrongfully
expanded the debt of CitX and waste of its illegally raised
capital, by permitting CitX to incur additional debt by virtue of
the compilation statements prepared and relied upon by third
parties.” Compl. ¶ 32.
This requires us to decide whether deepening insolvency
is a viable theory of damages for negligence (as opposed to
whether it is a viable cause of action—a topic dealt with in
section B below). Our only opinion to address “deepening
insolvency,” Official Committee of Unsecured Creditors v. R.F.
Lafferty & Co., 267 F.3d 340 (3d Cir. 2001), defined it, in
predicting Pennsylvania law, as “an injury to [a debtor’s]
corporate property from the fraudulent expansion of corporate
debt and prolongation of corporate life.” Id. at 347. In that
opinion, we concluded that deepening insolvency was a valid
Pennsylvania cause of action. Id. at 344. Although we did
describe deepening insolvency as a “type of injury,” id. at 347,
and a “theory of injury,” id. at 349, we never held that it was a
valid theory of damages for an independent cause of action.
Those statements in Lafferty were in the context of a deepening-
11
insolvency cause of action. They should not be interpreted to
create a novel theory of damages for an independent cause of
action like malpractice.8
Also, we note that Seitz did not provide sufficient
evidence to allow a reasonable jury to find harm. Assuming for
the sake of argument that Detweiler’s financial statements
allowed CitX to raise over one million dollars, that did nothing
to “deepen” CitX’s insolvency. Rather, it lessened CitX’s
insolvency. Cf. Sabin Willett, The Shallows of Deepening
Insolvency, 60 Bus. Law. 549, 552–57 (2005) (discussing loans).
Before the equity infusion, CitX was $2,000,000 in the red
(using round numbers for ease of discussion). With the added
$1,000,000 investment, it was thereby insolvent only
$1,000,000. This hardly deepened insolvency. Any increase in
insolvency (i.e., the several million dollars of debt incurred after
the $1,000,000 investment) was wrought by CitX’s
management, not by Detweiler.
The crux, then, is the claim that the $1,000,000 equity
investment allowed CitX to exist long enough for its
management to incur millions more in debt. But that looks at
the issue backward. As noted, the equity investment was hardly
harmful to CitX. Its management surely misused the
8
By this we do not mean to imply that deepening
insolvency would be a valid theory of damages for any other
cause of action, such as fraud, and Lafferty did not so hold.
12
opportunity created by that investment; that was unfortunate.
But they could have instead used that opportunity to turn the
company around and transform it into a profitable business.
They did not, and therein lies the harm to CitX. Put another
way, “[t]he deepening of a firm’s insolvency is not an
independent form of corporate damage. Where an independent
cause of action gives a firm a remedy for the increase in its
liabilities, the decrease in fair asset value, or its lost profits, then
the firm may recover, without reference to the incidental impact
upon the solvency calculation.” Id. at 575.9
2. Causation
Even if CitX’s insolvency deepened between when it
issued financial statements in January 2000 and when it filed for
Chapter 11 protection 18 months later, Seitz must establish that
Detweiler’s actions caused that condition (which for the sake of
argument we assume to be a harm). See Martin, 711 A.2d at
461. Seitz’s complaint alleges that—by failing to investigate
CitX’s problems, determine that the financial statements were
wrong, and tell CitX’s board of directors about those
issues—Detweiler did not give the board the chance to
9
In any event, even Seitz’s counsel acknowleged that
deepening insolvency as a measure of damages merely replicates
malpractice damages. In a letter to counsel for Detweiler that
Seitz’s counsel wrote in January 2005, he concedes that “the
damages analyses under the deepening insolvency theory and
under the malpractice theory are identical.”
13
“safeguard the remaining assets of CitX.” Compl. ¶ 33. Thus,
whatever harm occurred to CitX was “[a]s a result of the
damage caused by [Detweiler].” Compl. ¶ 34.
Seitz provides as support for these allegations an affidavit
given by Richard Marks, CitX’s Chief Operating Officer and a
former member of the CitX board. This affidavit suggests,
among other things, that Marks was misled by the Detweiler-
compiled financial statements and that, had he known that the
statements were incorrect, he would not have pursued investor
capital, would have started CitX’s dissolution, would have taken
steps to avoid further losses, and would have prompted
investigations to protect CitX’s assets.
The District Court found Marks’s affidavit ineffective in
creating a genuine issue of material fact, for Marks in a
subsequent deposition virtually disavowed the affidavit.
Contrary to the suggestion in his affidavit, Marks testified that
he continued to solicit investor funds. He pursued investor
funds even into 2001, which was well after PRSI’s problems
became apparent. He also admitted that he “absolutely knew for
a fact that PRSI was shut down before the shareholders
meetings. No question in my mind.”
Apparently Marks gave his affidavit as part of a deal to
get a suit against him dropped. The affidavit was purely
hypothetical; Marks described his intent in signing it as “if, back
then, you were told this, or, if, back then, you were apprised of
14
that, could you have, would you have. And . . . my affidavit
pretty much says, I may have, based on that—those facts.
There’s no absolute.” And even Marks’s hypothetical answers
were armchair theory, because, as he said, “the may or may
not . . . could also be academic because, if the truth be told, Mr.
Roemmele really is the one who influenced and determined
what or what did not occur in the CitX Corporation, not the
board members, not any officers . . . .”
In signing his affidavit, Marks relied on but a couple
hours’ study of CitX’s corporate minutes from its 2000
shareholder meeting, its financial statements, and two expert
opinions pointing out to him the problems in those financial
statements. So Marks—disclaiming his own knowledge of any
inaccuracies in CitX’s financials—took the expert opinions as
fact in his affidavit.10 Most damaging to the credibility of
10
It is characterized by statements like “I now understand
that collection of the PRSI receivable was highly doubtful at
best and should have been backed out of the financial
statements.” Marks explained in his deposition, however, “I
said, you know, based on what you’re showing me now, and I’m
reading these . . . expert witness opinions on the financial
statements, they have a lot more expertise in these matters than
I do, I was relying on what they showed me. So it was my
understanding at the time that they showed me those ex[p]ert
opinions, at that time that we were sitting in that room, and
that’s what the ‘I now understand’—‘now’ refers to sitting in
that room at that time.”
15
Mark’s affidavit is the following exchange in his deposition:
Q: Okay. Now, the affidavit that you
signed that we went through, is
there anything in there that’s
untrue?
[Marks]: You know, I’m going to—how do
I say this? I don’t want to answer
this with a simple yes or no answer,
because there are issues here, if you
can appreciate, which impact me
and I feel uncomfortable making
that answer—
Q: Okay.
[Marks]: —without the advice of legal
counsel.
This non-affirming affirmance seems to say that Marks’s
affidavit was a scheme to provide sufficient “facts” to survive a
summary judgment motion. The District Court properly
disregarded it under the principles of the “sham affidavit”
doctrine.
That doctrine generally “refers to the trial courts’ practice
of disregarding an offsetting affidavit that is submitted in
16
opposition to a motion for summary judgment when the affidavit
contradicts the affiant’s prior deposition testimony.” Baer v.
Chase, 392 F.3d 609, 624 (3d Cir. 2004) (internal quotation
marks omitted). As this quote suggests, the doctrine typically
applies when the deposition precedes the affidavit. See also
Martin v. Merrell Dow Pharms., Inc., 851 F.2d 703, 706 (3d Cir.
1988) (noting that the doctrine applies to contradictions of
“prior testimony” (emphasis added)); Black’s Law Dictionary
63 (Bryan A. Garner ed., 8th ed. 2004) (“[A sham affidavit is
a]n affidavit that contradicts clear testimony previously given by
the same witness, usu. used in an attempt to create an issue of
fact in response to a motion for summary judgment.” (emphasis
added)). That is, the affidavit comes in later to explain away or
patch up an earlier deposition in an attempt to create a genuine
issue of material fact. In this case, however, the affidavit came
first, and only later did the deposition uncover the untruths in
the affidavit.
We perceive no principle that cabins sham affidavits to
a particular sequence. Cf. Shearer v. Homestake Mining Co.,
557 F. Supp. 549, 558 n.5 (D.S.D. 1983) (“When a witness has
given testimony both by affidavit and by deposition, the two
forms should be considered on a motion for summary judgment,
but greater reliability is usually attributed to the deposition.
Summary judgment may be granted based upon the deposition
testimony if the court is satisfied that the issue potentially
created by the affidavit is not genuine.” (citations omitted)),
aff’d, 727 F.2d 707, 709 & n.3 (8th Cir. 1984). Indeed, cross-
17
examining the affiant in a later deposition seems the better way
to find the flaws in a bogus affidavit. See 10B Charles Alan
Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice
and Procedure § 2738, at 334–35 (3d ed. 1998) (“[A] witness’
affidavit will not be automatically excluded because it conflicts
with the witness’ earlier or later deposition, despite the greater
reliability usually attributed to the deposition. The court may,
however, consider whether the conflict creates a credibility issue
preventing summary judgment from being entered.” (emphasis
added) (footnotes omitted)); see also 10A id. § 2722, at 373, 379
(noting that depositions are “one of the best forms of evidence
for supporting or opposing a summary-judgment motion,” and
that affidavits, not being subject to cross-examination, “are
likely to be scrutinized carefully by the court to evaluate their
probative value”).
We hold that the District Court properly discounted
Marks’s affidavit in light of his deposition testimony. Because,
without Marks’s affidavit, there is nothing in the record to
support a finding that anyone extended credit to CitX in reliance
on the financial statements compiled by Detweiler, Seitz cannot
establish that Detweiler caused any harm to CitX.
B. Was summary judgment correctly granted on the
deepening-insolvency cause of action?
Seitz alleges that Detweiler should have known about the
errors in the financial statements that (he further alleges)
18
eventually caused the harm to CitX. His complaint barely
makes out, and his evidence completely fails to support, any
allegation of fraudulent conduct on Detweiler’s part. Without
fraud, Seitz must fall back on his allegation that Detweiler
negligently deepened CitX’s insolvency. Therefore, we must
decide whether an allegation of negligence can support a claim
of deepening insolvency. As opposed to our discussion above
about deepening insolvency as a theory of damages, we deal
with it here as a cause of action, which Lafferty held it to be
under Pennsylvania law. Lafferty, 267 F.3d at 344, 351.11
Seitz’s contention that negligence can suffice for
11
Though Lafferty and the economic tort it interpreted
Pennsylvania law as approving for fraudulent conduct have
provoked much comment, see, e.g., William Bates III,
Deepening Insolvency: Into the Void, Am. Bankr. Inst. J., Mar.
2005, at 1; J.B. Heaton, Deepening Insolvency, 30 J. Corp. L.
465 (2005); Willett, supra, that issue is not before us. Even if
it were, we cannot revisit the correctness of that interpretation
of Pennsylvania law. See In re Merck & Co. Sec. Litig., 432
F.3d 261, 274 (3d Cir. 2005) (noting that only the Court en banc
can overrule a precedential decision). Although some courts in
this Circuit have extended Lafferty’s reasoning to other states,
see, e.g., OHC Liquidation Trust v. Credit Suisse First Boston
(In re Oakwood Homes Corp.), Nos. 02-13396 & 04-57060,
2006 WL 864843, at *16–17 (Bankr. D. Del. Mar. 31, 2006)
(holding that Delaware, New York, and North Carolina would
recognize the cause of action), nothing we said in Lafferty
compels any extension of the doctrine beyond Pennsylvania.
19
deepening insolvency has some support. For example, the Ninth
Circuit Court of Appeals recently suggested that deepening
insolvency does not require intentional conduct. See Smith v.
Arthur Andersen LLP, 421 F.3d 989, 995 (9th Cir. 2005)
(recognizing deepening insolvency when the allegations were
that the defendants “misrepresent[ed] (not necessarily
intentionally) the firm’s financial condition to its outside
directors and investors”); see also Bondi v. Bank of Am. Corp.
(In re Parmalat Sec. Litig.), 383 F. Supp. 2d 587, 601 (S.D.N.Y.
2005). Indeed, Lafferty relied, in a string cite of five cases, on
one case suggesting that negligence would suffice. 267 F.3d at
350–51 (citing Gouiran Holdings, Inc. v. DeSantis, Prinzi,
Springer, Keifer & Shall (In re Gouiran Holdings, Inc.), 165
B.R. 104, 107 (E.D.N.Y. 1994)).
In addressing this question, we note that Lafferty holds
only that fraudulent conduct will suffice to support a deepening-
insolvency claim under Pennsylvania law. See id. at 347
(defining the injury as a “fraudulent expansion of corporate debt
and prolongation of corporate life”); id. at 349 (referring to the
“fraudulent and concealed incurrence of debt”); see also
Corporate Aviation Concepts, Inc. v. Multi-Serv. Aviation Corp.,
No. Civ.A. 03-3020, 2004 WL 1900001, at *4 (E.D. Pa. Aug.
25, 2004) (holding that only fraudulent conduct will suffice for
a deepening-insolvency claim); OHC Liquidation Trust v. Credit
Suisse First Boston (In re Oakwood Homes Corp.), Nos. 02-
13396 & 04-57060, 2006 WL 864843, at *20 (Bankr. D. Del.
Mar. 31, 2006) (same). We know no reason to extend the scope
20
of deepening insolvency beyond Lafferty’s limited holding. To
that end, we hold that a claim of negligence cannot sustain a
deepening-insolvency cause of action.12
IV. Conclusion
Seitz’s malpractice claim fails because he cannot
establish harm or causation. He could not establish harm
because deepening insolvency is not a valid theory of damages
for negligence. And the affidavit that purported to create a
genuine issue of fact on the causation issue should be discarded
in favor of that affiant’s later, conflicting deposition testimony.
Seitz’s deepening-insolvency claim fails because he
cannot establish a genuine factual issue to support the allegation
that Detweiler engaged in fraudulent conduct. Negligence
cannot support such a claim.13
12
Therefore, we need not address the parties’ arguments
about the application of in pari delicto (which simply means that
a plaintiff wrongdoer cannot recover from a defendant
wrongdoer).
13
Moreover, even were negligence capable of supporting
a deepening-insolvency claim, we have already noted the lack
of evidence to support a causal connection between the
worsening of CitX’s financial condition and the issuance by
Detweiler of the compiled financial statements in January 2000.
21
We therefore affirm the District Court’s grant of
summary judgment in favor of Detweiler.
22