Academic journal article Journal of Accountancy

Lender Suit against Accountants Barred

Academic journal article Journal of Accountancy

Lender Suit against Accountants Barred

Article excerpt

A California appellate court ruled that in a case alleging both breach of contract and negligence, the negligence action predominates for determining the statute of limitations.

This case involved the Spitzer family, which controlled various partnerships and "alternative lender" companies that made loans to parties that might not qualify for bank loans. The companies allegedly made unconectible loans and loans unjustified by appropriate lending criteria, and generally engaged in unsound lending practices.

Arthur Andersen & Co. audited the financial statements of the partnerships and companies from 1981 to 1988, allegedly failed to disclose these practices in its audit reports and concluded the "loan portfolio was adequately collateralized." On March 28, 1989, the city of Los Angeles and others sued various defendants, including the Spitzer companies, to redress their practice of maintaining and operating slum buildings through a complex set of financial transactions.

Following the filing of this lawsuit, banks refused to extend any further credit to the Spitzer partnerships and companies. On November 24, 1989, the companies and partnerships filed for protection under Chapter 1 1 of the U.S. Bankruptcy Code. On October 15, 1993, investors in the Spitzer companies and partnerships filed an action for professional negligence and breach of contract against the firm. …

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