Academic journal article Journal of Accountancy

Bankruptcy Trustee May Sue

Academic journal article Journal of Accountancy

Bankruptcy Trustee May Sue

Article excerpt

The U.S. District Court for the District of Massachusetts ruled that the trustee of a failed bank may bring a direct action against the bank's former auditors.

This case arose from the failure of a bank holding company, the Bank of New England, and several subsidiary banks. On January 6, 1991, the subsidiaries were declared insolvent and the Federal Deposit Insurance Corporation was appointed as receiver. The following day BNEC filed Chapter 7 bankruptcy. The plaintiff, Ben Branch, was appointed bankruptcy trustee.

In 1982 Ernst & Young was hired as auditor of BNEC and the subsidiaries. In September 1989 BNEC raised capital through a $250 million debt offering. Between September and December of that year, BNEC transferred to its subsidiaries $183 million, which had been raised by the debt offering. The plaintiff alleged that BNEC had received nothing in exchange for these transfers. BNEC claimed that the money "was lost at the moment the transfers were made," because the subsidiaries were already insolvent.

BNEC said that it was unaware of its own and the subsidiaries' financial condition because the firm had failed to perform its duties competently. Specifically, BNEC alleged that the firm was negligent in not reporting BNEC's insolvency and that of its subsidiaries. …

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