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IN RE PHAR-MOR

July 26, 1995

IN RE: PHAR-MOR, INC. SECURITIES LITIGATION; TRICON CAPITAL, a division of Greyhound Financial Corporation, as successor in interest to Bell Atlantic TriCon Leasing Corporation, Plaintiff,
v.
COOPERS & LYBRAND, et al., Defendants. COMPUTER LEASING, INC., Plaintiff, v. COOPERS & LYBRAND, et al., Defendants. CENTER CAPITAL CORPORATION, Plaintiff, v. COOPERS & LYBRAND, et al., Defendants. NEW ENGLAND CAPITAL CORPORATION, Plaintiff, v. COOPERS & LYBRAND, et al., Defendants.



The opinion of the court was delivered by: DONALD E. ZIEGLER

 ZIEGLER, Chief Judge

 Pending before the court are the motions of defendants, Coopers & Lybrand and a defendant class of Coopers' partners and principals (collectively "Coopers"), for summary judgment with respect to the claims of plaintiffs, TriCon Capital, Computer Leasing Inc., Center Capital Corporation, and New England Capital Corporation (collectively "plaintiffs"). For the reasons that follow, Coopers' motions will be granted in part and denied in part.

 These actions are part of the In re Phar-Mor Securities Litigation, MDL No. 959, which arose out of the fraud that occurred at Phar-Mor, Inc. during the late 1980's and early 1990's. Shortly after the fraud was revealed, Phar-Mor filed for bankruptcy under Chapter 11 of the Bankruptcy Code. Coopers, an international public accounting firm with offices in Pittsburgh, Pennsylvania, was Phar-Mor's independent public auditor during the period of the fraud and has been accused by the plaintiffs in the MDL of failing to uncover the fraud due to its allegedly negligent, reckless and/or fraudulent conduct in the performance of its audits.

 TriCon Capital, a division of Greyhound Financial Corporation, as successor in interest to Bell Atlantic TriCon Leasing Corporation ("TriCon"), is a Delaware corporation with its principal place of business in New Jersey. TriCon is in the business of leasing or financing the acquisition of furniture, fixtures and equipment for commercial entities. In 1991 and 1992, TriCon extended credit and made loans to Phar-Mor of nearly $ 15 million in connection with the construction of 40 new stores, allegedly in reliance on Coopers' audit reports. TriCon has sued Coopers for (1) violation of sections 1962(c) and 1962(d) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) and (d), (2) common law fraud, (3) negligent misrepresentation, and (4) professional negligence. In addition to its actual and consequential damages, TriCon seeks treble and punitive damages.

 Computer Leasing Inc. ("CLI") is a New York corporation with its principal place of business in New Jersey. In 1989 and 1992, CLI entered into equipment finance lease agreements with, and made other loans to Phar-Mor, allegedly in reliance on Coopers' audit reports. CLI claims that it has suffered damages in excess of $ 30 million as a result of the fraud. It has sued Coopers for (1) common law fraud, (2) negligent misrepresentation, and (3) professional negligence. CLI also seeks punitive damages against Coopers.

 New England Capital Corporation ("NECC") is a New Hampshire corporation with its principal place of business in Connecticut. NECC is also in the business of leasing or providing financing for the acquisition of computers and related equipment. It too purchased a lease agreement from GE Capital which had originally been between CLI and Phar-Mor. NECC paid $ 1,373,005.00 for the lease, allegedly in reliance on Coopers' audit reports. Following the assumption and modification of the lease agreement, NECC claims to have suffered loss of principal in the amount of $ 1,162,266.43, plus contractual interest at 18% per annum. NECC has sued Coopers for (1) violation of sections 1962(c) and (d) of RICO, 18 U.S.C. § 1962(c) and (d), (2) common law fraud, (3) negligent misrepresentation, and (4) professional negligence. In addition to its actual and consequential damages, NECC seeks treble and punitive damages.

 Coopers has moved for summary judgment with respect to all of the claims asserted by plaintiffs. Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). In considering a motion for summary judgment, we must examine the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in favor of that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 We will initially address plaintiffs' federal claims under RICO. *fn1" Section 1962(c) makes it unlawful for "any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." Coopers contends that it is entitled to judgment on this claim because it did not "participate" in the affairs of Phar-Mor.

 In Reves v. Ernst & Young, U.S. , 113 S. Ct. 1163, 122 L. Ed. 2d 525 (1993), the Supreme Court addressed the scope of the "participation" requirement of section 1962(c). In that case, the Court was confronted with the issue of whether a public accounting firm, Arthur Young & Company, was a participant in the affairs of its audit client, the Farmer's Cooperative of Arkansas and Oklahoma, Inc., where its involvement was "limited to the audits, meetings with the Board of Directors to explain the audits, and presentations at annual meetings." Arthur Young & Co. v. Reves, 937 F.2d 1310, 1324 (8th Cir. 1991). The claim against Arthur Young arose from its failure to inform the cooperative's board of directors, at the annual meeting, of its conclusion that the valuation of a major asset of the cooperative, a gasahol plant, was inflated on the financial statements. Had the gasahol plant been properly valued, the financial statements would have revealed that the cooperative was insolvent.

 Shortly after Reves was decided, the Court of Appeals applied the "participation" test to RICO claims lodged against an accounting firm in University of Maryland v. Peat, Marwick, Main & Company, 996 F.2d 1534 (3d Cir. 1993). In that case, an insurance company, Mutual Fire, Marine & Inland Insurance Company, went into statutory bankruptcy, triggering various insolvency proceedings and suits in state and federal courts. The plaintiffs brought a class action against Peat Marwick, including claims under RICO, for allegedly performing materially deficient audits of Mutual Fire. Peat Marwick moved to dismiss the RICO claim under Fed.R.Civ.P. 12(b), and the district court granted the motion.

 On appeal, the Court of Appeals first set forth the essential facts pleaded by the plaintiffs in ...


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