                                                               FILED
                                                          Mar 08 2017, 8:23 am

                                                               CLERK
                                                           Indiana Supreme Court
                                                              Court of Appeals
                                                                and Tax Court




ATTORNEY FOR APPELLANT                                     ATTORNEYS FOR APPELLEE
R. William Jonas, Jr.                                      Caesar A. Tabet
Hammerschmidt, Amaral, & Jonas                             Mark H. Horwitch
South Bend, Indiana                                        John M. Fitzgerald
                                                           Tabet DiVito & Rothstein LLC
                                                           Chicago, Illinois
                                                           Michael A. Trippel
                                                           Phillip A. Garrett
                                                           Thorne Grodnik, LLP
                                                           Mishawaka, Indiana



                                            IN THE
    COURT OF APPEALS OF INDIANA

Magic Circle Corp., D/B/A                                  March 8, 2017
Dixie Chopper, Arthur Evans,                               Court of Appeals Case No.
Wesley Evans, and Jeffrey                                  71A03-1607-PL-1520
Haltom,                                                    Appeal from the St. Joseph Circuit
Appellants-Plaintiffs,                                     Court
                                                           The Honorable Michael G.
        v.                                                 Gotsch, Sr., Judge
                                                           Trial Court Cause No.
Crowe Horwath, LLP,                                        71C01-1404-PL-93
Appellee-Defendant.




Bailey, Judge.




Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017               Page 1 of 16
                                           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




      Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 2 of 16
                        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




      1
       We reverse the trial court’s order on the issues identified above. Accordingly, we do not reach Magic
      Circle’s other arguments, including whether the exculpatory and liability limitation provisions of its
      agreements with Crowe are contrary to public policy.
      2
        Because this Court has already affirmed the judgment of the trial court that Magic Circle failed to plead
      facts that would support its claims for fraud against Wilson and Morgan, we do not take as true the
      allegations of fraud against Wilson and Morgan.

      Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017                           Page 3 of 16
      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]   This appeal ensued.


      Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017      Page 4 of 16
                                  Discussion and Decision
                                          Standard of Review
[10]   Magic Circle argues that the trial court erred when it dismissed for failure to

       state a claim under Trial Rule 12(B)(6) the company’s claim that Crowe had

       committed accountant malpractice. Our Indiana Supreme Court has

       announced the standard of review for appeals from orders of dismissal under

       Rule 12(B)(6):


               A motion to dismiss for failure to state a claim tests the legal
               sufficiency of the claim, not the facts supporting it. Charter One
               Mortgage Corp. v. Condra, 865 N.E.2d 602 (Ind. 2007). Thus, our
               review of a trial court’s grant or denial of a motion based on Trial
               Rule 12(B)(6) is de novo. Id. When reviewing a motion to
               dismiss, we view the pleadings in the light most favorable to the
               nonmoving party, with every reasonable inference construed in
               the nonmovant’s favor. City of New Haven v. Reichhart, 748
               N.E.2d 374 (Ind. 2001). Inasmuch as motions to dismiss are not
               favored by the law, they are properly granted only “when the
               allegations present no possible set of facts upon which the
               complainant can recover.” Mart v. Hess, 703 N.E.2d 190, 193
               (Ind. Ct. App. 1998). Put another way, a dismissal under Rule
               12(B)(6) will not be affirmed “unless it is apparent that the facts
               alleged in the challenged pleading are incapable of supporting
               relief under any set of circumstances.” Couch v. Hamilton County,
               609 N.E.2d 39, 41 (Ind. Ct. App. 1993).


       City of E. Chicago, Indiana v. E. Chicago Second Century, Inc., 908 N.E.2d 611, 617

       (Ind. 2009).




       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 5 of 16
                                         Economic Loss Rule
[11]   We address first one of the bases upon which the trial court rested its dismissal

       of Magic Circle’s claims, the economic loss doctrine. Generally, the economic

       loss rule states:

               damage from a defective product or service may be recoverable
               under a tort theory if the defect causes personal injury or damage
               to other property, but contract law governs damage to the
               product or service itself and purely economic loss arising from
               the failure of the product or service to perform as expected.


       Indianapolis-Marion Cnty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d

       722, 728 (Ind. 2010) (citation omitted).


[12]   In explaining the rule, the Indiana Supreme Court has stated that “the

       economic loss rule reflects that the resolution of liability for purely economic

       loss caused by negligence is more appropriately determined by commercial

       rather than tort law.” Id. at 729. Limiting a recovery of such purely pecuniary

       losses to commercial law serves to ensure the application of warranty and other

       commercial rules, whereas a remedy at tort would allow a plaintiff buyer “‘to

       circumvent the seller’s effective limitation or exclusion of warranties under [the

       Uniform Commercial Code], and subject[ ] manufacturers to liability for

       damages of unknown and unlimited scope.’” Id. (quoting Reed v. Central Soya

       Co., Inc., 621 N.E.2d 1069, 1075 (Ind. 1993)). The economic loss rule serves a

       second purpose related to the question of unlimited scope of damages: use of

       tort remedies may create “‘a potential for liability so uncertain in time, class, or


       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 6 of 16
       amount that [a defendant should not be] fairly or practically expected to

       account for the potential liability when undertaking the conduct that gives rise

       to it.’” Id. at 730 (quoting Restatement (Third) of Economic Torts and Related

       Wrongs § 8, cmt. d(2) (Council Draft No. 2, 2007)).


[13]   However, our supreme court has made clear that the economic loss rule is a

       general rule, and thus certain purely economic losses fall within exceptions that

       permit recoveries at tort. Id. Among the exceptions articulated by the Indiana

       Supreme Court are “lawyer malpractice, breach of a duty of care owed to a

       plaintiff by a fiduciary, breach of a duty to settle owed by a liability insurer to

       the insured, and negligent misstatement.” Id. at 736. Magic Circle argues that

       the nature of its negligence claim—accountant malpractice—is among the

       exceptions to the rule.


[14]   We have found no Indiana case that addresses directly the question of whether

       the economic loss rule applies to bar actions at tort for accountant malpractice.

       We note, however, that courts in our sister State of Illinois, as well as federal

       courts, have held that the economic loss rule does not preclude an action

       against accountants for professional negligence. The Illinois Supreme Court

       confronted the applicability vel non of the economic loss rule to accountant

       malpractice claims in Congregation of the Passion, Holy Cross Province v. Touche

       Ross & Co., 636 N.E.2d 503 (Ill. 1994), cert. denied. In Congregation of the Passion,

       the plaintiff, an order of the Roman Catholic Church that met operating

       expenses through the use of contributions and investment income, sued its

       accounting firm for professional negligence in the preparation of financial

       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017    Page 7 of 16
       statements. Id. at 505. Congregation of the Passion prevailed at trial and the

       Touche Ross & Company appealed. Id. at 509. Among the claims of error was

       that the lower courts had erred in awarding damages at tort for purely economic

       losses associated with Touche Ross & Company’s professional negligence. Id.


[15]   Addressing Touche Ross & Company’s claims, the Illinois Supreme Court

       observed that the economic loss rule prevents an outcome “that tort law would,

       if allowed to develop unchecked, eventually envelop contract law.” Id. at 513.

       The Illinois Supreme Court observed that though it had held that the economic

       loss rule applied to certain contracts for services, the rule operated to preclude a

       tort recovery “only where the duty of the party performing the service is defined

       by the contract that he executes with his client.” Id. at 514. “Where a duty

       arises outside of the contract, the economic loss doctrine does not prohibit

       recovery in tort for the negligent breach of that duty.” Id. Reviewing the

       agreement between Congregation of the Passion and its accountants, the court

       observed:

               While a client contracts with an accountant regarding some
               general matters, an accountant must make his own decisions
               regarding many significant matters, and the final decision he
               makes is not necessarily contingent on the contract he executes
               with his client. An accountant may offer different levels of
               service, such as audited or unaudited preparation of financial
               statements, but within these levels of service, the client is not
               required or expected to be able to direct the conduct of the
               accountant through contractual provisions. A client should
               know that an accountant must make certain decisions
               independently, and the client had the right to rely on the
               accountant's knowledge and expertise when those decisions are

       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017    Page 8 of 16
               made by the accountant. This knowledge and expertise cannot
               be memorialized in contract terms, but is expected independent
               of the accountant’s contractual obligations.


       Id. at 514-15.


[16]   The court likened the accountant-client relationship to the attorney-client

       relationship because “the ultimate result of the relationship between the

       professional and the client is something intangible,” and because whatever the

       written output, “the value of the services rendered lies in the ideas behind the

       documents, not the documents themselves.” Id. at 515. Moreover, accountants

       “‘have long been held to be members of a skilled profession, and liable for their

       negligent failure to observe reasonable professional competence.’” Id. (quoting

       P. Kelly, An Overview of Accountants’ Liability¸15 Forum 579, 583 (1979)). The

       duty to act with reasonable professional competence is “independent of any

       contract,” and “[t]ort law has traditionally afforded an avenue of recovery for

       accountant malpractice.” Id. Thus, the Illinois Supreme Court held that the

       economic loss rule did not apply to bar an action at tort against Touche Ross &

       Company.


[17]   Federal courts have applied Congregation of the Passion in similar contexts. In

       Gallagher Corp. v. Mass. Mut. Life. Ins. Co., 940 F. Supp. 176 (N.D. Ill. 1996), the

       United States District Court for the Northern District of Illinois observed that

       the defendant, Massachusetts Mutual Life Insurance Company, rendered

       services akin to “‘business consulting,’” and that such services were generally

       “advisory in character and intangible,” so that the economic loss rule did not

       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 9 of 16
       bar a tort claim. Id. at 180. The same district court would later hold that the

       economic loss rule did apply, however, concluding that “absent a contract of

       carriage,” an airline had no independent duty to transport a passenger’s

       baggage. Harger v. Spirit Airlines, Inc., No. 01 C 8606, 2003 WL 21218968 at *10

       (N.D. Ill. May 22, 2003).


[18]   Here, the trial court determined that the economic loss rule’s general use—

       barring liability at tort for a purely economic loss caused by a defendant’s

       negligence—applied to the accounting relationship between Magic Circle and

       Crowe. The court thus concluded that Magic Circle’s negligence claim was

       barred, but that Magic Circle could nevertheless bring a claim for breach of

       contract. The court then went on to address the question of breach and the

       effect of the exculpatory and damage limitation provisions of the engagement

       letters.


[19]   We address the contract’s exculpatory provisions below. However, we

       conclude that the trial court was incorrect as a matter of law when it concluded

       that the economic loss rule barred Magic Circle’s tort claim against Crowe. We

       agree with our sister courts that the full scope of the work performed by an

       accountant is not capable of being described in an engagement letter, and that

       the real benefit of the work of an auditor is the audit itself—not simply the

       resultant documents. Crowe’s engagement letters indicate that the firm would

       exercise considerable independent judgment, referring on several occasions to

       the generation of “opinion” concerning Magic Circle’s financial status. (App’x

       Vol. 2 at 68, 69.) The wide-ranging scope of the work is further noted in the

       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 10 of 16
       engagement letter with reference to Crowe’s request for contact persons toward

       whom to direct inquiries. We accordingly hold that the trial court erred as a

       matter of law when it concluded that Magic Circle had failed to state a claim in

       tort due to the operation of the economic loss rule.


                                      Exculpatory Provisions
[20]   Having held that Magic Circle’s tort claim was not barred, we turn now to the

       effect of the exculpatory provisions of the various engagement letters between

       Magic Circle and Crowe.


[21]   Construction of an exculpatory clause, like other contractual provisions, is a

       matter of contract interpretation and a matter of law reserved to the court. City

       of Hammond v. Plys, 893 N.E.2d 1, 3 (Ind. Ct. App. 2008).


               When reviewing a contract, we examine the language used to
               express the parties’ rights and duties to determine their intent. Id.
               Words are given their usual meaning unless it is clear from the
               context that another meaning was intended. Words, phrases,
               sentences, paragraphs, and sections of a contract cannot be read
               out of context. If possible, the entire contract must be read
               together and given meaning.


                [A]n exculpatory clause must both specifically and explicitly
               refer to the negligence of the party seeking release from liability.
               But, this court has held that an exculpatory clause need not
               include the word “negligence” so long as it conveys the concept
               specifically and explicitly through other language.


       Id. (citations and quotations omitted).


       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 11 of 16
[22]   The trial court here addressed an exculpatory provision in each of the various

       audit engagement letters that provided:


               Management is responsible for making available to us, on a
               timely basis, all financial records and related information and
               your personnel to whom we may direct inquiries. Management
               agrees to provide us with written representations relating to
               matters contained in or related to the financial statements
               including that the effects of any uncorrected misstatements
               aggregated by us during the current engagement and pertaining
               to the latest period presented are immaterial, both individually
               and in the aggregate, to the financial statements taken as a whole.
               Because of the importance of management’s representations to
               an effective audit, you agree to release [Crowe] and its personnel
               from any liability and costs relating to our services under this
               letter attributable to any misrepresentations by management.


       (App’x Vol. 2 at 69-70.) Interpreting this provision, the trial court concluded

       that “the release serves to protect [Crowe] from liability due to its alleged

       improper conduct in performing the audit of Magic Circle, and [Crowe] is

       released from any duty or liability from its nonperformance of the contract.”

       (App’x Vol. 3 at 249.)


[23]   Exculpatory clauses must be given effect—however, they must be given proper

       effect in light of the acts they are intended to excuse and, upon review of a

       motion to dismiss under Trial Rule 12(B)(6), the facts as alleged in any given

       case. In its Second Amended Complaint, Magic Circle alleged facts that

       consisted of misrepresentations by management and, to the extent Crowe’s

       errors were the result of such misrepresentations, it would by operation of the

       exculpatory provisions be excused for its errors. However, not all of the
       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 12 of 16
       allegations in the complaint depend upon misrepresentations by Magic Circle’s

       former managers.


[24]   Among the allegations in the complaint are that Crowe did not satisfy its

       independent professional obligation to “exercise professional skepticism” by

       “having a ‘questioning mind’ and a ‘critical assessment’ of audit evidence.”

       (App’x Vol. 2 at 35.) Magic Circle alleged that Crowe ignored “fraud ‘risk

       factors’” set forth in audit standards. (App’x Vol. 2 at 35.) Magic Circle further

       alleged a series of failures of exercise of due care, independent of any allegation

       of fraud or misrepresentation by management, including: assigning auditors

       who lacked expertise with Magic Circle’s accounting system and “basic

       competence to evaluate the schedules provided by Morgan and Wilson”; failing

       to apprise the board of questionable transactions when Crowe was aware of

       such transactions; failing to inquire into back-up data; and failing “to undertake

       independent analysis of the company’s financial record keeping system.”

       (App’x Vol. 2 at 36-37.)


[25]   These allegations, if true, constitute separate grounds for relief as they are at

       least facially independent of the question of management misrepresentations

       through spreadsheet data separate and discrepant from data found within the

       regular accounting systems used by Magic Circle. That is, the allegations noted

       above are not alleged to have been “attributable to any misrepresentations by

       management” (App’x Vol. 2 at 70). They are therefore not within the scope of

       the exculpatory clause, which by its terms does not have the effect of excusing



       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 13 of 16
       Crowe at tort “from any duty or liability from its nonperformance of the

       contract.” (App’x Vol. 3 at 249.)


[26]   In its reply brief, Crowe suggests an alternate basis upon which we might affirm

       the dismissal of Magic Circle’s claim. Crowe argues that even if the

       exculpatory provision does not bar Magic Circle’s claim of accountant

       malpractice as pleaded—that is, sounding in tort—provisions in the

       engagement letters that limit Crowe’s damages have the same effect. Crowe

       correctly observes that we may affirm an order of dismissal on any legal basis

       supported by the record. See, e.g., Williams v. Cingular Wireless, 809 N.E.2d 473,

       476 (Ind. Ct. App. 2004) (stating, “[w]e sustain the trial court’s ruling if we can

       affirm on any basis found in the record”), trans. denied.


[27]   Crowe directs us to this limitation of liability provision in the engagement

       letters:


               LIMIT OF LIABILITY – The provisions of this section
               establishing a limit of liability will not apply if, as determined in a
               judicial proceeding, we performed our services with gross
               negligence and willful misconduct. Our engagement with you is
               not intended to shift risks normally borne by you to us. With
               respect to any services or work product or this engagement in
               general, the liability of [Crowe] and its personnel shall not exceed
               the fees we receive for the portion of the work giving rise to
               liability. A claim for a return of fees paid shall be the exclusive
               remedy for any damages. This limitation of liability is intended
               to apply to the full extent allowed by law, regardless of the
               grounds or nature of any claim asserted. This limitation of
               liability shall also apply after the termination of this agreement.



       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017     Page 14 of 16
       (App’x Vol. 2 at 73.) Crowe argues that even if Magic Circle’s claim in tort was

       not subject to dismissal based upon the facts pled in the complaint, a tort claim

       is barred by the provision above because Magic Circle’s damages claim does not

       seek a contract price for each allegedly negligent audit, but instead seeks

       compensatory, treble, and exemplary damages, as well as attorneys’ fees. This

       argument finds some support in the trial court’s order of dismissal, which states

       in a footnote that Magic Circle’s complaint “makes no claim against [Crowe]

       for gross negligence or intentional misconduct.” (App’x Vol. 3 at 249 n. 7.)


[28]   But we hold, again, that the trial court’s order was in error—in no small part

       because the trial court appears to have disregarded a specific allegation in

       Magic Circle’s complaint: “Crowe’s acts or omissions constitute negligence,

       gross negligence and/or willful misconduct.” (App’x Vol. 2 at 51, emphasis added.)

       Further, any number of the facts pled by Magic Circle might support a finding

       of gross negligence. “Inasmuch as motions to dismiss are not favored by the

       law, they are properly granted only when the allegations present no possible set

       of facts upon which the complainant can recover.” City of E. Chicago, 908

       N.E.2d at 617 (citation and quotation marks omitted). Because the facts Magic

       Circle pled do not exclude the possibility of gross negligence in hiring or

       assigning employees or of failing to report known irregularities to the

       company’s board, it is not possible to say that there is no set of facts under

       which a recovery might be possible. And because this is so, we must in turn

       conclude that the liability limitation provisions of the engagement letters fail to

       require dismissal of the complaint.


       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 15 of 16
                                                Conclusion
[29]   The economic loss rule does not have the effect of barring an accountant

       malpractice claim at tort. The exculpatory and limitation of liability clauses did

       not operate to preclude a recovery such that Magic Circle failed to plead a claim

       upon which, based upon the facts as pled in the complaint, relief could be

       granted. Thus the trial court erred in dismissing the Second Amended

       Complaint as to negligence through accountant malpractice.


[30]   Reversed and remanded.


       Vaidik, C.J., and Riley, J., concur.




       Court of Appeals of Indiana | Opinion 71A03-1607-PL-1520 | March 8, 2017   Page 16 of 16
