IN THE UNITED STATES COURT OF APPEALS FOR THE …commission.abi.org/sites/default/files/Trust...

11-15626

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

USACM LIQUIDATING TRUST,

Plaintiff - Appellant,

v.

DELOITTE & TOUCHE, LLP,

Defendant – Appellee.

D.C. No. 2:08-cv-00461-PMP-PAL

District of Nevada,Las Vegas

On Appeal From the United States District CourtFor the District of Nevada

Honorable Judge Phillip M. Pro

APPELLANT’S OPENING BRIEF

DIAMOND MCCARTHY LLPAllan B. DiamondJ. Maxwell Beatty909 Fannin, Suite 1500Houston, Texas 77010 Telephone (713) 333-5100

ATTORNEYS FOR APPELLEEUSACM LIQUIDATING TRUST

Case: 11-15626 08/08/2011 ID: 7847937 DktEntry: 9 Page: 1 of 75

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TABLE OF CONTENTS

I. JURISDICTION ........................................................................................ 1

II. STATEMENT OF ISSUES ....................................................................... 1

III. STATEMENT OF THE CASE ................................................................. 3

IV. STATEMENT OF FACTS ........................................................................ 4

A. CASE OVERVIEW ................................................................................... 4

B. HANTGES AND MILANOWSKI’S TWO SCHEMES TO LOOT AND ABUSE USACM ............................................................................... 6

1. Hantges And Milanowski’s Looting And Self-Dealing Scheme ........... 6

2. Hantges And Milanowski’s Ponzi-Like Scheme ................................... 9

C. DELOITTE’S AUDITS OF USACM AND INTERACTION WITH USACM’S REGULATORS......................................................................11

D. USACM’S INNOCENT INSIDERS COULD AND WOULD HAVE STOPPED THE TWO WRONGFUL SCHEMES..................................14

V. SUMMARY OF ARGUMENT ................................................................18

VI. ARGUMENT ............................................................................................23

A. LEGAL STANDARD ...............................................................................23

B. BECAUSE HANTGES AND MILANOWSKI TOTALLY ABANDONED USACM’S INTERESTS, THEIR KNOWLEDGE AND CONDUCT CANNOT BE IMPUTED TO USACM OR THE TRUST.......................................................................................................24

1. Hantges And Milanowski’s Looting And Self-Dealing Scheme Was Totally Adverse To USACM.........................................................25

2. The Ponzi-Like Scheme Was Totally Adverse To USACM ................26


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C. THE SOLE ACTOR EXCEPTION DOES NOT APPLY HERE ..........29

1. The District Court Employed An Incorrect Formulation Of The Sole Actor Exception That Was Subsequently Rejected By The Nevada Supreme Court .........................................................................29

2. Substantial Evidence Demonstrated That Decision-Makers At USACM Were Unaware Of The Corrupt Insiders’ Wrongdoing.......32

D. BECAUSE DELOITTE DID NOT ACT IN GOOD FAITH, IMPUTATION WAS IMPROPER..........................................................43

E. PUBLIC POLICY CONCERNS PRECLUDE THE APPLICATION OF IN PARI DELICTO.............................................................................48

F. THE DISTRICT COURT ERRED IN RULING THAT THE TRUST’S CLAIMS WERE BARRED BY LIMITATIONS ..................51

1. Deloitte Concealed Its Wrongdoing, Thereby Tolling The Statute Of Limitations As To The Trust’s Audit Malpractice Claim..............53

2. The Discovery Rule Or The Adverse Domination Rule Preserved The Trust’s Audit Malpractice Claims Relating To The Fiscal Year 2001 Audit .....................................................................................55

3. The Discovery Rule Or The Adverse Domination Doctrine Preserved The Trust’s Aiding And Abetting Breach Of Fiduciary Duty Claims. ..........................................................................................59

VII. CONCLUSION .........................................................................................60

CERTIFICATE OF COMPLIANCE ................................................................61

ADDENDUM TO APPELLANT’S OPENING BRIEF ....................................62


iii

TABLE OF AUTHORITIES

CASES

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505 (1986) .................40

Ashwander v. Tenn. Valley Authority, 297 U.S. 288, 56 S.Ct. 466 (1936).............39

Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 105 S.Ct. 2622 (1985) ....................................................................................................48, 50

BCCI Holdings (Luxembourg), S.A. v. Clifford, 964 F.Supp. 468 (D.D.C. 1997) ....................................................................................................................44

Bedore v. Familian, 125 P.3d 1168 (Nev. 2006) ................................. 34, 38, 39, 40

Blackman v. Las Vegas-Tonopah-Reno Stage Line, Inc., 476 P.2d 964 (Nev. 1970).....................................................................................................34, 38

Clark v. Milam, 452 S.E.2d 714 (W. Va. 1994).....................................................58

Cobalt Multifamily Investors I, LLC v. Shapiro, No. Civ. 6468, 2009 WL 4408207 (S.D.N.Y Dec. 1, 2009) ..........................................................................26

Cook v. Colyer's Administrator, 2 B.Mon. 71 (Ky. App. 1841).............................48

FDIC v. Gonzalez-Gorrondona, 833 F.Supp. 1545 (S.D. Fla. 1993).....................58

Freeman v. Sedwick, 6 Gill. 28 (Md. 1847)...........................................................48

Glenbrook Capital Ltd. Partnership v. Dodds (In re AMERCO Derivative Litigation), 252 P.3d 681 (Nev. 2011)............................................................passim

In re 1031 Tax Group, LLC, 420 B.R. 178 (Bankr. S.D.N.Y. 2009)..........26, 28, 37

In re Allou Distributors, Inc., 387 B.R. 365 (Bankr. E.D.N.Y. 2008)....................37

In re CBI Holding Co., 529 F.3d 432 (2d Cir. 2008) .......................................26, 35

In re Friedman's, Inc., 394 B.R. 623 (S.D. Ga. 2008) ...........................................37


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In re Mediators, Inc., 105 F.3d 822 (2d Cir. 1997)................................................30

In re NM Holdings Co., 411 B.R. 542 (E.D. Mich. 2009) .....................................37

In re Sharp International Corp., 319 B.R. 782 (Bankr. E.D.N.Y. 2005) ...............37

In re Sunpoint Securities, Inc., 377 B.R. 513(Bankr. E.D. Tex. 2007)...................................................................... 28, 44, 49, 50

Magill v. Lewis, 333 P.2d 717 (Nev. 1959) ...........................................................48

Mark H. v. Hamamoto, 620 F.3d 1090 (9th Cir. 2010)...........................................23

Meyer v. Fleming, 327 U.S. 161, 66 S.Ct. 382 (1946)...........................................39

Mosesian v. Peat, Marwick, Mitchell & Co., 727 F.2d 873 (9th Cir. 1984) .....57, 58

Mutual Life Insurance Co. of N.Y. v. Hilton-Green, 241 U.S. 613, 36 S.Ct. 676 (1916).........................................................................................43, 44

NCP Litigation Trust v. KPMG LLP, 901 A.2d 871 (N.J. 2006) .....................44, 50

Nevada State Bank v. Jamison Family Partnership, 801 P.2d 1377(Nev. 1990).....................................................................................................52, 59

Nisselson v. Ford Motor Co., 340 B.R. 1 (E.D.N.Y. 2006) .............................37, 38

Official Committee of Unsecured Creditors of Allegheny Health Education & Research Foundation v. PriceWaterhouseCoopers, LLP, 607 F.3d 346 (3rd Cir. 2010) ....................................................................44, 45, 46

Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001).................................................................................................36

Orthodontic Centers of Texas, Inc. v. Wetzel, 410 Fed. Appx. 795 (5th Cir. 2011) ......................................................................................................49

Oswalt v. Resolute Industrial, Inc., 642 F.3d 856 (9th Cir. 2011)..........................23


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Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063 (1988) ............................................49

Resolution Trust Corp. v. Farmer, 865 F.Supp. 1143 (E.D. Pa. 1994) ......57, 58, 59

Resolution Trust Corp. v. Gardner, 798 F.Supp. 790 (D.D.C. 1992).....................58

Resolution Trust Corp. v. Grant, 901 P.2d 807 (Ok. 1995) ..................................57

Resolution Trust Corp. v. O’Bear, Overholser, Smith & Huffer, 840 F.Supp. 1270, 1284 (N.D. Ind. 1993) .................................................................................58

Shimrak v. Garcia-Mendoza, 912 P.2d 822 (Nev. 1996) .......................................49

Smith v. Arthur Andersen LLP, 175 F.Supp.2d 1180 (D. Ariz. 2001)....................27

Sprint PCS Assets, L.L.C. v. City of Palos Verdes Estates, 583 F.3d 716 (9th Cir.2009)...............................................................................................................23

Swartzer v. Gillet, 2 Pin. 238 (Wis. 1849).............................................................48

Thabault v. Chait, 541 F.3d 512 (3rd Cir. 2008) .............................................49, 50

STATUTES

11 U.S.C. § 108 ........................................................................................51, 58, 59

28 U.S.C. § 1291.....................................................................................................1

Nev. Rev. Stat. § 11.190 .................................................................................52, 59

Nev. Rev. Stat. § 11.2075 ..............................................................................passim

Nev. Rev. Stat. § 78.140 .................................................................................16, 33


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RULES

9th Cir. R. 28-2.7 ....................................................................................................2

Fed. R. App. P. 4.....................................................................................................1

Fed. R. Civ. P. 56..................................................................................................23

Nev. R. Civ. P. 23.1 ..............................................................................................39

SECONDARY AUTHORITY

RESTATEMENT (THIRD) OF AGENCY § 5.04.............................................................45


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I. JURISDICTION

The Court has jurisdiction over this appeal of a final order of the District

Court of Nevada (“District Court”) under 28 U.S.C. § 1291. On February 16,

2011, the District Court granted summary judgment in favor of Deloitte & Touche,

LLP (“Deloitte”), and the District Court Clerk entered judgment for Deloitte on the

same day. ER000001-36. The Trust filed its notice of appeal on March 15, 2011,

which was timely under FED. R. APP. P. 4(a)(1)(A). ER000037.

II. STATEMENT OF ISSUES

1. The District Court ruled that there were no genuine issues of material fact as

to whether the knowledge of certain wrongdoing former insiders of USA

Commercial Mortgage Company (“USACM”) must be imputed to the USACM

Liquidating Trust (the “Trust”) for purposes of Deloitte’s in pari delicto defense.

The District Court assumed that these wrongdoing insiders had totally abandoned

USACM’s interests, yet the District Court ruled that their knowledge must be

imputed to USACM and the Trust because the wrongdoers were the “sole actors”

at USACM. The first issue raised by this appeal is whether the District Court erred

in holding that no genuine issues of material fact regarding the “sole actor” rule

existed, even though the evidence showed that (a) the wrongdoers were not the

sole shareholders of USACM, and (b) other corporate decision-makers—including


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officers, a director, and shareholders—were innocent of any wrongdoing and stood

ready and able to stop the insiders’ wrongdoing.

2. Whether the District Court erred in applying the equitable doctrines of

imputation and in pari delicto to bar the Trust’s claims when the evidence

demonstrated that Deloitte knew or should have known of the insiders’

wrongdoing and thus did not deal in good faith with USACM.

3. Whether the District Court erred in holding that the equitable doctrine of in

pari delicto barred the Trust’s claims even though the equities and public policy

considerations weighed heavily against application of the defense because (a)

USACM’s wrongdoing insiders, now removed from USACM, do not stand to

benefit from any recovery by the Trust, (b) all recoveries would be used to

compensate the innocent creditors and victims of the insiders’ and Deloitte’s

wrongful conduct, and (c) providing Deloitte with immunization for its misconduct

and all liability not only is antithetical to the public policy goal of deterring such

conduct, but also it undermines public policy by encouraging future misconduct by

auditors and other professionals.

4. Whether the District Court erred in finding that that the Trust’s claims were

time barred.

Pursuant to 9th Circuit Rule 28-2.7, an addendum of relevant statutory

authority is attached at the close of this brief.


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III. STATEMENT OF THE CASE

The District Court granted Deloitte’s motion for summary judgment,

dismissing all of the Trust’s claims, on two alternative grounds: (1) in pari delicto,

and (2) limitations. The District Court erred as to each. This Court should reverse

the District Court and deny Deloitte’s motion for summary judgment.

* * *

On April 13, 2006, USACM filed for bankruptcy protection in the United

States Bankruptcy Court for the District of Nevada (the “Bankruptcy Court”).

The Bankruptcy Court confirmed the Third Amended Joint Chapter 11 Plan of

Reorganization (the “Plan”) on January 8, 2007. Excerpts of Record (“ER”) at

ER000003 & 255. The Trust is the successor-in-interest to USACM, and under the

Plan, has the authority to pursue USACM’s litigation claims. ER000003 & 255.

The beneficiaries of the Trust are the holders of allowed unsecured claims in

USACM’s bankruptcy. ER000255-256.

The Trust filed its Complaint against USACM’s former auditor, Deloitte, in

the District Court on April 11, 2008, seeking the recovery of damages associated

with Deloitte’s professional negligence, breach of contract, and aiding and abetting

breaches of fiduciary duty. ER000120-28.

Deloitte filed its Motion for Summary Judgment (Imputation, In Pari

Delicto, and Statute of Limitations) (the “Motion”) on April 26, 2010. ER000002


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& 1192. Deloitte filed a second Motion for Summary Judgment (Causation) on

June 4, 2010 (the “Causation Motion”). ER001195. After complete briefing by

both parties, the District Court held a hearing on both motions on August 30, 2010.

ER000003. After the conclusion of the hearing, Deloitte filed additional briefs

regarding supplemental authority, and the Trust filed responses. ER00003 & 1199-

200. The District Court entered its order dismissing the Trust’s claims on February

16, 2011 (the “Order”) based on in pari delicto and limitations. ER001200. The

Court denied Deloitte’s Causation Motion as Moot. ER000035.

IV. STATEMENT OF FACTS

A. CASE OVERVIEW

USACM’s primary business activities consisted of the following: (a)

originating loans to real estate borrowers with funds provided by direct lenders,

and (b) servicing the loans it originated by collecting principal and interest from

the borrowers and distributing those payments to the direct lenders. ER000005.

USACM primarily obtained revenue through loan origination and servicing fees.

ER000005. USACM-originated loans provided each direct lender with a partial

interest in both the loan and the underlying security for each loan. ER00005.

Unfortunately, two former USACM insiders—Tom Hantges (“Hantges”)

and Joseph Milanowski (“Milanowski”)—systematically looted the company.

Hantges and Milanowski, now completely removed from USACM, were two of its


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former shareholders, board members, and senior officers. These two corrupt

insiders kept their misconduct secret from other decision-makers at USACM.

USACM’s innocent creditors suffered because of Hantges and Milanowski’s

misconduct.

However, it was not only USACM’s corrupt insiders who betrayed USACM.

So too did its auditor. Deloitte served as USACM’s auditor for the fiscal years

ending December 31, 1998 through 2001. ER000153. During this time,

USACM’s corrupt insiders looted and abused the company. A reasonable auditor

in Deloitte’s position would have discovered and reported their misconduct.

Despite having actual knowledge of both suspicious and wrongful activity

occurring at USACM, for each audit year, Deloitte issued an unqualified opinion

on USACM’s financial statements and never reported Hantges and Milanowski’s

misconduct to USACM’s other, innocent decision-makers. ER000334, 347, 362,

& 381. Deloitte either knew of the corrupt insiders’ wrongdoing or utterly failed in

its duty to conduct reasonable audits of the company in accordance with generally

accepted auditing standards, which necessarily would have exposed the

wrongdoing. Because of Deloitte’s audit failures, Hantges and Milanowski were

able to loot and abuse USACM. Through this action, the Trust seeks to recover the

damages caused by Deloitte’s audit failures for the benefit of USACM’s innocent

creditors.


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B. HANTGES AND MILANOWSKI’S TWO SCHEMES TO LOOT AND ABUSE USACM

Hantges and Milanowski engaged in two separate, wrongful schemes, both

of which a properly conducted audit would have uncovered: (1) they looted the

company by regularly using USACM’s assets to fund entities in which they held a

direct or indirect ownership interest; and (2) in violation of Nevada law, they

perpetrated a Ponzi-like scheme whereby they misappropriated USACM’s funds

and funds received from performing loans to pay the interest on non-performing

loans so the direct lenders that funded the non-performing loans would not know

the loans were not performing. ER000005-06.

1. Hantges And Milanowski’s Looting And Self-Dealing Scheme

Hantges and Milanowski regularly looted USACM’s assets to fund entities

in which they held a direct or indirect ownership interest. See ER000482.

USACM had no ownership interests in these entities. USACM received no benefit

and had no potential to benefit from these transfers. As described below, the

profits from the underlying investments funded with USACM’s assets ultimately

flowed to Hantges and Milanowski—never to USACM. Not only did these

transfers drain USACM of assets, but also they placed USACM in danger of

failing to meet the capitalization requirements under Nevada laws that governed

mortgage brokers such as USACM. ER000265, 000283 (noting discussion with

Deloitte about transactions with related parties), & 000293 (discussing elimination


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of related party receivables and effect on net worth requirement).

One of the principal recipients of Hantges and Milanowski’s looting was

USA Investment Partners, LP (“USAIP”). In October 1999, the second year

Deloitte served as USACM’s auditor, Hantges and Milanowski formed USAIP as a

holding company for equity interests in certain real estate and non-real estate

related entities. ER000156. Hantges and Milanowski owned, managed and

controlled USAIP. ER000156 & 827-828. USACM did not have any ownership

interest in USAIP, and USACM was not obligated to provide funding to USAIP.

ER000843. Nevertheless, USACM transferred tens of millions of dollars to, or for

the benefit of, USAIP from October 1999 through April 2006. ER000482 & 993-

995. USAIP used the funds it received from USACM to acquire new investments,

make additional capital contributions to the various entities owned by USAIP,

support the operations of USAIP’s investments, and pay USAIP’s debts.

ER000843-845. None of these activities provided any benefit to USACM. After

USACM’s bankruptcy in 2006, Milanowski, on behalf of USAIP, executed a

promissory note for $58 million in favor of USACM, purportedly in recognition of

the minimum amount due to USACM from USAIP. ER000993-995. Prior to the

execution of this note, USACM had no contractual right to and did not receive

interest on the transfers that it made to USAIP. ER000842-43. In short, Hantges

and Milanowski caused USACM to simply give its money to USAIP.


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USACM’s funds were also transferred directly to entities in which USAIP—

not USACM—held an ownership interest. For instance, USACM’s assets were

used to support the operations of HMA Sales, LLC (“HMA”). ER000836-37.

USACM did not have any ownership interest in HMA, was not obligated to

advance funds to HMA to support its operations, and did not earn or collect interest

on the advances to HMA. ER000837-38. Furthermore, USACM did not originate

any loans to HMA, and the advances to HMA did not provide any benefit to

USACM’s loan origination or servicing operations. ER000837. In fact,

Milanowski testified that there was no upside to USACM in advancing funds to

HMA, and stated that “[a]ny upside would have inured to the benefit of USA

Investment Partners.” ER000838-39.

USACM’s funds were also used to support the operations of Twelve Horses

North America, LLC (“Twelve Horses”). ER000839. USACM did not have an

ownership interest in Twelve Horses and, according to Milanowski, was not

obligated to provide it funding. ER000840. Milanowski testified that “[t]he

benefit of any upside in the investment of Twelve Horses would have been to USA

Investment Partners.” ER000840-41.

Even when Hantges and Milanowski purportedly structured transactions in a

manner that could benefit USACM, they ultimately prevented USACM from

realizing those benefits. For example, Hantges and Milanowski directed USACM


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to provide a loan of $5 million to Eagle Ranch, LLC (“Eagle Ranch”), an entity in

which they held an ownership interest. ER000390. The loan was documented via

a promissory note, which stated that USACM would receive 12% interest on the

loan. ER000390. An analysis of the transfers between Eagle Ranch and USACM

show that the transfers from Eagle Ranch to USACM totaled only $3.1 million.

ER000500-501. Despite the fact that the underlying project was successful

(resulting in millions of dollars of profits to Milanowski, Hantges, and others),

Eagle Ranch did not repay USACM or pay the required interest. ER000500-501.1

2. Hantges And Milanowski’s Ponzi-Like Scheme

In addition to the looting and self-dealing scheme, Hantges and Milanowski

perpetrated a second, Ponzi-like scheme designed to damage USACM. In 2000,

Hantges and Milanowski created the Diversified Trust Deed Fund, LLC

(“DTDF”). ER000157. A real estate investment fund, DTDF offered membership

interests to Nevada residents and acted as a direct lender for numerous loans

brokered by USACM. ER000157.

USACM had established a “Collections Trust” account used to collect

interest payments from borrowers for distribution to the direct lenders. In violation

of Nevada law, Hantges and Milanowski caused USACM to transfer funds from its

1 Eagle Ranch’s tax returns show significant income and membership distributions to Milanowski and USAIP, evidencing the success of the underlying project. ER000513, 549, 557, 578, 603, 606, 623, 638, 641, 660, 662.


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bank account to the Collections Trust in order to pay direct lenders on behalf of

nonperforming borrowers. Hantges and Milanowski caused USACM to make such

payments to give the appearance that borrowers were not in default. ER000870

(noting that during 2000, USACM “paid interest owed by borrowers to lenders in

order to avoid any borrower defaults” and that “[t]his practice was still occurring in

2001, but the majority of the balance was transferred to USAIP”).

As the scheme progressed and USACM’s funds alone were not enough to

cover the hole created by the Ponzi-like scheme, Hantges and Milanowski withheld

principal payments made by borrowers and due to direct lenders in order to fund

the Collections Trust. ER000846-47. Beginning as early as January 2002,

Hantges and Milanowski caused USACM to withhold principal repayments

received from borrowers that were due to DTDF. ER000885 & 846-47. They

continued this practice up until USACM’s bankruptcy, causing USACM to

wrongfully withhold $18.9 million in principal payments from DTDF. ER000256;

see ER001023 (providing definition of “DTDF Unremitted Principal Claim”). As

USACM neared bankruptcy, Hantges and Milanowski expanded this practice,

withholding checks from other direct lenders. See ER000256 & 1023. As of the

date of the Trust’s response to the Motion, approximately $25.9 million in allowed

proofs of claims in USACM’s bankruptcy related to claims for “Direct Lender

Unremitted Principal.” ER000256 & 1021.


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This Ponzi-like scheme provided absolutely no benefit to USACM and was

only designed allow Hantges and Milanowski to loot USACM.

C. DELOITTE’S AUDITS OF USACM AND INTERACTION WITH USACM’S REGULATORS

Deloitte finished its audit and issued its opinion on USACM’s 2000

financial statements on July 11, 2001. ER000712. Deloitte issued its opinion on

USACM’s 2001 financial statements on November 26, 2002 (ER000153 & 958),

and terminated its relationship with USACM in approximately January 2003.

ER000153 & 718. Substantial evidence demonstrates that Deloitte knew of, but

failed to stop, Hantges and Milanowski’s abuse of USACM. At the least, Deloitte,

in the reasonable exercise of its duties as an auditor, should have been aware of

their abuses.

Deloitte knew of Hantges and Milanowski’s transfers to companies in

which they held an ownership interest. ER000370-372 & 390-391. Deloitte’s own

audit planning documents referred to this misconduct. They note that Deloitte

discovered “risk factors related to fraudulent financial reporting or

misappropriation of assets” dealing with these and other “related party”

transactions. ER000732 & 736. Deloitte’s workpapers state that Deloitte was

“aware of the existence of a significant number of related-party transactions that

have arisen outside the normal course of business” and that USACM “engage[d] in

unique, highly complex and material transactions that pose[d] difficult ‘substance


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over form’ questions.” ER000732 & 737. Despite its knowledge, Deloitte failed

to appropriately investigate or protect USACM.

In each year that Deloitte served as auditor, Deloitte was aware that USACM

transferred funds from its bank account to the Collections Trust in order to pay

direct lenders on behalf of nonperforming borrowers. ER000740, 745, 751, & 755.

Deloitte was aware that this constituted a potential illegal act, because it knew that

a payment on behalf of a defaulted borrower was specifically prohibited by Nevada

law. ER000723-24, 765, 795, & 797.2

Deloitte’s interactions with regulatory authorities confirmed its knowledge

of Hantges and Milanowski’s wrongdoing. The Financial Institutions Division

“FID”) was the regulator that governed USACM during the period that Deloitte

served as USACM’s auditor. See ER000262-321. The FID began its 2002

examination of USACM on June 19, 2002, but it suspended the examination

because of its inability to get information from USACM. ER000263 & 283.

During the course of auditing USACM’s 2001 financial statements, Deloitte

communicated with Paul Ashworth (“Ashworth”), a FID supervisory examiner, to

satisfy the FID’s need for information with regard to USACM’s business.

ER000283. Specifically, the FID contacted Deloitte regarding at least two issues:

(a) concerns the FID had about $7 million in funds received from borrowers that

2 ER000795 & 797 were contained in Deloitte’s audit workpapers. ER0000667.


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were not remitted to a particular direct lender, DTDF; and (b) concerns about

related party transactions and their effect on USACM’s solvency. ER000283, 817,

821, 803, & 806-07. Direct discussions with auditors are not a standard part of a

FID examination, and if there were not any “controversial issues” surrounding an

examination, the FID did not normally speak with the examinee’s external

auditors. ER000812-13. Upon learning of the FID’s concerns, Deloitte

“reportedly revisited the company to get more information.” ER000283. Between

the period in which the FID notified Deloitte of its concerns and the time Deloitte

issued its opinion on the 2001 financial statements, Deloitte was in “frequent

contact” with Ashworth. ER000283.

On October 18, 2002, Deloitte met with the FID concerning the issues

Ashworth previously raised. ER000803, 806-07, & 824. Milanowski testified that

Deloitte spoke with the FID and tried to “assuage their fears at that level that there

was some sort of issue or problem with the company.” ER000852-54. After that

meeting, Milanowski believed that Deloitte was ready to terminate its relationship

with USACM. ER000855-56. On November 22, 2002, Deloitte made a follow up

call to the FID, wherein Deloitte asked if the FID would take any action against

USACM. ER000824. The FID received a copy of USACM’s financial statements

on December 15, 2002, and on January 10, 2003, closed the examination of

USACM without any significant disciplinary action. ER000263 & 283.


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Despite its knowledge of Hantges and Milanowski’s activities, the potential

effect on USACM’s financial statements, and the FID’s concerns, Deloitte issued

an unqualified audit opinion for fiscal year 2001. E.g., ER000381 & 952

(recognizing that “noncompliance by the entity with laws and regulations may

materially affect the financial statements”). After the report was issued, Deloitte

fired USACM as a client. ER000153 & 718. The audit partner on the USACM

engagement testified that both related party transactions and the fees from the

USACM audit were considerations in terminating the relationship. ER000721-

722. Although Deloitte’s purported rationale for firing USACM included the

limited profitability of the engagement, Deloitte never approached USACM to

discuss increasing the fees related to the engagement to compensate for the

additional resources required to complete the audit. ER000719-22.

D. USACM’S INNOCENT INSIDERS COULD AND WOULD HAVESTOPPED THE TWO WRONGFUL SCHEMES

Other USACM decision-makers—shareholders, a director, officers, and

other agents—were unaware of Hantges and Milanowski’s wrongdoing and could

have stopped the corrupt insiders’ abusive activity. Milanowski admitted that no

one other than he, Hantges, and Victoria Loob (a former defendant in this case who

assisted Hantges and Milanowski in their misconduct) had a true understanding of

what was going on with respect to the two fraudulent schemes. ER000857-58.

The record evidence demonstrates that if Deloitte’s audit had exposed Hantges and


15

Milanowski’s wrongdoing to USACM’s innocent decision-makers, they could and

would have taken action to stop further harm to USACM.

Hantges and Milanowski were not USACM’s sole shareholders. ER000158.

Prior to 1999, Hantges and Milanowski were the sole owners of USACM stock

(ER000154), but in January of 1999 Jamie Wise (“Wise”) acquired an ownership

interest in USACM. ER000159. During July of that same year, Paul Hamilton

(“Hamilton”) acquired 5% of USACM. ER000159 & 687. During 2001, Wise

transferred five of her shares in USACM to Hantges, and the remainder to Red

Granite, LLC (“Red Granite”). ER000159 & 406-07. Wise was the sole member

of Red Granite. See ER000159. Wise (through Red Granite) and Hamilton

remained shareholders as of the date of USACM filed its bankruptcy petition.

ER000400 & 680. Wise was unaware of Hantges and Milanowski’s wrongdoing.

ER000674 & 683.

Hantges and Milanowski also were not USACM’s sole directors during the

relevant period. ER000160. On March 15, 2001, Eugene Buckley (“Buckley”)

joined USACM’s board of directors and remained a director until September 21,

2004. ER000160-61 & 706-07. Buckley was unaware of Hantges and

Milanowski’s wrongdoing. ER001166-67 & 1174-75.

USACM’s innocent shareholders and director could and would have taken

action to stop the two fraudulent schemes. USACM’s other shareholders could


16

have exercised their legal right to stop Hantges and Milanowski’s continued

misuse of company assets. In fact, Wise and Hantges were going through a

contentious and hostile divorce at the time that Deloitte was auditing USACM’s

2001 financial statements. ER000672 & 700. During the divorce, Wise’s attorney

and accountant sought financial information including financial statements from

USACM and other related entities. ER00675-677. If Deloitte informed Wise that

Hantges and Milanowski’s were misusing USACM’s funds, Wise would have

informed her attorney and sought to protect her interests in USACM. ER000675-

83. USACM’s innocent director, Buckley, also had the ability to stop Hantges and

Milanowski’s looting and self-dealing through his voting power. As the only

board member disinterested in Hantges and Milanowski’s transfers of USACM’s

funds to entities they owned, under Nevada law, Buckley’s vote alone could

approve or disapprove those transactions. See NEV. REV. STAT. § 78.140 and

discussion infra at (VI)(D)(2)(a) at pgs. 32-35.

USACM’s other officers and employees also could have stopped Hantges

and Milanowski’s wrongdoing. Tom Rondeau was the company’s Executive Vice-

President and in-house counsel, vested with the authority to bind USACM to

contracts in all matters. ER000424. Rondeau testified that, had he discovered any

material fraud at USACM, he would have reported those findings to the FID.

ER000696-97. Furthermore, that Rondeau knew that his duty was to USACM,


17

rather than Hanges and Milanowski, is demonstrated by his email to Milanowski,

noting that he would be required to disclose Hantges’ relationship with a reputed

mobster to Wise at a meeting of the shareholders. ER000698-99 & 918. Robert

Hilson, USACM’s Chief Financial Officer during Deloitte’s final audit, similarly

testified that he would have reported any findings of fraud to USACM’s regulators.

ER000433 (showing Hilson signature as CFO), 888-91, & 906-907. Furthermore,

when Hilson did identify irregularities in DTDF’s accounting records, he brought

that information to DTDF’s external auditor, providing empirical evidence that

Hilson would have taken action to prevent harm to USACM. ER000891-97.

USACM had numerous other innocent agents, who would have taken action

to stop fraudulent activity. For instance, Phillip Dickinson, USACM’s Vice

President of Investments, testified that he was unaware of any fraudulent or illegal

activity, and if he would have discovered any, he would have informed Hamilton,

Buckley, the FID, and USACM’s investors. ER000921-926. Similarly, Devin

Lee, USACM’s Vice President of Permanent Finance, testified that he was

unaware of any fraudulent or illegal conduct occurring at USACM. ER000930-

933. If Lee would have discovered any, he would have reported that information

to the FID. ER000934.


18

V. SUMMARY OF ARGUMENT

The District Court granted summary judgment for Deloitte on two grounds.

First, the District Court held that Hantges and Milanowski’s wrongdoing must be

imputed to USACM. Because USACM was itself a wrongdoer (via imputation),

and because the Trust stands in the shoes of USACM, the doctrine of in pari

delicto barred the Trust’s claims. Second, the District Court held that the Trust’s

claims were barred by the statute of limitations. The District Court was wrong on

both counts, and this Court must reverse.

I.

The District Court dismissed the Trust’s claims on the ground that the Trust

failed to introduce evidence of a material issue of fact to defeat Deloitte’s in pari

delicto affirmative defense. In general, the in pari delicto defense precludes courts

from adjudicating disputes between wrongdoers. A corporation becomes a

wrongdoer if the wrongful knowledge and misconduct of its agents are imputed to

it. Here, the District Court erred in determining that the knowledge and

misconduct of Hantges and Milanowski must be imputed to USACM, even though

these miscreant insiders totally abandoned USACM’s interests, and even though

evidence indicated that Deloitte knew these insiders had abandoned USACM’s

interests. The District Court further erred in determining that the in pari delicto

defense barred the Trust’s claims, even though public policy considerations


19

weighed heavily against application of the defense.

A.

The District Court erred in imputing Hantges and Milanowski’s misconduct

to USACM for two reasons. First, there are genuine issues of material fact as to

whether Hantges and Milanowski’s wrongful conduct should be imputed to

USACM. Under Nevada law, the wrongful conduct of an agent will not be

imputed to the agent’s corporate principal where the agent’s conduct was totally

adverse to the corporation. An exception to this rule arises where the agent is the

“sole actor” for the corporation. Here, the Trust introduced substantial evidence of

total abandonment, and the District Court assumed that Hantges and Milanowski’s

conduct was totally adverse to USACM. However, it found that these wrongdoing

insiders were USACM’s sole actors and that their wrongful, totally adverse

conduct must be imputed to USACM.

The District Court reached the wrong result because it used the wrong

standard for assessing whether Hantges and Milanowski were USACM’s sole

actors. The District Court’s decision was based on a prediction of Nevada law—a

prediction that a subsequent decision of the Nevada Supreme Court revealed to be

incorrect. The District Court’s prediction differs from actual Nevada law with

respect to the significance of innocent insiders at the corporation in assessing

whether the wrongdoing insiders were the corporation’s sole actors. According to


20

the Nevada Supreme Court, “[i]f some corporate decision-makers are unaware of

wrongdoing, then there exists no unity between the agent and the corporation such

that the agent’s complete adversity will impute to the corporation.” Glenbrook

Capital Ltd. P’ship v. Dodds (In re AMERCO Derivative Litig.), 252 P.3d 681, 696

(Nev. 2011). This standard is substantially different from that employed by the

District Court, which predicted that “Nevada would require the innocent insider to

have actual corporate authority to stop the fraud” before the existence of an

innocent insider would affect the sole actor inquiry. ER000016. The Nevada

Supreme Court imposed no such “actual corporate authority” requirement.

Because the Trust offered substantial evidence demonstrating that USACM

decision makers were unaware of the wrongdoing, the District Court’s grant of

summary judgment was inappropriate.

Moreover, even if Nevada did require a showing that the innocent insiders

had “actual corporate authority” to stop the wrongdoing, the Trust introduced

evidence showing that USACM had an innocent director, and innocent

shareholders, officers, and employees who were unaware of any wrongdoing and

who could and would have taken action to stop Hantges and Milanowski’s

misdeeds. These persons, in fact, had actual corporate authority to stop the

wrongdoing. Therefore, even under the District Court’s mis-prediction of Nevada

law, Hantges and Milanowski’s conduct could not be imputed to USACM for


21

purposes of an in pari delicto analysis.

Apart from the sole actor issues, the District Court erred in imputing

Hantges and Milanowski’s misconduct to USACM for a second reason. The

doctrine of imputation is intended to protect those parties dealing with a principal

in good faith. Where the circumstances indicate that the defendant knows that an

agent’s conduct is adverse to the principal such that the agent will not advise its

principal of the agent’s conduct, the basis for applying the imputation doctrine

breaks down. Here, the Trust provided evidence that Deloitte knew or should have

known that Hantges and Milanowski’s wrongdoing was adverse to USACM, and

therefore Deloitte had no basis to believe that the wrongdoers would advise

USACM of their misdeeds. Thus, there is a genuine issue of fact as to whether

Deloitte acted in good faith, and granting summary judgment was improper.

B.

Even if Hantges and Milanowski’s misconduct must be attributed to

USACM, the District Court should have declined to apply in pari delicto based on

equitable considerations. In pari delicto does not apply when its application would

be contrary to public policy. Applying in pari delicto in this matter frustrates,

rather than advances, the important policies of the doctrine and tort law in general.

Hantges and Milanowski were removed from their positions long ago and do not


22

stand to benefit in any way from a recovery by the Trust.3 Rather, it is USACM’s

unsecured creditors—including the victims of Hantges and Milanowski’s

misconduct—who stand to benefit from any recovery from Deloitte. Nevada has

long recognized that that underlying equities must be considered before blindly

applying in pari delicto. Here, application of the doctrine frustrates one of the core

purposes of tort law—compensation of the innocent victims—while

simultaneously immunizing Deloitte for its participation in the misconduct. As a

result, the application of in pari delicto here not only inequitably protects Deloitte,

but also encourages the very auditor misconduct that the public policy goals at the

core of the doctrine were designed to deter, all to the detriment of USACM’s

innocent creditors. Such a result is contrary to public policy, and in pari delicto

must have no application here.

II.

The District Court found that the Trust’s claims were also barred by the

applicable limitations periods. However, the District Court erred. The Trust

introduced evidence that Deloitte took active steps to conceal its misdeeds, and,

3 Milanowski is currently serving a twelve year sentence in conjunction with a plea agreement with the U.S. Attorney for wire fraud involving DTDF. Both Milanowski and Hantges were placed into involuntary bankruptcy proceedings in 2007, and both cases have since been converted to cases under chapter 7 of the Bankruptcy Code. Neither Milanowski nor Hantges have had any involvement with the post-petition debtor since June 2006, and they have never had any involvement with the post-confirmation estate.


23

pursuant to Nevada law, Deloitte’s concealment tolled the running of the

limitations period with respect to the Trust’s audit malpractice claims. In addition,

because the Trust introduced evidence demonstrating that USACM could not have

discovered Deloitte’s wrongful conduct until Hantges and Milanowski were

removed after USACM entered bankruptcy, none of the Trust’s claims could be

dismissed on summary judgment.

VI. ARGUMENT

A. LEGAL STANDARD

The District Court’s decision on an appeal is subject to de novo review. Oswalt

v. Resolute Indus., Inc., 642 F.3d 856, 859 (9th Cir. 2011). Summary judgment is

only appropriate if the evidence shows that there is no material issue of fact and

that the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56.

Viewing the evidence in the light most favorable to the non-movant, the Court

must determine “whether there are any genuine issues of material fact and whether

the district court correctly applied the relevant substantive law.” Oswalt, 642 F.3d

at 859 (internal quotations omitted). “‘All justifiable factual inferences must be

drawn in [ ] favor [of the nonmoving party], and we must reverse the grant of

summary judgment if any rational trier of fact could resolve a material factual issue

in [ ] favor [of the nonmoving party].’” Mark H. v. Hamamoto, 620 F.3d 1090,

1097 (9th Cir. 2010) (quoting Sprint PCS Assets, L.L.C. v. City of Palos Verdes


24

Estates, 583 F.3d 716, 720 (9th Cir.2009)) (alterations in Mark H.). As

demonstrated below, the Trust has set forth evidence demonstrating that there are

genuine issues of material fact for a jury to decide.

B. BECAUSE HANTGES AND MILANOWSKI TOTALLY ABANDONED USACM’S INTERESTS, THEIR KNOWLEDGE AND CONDUCT CANNOT BE IMPUTED TO USACM OR THE TRUST

In general, the actions of a corporation’s agents are imputed to the company.

Glenbrook Capital Ltd. P’ship v. Dodds (In re AMERCO Derivative Litig.), 252

P.3d 681, 695 (Nev. 2011). However, where an agent abandons the company’s

interest in favor of his own or another party’s interest, his knowledge and wrongful

acts are not imputed to the company. Id. Theft, looting, and embezzlement are

classic examples of such behavior. See id. This principle is known as the “adverse

interest” exception to imputation. Id.

As the Trust has described, Hantges and Milanowski engaged in two

separate schemes that were totally adverse to USACM’s interests. See supra

(IV)(B), pgs. 6-11. First, Hantges and Milanowski engaged in a looting and self-

dealing scheme wherein they systematically used USACM’s funds for their own

benefit to the exclusion of any benefit for USACM. Second, Hantges and

Milanowski engaged in a scheme—the “Ponzi-like scheme”—wherein they

utilized funds belonging both to USACM and other investors to pay interest on

behalf of non-performing borrowers in violation of Nevada law.


25

The District Court assumed, without deciding, that the Trust’s evidence

raised an issue of fact as to whether Hantges and Milanowski totally abandoned

USACM’s interests in perpetrating these two schemes for their exclusive benefit.

ER000019. In fact, the evidence demonstrated that Hantges and Milanowski

totally abandoned USACM’s interests. Because these two schemes represent

distinct activities, the Trust will address each in turn.

1. Hantges And Milanowski’s Looting And Self-Dealing Scheme Was Totally Adverse To USACM

Hantges and Milanowski’s looting and self-dealing were never designed to

and in fact did not benefit USACM. As discussed above (see supra (IV)(B)(1) at

pgs. 6-9), Hantges and Milanowski regularly used USACM’s funds to support the

operations of other entities—such as USAIP, HMA, Twelve Horses, and Eagle

Ranch4—that they directly or indirectly owned. Hantges and Milanowski

transferred tens of millions of dollars from USACM’s operating account to these

entities. See supra (IV)(B)(1) at pg. 7. USACM had no ownership interest in

these entities, had no right to receive any profits from the underlying business

ventures, and received no interest in exchange for making these transfers.

4 The Trust’s evidence regarding Hantges and Milanowski’s schemes and the damages suffered by USACM include other entities which were also owned directly or indirectly by Hantges and Milanowski. For the sake of brevity, the Trust refers to USAIP, HMA, Twelve Horse, and Eagle Ranch as examples of the looting scheme. USACM’s transfers to other unrelated entitles for no benefit to itself are detailed in the report prepared by the Trust’s expert. ER000437-509.


26

Moreover, USACM was not obligated to make these advances, did not receive

interest payments, and all potential benefits of the underlying projects were held

directly or indirectly by Hantges and Milanowski. See supra (IV)(B)(1) at pgs. 6-

9. Because these transfers provided no benefit to USACM, Hantges and

Milanowski totally abandoned USACM’s interests in causing USACM to make the

transfers. Put simply, Hantges and Milanowski looted USACM for the benefit of

themselves and other entities they controlled.

Looting and self-dealing present the classic examples of conduct totally

adverse to the agent’s principal. See Glenbrook, 252 P.3d at 695. Because

Hantges and Milanowski’s looting scheme was totally adverse to USACM, their

knowledge related to the scheme cannot be imputed to the Trust.

2. The Ponzi-Like Scheme Was Totally Adverse To USACM

The adverse interest exception also applies when wrongdoers take actions

that—while conferring some supposed, artificial short-term benefit on the

company—have the intent and effect of concealing and/or perpetuating looting and

other misconduct. See In re CBI Holding Co., 529 F.3d 432, 451-53 (2d Cir.

2008)(stating that evidence that the company may have “actually benefitted” from

its management’s fraud is not necessarily dispositive if management “did not

intend to benefit” the company); Cobalt Multifamily Investors I, LLC v. Shapiro,

No. Civ. 6468, 2009 WL 4408207, at *4-5 (S.D.N.Y Dec. 1, 2009)(same); In re


27

1031 Tax Group, LLC, 420 B.R. 178, 201 (Bankr. S.D.N.Y. 2009)(finding that a

company did not benefit where insider made “lulling” payments to investors to

perpetuate the company and the underlying scheme); Smith v. Arthur Andersen

LLP, 175 F. Supp. 2d 1180, 1199-200 (D. Ariz. 2001) (applying the adverse

interest exception where fraudulent financial statements allowed insiders to

conceal wrongdoing and loot the company).

Here, the Ponzi-like scheme—like the looting scheme—also failed to

provide benefit to USACM. Much like a classic Ponzi scheme, Hantges and

Milanowski caused USACM to repay direct lenders regardless of the actual

performance by the underlying borrowers, thereby creating artificially high income

for those investors in nonperforming loans. The wrongdoers funded these

payments in several ways, including utilizing USACM’s assets and funds paid by

other borrowers and due to direct lenders. See supra (IV)(B)(2) at pgs. 9-11. Like

similar schemes, Hantges and Milanowski’s Ponzi-like scheme eventually ended

with massive losses. The Trust has allowed claims related to “Unremitted

Principal” associated with this Ponzi-like scheme that total over $44.8 million.

ER000256.

The evidence in this matter indicates that Hantges and Milanowski’s intent

in employing the Ponzi-like scheme was to fund their own personal investments,

not to benefit USACM. Although USACM’s revenues may have increased for a


28

period of time, Hantges and Milanowski did not use these increased profits for the

benefit of USACM. Rather than using USACM’s funds as a source to pay down

its own liabilities, the Culpable Insiders instead funneled all available cash to other

entities they owned. See supra (IV)(B)(1) at pgs. 6-9; In re Sunpoint Secs., Inc.,

377 B.R. 513, 565 (E.D. Tex. 2007)(holding that agents completely abandoned the

principal’s interest even when the agents infused the principal with funds to “keep

the operation in existence and to satisfy periodic regulatory requirements” because

“such infusions were incidental and never intended for the benefit of [the

principal], but were rather intended to preserve one of the mechanisms by which

[the agent] could access large amounts of cash for his personal use.”). In fact, the

FID had concerns about USACM’s debt load, noting that USACM had “maxed

[its] lines of credit (debt),” (ER000283) some of which was subject to interest rates

as high as 20%. E.g., ER000394. If Hantges and Milanowski’s were attempting to

advance USACM’s interests in implementing the Ponzi-like scheme, then they

would have utilized USACM’s revenues to reduce USACM’s liabilities or to invest

in opportunities for which USACM could potentially turn a profit. Instead,

Hantges and Milanowski used USACM’s funds for their own benefit, sending

every available dollar to their personal investments. See In re 1031 Tax Group,

LLC, 420 B.R. at 201 (applying the adverse interest exception even where agent

undertook actions that benefitted the company because the agent likely “intended


29

these actions to extend the life of his scheme, increasing his opportunities to

steal”).

The Ponzi-like scheme was not designed to benefit USACM, but instead to

perpetuate and facilitate the wrongdoers’ looting. The adverse interest exception

applies here because Hantges and Milanowski used the Ponzi-scheme to solely

benefit themselves to the detriment of USACM.

C. THE SOLE ACTOR EXCEPTION DOES NOT APPLY HERE

1. The District Court Employed An Incorrect Formulation Of The Sole Actor Exception That Was Subsequently Rejected By The Nevada Supreme Court

The District Court held that the sole actor rule applies here such that the

adverse interest exception to imputation would not prevent Hantges and

Milanowski’s knowledge and actions from being imputed to USACM. However,

the standard the District Court used in assessing whether the sole actor exception

applied—in particular, the significance of the existence of innocent insiders at

USACM—was a prediction of Nevada law since proven to be incorrect.

The adverse interest exception to the rule of imputation is itself subject to a

“limited” exception—the sole actor exception. Glenbrook, 252 P.3d at 695.

Pursuant to the sole actor exception, even though the agent has acted “completely

and totally adverse to the corporation” such that the “agent is acting on his own

behalf,” the conduct and knowledge of the agent still can be imputed to the


30

corporation “if the agent is the sole agent or sole shareholder of a corporation.” Id.

This is because “‘the principal and agent are one and the same.’” Id. at 695-96

(quoting In re Mediators, Inc. 105 F.3d 822, 827 (2d Cir. 1997)). This exception

makes sense because, if the agent and the principal are truly “one and the same,”

then by doing something in his own interest, the agent has not truly abandoned the

principal’s interest.

One of the critical issues in this appeal is when are the principal and the

agent so yoked together that they are “one and the same.” Many courts—including

the District Court and the Nevada Supreme Court in Glenbrook— have considered

the impact of innocent insiders, decision-makers, or stakeholders at a corporation

on this question. The District Court held that, ostensibly pursuant to Nevada law,

the existence of an innocent insider matters only if the insider had “actual

corporate authority to stop the fraud.” ER000016. In other words, innocent

insiders only matter if they could, through their own, independent actions, legally

and unilaterally stop the wrongdoing agent’s misconduct.

The District Court’s approach is inconsistent with the principles behind

imputation, the adverse interest exception, and the sole actor exception. An

agent’s knowledge and conduct is imputed to the principal so the principal will

monitor “those who are acting on the corporation’s behalf.” Glenbrook, 252 P.3d

at 695. The limited sole actor exception to the adverse interest exception assumes


31

that the agent is not acting on the corporation’s behalf and imputation is

inappropriate unless the corporation and the agent are “one and the same.” Id. at

695-96. Under the District Court’s approach, a wrongdoing CEO of a corporation

would be the sole actor of the corporation, even if five of eleven board members

and the rest of management were innocent, because the innocent persons could not

unilaterally stop the improper conduct. In such a situation, however, it cannot

reasonably be said that the CEO and the corporation were “one and the same” such

that the CEO’s misconduct—which was totally adverse to the corporation—is

necessarily the corporation’s misconduct.

The Nevada Supreme Court recently set forth a far different formulation of

the sole actor exception than that followed by the District Court. After surveying

various approaches courts have taken to assessing the significance of innocent

insiders, the Nevada Supreme Court ruled that the sole actor exception does not

apply “[i]f some corporate decision-makers are unaware of wrongdoing.” Id. at

696. This formulation recognizes that a principal and an agent will be “one and the

same” only in limited circumstances and that the “sole actor” exception cannot

apply when there are innocent actors, or decision-makers, at the corporation, even

if those innocent decision-makers could not stop the wrongdoing through their own

independent acts within the corporate framework.


32

2. Substantial Evidence Demonstrated That Decision-Makers At USACM Were Unaware Of The Corrupt Insiders’ Wrongdoing

The Nevada Supreme Court’s opinion does not include a “could and would

have” stopped the wrongdoing test, or any requirement that innocent insiders have

“actual corporate authority” to stop the wrongdoing. Glenbrook, 252 P.3d at 695-

96. As discussed in the sections that follow, USACM had innocent decision-

makers—an innocent director, as well as innocent officers, employees, and

shareholders—who were unaware of wrongdoing, and therefore, the sole actor rule

is inapplicable under Nevada law. Moreover, even under the District Court’s

incorrect standard, summary judgment was inappropriate because the Trust

presented evidence of innocent insiders at USACM who could have, and would

have, stopped Hantges and Milanowski’s wrongdoing.

a. USACM’s Innocent Director Was A Corporate Decision–Maker.

During the time of Deloitte’s 2001 audit, Eugene Buckley was a USACM

director innocent of wrongdoing and unaware of any misconduct. See supra

(IV)(D) at pg. 15. As a director, Buckley was vested with the same rights and

authority Hantges and Milanowski held as directors, and he unquestionably was a

“corporate decision-maker” relevant to the sole actor inquiry. Glenbrook, 252 P.3d

at 696. The essential element of a corporate director’s job is to make decisions on

behalf of the corporation. Even though the board as a whole controls the


33

corporation, directors clearly make decisions regarding the conduct of the

corporation. Thus, under Nevada law, Hantges and Milanowski cannot have been

USACM’s sole actors.

Moreover, even under the District Court’s requirement that an innocent

insider have the authority to stop the wrongdoing within the corporation, Buckley

had that authority, and he would have acted to stop the wrongdoing, had he been

aware of it. Buckley was the only disinterested director for transactions between

USACM and other entities owned by Hantges and Milanowski. Under Nevada

Revised Statute § 78.140, contracts or transactions involving interested directors

are voidable under certain situations. Specifically, a transaction between a

corporation and a director is voidable if none of the following criteria are met: (a)

the interest is known to the board and the board approves the transactions in good

faith, with sufficient votes to approve the transaction exclusive of the votes from

the interested directors; (b) the transactions are approved by a majority vote of the

shareholders; (c) the interest is unknown to the interested directors at the time of

the transaction; or (d) the transaction is fair. NEV. REV. STAT. § 78.140.

Option (b) could not have been met because proposing the transaction to the

full body of shareholders would have alerted USACM’s minority shareholders to


34

Hantges and Milanowski’s interested transactions and misconduct.5 Option (c)

could not apply (Hantges and Milanowski clearly knew of their interest in the

transaction), and option (d) could not apply (the transactions plainly were not fair).

Thus, because only option (a) was viable, only Buckley had the power, as a

director, to render Hantges and Milanowski’s otherwise voidable transactions

binding on USACM. Moreover, Buckley had the power to stop the transactions

because, as the only non-interested director, only he could approve them. This is

power Buckley had within the existing corporate structure at USACM, and even

under the District Court’s mis-prediction of Nevada law, Hantges and Milanowski

cannot be USACM’s sole actors.

The District Court rejected this argument on the grounds that Buckley could

not stop the misconduct, but only render the harmful transactions voidable.

ER000022. The District Court here took to absurd lengths its requirement that a

corporate insider have the power to stop the fraud. Seemingly unless Buckley had

the authority to terminate Hantges and Milanowski and order the guards to escort

Hantges and Milanowski from USACM’s offices, Buckley did not have sufficient

authority. Such a requirement is unreasonable and is not in keeping with the

5 USACM’s minority shareholders could then have stopped the transactions, as described below. See infra (VI)(D)(2)(b) at pgs. 35-42. See also Bedore v. Familian, 125 P.3d 1168, 1172-73 (Nev. 2006); Blackman v. Las Vegas-Tonopah-Reno Stage Line, Inc., 476 P.2d 964, 964-65 (Nev. 1970).


35

principles behind the sole actor exception. If only Buckley could render Hantges

and Milanowski’s abusive transactions binding, or if Buckley could stop the

transactions as the only non-interested director, it cannot be said that Hantges and

Milanowski were “one and the same” with USACM.6

b. USACM’s Innocent Shareholders Were Decision-Makers

When analyzing the sole actor exception, the Nevada Supreme Court relied

on the decision from the Southern District of New York from In re CBI Holding

Company. Glenbrook, 252 P.3d at 695 (citing CBI in stating that “[t]he [sole actor]

rule also applies when there are multiple owners and managers who are each

engaged in fraud against the corporation.”). On appeal from the decision of the

Southern District of New York, the Second Circuit examined the defendant’s

argument that the sole actor rule applied, choosing to dismiss the argument in a

footnote based on the existence of a minority shareholder: “The sole actor rule

does not apply in this case because the CBI managers involved in the fraud were

not the sole shareholders of the corporation, nor was there any finding that all

shareholders were complicit in the fraud.” In re CBI Holding Co¸ 529 F.3d 432,

6 The District Court also, without citation, rejected Buckley’s statement that he would have tried to stop the fraud, had he known of it, as no evidence whatsoever “that he actually would or could have done anything to stop the fraud.” ER000021. As noted above, Buckley had the power to stop the transactions (or at least only he could render them binding on USACM). Moreover, Buckley’s testimony is at least some evidence from which a reasonable fact-finder could conclude that he would have acted to stop the fraud.


36

453 n.9 (2d Cir. 2008). The Second Circuit’s rejection of the sole actor exception

where the corporation had innocent minority shareholders is in keeping with the

purposes of the exception: to impute a wrongdoing agent’s knowledge to the

corporation, even though the agent has totally abandoned the interests of the

corporation, only when the corporation and the agent are “one and the same.” If

innocent parties partly own the corporation, it cannot be said that the corporation

and the wrongdoing agent are “one and the same.” Where the wrongdoers have

other shareholders “to whom [they could] impart [their] knowledge, or from whom

[they could] conceal it,” the underlying basis of applying the sole actor rule is

simply not present. Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co.,

267 F.3d 340, 359 (3d Cir. 2001); see Glenbrook, 252 P.3d at 695-96.

The existence of innocent, minority shareholders precludes application of

the sole actor exception under the Nevada Supreme Court’s decision in Glenbrook.

The Glenbrook court wrote that the sole actor exception could not apply “[i]f some

corporate decision-makers are unaware of wrongdoing.” 252 P.3d at 696. A

shareholder—whether minority or not—makes decisions on behalf of the

corporation by voting. Together, Hantges and Milanowski owned the majority of

the shares, but they were not the sole shareholders. See supra (IV)(D) at pg. 15.

USACM had two other shareholders—Wise and Hamilton—who were innocent of


37

any wrongdoing. Under Glenbrook’s controlling standard, Hantges and

Milanowski were not USACM’s sole actors.

Moreover, even under the District Court’s requirement that an innocent

insider have the power to stop the fraud, summary judgment was improper. Other

courts have held that the sole actor rule does not apply where innocent

shareholders have the ability to stop wrongdoing by exercising their rights.

Nisselson v. Ford Motor Co., 340 B.R. 1, 25-26 (E.D.N.Y. 2006); In re NM

Holdings Co., 411 B.R. 542, 549 (E.D. Mich. 2009); In re Allou Distributs., Inc.,

387 B.R. 365, 391 (Bankr. E.D.N.Y. 2008); In re Friedman’s, Inc., 394 B.R. 623,

633 (S.D. Ga. 2008); In re Sharp Int’l Corp., 319 B.R. 782, 789-90 (Bankr.

E.D.N.Y. 2005); see In re 1031 Tax Group, LLC, 420 B.R. 178, 204 (Bankr.

S.D.N.Y. 2009). For instance, the Eastern District of New York addressed similar

issues related to imputation and in pari delicto in Nisselson v. Ford Motor Co.,

340 B.R. at 22-26. In analyzing the sole actor exception, the court noted that the

wrongdoer was not the sole shareholder of the company and that the minority

shareholder “had standing to commence a derivative action or an action to enforce

her rights under applicable law.” Id. at 25. The court held that the existence of the

minority shareholder showed “the presence of a person with the ability to bring an

end to the fraudulent activity at issue.” Id. (quotations omitted). Here, the

summary judgment record indicates that two such individuals existed at USACM.


38

As shareholders, Wise and Hamilton had the ability to stop Hantges and

Milanowski even if that meant seeking relief from the courts. Id. at 25. The

District Court’s ruling suggests that Wise and Hamilton could not have acted to

stop the looting and illegal activity occurring at USACM. That proposition is

inaccurate and ignores long-standing minority shareholder rights in Nevada.

Moreover, Hantges and Milanowski had no ability to rid themselves of these

shareholders or prevent them from exercising their legal rights. See id.

Nevada law provides minority shareholders with the right to bring causes of

action against majority shareholders for misusing corporate assets and breaching

their fiduciary duties. For instance, in Blackman v. Las Vegas-Tonopah-Reno

Stage Line, Inc., the Nevada Supreme Court affirmed the lower court’s grant of a

permanent injunction forbidding the dissipation of corporate assets where the

defendants had used company funds to purchase real property in the defendants’

name. 476 P.2d 964, 964-65 (Nev. 1970). In Bedore v. Familian, the Nevada

Supreme Court affirmed a ruling in favor of a minority shareholder where the court

found that the majority shareholders had breached their fiduciary duties to the

company. 125 P.3d 1168, 1172-73 (Nev. 2006). The majority shareholders were

ordered to return portions of their salaries that were deemed excessive and were

further enjoined from usurping corporate opportunities. Id.


39

Contrary to the District Court’s ruling, the ability for Wise or Hamilton to

bring suit to stop the wrongdoers does not indicate that “the corporation and its

wrongdoing agents are unified.” ER000021. To the contrary, minority

shareholders are entitled to bring derivative actions to enforce a corporation’s

claims over the objection of the majority shareholders. See e.g., Meyer v. Fleming,

327 U.S. 161, 167, 66 S.Ct. 382, 386 (1946); Ashwander v. Tenn. Valley Auth., 297

U.S. 288, 318, 56 S.Ct. 466, 469-70 (1936); see also, NEV. R. CIV. P. 23.1

(discussing derivative actions brought by shareholders); Bedore, 125 P.3d at 1170

n.2 (noting that minority shareholder’s suit to stop majority shareholders’ breaches

of fiduciary duty was considered shareholder derivative action). As recognized by

the U.S. Supreme Court, derivative suits “are one of the remedies which equity

designed for those situations where the management through fraud, neglect of duty

or other cause declines to take the proper and necessary steps to assert the rights

which the corporation has.” Meyer, 327 U.S. at 167. The ability for USACM’s

innocent shareholders to file suit against Hantges and Milanowski on behalf of

USACM evidences the fact that the company and wrongdoers were not “one and

the same.” The District Court’s decision ultimately ignores this important

authority which undeniably was vested with Wise and Hamilton.

Similar to the minority shareholders in Blackman and Bedore, USACM’s

minority shareholders had the ability to stop Hantges and Milanowski from


40

converting USACM’s assets to their own use and engaging in illegal activity.

Wise or Hamilton could have sought an injunction seeking to restrain Hantges and

Milanowski from funding their side ventures with USACM’s assets and

perpetrating the Ponzi-like scheme. Moreover, USACM’s minority shareholders

could have requested that the court order that Hantges return funds wrongfully

taken from USACM and sent to other entities. Bedore, 125 P.3d at 1172-73.

The Trust introduced evidence that Wise would have taken action to protect

her interests in USACM. See supra (IV)(D) at pgs. 15-16. Wise and Hantges were

going through a bitter divorce at the time Deloitte conducted its audit of USACM’s

2001 financial statements. See supra (IV)(D) at pg. 15-16. To protect her assets,

including her ownership interest in USACM, Wise employed an attorney and

sought financial information including financial statements from USACM and

other related entities. See supra (IV)(D) at pgs. 15-16. Wise testified that she was

unaware of any fraud or illegal activities going on at USACM, and if she had

discovered any, she would have informed her attorney of those findings. See supra


41

(IV)(D) at pgs. 15-16.7 Based on the evidence in the record, the Trust is entitled to

an inference that Wise would have continued to protect her interests if Deloitte’s

audit had exposed wrongdoing at the company. Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 255, 106 S.Ct. 2505, 2513 (1986).

The District Court rejected this argument on the grounds that while the Trust

had introduced proof (1) that Wise would have informed her attorney of the

wrongdoing, and (2) that Wise would have acted to protect her rights, and (3) that

Wise could have brought a shareholder derivative action to protect her rights, and

(4) that Wise, as a minority shareholder, was financially interested in stopping the

looting of USACM, the Trust failed to present evidence that Wise’s attorney

would, in fact, have pursued a shareholder’s derivative action on Wise’s behalf.

ER000020-21. The District Court’s requirement of evidence of what Wise’s

attorney would have done—in the hypothetical, speculative world—is impossibly

strict, requires the introduction of testimony by Wise’s attorney that would garner

objections based on improper speculation, and completely ignores the basis of the

7 Additionally, communication between Milanowski and Rondeau evidences her ability to influence the operations of the company. ER000918. Rondeau stated that if Wise informed her attorney of Hantges’ relationship to a reputed mobster, “the grief that could cause I would rather not contemplate.” ER000918. Given that Wise and Hantges were going through a “contentious and hostile divorce” (ER000700) during Deloitte’s audit of USACM’s 2001 financial statements, Wise would have caused similar “grief” if she was told that Hantges and Milanowski were looting the company and threatening USACM’s ability to continue its business by serially breaching Nevada law.


42

sole actor rule—imputing knowledge because the corporation and the agent are one

and the same. In light of Wise’s partial ownership of the company, and her ability

and determination to protect her interests, it cannot be said that USACM and its

wrongdoing agents were one and the same.

c. USACM’s Innocent Officers And Employees Were Corporate Decision-Makers

USACM had other innocent officers and employees who were decision-

makers, further showing Hantges and Milanowski were not USACM’s sole actors

under Glenbrook. Moreover, these innocent officers and employees could and

would have taken action to stop Hantges and Milanowski’s wrongdoing. Any one

of these individuals could have taken action to stop the fraud, including reporting

their findings to Buckley, Wise, Hamilton, or to USACM’s regulators. Therefore,

under the District Court’s own standard, Hantges and Milanowski were not

USACM’s sole actors.

As USACM’s Executive Vice President and CFO respectively, Rondeau and

Hilson were innocent corporate decision makers, and their employment at USACM

precludes the application of the sole actor exception under Glendwood. See supra

(IV)(D) at pg. 16-17. Furthermore, Dickinson and Lee, the Vice President of

Investments and Vice President of Permanent Finance, were both unaware of the

fraud. See supra (IV)(D) at pg. 17. The evidence indicates that these individuals,

had they known of wrongdoing, would have taken action to stop the fraud. See


43

supra (IV)(D) at pg. 16-17.8 Based on the record evidence, the Trust is entitled to

the reasonable inference that, had they known of Hantges and Milanowski’s

wrongdoing, they would have taken action, and at least, reported it to USACM’s

other innocent insiders and the FID.

D. BECAUSE DELOITTE DID NOT ACT IN GOOD FAITH, IMPUTATION WAS IMPROPER

Completely apart from the sole actor issues, imputation of USACM’s

wrongdoing insiders to USACM was improper because Deloitte lacked good faith

in dealing with USACM. One of the principle rationales behind the imputation

doctrine is that “an innocent third party may properly presume the agent will

perform his duty and report all facts which affect the principal’s interest.” Mut.

Life Ins. Co. of N.Y. v. Hilton-Green, 241 U.S. 613, 622, 36 S.Ct. 676, 680 (1916).

However, imputation should not apply when circumstances “plainly indicat[e] that

the agent will not advise his principal.” Id. at 623. “The rule [of imputation] is

intended to protect those who exercise good faith, and not as a shield for unfair

8 Had USACM’s other shareholders, officers, directors, or employees reported Hantges and Milanowski’s wrongdoing to USACM’s regulator, the FID could have stopped the fraud. The FID conducted examinations of USACM in order to ascertain USACM’s compliance with Nevada law. See supra (IV)(C) at pgs 12-13; ER000802. To the extent that the FID identified violations of Nevada law, the FID had the ability to fine USACM or suspend, revoke, or otherwise place conditions on USACM’s license. ER000809. Paul Ashworth, the supervisory examiner for the FID’s 2002 examination of USACM, stated that the FID would have investigated allegations of illegal or fraudulent activity occurring at USACM and taken appropriate action based on its findings. ER000810-811.


44

dealing.” Id.; see also, In re Sunpoint Sec., Inc., 377 B.R. 513, 566-67 (Bankr.

E.D. Tex. 2007)(“the imputation rule should be invoked in auditor liability cases

only under circumstances in which its application would serve the objectives of

tort liability—to compensate the victims of wrongdoing and to deter future

wrongdoing.”); NCP Litig. Trust v. KPMG LLP, 901 A.2d 871, 882 (N.J. 2006)

(holding that “one who contributed to the misconduct cannot invoke imputation”

and stating that “[a]llowing KPMG to avoid liability for its allegedly negligent

conduct would not promote the purpose of the imputation doctrine—to protect the

innocent.”); BCCI Holdings (Luxembourg), S.A. v. Clifford, 964 F. Supp. 468, 480

(D.D.C. 1997)(“That the imputation doctrine is not available for the benefit of

wrongdoers who seek to shield their wrongful acts is a well-established principle. .

. .”).

The Third Circuit recently addressed the availability of defensive use of

imputation in the context of a wrongdoing auditor. After certifying questions on

imputation to the Pennsylvania Supreme Court, the Third Circuit stated that “[t]he

proper test to determine the availability of defensive imputation in scenarios

involving non-innocents depends on whether or not the defendant dealt with the

principal in good faith.” Official Comm. of Unsecured Creditors of Allegheny

Health Educ. & Research Found. v. PriceWaterhouseCoopers, LLP, 607 F.3d 346,

351 (3rd Cir. 2010). Vacating a prior order in favor of the defendant-auditor based


45

on imputation and in pari delicto, the Third Circuit stated that “imputation is

unavailable relative to an auditor which has not dealt materially in good faith with

the client-principal.” Id. at 353-54 (internal quotations omitted).

The Restatement (Third) of Agency § 5.04 contains an illustration helpful in

determining whether or not an auditor has acted in “good faith” for purposes of

applying imputation. In comment c, illustration 5, the CFO of a corporation

withholds material financial information from its auditor. The auditor knows or

has reason to know that the CFO has withheld material information from the

auditor, but certifies the company’s materially false financial statements.

RESTATEMENT (THIRD) OF AGENCY § 5.04 cmt. c, illus. 5 (2006). The illustration

states that, when the company sues the auditor for losses due to its inaccurate

financial statements, the auditor “may not assert, as a defense to [the company’s]

claim, that [the CFO’s] knowledge of [the company’s] true financial condition is

imputed to [the company]. [The auditor] has not dealt with [the company] in good

faith.” Id.

The Trust introduced evidence demonstrating Deloitte’s lack of good faith.

First, Deloitte was aware of facts evidencing the looting and self-dealing scheme.

Deloitte examined USACM’s transactions with entities owned by Hantges and

Milanowski, and knew that USACM’s funds were being diverted to their side

investments. See supra (IV)(C) at pgs. 11-14. Second, Deloitte was aware that


46

USACM’s funds were regularly used to pay the obligations of nonperforming

borrowers, and that payment of interest on behalf of defaulting borrowers

constituted a violation of Nevada law. See supra (IV)(C) at pgs. 12. Moreover,

Deloitte’s audit partner testified that no one at USACM ever refused to provide

them any requested information or documentation, and no one at USACM ever

attempted to interfere with the auditor’s test work. ER000716-17. Despite its

knowledge and the potential effects of this misconduct on USACM’s financial

statements, Deloitte issued unqualified opinions for USACM’s 2000 and 2001

financial statements. See supra (IV)(A) & (C) at pg. 5 & 14. Shortly thereafter,

Deloitte terminated its relationship, citing the increasing prevalence of related

party transactions as part of the basis for its decision. See supra (IV)(C) at pg. 14.

Like the committee in Allegheny, the Trust alleged that Deloitte “should

have brought [the resulting] misstatements to light,” but instead “knowingly

assisted in the officers’ misconduct by issuing a ‘clean’ opinion.” Allegheny, 607

F.3d at 349. Deloitte’s conduct goes beyond simply issuing unqualified opinions:

Deloitte helped cover up the misconduct. See supra (IV)(C) at pgs. 11-14.

Deloitte was notified by the FID of the regulator’s concerns regarding both: (a) $7

million in principal repayments withheld from DTDF and (b) the transactions

between USACM and entities owned by Hantges and Milanowski and their

potential effect USACM’s solvency. See supra (IV)(C) at pgs. 12-13. Deloitte


47

discussed these matters with the FID, easing the regulator’s concerns regarding

USACM’s operations. See supra (IV)(C) at pg. 12-13. Given Deloitte’s

knowledge and affirmative actions in calming USACM’s alarmed regulator, a fact

finder should be permitted to determine whether or not Deloitte acted with the

requisite good faith. And if Deloitte lacked good faith, imputing Hantges and

Milanowski’s wrongdoing to USACM so that Deloitte can evade liability for its

own misconduct is inappropriate.

The District Court rejected this argument by returning to its sole actor

analysis and holding that because “any intentional misrepresentations made by

Deloitte would have been made with USACM’s full complicity through Hantges

and Milanowski,” imputation was still required. ER000028. But the District Court

missed the point of the Trust’s argument. Because Deloitte knew or should have

known Hantges and Milanowski had abandoned USACM’s interests, it could not

have presumed that they would impart their knowledge to USACM, and

imputation was simply not available to support its in pari delicto defense,


48

regardless of whether Hantges and Milanowski were USACM’s sole actors.9

E. PUBLIC POLICY CONCERNS PRECLUDE THE APPLICATION OF IN PARI DELICTO

Even if the District Court had been correct in determining that Hantges and

Milanowski’s wrongdoing must be imputed to USACM (it was not), equitable

considerations and public policy concerns still would preclude application of in

pari delicto. The ultimate purpose of in pari delicto is not to shield defendants

from liability, but rather to protect the public. E.g., Magill v. Lewis, 333 P.2d 717,

719 (Nev. 1959). Courts have long recognized that the equitable doctrine should

not apply where it would frustrate its intended purpose. E.g., Bateman Eichler,

Hill Richards, Inc. v. Berner, 472 U.S. 299, 310-11, 105 S.Ct. 2622, 2629 (1985).10

In recognizing this principle, the Nevada Supreme Court has cautioned courts to

9 The District Court argued in a footnote that precluding imputation here would create an impermissible double-standard: “USACM’s innocent stakeholders would be able to avoid having the bad faith conduct of USACM’s agents imputed to USACM, but Deloitte’s innocent stakeholders would have no such opportunity.” ER000028 at n.3. The District Court’s logic is not sound given the underlying basis of imputation and in pari delicto. The District Court assumed that imputation principles apply equally when considering the application of the in pari delictodefense and when assessing whether a defendant is liable for its agent’s misconduct. Since the very nature of the in pari delicto defense is to allow wrongdoers to evade liability, equity may require a different imputation analysis in the different contexts. Thus, a “double-standard” can be appropriate, depending on the situation. 10 Bateman Eichler is consistent with the earliest reported decisions on in pari delicto indicating the importance of policy considerations. E.g, Swartzer v. Gillet,2 Pin. 238 (Wis. 1849); Freeman v. Sedwick, 6 Gill. 28 (Md. 1847); Cook v. Colyer’s Adm’r, 2 B.Mon. 71 (Ky. App. 1841).


49

not be “so enamored with the [L]atin phrase ‘in pari delicto’ that they blindly

extend the rule to every case where illegality appears somewhere in the

transaction.” Shimrak v. Garcia-Mendoza, 912 P.2d 822, 826 (Nev. 1996)

(internal quotations omitted).

Here, the public interest cannot be advanced by applying in pari delicto. To

the contrary, application of in pari delicto will harm the public: the innocent

individuals who invested in USACM-brokered loans and who were victimized

once by Hantges and Milanowski will be victimized again by in pari delicto, if the

District Court’s decision stands. In re Sunpoint Secs., Inc., 377 B.R. 513, 566-67

(E.D.Tex. 2007); Thabault v. Chait, 541 F.3d 512, 528-29 (3rd Cir. 2008); see also

Orthodontic Centers of Tex., Inc. v. Wetzel, 410 Fed. Appx. 795, 800 (5th Cir.

2011)(“The public policy inquiry is focused on the public’s interest, not the

parties”).

Furthermore, applying in pari delicto in this matter does not achieve the goal

of deterring illegality. See Pinter v. Dahl, 486 U.S. 622, 634, 108 S. Ct. 2063,

2072 (1988); In re Sunpoint Sec., Inc., 377 B.R. at 567. Hantges and Milanowski

will not be deterred from future wrongdoing if this Court dismisses this matter via

in pari delicto. No matter the result of this or any of the Trust’s other pending

cases, Hantges and Milanowski will not receive a single penny in distributions

from the Trust. ER000255-56. Instead, applying in pari delicto here perverts the


50

deterrent effect by allowing Deloitte to escape liability despite its wrongdoing to

the detriment of USACM’s innocent creditors. Applying in pari delicto here thus

encourages auditor misconduct, rather than deters it. See Bateman Eichler, Hill

Richards, Inc., 472 U.S. 299, 105 S.Ct. 2622 (1985); In re Sunpoint Secs., Inc., 377

B.R. at 567. Indeed, some courts have recognized the chilling effect of imputation

and in pari delicto on auditor claims, wholly denying auditors the right to shield

themselves from any share of responsibility. See Thabault v. Chait, 541 F.3d 512,

529 (3rd Cir. 2008); NCP Litig. Trust v. KPMG LLP, 901 A.2d 871, 882 (N.J.

2006).

The District Court rejected this argument on the basis that failing to apply

the in pari delicto defense would “permit[] USACM’s innocent shareholders and

creditors to evade having their corporate wrongdoers’ knowledge and conduct

imputed to them, while Deloitte’s innocent shareholders and creditors would have

no such opportunity.” ER000030. Yet applying the in pari delicto doctrine

guarantees that all of the cost of Deloitte and USACM’s corrupt insiders’

wrongdoing falls solely on USACM’s innocent creditors, while Deloitte’s owners

and creditors continue to reap the benefit of the fees USACM paid Deloitte—fees

paid for their misconduct. In other words, applying in pari delicto here guarantees

an inequitable result. Refusing to apply in pari delicto leaves open the possibility

that the cost of the shared wrongdoing ultimately will be comparatively shared.


51

This result would be consistent with the public policy goals of deterring wrongful

conduct by all those who are complicit in it. On the other hand, the District

Court’s decision fosters complicity in illegal conduct by nullifying any adverse

consequences for professionals who engage in misconduct in tandem with a

corporation’s agents.

For these reasons, this Court should reject the application of in pari delicto,

even if the District Court properly imputed Hantges and Milanowski’s misconduct

to USACM.

F. THE DISTRICT COURT ERRED IN RULING THAT THE TRUST’S CLAIMS WERE BARRED BY LIMITATIONS

Contrary to the District Court’s ruling, the Trust’s claims are not time barred

in this matter. USACM filed for bankruptcy on April 13, 2006, and it filed its

complaint against Deloitte on April 11, 2008. Under 11 U.S.C. § 108(a), all

limitations periods are tolled for two years following the date of the bankruptcy

petition. Thus, the Trust’s claims were timely if they would have been timely prior

to the time USACM filed bankruptcy. The key dates here are June 28, 2001—the

date Deloitte completed USACM’s fiscal year 2000 audit—and November 26,

2002—the date Deloitte completed USACM’s fiscal year 2001 audit.

The Trust’s auditor malpractice claims against Deloitte are governed by

Nevada Revised Statutes § 11.2075(1). (The Trust does not seek to have a

different limitations period applied to its breach of contract claim.) Section


52

11.2075(1) requires that audit malpractice claims be brought within the shortest of

three time periods:

(a) Two years after the date on which the alleged act, error or omission is discovered or should have been discovered through the use of reasonable diligence;

(b)Four years after completion of performance of the service for which the action is brought; or

(c) Four years after the date of the initial issuance of the report prepared by the accountant or accounting firm regarding the financial statements or other information, whichever occurs earlier.

However, Section 11.2075(2) tolls the running of these limitations periods when

the auditor conceals its wrongdoing:

The time limitation set forth in subsection 1 is tolled for any period during which the accountant or accounting firm conceals the act, error or omission upon which the action is founded and which is known or through the use of reasonable diligence should have been known to the account or the firm.

The Trust’s aiding and abetting breach of fiduciary duty claims are subject to a

three-year statute of limitations. See Nev. Rev. Stat. § 11.190(3)(d); Nev. State

Bank v. Jamison Family P’ship, 801 P.2d 1377, 1382 (Nev. 1990). This

limitations period does not begin to run until the plaintiff discovers the grounds for

the complaint. See Nev. Rev. Stat. § 11.190(3)(d).

The District Court erred in ruling that the Trust’s claims were barred on

limitations grounds for several reasons. First, the Trust introduced evidence


53

demonstrating a genuine issue of material fact as to whether Deloitte concealed its

misconduct. Thus, the District Court erred in holding that the Trust’s audit

malpractice claims for both the 2000 and 2001 fiscal year audits were not tolled by

Section 11.2075(2). Pursuant to the Section 11.2075(2) tolling, the Trust’s claims

as to both the audits were timely. Second, even if Section 11.2075(2) does not

apply, Section 11.2075(1)(a)’s two-year limitations period would not apply to the

Trust’s claim because USACM did not discover, and should not have discovered,

Deloitte’s misconduct prior to filing for bankruptcy. Under Section

11.2075(1)(b)’s four-year statute of limitations, the Trust’s claims with respect to

the 2001 fiscal year audit were timely.

In addition, because USACM did not and should not have discovered

Deloitte’s misconduct prior to its filing for bankruptcy, the three-year statute of

limitations governing the Trust’s aiding and abetting breach of fiduciary duty claim

did not begin to run until after USACM filed for bankruptcy.

For these reasons, the District Court erred in granting Deloitte summary

judgment on limitations grounds.

1. Deloitte Concealed Its Wrongdoing, Thereby Tolling The Statute Of Limitations As To The Trust’s Audit Malpractice Claim

Nevada Revised Statute § 11.2075(2) tolled the Trust’s claims because

Deloitte actively concealed its misdeeds. Under that section, audit malpractice

claims are tolled “for any period during which the accountant or accounting firm


54

conceals the act, error or omission upon which the action is founded.” NEV. REV.

STAT. § 11.2075(2). As described above, Deloitte took steps to conceal its

wrongdoing when it met with the FID to calm the regulator’s concerns and when it

attempted to distance itself from USACM by quietly firing its former client. See

supra (IV)(C) at pgs. 12-14. Although the mere issuance of an unqualified opinion

might not trigger tolling, Deloitte’s actions showed more than just silence or

passive conduct. Deloitte actively communicated with USACM’s regulators on the

issues and calmed their concerns on the very issues that form the basis of this

controversy—the transfer of USACM’s funds to entities owned by the wrongdoers

and illegal activities occurring in USACM’s loan origination and servicing

operations. Moreover, Deloitte took steps to disassociate itself from USACM and

potential liability associated with the engagement by terminating its four-year long

relationship and distancing itself from its prior opinions. See supra (IV)(C) at pg.

14. Because Deloitte took active steps to conceal its wrongdoing, section §

11.2075(2) tolls the statute of limitations applicable to USACM’s claims against

Deloitte. At a minimum, a reasonable fact-finder could find concealment based

upon this evidence, thereby precluding summary judgment.

The District Court rejected this argument on the grounds that because

Hantges and Milanowski’s knowledge was imputed to USACM, and because

Hantges and Milanowski participated in the wrongdoing, Deloitte thus did not


55

conceal its wrongdoing from USACM. However, as discussed above (see supra

(VI)(C) pgs. 29-43), Hantges and Milanowski were not USACM’s sole actors, and

the District Court erred in imputing their knowledge to USACM. Absent

imputation of Hantges and Milanowski’s knowledge, evidence that Deloitte

actively concealed the wrongdoing on which this action is based precluded the

District Court from rejecting the Trust’s argument under Section 11.2075(2).

The District Court alternatively rejected the Trust’s Section 11.2075(2)

argument on the grounds that the Trust introduced no evidence that Deloitte sought

to hide wrongdoing from USACM, as opposed to hiding wrongdoing from the

FID. However, this misses the point of the Trust’s argument. If Deloitte had been

accurate and forthcoming in its discussions with the FID, the regulator would have

taken action to halt continued wrongdoing at USACM. In turn, action by the FID

would have revealed wrongdoing to USACM’s innocent insiders, allowing them to

both take action to stop Hantges and Milanowski and discover that Deloitte’s audit

opinions were inaccurate. Instead, Deloitte calmed the regulator’s concerns,

thereby affirmatively preventing USACM’s innocent insiders from discovering the

underlying conduct of Hantges, Milanowski, and Deloitte.

2. The Discovery Rule Or The Adverse Domination Rule Preserved The Trust’s Audit Malpractice Claims Relating To The Fiscal Year 2001 Audit

Even if Section 11.2075(2) did not apply, the Trust still would have valid


56

claims for audit malpractice regarding the fiscal year 2001 audit under Section

11.2075(1)(b). Section 11.2075(1) provides a two-year provision (subsection (a))

and two four-year provisions (subsections (b) and (c)). Whichever provision

would lead to the shortest limitations period applies. The two-year provision in

subsection (a) does not apply to the Trust’s claims because USACM did not

discover, and in the exercise of reasonable diligence would not have discovered,

Deloitte’s misconduct until after USACM entered bankruptcy. The four-year

provision in subsection (b) began running, at the earliest, when Deloitte issued its

audit opinions regarding the 2000 and 2001 audits, and thus it leads to a sooner

expiration of the limitations period than subsection (a). Subsection (c) is simply

inapplicable (no initial report is at issue); therefore, subsection (b) provides the

applicable limitations period. Because USACM’s claim regarding the 2001 audit

arose less than four years prior to USACM’s bankruptcy, that claim was timely

brought.

However, the District Court held that even the 2001 audit claim was

untimely because USACM, through Hantges and Milanowski, knew of the

misconduct upon which the Trust’s audit malpractice claims were based.

ER000032. Thus, the two-year limitations period under subsection (a) began to

run when, at the latest, Deloitte issued its audit opinion letters, making the two-

year limitations period the soonest to expire, under which the Trust’s claims


57

expired prior to USACM’s bankruptcy filing. The District Court erred because, for

all the reasons discussed at length above, a disputed issue of material fact exists as

to whether Hantges and Milanowski’s knowledge can be imputed to USACM. See

supra (VI)(B)-(D) pgs. 24-48. If their knowledge cannot be imputed to USACM,

then subsection (a) does not begin to run until USACM filed for bankruptcy.

The District Court’s ruling that subsection (a) applied was in error for a

second reason—the “adverse domination” doctrine. The “adverse domination”

doctrine tolls limitations for claims by corporations while the corporation is

controlled by those acting against its interests. E.g., Mosesian v. Peat, Marwick,

Mitchell & Co., 727 F.2d 873, 879 (9th Cir. 1984); Resolution Trust Corp. v.

Farmer, 865 F.Supp. 1143, 1156-59 (E.D. Pa. 1994); Resolution Trust Corp. v.

Grant, 901 P.2d 807, 811 (Ok. 1995). In granting summary judgment for Deloitte

based on the sole actor exception, the District Court necessarily determined that

Hantges and Milanowski “dominated and controlled” USACM. If the District

Court were correct that Hantges and Milanowski were USACM’s wrongdoing sole

actors (it was not), then the adverse domination rule tolled the running of the

limitations period and all of the Trust’s claims were brought timely. (The Trust’s

claims would survive the District Court’s sole actor ruling because equitable

concerns preclude the application of the in pari delicto defense, regardless of

imputation. See supra (VI)(E) pgs. 48-51.


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Although Nevada has not addressed the adverse domination doctrine, it

would likely adopt this equitable rule. The adverse domination doctrine is

recognized in numerous jurisdictions, and “it has been generally accepted by

federal courts to be the law of states that have not yet explicitly ruled on the

subject themselves.” Clark v. Milam, 452 S.E.2d 714, 718 (W. Va. 1994);

Resolution Trust Corp. v. Gardner, 798 F. Supp. 790, 794 (D.D.C. 1992). In fact,

this Court has recognized the adverse domination doctrine in a trustee’s action

against a third-party accountant. Mosesian, 727 F.2d at 879 (recognizing

applicability of doctrine but finding no admissible evidence of domination). The

adverse domination doctrine is a corollary of the discovery rule. E.g., Farmer, 865

F.Supp. at 1155; Resolution Trust Corp. v. O’Bear, Overholser, Smith & Huffer,

840 F.Supp. 1270, 1284 (N.D. Ind. 1993); FDIC v. Gonzalez-Gorrondona, 833

F.Supp. 1545, 1156-57 (S.D. Fla. 1993). Given that Section 11.2075(1)(a)

recognizes that claims accrue based on the discovery of facts supporting the claim,

Nevada would likely recognize the adverse domination doctrine as well.

Should this Court find that the sole actor rule applies (which it should not),

the adverse domination doctrine precludes application of Section 11.2075(1)(a)’s

two-year limitations provision. USACM cannot have known or have been

expected to know of Deloitte’s misconduct if it were adversely dominated by

Hantges and Milanowski, until those wrongdoing insiders were removed from


59

USACM. Hantges and Milanowski were not in a position to cause USACM to sue

Deloitte “without possibly exposing their own alleged wrongdoing.” Farmer, 865

F.Supp. at 1158. Because § 11.2075(1)(a) would not begin to run until after

Hantges and Milanowski left their positions with USACM, the Trust had four years

from the date Deloitte issued its audit opinions to bring its claims. Therefore, as

discussed above, the limitations period related to the Trust’s claims of accounting

malpractice related to Deloitte’s 2001 audit opinion would not have run until April

13, 2008—two days after the Trust filed suit. NEV. REV. STAT. § 11.2075(1)(b); 11

U.S.C. § 108(a). The District Court reasoned that if the adverse domination

doctrine applied, its determination that imputation and in pari delicto barred the

Trust’s claims would only be strengthened. ER000034-35. However, the District

Court failed to recognize, as demonstrated above, that the in pari delicto defense

could not apply in this case against the Trust because of basic public policy and

equitable principles.

3. The Discovery Rule Or The Adverse Domination Doctrine Preserved The Trust’s Aiding And Abetting Breach Of Fiduciary Duty Claims.

As noted above, the Trust’s aiding and abetting breach of fiduciary duty

claims are subject to a three-year statute of limitations which does not begin to run

until the plaintiff discovers the grounds for the complaint. See Nev. Rev. Stat. §

11.190(3)(d); Nev. State Bank v. Jamison Family P’ship, 801 P.2d 1377, 1382


60

(Nev. 1990). For the reasons discussed above, either the discovery rule or,

alternatively, the adverse domination doctrine precluded the running of the

limitations period until after USACM entered bankruptcy. Unlike the Trust’s

claims for audit malpractice, however, the claims for aiding and abetting breach of

fiduciary duty do not default to a four-year limitations period that begins to run

regardless of the plaintiff’s knowledge of the misconduct. Thus, the Trust’s claims

for aiding and abetting breach of fiduciary duty are preserved with respect to both

the 2000 and 2001 audits.

VII. CONCLUSION

For all the reasons stated above, this Court should reverse the District Court,

deny Deloitte’s Motion, and remand the case for further proceedings consistent

with this Court’s opinion.

Dated: August 8, 2011 DIAMOND MCCARTHY LLP

/s/ Allan B. DiamondAllan B. DiamondJ. Maxwell Beatty

Attorneys for Plaintiff-Appellant


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CERTIFICATE OF COMPLIANCE

1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) and 9th Cir. R. 32-1 because:

x this brief contains 13,671 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii), or. this brief uses a monospaced typeface and contains ________ lines of text, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because:

x this brief has been prepared in a proportionally spaced typeface using Microsoft Word with 14 point, Times New Roman font, or

this brief has been prepared in a monospaced typeface using _________.


/s/ J. Maxwell BeattyAllan B. DiamondJ. Maxwell Beatty



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ADDENDUM TO APPELLANT’S OPENING BRIEF

TABLE OF CONTENTS

11 U.S.C. § 108(a) ................................................................................................63

NEV. REV. STAT. § 11.2075 ..................................................................................63

NEV. REV. STAT. § 11.190(3)(d) ...........................................................................64

NEV. REV. STAT. § 78.140 ....................................................................................65

NEV. R. CIV. P. 23.1 .............................................................................................67


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11 U.S.C. § 108(a)

(a) If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of -

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) two years after the order for relief.

. . .

NEV. REV. STAT. § 11.2075

Malpractice actions against accountants.1. An action against an accountant or accounting firm to recover damages for malpractice must be commenced within:

(a) Two years after the date on which the alleged act, error or omission is discovered or should have been discovered through the use of reasonable diligence;

(b) Four years after completion of performance of the service for which the action is brought; or

(c) Four years after the date of the initial issuance of the report prepared by the accountant or accounting firm regarding the financial statements or other information,

whichever occurs earlier.

2. The time limitation set forth in subsection 1 is tolled for any period during which the accountant or accounting firm conceals the act, error or omission


64

upon which the action is founded and which is known or through the use of reasonable diligence should have been known to the accountant or the firm.

3. As used in this section, “accountant” means a person certified or registered as a public accountant pursuant to chapter 628 of NRS who holds a live permit, as defined in NRS 628.019.

NEV. REV. STAT. § 11.190(3)(d)

Periods of Limitations.

Except as otherwise provided in NRS 125B.050 and 217.007, actions other than those for the recovery of real property, unless further limited by specific statute, may only be commenced as follows:

. . .

3. Within 3 years:

(a) An action upon a liability created by statute, other than a penalty or forfeiture.

(b) An action for waste or trespass of real property, but when the waste or trespass is committed by means of underground works upon any mining claim, the cause of action shall be deemed to accrue upon the discovery by the aggrieved party of the facts constituting the waste or trespass.

(c) An action for taking, detaining or injuring personal property, including actions for specific recovery thereof, but in all cases where the subject of the action is a domestic animal usually included in the term “livestock,” which has a recorded mark or brand upon it at the time of its loss, and which strays or is stolen from the true owner without the owner’s fault, the statute does not begin to run against an action for the recovery of the animal until the owner has actual knowledge of such facts as would put a reasonable person upon inquiry as to the possession thereof by the defendant.

(d) Except as otherwise provided in NRS 112.230 and 166.170, an action for relief on the ground of fraud or mistake, but the cause of action in such a


65

case shall be deemed to accrue upon the discovery by the aggrieved party of the facts constituting the fraud or mistake.

(e) An action pursuant to NRS 40.750 for damages sustained by a financial institution or other lender because of its reliance on certain fraudulent conduct of a borrower, but the cause of action in such a case shall be deemed to accrue upon the discovery by the financial institution or other lender of the facts constituting the concealment or false statement.

. . . .

NEV. REV. STAT. § 78.140

Restrictions on transactions involving interested directors or officers; compensation of directors.

1. A contract or other transaction is not void or voidable solely because:

(a) The contract or transaction is between a corporation and:(1) One or more of its directors or officers; or(2) Another corporation, firm or association in which one or more of its directors or officers are directors or officers or are financially interested;

(b) A common or interested director or officer:

(1) Is present at the meeting of the board of directors or a committee thereof which authorizes or approves the contract or transaction; or(2) Joins in the signing of a written consent which authorizes or approves the contract or transaction pursuant to subsection 2 of NRS 78.315; or

(c) The vote or votes of a common or interested director are counted for the purpose of authorizing or approving the contract or transaction,

if one of the circumstances specified in subsection 2 exists.

2. The circumstances in which a contract or other transaction is not void or voidable pursuant to subsection 1 are:

(a) The fact of the common directorship, office or financial interest is known to the board of directors or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a


66

vote sufficient for the purpose without counting the vote or votes of the common or interested director or directors.

(b) The fact of the common directorship, office or financial interest is known to the stockholders, and they approve or ratify the contract or transaction in good faith by a majority vote of stockholders holding a majority of the voting power. The votes of the common or interested directors or officers must be counted in any such vote of stockholders.

(c) The fact of the common directorship, office or financial interest is not known to the director or officer at the time the transaction is brought before the board of directors of the corporation for action.

(d) The contract or transaction is fair as to the corporation at the time it is authorized or approved.

3. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or a committee thereof which authorizes, approves or ratifies a contract or transaction, and if the votes of the common or interested directors are not counted at the meeting, then a majority of the disinterested directors may authorize, approve or ratify a contract or transaction.

4. The fact that the vote or votes of the common or interested director or directors are not counted for purposes of subsection 2 does not prohibit any authorization, approval or ratification of a contract or transaction to be given by written consent pursuant to subsection 2 of NRS 78.315, regardless of whether the common or interested director signs such written consent or abstains in writing from providing consent.

5. Unless otherwise provided in the articles of incorporation or the bylaws, the board of directors, without regard to personal interest, may establish the compensation of directors for services in any capacity. If the board of directors establishes the compensation of directors pursuant to this subsection, such compensation is presumed to be fair to the corporation unless proven unfair by a preponderance of the evidence.


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NEV. R. CIV. P. 23.1

Derivative Actions by Shareholders In a derivative action brought by one or more shareholders or members to

enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff’s share or membership thereafter devolved on the plaintiff by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff’s failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs.


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CERTIFICATE OF SERVICE

I hereby certify that I electronically filed the foregoing with the Clerk of the

Court for the United States Court of Appeals for the Ninth Circuit by using the

appellate CM/ECF system on November 19, 2010. I certify that all participants in

the case are registered CM/ECF users and that service will be accomplished by the

appellate CM/ECF system.


/s/ J. Maxwell BeattyAllan B. DiamondJ. Maxwell Beatty



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