The Bankruptcy Hotline

The Third Circuit has dismissed a Chapter 7 trustee's malpractice and 'deepening insolvency' claims against the accounting firm for the debtor. The court found that the malpractice claim failed because the company was not harmed by its accountants' actions, and also because the deepening-insolvency claim was insufficiently supported by mere allegations of negligent conduct. Seitz v. Detweiler, Hershey and Associates PC (In re CitX Corp.), No. 05-2760 (May 26).

The founder of an Internet company, CitX Corp., began pillaging it almost immediately after it was founded in 1996. He used corporate funds to license his own intellectual property, cover his debts, and settle one of his lawsuits. In 1999, CitX joined with Professional Resources International Inc. to create an Internet shopping mall for home-based merchants who would pay a fee to be featured. CitX used this relationship, along with some help from the Internet Bubble to sell equity in itself. Unfortunately, PRSI was a fraudulent enterprise, and CitX's stock sales were illegal under federal and Pennsylvania law. The result was that PRSI scammed nearly $18 million from would-be online merchants, and CitX received about $700,000 of this money. The Florida Attorney General shut down PRSI in January 2000, and a receiver was appointed. PRSI was CitX's only significant client, and at the time PRSI was closed it owed CitX over $2.4 million. According to CitX's records, although this relationship was the only thing keeping the company theoretically viable, because CitX showed a positive balance sheet, it was also able to sell more that $1 million worth of additional securities.