An interesting case recently arose in the Federal Bankruptcy Court. The party who filed bankruptcy (the debtor) engaged the defendant to conduct an audit of his financial statements. The defendant audited the statements for three years and in 2018 issued his audit report for fiscal year 2018. In 2019, the debtor filed bankruptcy and in 2021 confirmed a plan of liquidation.

The liquidating trustee in bankruptcy filed a complaint against the defendant, alleging many counts, which he claimed amounted to professional malpractice and requested money damages.

The defendant filed a motion seeking to dismiss damages in excess of the amount the debtor paid to the defendant. The defendant relied on a provision in the agreement, which stated, among other things, that the defendant’s liability for all claims, damages and costs of the debtor’s services arising from this engagement is limited to the amount of fees paid by the debtor to the defendant for the services rendered under this arrangement letter. The defendant referred to this language as a “limitation of liability clause,” contending in his motion that that the language of the provision unambiguously limits the claim against defendants to the amount paid to the defendant by the debtor.

The court denied the defendant’s motion to dismiss stating, among other things, that it was unable to ascertain whether the defendant’s actions rise to the level of mere negligence, gross negligence or even recklessness. The judge further went on to state that it could not ascertain the severity of the actions based on the facts before it and cannot determine whether the limitation of liability provision should be upheld.

The court then referred to a case in New Jersey involving an Alarm Company where the court granted the alarm company’s motion for summary judgment, finding the limitation of liability clause enforceable. The court pointed out that the limitation of liability clause included the word “negligence” specifically.

The court stated that in the present case, the limitation of liability provision in the agreement states that the defendant’s liability is limited for “all claims, damages and costs of the debtor,” that the language was far too broad and purports to potentially limit not just negligence but possibly gross negligence, willful and wanton or reckless conduct.

For the reasons state above, the court denied the defendant’s motion for summary judgment, without prejudice.

Bottom line, make sure limitation of liability provision in your contract is properly drafted.

Therefore, with respect to each of the above claims, the Defendants’ motion to dismiss was granted.