QUEENSWAY FINANCIAL HOLDINGS LTD V. COTTON & ALLEN
CIVIL PROCEDURE:  STATUTE OF LIMITATIONS, PROFESSIONAL NEGLIGENCE
2004-SC-000254-DG.pdf
PUBLISHED: AFFIRMING; OPINION WRITTEN BY –  NOBLE
DATE RENDERED:  11/01/2007

The Supreme Court affirms grant of summary judgment to Cotton & Allen, PSC, on statute-of-limitations grounds in this case of professional (accounting) negligence.

Queensway agreed to buy Paradigm Insurance. Under the agreement, Paradigm was to produce an audited financial statement as of 9/30/97, to be performed by CPA firm Collon & Allen. As part of the audit, Cotton & Allen was to review Paradigm’s reserves. Before the purchase was concluded and before Cotton & Allen’s report was delivered, Paradigm’s general counsel and head of claims sent a memo to Queensway, in short, detailing changes needed in Paradigm’s reserves. Cotton & Allen delivered its report thereafter on 12/16/97 (showing no problem with the reserves) and the deal was completed 12/31/97. When Queensway took over operations, Paradigm’s reserves were adjusted upward by approximately $3.3 million as reflected in a memo from the general counsel dated 12/31/97. The Indiana Department of Insurance conducted an evaluation in 1998 questioning Paradigm’s reserves and in 1999 ordered an upward adjustment of $6 million. On 2/11/00, Queensway filed suit against Cotton & Allen, alleging breach of contract and negligence in auditing the financial statements and asking for damages both as of the time of the purchase of Paradim and afterward. The issues at bar involve the accrual and discovery of the potential cause of action under KRS 413.245.

The Supreme Court holds that the action was, indeed, time-barred, but for different reasons than the lower courts held, i.e., the cause of action accrued at the time of purchase when Queensway overpaid for Paradigm. If the reserves were set too low, then the price paid for the company was too high. Also, that Queensway had to make a significant adjustment, and in essence suffered losses after havintg had the benefit of Cotton & Allen’s audit report, should have put them on notice that something was wrong with the report. Cotton & Allen’s report showed no problem with the reserves, yet within weeks of its delivery, Paradigm had to make significant adjustments to those reserves. Judgment affirmed.

Digested by John Hamlet
Sitlinger, McGlincy, Theiler & Karem