Appliance Recycling Centers of America, Inc. v. Protiviti Inc.

Background

Appliance Recycling Centers of America, Inc. (ARCA) brought a diversity action against Protiviti, Inc., its former consulting firm. ARCA alleged that Protiviti provided consulting services in 2012 and 2013 to help improve ARCA’s internal financial controls, but failed to identify or timely disclose accounting-control gaps involving taxes. ARCA alleged that these failures contributed to its not paying California sales taxes for 2011 through 2013, resulting in a tax bill of more than $4.6 million.

ARCA asserted claims for breach of contract, negligence, and gross negligence. Before this case, a shareholder-derivative action had been filed in Minnesota state court against ARCA’s directors and officers concerning ARCA’s failure to pay the California sales tax. ARCA was a nominal defendant in that action. The parties settled, and the state court entered a final judgment incorporating the settlement agreement.

The state-court release

The state-court judgment released and permanently barred “Released Claims” against “Released Persons.” The settlement agreement defined Released Claims broadly to include claims that could be brought derivatively or otherwise by or on behalf of ARCA and that arose from or related to matters alleged or that could have been alleged in the shareholder-derivative action. Released Persons included the defendants in that action and their related persons, including their consultants and advisors. ARCA’s outside auditing firm, Baker, Tilly, Virchow & Krause LLP, was expressly excluded from the definition of related persons.

Protiviti moved to dismiss under Rule 12, arguing that the state-court judgment barred all of ARCA’s claims. In deciding the motion, the court could consider the state-court judgment because it was a public record.

Court’s analysis

The court held that Protiviti was a Released Person because it was ARCA’s past consultant or advisor and therefore fell within the settlement agreement’s definition of a related person. The court rejected ARCA’s argument that the release applied only to the plaintiffs in the shareholder-derivative action. It reasoned that the settlement agreement expressly covered claims brought “derivatively or otherwise” by or on behalf of ARCA. The express exclusion for ARCA’s outside auditor also supported the conclusion that the release covered other related persons, including Protiviti.

The court also held that ARCA’s claims related to the state-court action because all three claims concerned Protiviti’s alleged failure to identify accounting-control gaps and disclose ARCA’s potential California sales-tax liability. The court rejected ARCA’s argument that its claims were outside the release because this case was a direct action rather than a shareholder-derivative action. It also rejected ARCA’s argument that Protiviti could not benefit from a settlement agreement to which it was not a party, explaining that the issue was enforcement of the state-court judgment rather than enforcement of the contract itself.

Disposition

The court concluded that the plain language of the state-court judgment barred all of ARCA’s claims against Protiviti. It therefore granted Protiviti’s motion to dismiss. The court dismissed the action without prejudice because ARCA might be able to amend or obtain relief from the state-court judgment, such as by obtaining a carve-out for Protiviti. The court expressly did not decide whether Minnesota law would permit such relief, whether any request for relief should be granted, or what effect a possible amended judgment would have.