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to abide by Generally Accepted Accounting Standards (GAAS) as it had promised to do in its

audit engagement letters. The Committee alleges that Grant Thornton failed to abide by the

AICPA standards, also in breach of the engagement letter, for quarterly audits it performed. The

Committee says that these failures caused Schlotzsky’s to become more insolvent because, had

the companies directors and officers known the Debtor’s real financial condition they would not

have allowed it to incur additional debt. The complaint alleges the following specific causes of

action:

  • 1.

    Professional Negligence for 2002 and 2003 Audits

  • 2.

    Breach of Contract for 2002 and 2003 Audits

  • 3.

    Aiding and Abetting Breaches of Fiduciary Duties

  • 4.

    Negligent Misrepresentation

  • 5.

    Gross Negligence

  • 6.

    Equitable Subordination pursuant to 11 U.S.C. § 510(c)

  • 7.

    Avoidance of Preferential Transfers pursuant to 11 U.S.C. §§ 547(b) and 550.

MOTION TO ABSTAIN

Grant Thornton first urges the court to abstain from hearing the state law causes of action

urged in the complaint. Grant Thornton admits that mandatory abstention does not apply in this

action because the action had not previously been commenced in state court prior to the

bankruptcy filing. See 28 U.S.C. § 1334(c)(2). Grant Thornton argues however that the court

should exercise its discretion under the permissive abstention provisions of section 1334(c)(1),

because the majority of the claims are state law claims. See 28 U.S.C. § 1334(c)(1). It adds that

the federal actions pleaded by the Committee are only loosely connected to the state law claims

The Committee, in its response, argues that “only noncore matters are suitable for

permissive abstention,”3 and that the preference and equitable subordination actions are certainly

3 Committee Response at 3 (quoting In re Terracor, 86 B.R. 671, 675 n.11 (Bankr. D. Utah 1988) which cites In re Arnold Printworks, Inc. 815 F.2d 165, 171 (1st Cir. 1987)).

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