### Seitz v Marcum LLP 2024 NY Slip Op 33048(U) August 30, 2024 Supreme Court, New York County Docket Number: Index No. 153725/2021 Judge: Robert R. Reed Cases posted with a "30000" identifier, i.e., 2013 NY Slip

Op 30001(U), are republished from various New York State and local government sources, including the New

York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication.NYSCEF DOC. NO. 22 INDEX NO. 153725/2021 RECEIVED NYSCEF: 08/30/2024



### SUPREME COURT OF THE STATE OF NEWYORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART

### 43
-----------------------------------------------------X GARY F SEITZ, in his capacity as Trustee for City Line Behavioral Healthcare, LLC and Life of PurposePennsylvania, LLC, Plaintiff,

- V - MARCUM LLP, Defendant.

---------------------------------------------X HON. ROBERT R. REED: INDEX NO. 153725/2021 MOTION DATE 06/18/2021 MOTION SEQ. NO. 001

DECISION+ ORDER ON MOTION

The following e-filed documents, listed by NYSCEF document number (Motion 001) 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 were read on this motion to/for DISMISSAL This action arises from defendant Marcum LLP's (Marcum) allegedly negligent services
as auditor and accountant for now-bankrupt entities City Line Behavioral Healthcare, LLC, formerly known as Liberation Behavioral Health, LLC (LBH), and its subsidiary, Life of Purpose-Pennsylvania, LLC, formerly known as Liberation Way, LLC (Liberation Way) (collectively, the Liberationcompanies). PlaintiffGary F. Seitz, as trustee ofthe bankruptcy estates ofthe Liberation companies, asserts four claims against defendant for accounting malpractice, breach offiduciary duty, breach ofcontract, and unjust enrichment. Inthis motion, defendant moves pursuantto CPLR 3211 (a) (5) and (a) (7) to dismissthe complaint in its entirety. Forthe following reasons, the motion is granted, and the complaint is dismissed. 

### I. BACKGROUND The following facts are taken from plaintiffscomplaint and are assumed to be true for the purposes ofthis motion.

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The Liberation companies operated three facilities in Pennsylvaniathat provided treatment for drug and alcohol addiction. Liberation Way was a single-member limited liability company owned and controlled by LBH, which was, in turn, managed by a five-person board of directors. From the very first year ofits founding in 2015, the CEO, CFO, and COO and President ofLBH began engaging in fraudulent schemes including "(i) fraudulently billing patients and insurance companies for treatments that were not provided, not medically necessary or were substandard; (ii) paying for patients to fraudulently obtain high-end insurance policies and fraudulently billing the insurance companies under those policies; (iii) generating kickbacks by sending thousands ofmedically unnecessary urine tests from the Company's patients to co-conspiring labs in Florida; (iv) housing clients at sober-living homes associated with the Company without an inpatient license; and (v) failing to comply with [the Pennsylvania Department ofDrug and Alcohol Program's] regulations and licensing requirements" (compl

## 128). In addition, the Liberation companies "manipulated [their] financial statements, including by overstating [their] revenue collection figures" (id. 

### 129). Around May 2016, the Liberation companies engaged defendant Marcum to perform accounting and auditing services for them. In 2016, Independent Blue Cross (IBC), aninsurance company that insured many ofthe Liberationcompanies' patients, began conducting an audit ofthe Liberation companies' claims and billing practices. Throughthe audit, IBC discoveredthe fraud and othermisconductthatthe Liberation companies committedbetweenJuly 2015 and late 2017. IBC's auditwasknownto the Liberationcompanies' officers, directors, and critical advisors, and legal counsel to the Liberation companies disclosed the audit to defendantby no later than March 31, 2017.

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In December 2016, non-party Fulcrum Equity Partners, Inc. (Fulcrum) offered to purchase the Liberation companies and entered into a period ofnegotiation and diligence. Underthe proposed transaction, certain members ofLBH would sell their membership units in LBH to LBH Holdings, LLC (LBH Holdings), a company newly createdto become the parent company for LBH, and its subsidiary, LBH Holdco Corp. (LBH Holdco) pursuantto a Unit Purchase and Contribution Agreement (Purchase Agreement), in exchange for millions of dollars and membership units in LBH Holdings. In the Purchase Agreement, the selling members ofLBHrepresented "thatthe [Liberation companies] and its staffhad always followed all applicable laws, that they had not engaged in activity in violation ofPennsylvania law governing rehabilitation facilities, and that they maintained all required records." (compl**~** 58). These representations and warranties induced LBH Holdings and LBH Holdco to enter into the Purchase Agreement. As aresult ofthe transaction, LBH became a wholly owned subsidiary ofLBH Holdings. In connection with this proposed transaction, defendant performed accounting services for the Liberation companies, including valuation, due diligence, and opening balance sheet corrections. However, in its April 2017 audit report and accounting work, defendant never investigated or considered the implications ofthe IBC audit. Fulcrum and non-party Vocap Partners ultimately acquired the Liberation companies on December 11, 2017, contributing $12 million in cash and $29.6 million in funds loaned from OxfordFinance LLC (Oxford) and anotherbank, to purchase 70% ofLBHHoldings. The $29.6 million loan was secured primarily by LBH's assets. The selling members ofLBH maintained a 30% stake in LBH Holdings.

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After the Fulcrumtransaction, Fulcrum selected newofficers and directors to control and direct the Liberation companies, including a new CEO. In January 2018, defendant began its audit and accounting services for year 2017 for the Liberation companies. Duringthe audit, defendant learned ofa material overstatementofnet accounts receivablethat it had missed in its 2016 audit and accounting services for the Fulcrum transaction. In addition, in reviewing the companies' legal bills, defendant became aware ofa series ofgovernmental investigations thatplaced them injeopardy, such as an order from the Pennsylvania State Department ofDrug and Alcohol Programs (DDAP) to cease patient intake at multiple locations duetoproblems discovered during its inspections, an investigationby the Pennsylvania Office ofthe Attorney General, and an order from the federal Drug Enforcement Agency regarding violations offederal regulations governing Narcotics Treatment Programs. Defendant also learned thatthe Liberation companies were in default oftheir Credit Agreement with Oxford, according to a notice ofdefaultreceived onJuly 6, 2018. When defendant issued its 2017 audit report on August 8, 2018, it conducted no investigation into the government subpoenas orletter inquiries and never revisited findings from the IBC audit or Oxford's notice ofdefault. Likewise, when defendant began its audit and accounting service for 2018 in January 2019, it did did notinvestigate or address any ofthese issues. OnMarch 25, 2019, the Pennsylvania Office ofthe Attorney General announced criminal charges againstLBH and its former officers and directors. At or aboutthattime, defendant informed LBH's new CEOthatthe Liberation companies should no longerrely on its audited financial statements. Defendant continued to perform audit and accounting services, including in

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connection withthe Attorney General's investigation, until the Liberation companies declared bankruptcy onApril 17, 2019. Marcumnever issued an auditreport for 2018. The Liberation companies declared bankruptcy on or about April 17, 2019, and plaintiff Seitz was appointed as the trustee ofthe bankruptcy estates ofthe Liberation companies. On April 16, 2021, plaintiffcommenced this action by filing a summons with notice. Plaintifffiled a complaint on May 20, 2021, asserting four causes ofaction for accounting malpractice, breach offiduciary duty, breach ofcontract, and unjust enrichment withrespect to defendant's audit and accounting services from 2016 to 2019. On June 18, 2021, defendant filed the instantmotionto dismissthe complaint. Plaintiff opposes the motion. 

### II. DISCUSSION On a motion to dismiss under CPLR 32I1(a) (7), the court accepts the facts as alleged in the complaint as true, accords plaintiffsthe benefitofany possible favorable inference, and determines only whether the facts as alleged fit within any cognizable legal theory (see Leon v Martinez, 84 NY2d 83 [1994]). Defendant principally argues that the claims should be dismissed underthe principle ofin pari delicto. The doctrine ofinpari delicto "bars a party thathas beeninjured as a result ofits
own intentional wrongdoing from recovering for those injuries from anotherparty whose equal
or lesser fault contributed to the loss" (Rosenbach v DiversifiedGroup, Inc., 85 AD3d 569, 570 (1st Dept 2011]). The doctrine is available as a defense against all ofthe claimshere (see Kirschner v KPMGLLP, 

### IS NY3d 446 [2010] [malpractice]; Donovan vRothman, 302 AD2d 238 [1st Dept 2003] [breach ofcontract], Gitlin v Chirinkin, 121 AD3d 939 [2d Dept 2014] [breach ofcontract, breach offiduciary duty, unjust enrichment]).

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Where a corporation seeks to impose liability on a defendant for its contribution to an injury wrought by the corporation's ownofficers ormanagement, "[t]raditional agency principles play an important role in an inpari delicto analysis" (Kirschner at 465). In Kirschner, the Court ofAppeals observed the "fundamentalprinciple thathas informed the law ofagency and corporations for centuries" that "the acts ofagents ... while acting withinthe scope oftheir authority are presumptively imputed to theirprincipals" (id.) As the "principal that selectedthe agent," "[a] corporationmust, therefore, beresponsible for the acts ofits authorized agents even ifparticular acts were unauthorized," including acts offraud (id.). Thus, acts offraud by the officers ofthe corporation in the course oftheir corporate dealings "is in lawthe fraud ofthe corporation" (id.). This reflects the assessmentthat "the principal is generally better suited than a third party to control the agent's conduct" (id.). The decision ofthe Court ofAppeals in Kirschner comprehensively resolves this motion. Plaintiffhas alleged that LBH's officers themselves engaged in fraud and other malfeasance (compl

## ,r,r 28, 29), and those acts must be imputedto LBH. Further, plaintiff, as the trustee ofthe bankruptcy estates ofthe Liberation companies, stands inthe shoes ofthe Liberation companies and has no greater rights than they would have ifthey had not filed for bankruptcy (see Mediators, Inc. v Manney (In re Mediators, Inc.), 105 F3d 822, 826 [2d Cir 1997]). Therefore, defendant sufficiently demonstrates that, as a party in pari delicto, plaintiffis barred from bringing his claims stemming from the wrongful acts ofthe Liberation companies' directors and officers. In opposition, plaintiffargues that a determination ofwhether inpari delicto should apply here requires a fact-intensive inquiry and is therefore premature inthis motion, citing Stakoe v Marcum & Kleigman LLP (135 AD3d 645,645 [1st Dept 2016]). However, as the Court of

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Appeals observed in Kirschner, "inpari delicto may be resolved onthe pleadings
... in an appropriate case" (Kirschner at 459, n 3). Plaintiffdoes not point to any factual dispute that would preclude dismissal onthe basis ofthis doctrine and, indeed, its applicability is apparent on the face ofhis pleadings. Unlike in Stakoe, where the court found that defendants had failed to show fraudulent activity by plaintiffs' agent, here, it is plaintiffhimselfwho has pleaded the officers' fraudulent activity. Plaintiffalso argues thatthe doctrine should not apply to its malpractice claimto the extent it is based in defendant's services unconnected to the Liberation companies' own fraud or misconduct (plaintiffsbriefin oppositionto mot at 16-17). He argues thatthe complaint "alleges specific wrongdoing by Defendant, including, inter alia, (i) Defendant's failure to design and apply basic auditprocedures to obtainthe audit evidence required to address the specific issues andrisks facing the Company; (ii) Defendant's failure to perform its accounting function, in connectionwith the Company's transactions and other accounting matters, consistentwiththe standards ofthe accounting profession; (iii) Defendant's failure to adhere to several generally accepted auditing standards; (iv) Defendant's issuing an audit report without conducting an investigation or considering the results ofthe IBC audit, despite having knowledge ofthe IBC audit as early as March 2017" (id. at 17). However, evenputting aside that (i) and (iv) relate to wrongful conductby the LBH's officers, (ii) and (iii) pointonly vaguely to "standards ofthe accounting profession" and "generally accepted auditing standards" without alleging any facts showing howdefendant failed to fulfill an appropriate duty ofcare (id.). Without further details, these are no more than bare legal conclusions, which need not be presumed to be true (see StrunkvNYState Bd. of Elections, 126 AD3d 777, 778 [2d Dept 2015]). Moreover, otherparts ofthe complaint make clear that, even whenplaintiffdescribes various failures in accounting, these are related to defendant's failure to properly investigate fraud and disclose fraud. Indeed, plaintiffalleges that defendant was negligent after the Fulcrum

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### transaction by continuing to fail in investigating and disclosing the Liberation companies' fraud (compl

## ,r,r 9, 10, 29). In addition, the alleged damages all arise from defendant's failure to detect the fraud (id. 

### at 23). Indeed, as defendant points out, "[t]here is not a single allegation in the Complaint which suggeststhatMarcum's auditing services were negligent in any way otherthan in failing to detect the Company's own fraud. And there is no allegation thatthe Company's financial statements were inaccurate in any way otherthan as a result ofthe Company's fraud" (defendant's briefinreply at 8). Finally, plaintiffargues thatthe "adverse interest" exceptionto inpari delicto should · apply, such that the wrongful actions ofthe company's officers are not imputedto LBH. "Under this narrow exception, management misconduct will not be imputed to the corporation ifthe officer acted entirely in his own interest and adversely to the interest ofthe corporation" (Symbol Tech., Inc. v Deloitte & Touche, LLP, 

### 69 AD3d 191, 197 [2d Dept 2009]). To avail himselfof this exception, plaintiffmust showthat "the agent ...totally abandoned his principal's interests and [acted] entirely for his own or another's purposes. It 

### cannot be invoked merely because he has a conflict ofinterest orbecause he is not acting primarily for his principal" (Kirschner 

### at 466). Here, plaintiffargues that, because, because the Fulcrum transaction was "funded primarily through debt secured by the [Liberation companies'] assets" that the companies were "notin a financial position to take on," the officers and directors caused the Liberation companies to be "saddled with millions ofdollars ofdebt," "leaving it in a worse position" (plaintiffs briefin opposition to mot at 14-15). Plaintiffalso argues that "the officers and directors of[LBH] were the beneficiaries ofthe fraud" (id. 

### at 15).

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### !
. However, as the Court ofAppeals also observed in Kirschner, 

### "[a] fraud thatby its nature will benefitthe corporation is not 'adverse' to the corporation's interests, even ifit was actually motivated by the agent's desire for personal gain" (Kirschner 

### at 467). "So long as the corporate wrongdoer's fraudulent conduct enablesthebusiness to survive-to attract investors and customers and raise funds for corporate purposes-thistest is not met" (id 

### at 468). Moreover, "any harm from the discovery ofthe fraud-rather than from the fraud itself--does not bear on whether the adverse interest exception applies. The disclosure ofcorporate fraud nearly always injures the corporation" (id. 

### at 469). In addition, pertinentto this case, "the mere fact that a corporation is forced to file for bankruptcy does not determine whether its agents' conduct was, at the time it was committed, adverse to the company" (id. 

### at 468). At the time ofthe Fulcrum transaction, it cannot be said that the officers and directors "totally abandoned [their] principal's interests and be act[ed] entirely for [their] own or another's purposes" (id. 

### at 466). The transaction would have benefitedthe companies through the infusion of$12 million from Fulcrum and Vocap and $29.6 million in loans from Oxford. That the loan
was secured by LBH's assets alone does not render the transaction in "adverse interest" to the Liberation companies. Indeed, the transaction may, at least before discovery ofthe officers' fraudulent acts, have permitted them to "survive," "attract investors and customers andraise funds for corporate purposes" for thetime being (id. 

### at 468). Therefore, the complaintmust be dismissed in its entirety under the doctrine ofin pari delicto.Because the complaint is dismissed pursuant to CPLR 3211 (a) (7), the court declines to
assess whether it may be dismissedpursuantto CPLR 3211 (a) (5).

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ORDERED that defendant's motion is granted, and the complaint is dismissed in its entirety.

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# }it;

# =-

CHECK ONE:
APPLICATION: CHECK IF APPROPRIATE: CASE DISPOSED GRANTED**□** DENIED SETTLE ORDER INCLUDES TRANSFER/REASSIGN

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# ~ NON-FINAL DISPOSITION GRANTED IN PART SUBMIT ORDER FIDUCIARY APPOINTMENT

### □ OTHER**□** REFERENCE

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