Professional Negligence Law Reporter

A New York trial court held that dismissal was warranted in an accounting negligence suit under the doctrine of in pari delicto.

The Liberation companies, comprising now-bankrupt entities Liberation Behavioral Health, LLC, and its subsidiary, Liberation Way, LLC, operated three facilities in Pennsylvania that provided treatment for drug and alcohol addiction. Liberation Behavioral Health’s officers allegedly engaged in fraudulent schemes, including fraudulent billing, kickbacks, and manipulations of financial statements. Independent Blue Cross began an audit of Liberation’s claims and billing practices, which allegedly led to the discovery of fraud and other misconduct. Nevertheless, Fulcrum Equity Partners, Inc., later acquired the Liberation companies, contributing $12 million in cash, plus millions in loans. Approximately two years later, the Liberation companies declared bankruptcy.

The trustee of the Liberation bankruptcy estates sued Marcum LLP, which performed accounting and auditing services for the Liberation companies, alleging accounting malpractice, breach of fiduciary duty, breach of contract, and unjust enrichment. The defendant moved to dismiss.

Granting the motion, the court found that under the in pari delicto doctrine, a party that is injured as a result of its own intentional wrongdoing is barred from recovering for those injuries from another party whose equal or lesser fault contributed to the loss. Citing case law, the court concluded that the doctrine was available as a defense to all the plaintiff’s claims.

The court reasoned that because the plaintiff alleged that Liberation Behavioral Health’s officers had engaged in fraud and other misconduct, those alleged acts must be imputed to Liberation Behavioral Health. The plaintiff, as trustee of the Liberation companies’ bankruptcy estates, must stand in the shoes of the Liberation companies and has no additional rights. The court also rejected the plaintiff’s argument that the doctrine did not preclude its malpractice claim in that the claim is related to the defendant’s services, not officer misconduct. The complaint did not allege that the defendant’s auditing was negligent in any way other than failing to detect the Liberation companies’ own fraud, the court said.

Finally, the court found that the adverse interest exception to in pari delicto did not apply. A fraud that by its nature will benefit a corporation is not adverse to the corporation’s interests, the court said, adding that the acquisition here provided a benefit to the Liberation companies.

Citation: Seitz v. Marcum LLP, 216 N.Y.S. 3d 894 (Sup. Ct. 2024).