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holding that dismissal of claim is unwarranted and explaining that "[t]here are very few cases on point in Indiana, but it appears from the cases that do exist that a non-fiduciary can be liable for aiding and abetting another party's breach of its fiduciary duty"
Summary of this case from Wash. Frontier League Baseball, LLC v. ZimmermanOpinion
NO. 1:03-cv-00132-DFH-WTL
March 24, 2004
ENTRY ON PENDING MOTIONS
Defendants Ernst 85 Young and Charles J. Roach, an Ernst 85 Young partner, provided accounting services to plaintiffs Baker O'Neal Holdings, Inc. (BOH) and its wholly owned subsidiary, American Public Automotive Group, Inc. (APAG). BOH and APAG have sued defendants on claims arising from their alleged role in participating in or aiding and abetting the fraudulent transfer of assets from BOH and APAG by James O'Neal, President and Chief Executive Officer of BOH and APAG. O'Neal is alleged to have transferred more than $3.7 million from BOH and APAG under the guise of officer "loans" he could not and did not repay.
BOH and APAG both filed for bankruptcy protection on October 9, 1998, tolling any applicable statutes of limitations. The bankruptcy court confirmed the debtors' plan of reorganization on February 23, 2000. This action was filed as an adversary proceeding within the bankruptcy proceeding. The reference to the bankruptcy court was withdrawn so that the case would proceed in the district court.
The case is now before the court on plaintiffs' objection to the magistrate judge's denial of leave to file a Fourth Amended Complaint and defendants' motion to dismiss for failure to state a claim upon which relief can be granted. For the reasons discussed below, plaintiffs' objection is sustained, and plaintiffs are granted leave to file the Fourth Amended Complaint. Defendants' motion to dismiss is granted in part and denied in part.
I. Plaintiffs' Objection to Magistrate Judge's Order Deny ing Leave to File Fourth Amended Complaint
Plaintiffs amended their complaint three times prior to this entry. Two amendments came while the parties were contesting before the bankruptcy court defendants' motion to compel arbitration. After the case arrived in the district court, the magistrate judge permitted plaintiffs to file a third amended complaint on May 29, 2003. In July 2003, defendants filed their pending motion to dismiss Counts VI to XVII. That motion to dismiss has been defendants' first substantive response to plaintiffs' claims.
As part of their response to the motion to dismiss, plaintiffs sought leave to file a Fourth Amended Complaint. The magistrate judge denied plaintiffs' motion to file a fourth amended complaint on October 28, 2003. Plaintiffs objected pursuant to 28 U.S.C. § 636(b)(1), which authorizes a district judge to reconsider such a decision if the magistrate judge's decision was clearly erroneous or contrary to law. Because the proposed Fourth Amended Complaint is plaintiffs' first response to defendants' first substantive attack on the plaintiffs' claims, the court finds that the magistrate judge's decision was clearly erroneous and contrary to law.
Plaintiffs' proposed Fourth Amended Complaint makes a number of substantive changes. It expands on the allegations made in the previous version of the complaint, but does not assert any new causes of action. The proposed complaint adds new allegations designed to support plaintiffs' theory that a fiduciary relationship existed between Ernst 85 Young and BOH and APAG. The Fourth Amended Complaint also alleges that plaintiffs were fraudulently induced to enter into the engagement letters that formed the contract between the parties regarding Ernst 85 Young's accounting and financial services. Finally, the Fourth Amended Complaint removes language tending to suggest that BOH and APAG were aware of or participated in the fraudulent transfer scheme allegedly undertaken by O'Neal and Roach.
Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend pleadings "shall be freely given when justice so requires," but leave to amend is not automatic. Johnson v. Methodist Medical Ctr. of Ill., 10 F.3d 1300, 1303 (7th Cir. 1993) (affirming denial of leave to file third amended complaint). "In Foman v. Davis, 371 U.S. 178, 182 (1962), the Court determined that leave to amend should be granted under Federal Rule of Civil Procedure 15(a) unless there is 'undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment.'" Ferguson v. Roberts, 11 F.3d 696, 706 (7th Cir. 1993); accord, Perrian v. O'Grady, 958 F.2d 192, 194 (7th Cir. 1992) (affirming denial of leave to amend). When determining leave to amend, the court should also consider judicial economy. Perrian, 958 F.2d at 195; Bohen v. East Chicago, 799 F.2d 1180, 1184-85 (7th Cir. 1986). All of those factors must be balanced against any potential harm that could befall a moving party if leave is not granted. 3 Moore's Federal Practice § 15.15(1) (3d ed. 2003).
After reviewing the course of the proceedings, the court sees no valid reason for denying leave to file the Fourth Amended Complaint. In considering the Fomanfactors, first, there has been no undue delay by plaintiffs. Substantial time has passed since the suit was first filed in December 1999. Most of this delay, however, is attributable to the parties' dispute as to whether plaintiffs' claims should be arbitrated. That dispute, which was the subject of an interlocutory appeal, lasted into 2003.
Second, there is no pattern of repeated failures to cure deficiencies by previous amendments. Although this will be plaintiffs' fourth amended complaint, it is still their first request to amend in response to a challenge to the sufficiency of their pleading. Plaintiffs' request to amend is a direct response to defendants' motion to dismiss, which is the first time that defendants have attacked the complaint on the merits. Fairness requires that plaintiffs be allowed an opportunity to cure the perceived defects in their complaint. "The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits." Conley v. Gibson, 355 U.S. 41, 48 (1957). "If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Foman, 371 U.S. at 182.
The court also finds no evidence of bad faith on the part of plaintiffs in proposing the amendment. There are of course serious issues on the merits here. Those issues should not prevent plaintiffs from responding to the motion to dismiss, including deletion of allegations that plaintiffs contend the defendants have misconstrued in an effort to secure dismissal.
Defendants are not significantly prejudiced by allowing plaintiffs to amend. The arguments presented in defendants' motion to dismiss are still relevant because plaintiffs' substantive claims have not changed. Indeed, the majority (if not all) of the changes made in the Fourth Amended Complaint are consistent with the allegations of the Third Amended Complaint. Under these circumstances, BOH and APAG could have asserted these new allegations in a brief, without seeking leave to amend their complaint. See Hrubec v. Nat'l R.R. Passenger Corp., 981 F.2d 962, 963-64 (7th Cir. 1992) (in responding to a motion to dismiss, "[a] plaintiff need not put all of the essential facts in the complaint. He may add them by affidavit or brief — even a brief on appeal."); see also Chavez v. Illinois State Police, 251 F.3d 612, 650 (7th Cir. 2001) (stating that "the well-established law of this circuit provides that, when reviewing a dismissal under Rule 12(b)(6), 'we will consider new factual allegations raised for the first time on appeal provided they are consistent with the complaint.'"), quoting Veazey v. Communications Cable of Chicago, Inc., 194 F.3d 854, 861 (7th Cir. 1999), quoting in turn Highsmith v. Chrysler Credit Corp., 18 F.3d 434, 439 (7th Cir. 1994).
Because the court grants plaintiffs' motion to amend the complaint, defendants' motion to dismiss the Third Amended Complaint technically is moot. However, to prevent a wasteful repetition of the briefing, the court's ruling today applies to the Fourth Amended Complaint.
The only new allegations that defendants contend are inconsistent with the Third Amended Complaint are those relating to the fraudulent inducement theory. The new allegations respond to a partial affirmative defense. With rare exceptions, a plaintiff is not required to anticipate affirmative defenses in a complaint. U.S. Gypsum Co. v. Indiana Gas Co., 350 F.3d 623, 626 (7th Cir. 2003); accord, Gomez v. Toledo, 446 U.S. 635 (1980). When a defense is raised, the plaintiff is entitled to respond. These allegations do no more than that. To the extent they are arguably inconsistent with other allegations in the complaint, which assume the validity of the engagement letters as contracts, the plaintiff is entitled to plead in the alternative. See Fed.R.Civ.P. 8(e)(2). Moreover, since services were provided and money was paid, there clearly was a contract for professional services that could be the basis of a professional malpractice claim, even if one party's agreement to that contract was fraudulently induced and even if there is a dispute concerning the specific terms of the contract.
The court sees no prejudice to defendants by allowing the amendment. The court recognizes that defendants have spent significant time in drafting their motion to dismiss. Such effort, however, does not amount to "prejudice" sufficient to deny a plaintiff leave to amend his pleadings at least once in response to those briefs. As a general rule, a plaintiff whose complaint has been dismissed by the court is ordinarily entitled to amend it to try to cure the defects, unless it is apparent that such an effort would be fufile. E.g., Hart v. Bayer Corp., 199 F.3d 239, 247 n. 6 (5th Cir. 2000) (district court erred by denying leave to amend); Frey v. City of Herculaneum, 44 F.3d 667, 672 (8th Cir. 1995) (reversing denial of leave to amend); Polich v. Burlington Northern, Inc., 942 F.2d 1467, 1472 (9th Cir. 1991) (reversing denial of leave to amend). That's one major reason why Rule 12(b)(6) motions often seem to be more effective for educating the opposing party rather than narrowing the claims or issues. As explained below, however, the vast majority of the defendants' motion to dismiss still applies to the Fourth Amended Complaint. Under these circumstances, defendants are not unduly prejudiced by plaintiffs' proposed amendments to the complaint.
Upon consideration of all the factors under Foman v. Davis, therefore, the court sees no sound basis for denying plaintiffs leave to amend their complaint. The court sustains the plaintiffs' objection to the magistrate judge's order denying such leave, and the Fourth Amended Complaint shall be deemed filed today.
II. Motion to Dismiss
The Fourth Amended Complaint includes three groups of claims. Counts I to V seek to treat the fees that were paid by BOH and APAG to Ernst 85 Young as avoidable preferences or fraudulent conveyances, which BOH and APAG are entitled to recover. Defendants have not challenged these counts in their motion to dismiss.
Counts VI to XI and XVII assert a variety of common law claims against defendants, including breach of fiduciary duty, fraud, constructive fraud, civil action by a crime victim, negligence and breach of contract. Defendants have moved to dismiss all of these counts arguing that the doctrine of in pari delicto bars BOH and APAG from asserting these common law claims. Defendants additionally contend that the one-year statute of limitations period of the Indiana Accountancy Act of 1993 applies here to bar plaintiffs' common law claims. Finally, defendants attack several of the common law claims on an individual basis.
Counts XII to XVI allege that the O'Neal loan transfers were avoidable preferences and fraudulent conveyances. Defendants have moved to dismiss these counts on the ground that they were neither transferees nor beneficiaries of the transfers, so they cannot be held liable under the federal Bankruptcy Act or the Indiana Uniform Fraudulent Transfer Act (IUFTA).
For the reasons explained below, the court denies defendants' motion to dismiss with respect to Counts VI to XI and XVII, and grants defendants' motion to dismiss with respect to Counts XII to XVI.
A. Factual Allegations
In ruling on a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court must assume as true all well-pleaded facts set forth in the complaint, construing the allegations liberally and drawing all inferences in the light most favorable to the plaintiffs. See, e.g., Jackson v. E.J. Brach Corp., 176 F.3d 971, 977-78 (7th Cir. 1999); Zemke v. City of Chicago, 100 F.3d 511, 513 (7th Cir. 1996); McMath v. City of Gary, 976 F.2d 1026, 1031 (7th Cir. 1992).
For purposes of the motion, the court determines whether the plaintiffs might be able to prove any set of facts consistent with the allegations that would give the plaintiffs a right to relief. Wudtke v. Davel, 128 F.3d 1057, 1061 (7th Cir. 1997), citing Leatherman v. Tarrant County Narcotics Intelligence Coordination Unit, 507 U.S. 163, 168 (1993). Dismissal is appropriate only if it appears beyond a doubt that the plaintiffs can prove no facts that would entitle them to relief. Kennedy v. National Juvenile Detention Ass'n, 187 F.3d 690, 694 (7th Cir. 1999).
For the purpose of considering this motion, the court accepts the following allegations as true. Patrick Baker is the sole shareholder and Chairman of the Board of Directors of both BOH and APAG. APAG was created with the objective of developing and operating auto malls. The BOH and APAG business plan called for the purchase of automobile dealerships owned by Donald Massey. To this end, BOH and APAG raised money through loans from investors who were given promissory notes that were convertible into APAG stock. The notes were personally guaranteed by Baker and O'Neal.
O'Neal and Charles Roach had a close relationship prior to O'Neal's employment with BOH and APAG. In the late 1980s and early 1990s, O'Neal and Roach had both been officers of the Arnold Palmer Automotive Group (here, "the Palmer Group"). While with the Palmer Group, O'Neal had misappropriated corporate assets for his own personal use, including a significant amount of cash, which was taken under the guise of officer loans. The owners of the Palmer Group eventually obtained a multi-million dollar judgment against O'Neal for these misappropriations. Arising from his tenure with the Palmer Group, O'Neal was also prosecuted by the State of Florida on felony counts for theft of more than $300,000 in state sales tax funds that were held in trust for the state. Roach, who also worked for the Palmer Group during this period, was aware of O'Neal's malfeasance and the judgments against him.
After leaving the Palmer Group, O'Neal joined BOH and APAG. Roach left the Palmer Group and joined Ernst 85 Young as a partner. Beginning in 1994, O'Neal hired Roach and Ernst 85 Young to perform accounting, consulting and tax services for BOH and APAG. During this time, Roach operated as the " de facto CFO for both BOH and APAG." Cplt. ¶ 36. O'Neal directed all accounting-related questions to Roach. O'Neal directed BOH's and APAG's bookkeeper Paul Mohabir to follow Roach's instructions on all financial matters. Roach prepared BOH's tax returns in 1994 and 1995, and prepared APAG's tax returns in 1995. In 1996, BOH and APAG retained Ernst Young to audit and report on APAG's financial statements and the consolidated financial statements of the Massey auto dealership group. In 1997, BOH and APAG retained Ernst 85 Young to act as its exclusive financial advisor in the majority acquisition of Massey's auto dealership group.
At BOH and APAG, O'Neal removed large sums of money from the business. The transfers of cash were recorded as officer loans. Baker claims to have had no knowledge of these transfers. Roach had O'Neal execute promissory notes to account for the loan transactions. Roach had these loans listed as company assets in the BOH and APAG financial statements and tax filings even though he knew that O'Neal had no income and could not afford to repay the loans. Roach was aware of O'Neal's insolvency. In 1996 Roach had prepared a financial affidavit for O'Neal in an effort to show Florida probation officials that he should be given leniency on the state tax charges because he was unable to repay the stolen money. The affidavit showed no unencumbered assets, and liabilities exceeding $18 million. Also in 1996, prior to accepting the engagement with BOH and APAG, Ernst 85 Young conducted an internal review of BOH and APAG that revealed O'Neal's insolvency and checkered business history. Nevertheless, Roach recommended the engagement, personally vouching for O'Neal's integrity. Ernst 85 Young accepted the engagement.
O'Neal withdrew over $3.7 million from BOP and APAG through the officer loans. Ernst 85 Young was paid over $600,000 in fees by BOP and APAG. In 1995, Roach was appointed to the APAG board of directors. He was also expected to be the CFO and a director of the new entity to be created following the expected Massey acquisition. The Massey acquisition, however, never was consummated. When Baker discovered the loan transactions in 1988, he removed O'Neal from his positions with BOH and APAG. Additional allegations are noted below.
B. Counts VI to XI and XVII — Common Law Claims
1. Imputation of O'Neal's Wrongdoing and Knowledge
Defendants argue that knowledge of the O'Neal loan transfers should be imputed to BOH and APAG. Since the transfers form the basis of plaintiffs' common law claims, defendants argue that the doctrine of in pari delicto — literally, "of equal fault" — bars these claims since the corporate plaintiffs were complicit in O'Neal's wrongdoing. While the court agrees that knowledge of and responsibility for the O'Neal transfers must be imputed to BOH and APAG, the court is unable to say based solely on a review of the pleadings that the defense of in pari delicto applies to bar the claims asserted in Counts VI to XI and XVII.
O'Neal's conduct is imputable to BOH and APAG in several different ways. First, based on a bankruptcy court judgment, BOH and APAG are estopped from denying that they were complicit in O'Neal's wrongdoing. Federal law applies to collateral estoppel issues when, as here, the judgment to be given preclusive effect was a federal judgment. Havoco of America, Ltd. v. Freeman, Atkins Coleman, Ltd., 58 F.3d 303, 307 n. 7 (7th Cir. 1995). For issue preclusion to apply: (1) the issue must be the same as the one involved in the prior action; (2) the issue must actually have been litigated in the prior action; (3) the determination of the issue must have been essential to the prior final judgment; and (4) the party against whom issue preclusion is asserted must have been fully represented in the prior action. Id. at 307.
In the proceeding brought by BOH and APAG against O'Neal and his family to void the loan transfers as fraudulent conveyances, the bankruptcy court adopted the argument urged by BOH and APAG, holding as a matter of law that "O'Neal's fraudulent intent may be imputed to the Debtors [BOH and APAG]." Def. Ex. 12, Bankruptcy Court Findings of Fact and Conclusions of Law and Final Judgment ¶¶ 30, 33. This finding was essential to the court's judgment that the O'Neal transfers amounted to a fraudulent conveyance. BOH and APAG were seeking relief under Section 14(1) of the IUFTA, Ind. Code § 32-18-2-14(1), which required a finding that the debtors, BOH and APAG, had "actual intent to hinder, delay or defraud" their creditors.
Plaintiffs contend that the issue decided by the bankruptcy court is different from the issue to be decided here. In the prior proceeding, they argue, the bankruptcy court considered whether O'Neal's conduct with respect to the fraudulent transfers could be imputed to BOH and APAG, while in this proceeding the issue is whether O'Neal's entire wrongdoing may be imputed to plaintiffs. The allegations of the complaint, however, contain no mention of any wrongdoing on the part of O'Neal that could be considered separate and apart from the fraudulent transfers. When pressed at this court's hearing to identify additional wrongful conduct by O'Neal outside of the fraudulent loans, plaintiffs' counsel was able to cite only the improper capitalization of certain "expenses" alleged in paragraph 53 of the Third Amended Complaint (paragraph 63 in the Fourth Amended Complaint). But as plaintiffs' counsel conceded, these "expenses" were in fact the fraudulent loans obtained by O'Neal. The bankruptcy court — at the request of BOH and APAG — imputed O'Neal's fraudulent conduct to BOH and APAG. As a result, BOH and APAG are estopped from denying the same imputation in this proceeding.
BOH and APAG also had constructive knowledge of the O'Neal loans. Paul Mohabir, the internal accountant for BOH and APAG, was completely familiar with the loans and their dubious accounting treatment — so much so that Mohabir repeatedly expressed concern to Roach on the issue. Mohabir Aff. ¶ 6. Nor were the loans in any sense "hidden." The loans were recorded in the plaintiffs' key financial records — financial statements, promissory notes, and tax returns — of which Baker, as sole shareholder and Chairman of the Board of Directors, is deemed to have knowledge. See FDIC v. Lauterbach, 626 F.2d 1327, 1334 (7th Cir. 1980) ("A corporate director may not claim total ignorance of the corporation's affairs, particularly those matters fairly disclosed by the directors' meetings and those corporate records to which directors had access.").
In arguing that O'Neal's conduct should be imputed to BOH and APAG, defendants also rely on the "sole actor" doctrine. That doctrine teaches that even where an agent has acted to defraud the principal, the principal may still be charged with the agent's fraud where that agent is "the sole representative of the principal in the transaction in question." First Nat'l Bank of Cicero v. Lewco. Secs. Corp., 860 F.2d 1407, 1417-18 (7th Cir. 1988) ("This 'sole actor' exception is founded on the notion that, where a principal cannot embrace a transaction except through the acts of an unsupervised agent, the principal must accept the consequences of the agent's misconduct because it was the principal who allowed the agent to operate without accountability."). The Seventh Circuit has held, however, that the "sole actor" exception may not apply where the adverse party was aware of the agent's fraud and even participated in it. Ash v. Georgia-Pacific Corp., 957 F.2d 432, 436 (7th Cir. 1992) (affirming verdict in favor of corporation's successor against party who persuaded corporation's chief operating officer to act to defraud the corporation). Accordingly, the court does not rely on the "sole actor" exception to impute O'Neal's alleged wrongdoing to BOH and APAG.
2. The In Pari Delicto Defense
Even given the imputation of O'Neal's wrongdoing to BOH and APAG, whether plaintiffs' claims are barred by the in pari delicto doctrine is a different question. "The doctrine known by the latin phrase in pari delicto literally means 'of equal fault.'" Theye v. Bates, 337 N.E.2d 837, 844 (Ind.App. 1975), quoting Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 135 (1968). "The expression 'in pari delicto' is a portion of the longer Latin sentence, 'In pari delicto potior est conditio defendentis,' which means that where the wrong of both parties is equal, the position of the defendant is the stronger." Theye, 337 N.E.2d at 844, quoting W.M. Moldoff, Annotation, Purchaser's Right To Set Up Invalidity of Contract Because of Violation of State Securities Regulation as Affected by Doctrines of Estoppel or Pari Delicto, 84 A.L.R.2d 479, 491. As legal entities, corporations are subject to the in pari delicto defense, although to some extent the doctrine "loses its sting when the person who is in pari delicto is eliminated." Scholes v. Lehmann, 56 F.3d 750, 754-55 (7th Cir. 1995), citing McCandless v. Furlaud, 296 U.S. 140, 160 (1935).
Two recent Seventh Circuit decisions have addressed in detail the scope of the in pari delicto defense. In Scholes v. Lehmann, the Seventh Circuit was faced with a Ponzi scheme in which the perpetrator of the fraud, a Michael Douglas, had carried out the scheme through the use of three wholly owned corporations that he had created specifically for that purpose. The corporations solicited funds from "investors." Those funds were used to pay dividends to previous investors and to maintain the Ponzi scheme. Douglas also caused the corporations to pay funds to himself, his ex-wife, and his favorite charities. Douglas's scheme was eventually exposed, and he pled guilty to federal fraud charges. In the wake of the criminal proceedings, the court appointed Scholes as a receiver for Douglas and the corporations.
Scholes filed a fraudulent conveyance action under Illinois law against the entities that had received pay-outs from the Ponzi corporations. The Seventh Circuit was asked to consider whether the in pari delicto defense barred Scholes from pursuing the Illinois fraudulent conveyance action. The court held that it did not. The court found that the rationale behind in pari delicto — "that the wrongdoer must not be allowed to profit from his wrong" — did not apply to the receiver's action since "Douglas himself did not stand to benefit from the receiver's suit." Scholes, 56 F.3d at 754. The wrong invoked to support the defense of in pari delicto was chargeable to the Ponzi perpetrator. After the receivership entities were "freed from his spell[,] they became entitled to the return of the moneys . . . that Douglas had made the corporations divert to unauthorized purposes." Id.
The Seventh Circuit revisited this issue in Knauer v. Jonathan Roberts Financial Group, Inc., 348 F.3d 230, 234 (7th Cir. 2003). Like Scholes, Knauer arose out of a classic Ponzi scheme. Kenneth Payne and several other individuals, operating under the auspices of Heartland Financial Services and JMS Investment Group, defrauded nearly a thousand investors of millions of dollars. Knauer differed from Scholes, however, in that the receiver in Knauer was not seeking to void a fraudulent conveyance but rather was pursuing tort damages against several securities broker-dealers for failing to adequately supervise Payne, who was a registered representative of the broker-dealers. Id. at 234. Judge Tinder had granted a motion to dismiss based on the in pari delicto defense, and the Seventh Circuit affirmed.
In Knauer, the Seventh Circuit held that in pari delicto barred the receiver's tort claims. However, as Judge Tinder expressed in his district court opinion, see 2002 WL 31431484, *10 (S.D. Ind. 2002), and as the Seventh Circuit confirmed, the equitable context in which the in pari delicto defense is asserted is crucial. In the Seventh Circuit's view, the key distinction between Scholes and Knauer was that in Scholes the receiver had been seeking to recover "diverted funds from the beneficiaries of the diversions," while the broker-dealer defendants in Knauer "had derived no benefit from the embezzlements." Knauer, 348 F.3d at 236. In pari delicto was appropriate in Knauer because the equitable balancing favored the defendants. They had not seen a cent of the diverted funds, and their "involvement in the Ponzi scheme as a whole was quite minor." Id. at 237. On the other side of the equation, the Ponzi entities, as a result of the machinations of Payne, "were very much at the forefront of the Ponzi scheme." Id. It must also be noted that Knauer was decided on the pleadings.
For present purposes, however, the court must acknowledge the limits the Seventh Circuit placed on its reasoning. The Seventh Circuit emphasized that under the facts alleged in Knauer "there is no allegation whatsoever that the defendants were directly involved in the embezzlements or benefitted from them." Id. "Had the broker dealers been directly involved in the embezzlements, or attained some tangible benefit from them, this would be a different case." Id. at 237 n. 6.
The case before the court is a different case from the one the Seventh Circuit decided in Knauer and, at least on the pleadings, could fit within the situation described in footnote 6. Here the plaintiffs have alleged that Roach (and thus Ernst 85 Young) were directly involved in O'Neal's wrongdoing. Applying the reasoning of Scholesand Knauer, the court cannot hold as a matter of law, based on the pleadings alone, that in pari delicto applies here. In weighing plaintiffs' culpability, O'Neal's misconduct is imputed to BOH and APAG. O'Neal's removal from BOH and APAG lessens the "sting" of in pari delicto to some degree, see Scholes v. Lehmann, 56 F.3d at 754, but does not totally exculpate the entity. See Knauer, 348 F.3d at 237 (applying in pari delicto even where the fraud perpetrator had been removed from the receivership entity).
Accepting plaintiffs' allegations, as the court must at this point, defendants engaged in a course of conduct that went far beyond simply facilitating O'Neal's fraudulent loans. Plaintiffs allege that Roach and Ernst 85 Young committed several torts in the course of their relationship with BOH and APAG. Plaintiffs also allege that Roach and Ernst 85 Young acted negligently and fraudulently in not disclosing what they knew of O'Neal's financial and professional history and how these circumstances would affect the accounting treatment of the loans. According to BOH and APAG, defendants also had a duty, as established by the Statement on Standards for Accounting and Review Services, to report the lack of "management integrity" within the company. Moreover, plaintiffs claim that Roach and Ernst 85 Young had a duty to blow the whistle on themselves. Plaintiffs' view is that defendants were so compromised by their prior dealings with O'Neal that they committed a tort just by agreeing to provide advisory services.
While knowledge of the O'Neal loans is fairly imputed to BOH and APAG, the court cannot say on this record on a motion to dismiss that Baker himself should be charged with knowledge that the O'Neal loans would not be collectable.
Also, at least under the allegations of the complaint, Roach and Ernst 85 Young stood to benefit from their alleged wrongful conduct. Defendants disagree, citing Knauerior the proposition that the professional service fees an alleged tortfeasor receives during the course of his fraudulent conduct do not count as a "tangible benefit" for the purposes of the in pari delicto consideration. That is not a correct reading of Knauer. First, the broker-dealers in Knauerwere alleged to have been the employers of Payne and the other Ponzi perpetrators. 348 F.3d at 232. The broker-dealers' alleged duty to supervise originated from their employment of the Ponzi perpetrators, not from any fees they received. Nowhere in the Knauero pinion are fees mentioned. Second, in this case the fees and benefits received by Roach and Ernst 85 Young are alleged to have been obtained directly as a result of fraudulent conduct. Ernst 85 Young secured its auditing engagement through O'Neal. Roach was appointed to the Board of Directors of APAG and was allegedly intended to serve on the Board of the new entity created to facilitate the Massey acquisition. Cplt. ¶¶ 29, 31. Plaintiffs have further alleged that O'Neal promised Roach future business opportunities with BOH and APAG. Cplt. ¶ 24. Plaintiffs are entitled to the inference that the benefits O'Neal distributed to Roach and Ernst 85 Young were the result of defendants' involvement in O'Neal's allegedly fraudulent scheme to enrich himself.
As the Seventh Circuit recognized in Knauer, " in pari delicto is an affirmative defense and generally dependent on the facts, and so often not an appropriate basis for dismissal." Knauer, 348 F.3d at 237 n. 6 (affirming dismissal, though, based on the facts "thoroughly alleged" in the complaint"). Within the confines of deciding the Rule 12(b)(6) motion, the court cannot find as a matter of law that BOH's and APAG's alleged fault in the O'Neal transactions exceeded that of defendants. Unlike the situation in Knauer, there are allegations in this case that defendants both were involved in the fraudulent conduct and benefitted from it.
The risk of a liberal application of in pari delicto is that tortfeasors preparing to defraud an entity could potentially immunize themselves from liability simply by enlisting the help of an executive in the victim-corporation. That seems to be improbable, as the Seventh Circuit has indicated in a similar situation. See Ash v. Georgia-Pacific Corp., 957 F.2d 432, 436 (7th Cir. 1992) ("Georgia-Pacific's argument implies that anyone who suborns the chief operating officer of a corporation has by virtue of that success purchased immunity from liability to the principal victim. We cannot believe that Illinois treats successful schemes as self-protecting."). Outside of a fraudulent conveyance scenario, the best case for not applying the in pari delicto defense is where the insider and the third-party tortfeasor were essentially acting as co-conspirators. That is a fair summary of plaintiffs' allegations here, though it remains to be seen whether they can be proved. The doctrine of in pari delicto does not require dismissal at this stage of the litigation.
3. Accountancy Act Statute of Limitations
The Indiana Accountancy Act, Ind. Code § 25-2.1-1-1, et seq., imposes a one-year statute of limitations on all claims governed by the Act. The Accountancy Act applies to all actions
based on negligence or breach of contract brought against an accountant, a partnership of accountants, or an accounting corporation registered, licensed, or practicing in Indiana by an individual or a business entity claiming to have been injured as a result of financial statements or other information examined, compiled, certified, audited, or reported on by the defendant accountant as a result of an agreement to provide professional accounting services.
Ind. Code § 25-2.1-15-1. By its terms, the Act does not apply to Counts VI to IX because these counts allege neither negligence nor breach of contract.
Defendants argue that Crowe, Chizek, and Co. v. Oil Tech., Inc., 771 N.E.2d 1203, 1211 (Ind.App. 2002), and Shideler v. Dwyer, 417 N.E.2d 281, 286 (Ind. 1981), support a more expansive reading of the Accountancy Act's scope. In Crowe, Chizek the Indiana Court of Appeals applied the Accountancy Act's statute of limitations to a simple negligence action. In addressing the plaintiff's claim that constructive fraud operated to toll the statute of limitations, the court held that no evidence of constructive fraud had been presented. Crowe, Chizek, 771 N.E.2d at 1210. Contrary to defendants' argument, the bar to the constructive fraud claim in Crowe, Chizek was not the Accountancy Act but rather a lack of evidence.
In Shideler, the Indiana Supreme Court reaffirmed the general rule that plaintiffs cannot avoid otherwise applicable statutes of limitations by artful pleading. The court held that despite the plaintiffs pleading of multiple counts, each asserting a different theory of recovery for the same injury, plaintiff's claim was essentially one of legal malpractice. As such, it was subject to the general two-year statute of limitations applicable to personal injuries and property damage. 417 N.E.2d at 286-87.
The difference between Shideler, see Ind. Code § 34-1-2-2, and this case is that the Accountancy Act statute of limitations explicitly limits the causes of actions that it governs. The statute of limitations embedded in the Accountancy Act deliberately uses limited terms to give special treatment to certain types of claims that otherwise would have been governed by the general two-year limitations period or other more general statutes of limitation. Claims that are not specifically encompassed by the Act — such as plaintiffs' claims of fraud, constructive fraud, breach of fiduciary duty and civil action by crime victim — are governed by the more general rule. They are not within the deliberately narrower scope of the Accountancy Act's statute of limitations. With the Accountancy Act, the Indiana legislature crafted a purposefully narrow statute of limitations. This court is obliged to respect the Act's limits.
The pending motion does not call on the court to decide which of the more general limitations periods should apply to these claims.
Additional analysis is necessary to decide whether the Accountancy Act applies to Counts X and XI, which allege negligence and breach of contract respectively. Defendants argue that the Act applies to these counts because Roach and Ernst 85 Young were engaged in the "practice of accountancy," as defined in the Act. See Ind. Code § 25-2.1-1-10. This phrase, however, is not employed in the one-year statute of limitations section of the Act. Under the statutory language, the relevant inquiry is significantly narrower: whether BOH and APAG are "claiming to have been injured as a result of financial statements or other information examined, compiled, certified, audited, or reported on by the defendant accountant as a result of an agreement to provide professional accounting services." Ind. Code § 25-2.1-15-1. At least some of plaintiffs' allegations, such as defendants' alleged failure to disclose to Baker what they knew about O'Neal's background and his personal financial situation, do not, at least obviously, amount to claims of injury resulting from "financial statements or other information examined, compiled, certified, audited, or reported on by the defendant accountant as a result of an agreement to provide professional accounting services."
The statute specifically distinguishes between activities within the "practice of accountancy" and the narrower range of activities that are covered under the section of the Act dealing with negligence and breach of contract actions. Drawing that line accurately presents a challenge, especially at the pleadings stage. At this point, plaintiffs are entitled to the benefit of a range of favorable inferences and hypotheses. It would not be prudent at this point to try to map the boundary between the broader "practice of accountancy" and the covered claims for negligence and breach of contract without significantly more factual development. At this stage in the litigation, the court does not hold as a matter of law that the Accountancy Act's statute of limitations applies to Counts X and XI.
4. Objections to Individual Tort Counts
Count IX asserts that BOH and APAG are entitled to recover in tort for various crimes perpetrated upon them by Roach and Ernst 85 Young. While the court has its doubts about certain of the crimes that plaintiffs have alleged, the allegations of the complaint do present facts that generally conform to the elements of the crimes of fraud and conversion. Defendants' argument that there is no tort liability for aiding and abetting or conspiring to commit a crime is irrelevant because plaintiffs have also alleged that Roach and Ernst 85 Young actually committed the crimes as principals. Further, Cenco, Inc. v. Seidman Seidman, 686 F.2d 449, 453 (7th Cir. 1982), does not stand for the proposition that there can be no aiding and abetting liability under tort law, only that no separate tort of "aiding and abetting" is required since an aider and abettor is necessarily liable as a participant in the criminal venture. See Eastern Trading Co. v. Refco, Inc. 229 F.3d 617, 623 (7th Cir. 2000). Count IX asserts a viable theory of recovery.
Count XVII alleges that defendants aided and abetted O'Neal and conspired with him to breach his fiduciary duties. Defendants are correct that no separate tort for aiding and abetting the breach of a fiduciary duty has been established by Indiana law, but again this is not determinative. There are very few cases on point in Indiana, but it appears from the cases that do exist that a non-fiduciary can be liable for aiding and abetting another party's breach of its fiduciary duty.
The law is well established that, when a trustee of an express trust has taken advantage of his fiduciary relationship to cheat and defraud the cestui que trust out of the property held by him in trust, the cestui que trust is not limited to an action for the breach of the trust agreement; he may elect to prosecute an action against the trustee in his individual capacity, in tort, for the damages sustained. Holderman v. Hood (1904) 70 Kan. 267, 78 P. 838; Brys v. Pratt (1909) 55 Wn. 122, 104 P. 169; Sherwood v. Saxton (1876) 63 Mo. 78; Lathrop v. Bampton (1866) 31 Cal. 17, 89 Am. Dec. 141. It is also the law that a third party, who has aided and abetted the trustee in carrying out the fraudulent scheme, may be joined as defendant in the same action. Holderman v. Hood, supra.Sharts v. Douglas, 163 N.E. 109, 111 (Ind.App. 1928) ( en banc) (affirming verdict against trustee and non-fiduciary who participated in fraudulent scheme). Though the law in other jurisdictions is not uniform, the majority view is that a third-party non-beneficiary can be liable for aiding and abetting the breach of a fiduciary duty, especially where the third party is in privity with the fiduciary or has benefitted from the breach in some way. See Restatement (Second) of Torts § 874 cmt. c (1979) ("A person who knowingly assists a fiduciary in committing a breach of trust is himself guilty of tortious conduct and is subject to liability for the harm thereby caused."); 3 Am.Jur.2d Torts § 299 (1986) ("A person who intentionally causes or assists an agent to violate a duty to the principal is subject to liability in tort for the harm he has caused to the principal . . ."). Accordingly, dismissal of Count XVII is unwarranted.
The court is not persuaded by defendants' other objections to the common law counts. BOH and APAG have sufficiently pled a breach of fiduciary duty claim. Plaintiffs' negligence and breach of contract claims do not assert claims for negligent misrepresentation, but rather for professional malpractice. Finally, it is unnecessary to decide whether Indiana assigns liability for aiding and abetting negligent acts since plaintiffs have alleged that Roach and Ernst 85 Young were themselves negligent. Defendants' motion to dismiss Counts VI to XI and XVII is denied.
C. Counts XII to XVI-Accessory Liability for Fraudulent Transfers Under the Bankruptcy Code and IUFTA
Counts XII and XIII assert fraudulent transfer claims under sections 548 and 550 of the federal Bankruptcy Code. 11 U.S.C. § 548(a), 550. BOH and APAG concede that Roach and Ernst Young are not "transferees" within the meaning of the statute. See 11 U.S.C. § 550(a); Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 893 (7th Cir. 1988) ("we think the minimum requirement of status as a 'transferee' is dominion over the money or other asset, the right to put the money to one's own purposes."). BOH and APAG contend, however, that with respect to the O'Neal loans, defendants are "entit[ies] for whose benefit such transfer was made," and that they are therefore subject to liability under the Bankruptcy Code. Plaintiffs' view is that Roach and Ernst 85 Young were beneficiaries of the fraudulent loan transfers because they allegedly received fees and promises of future engagements in return for aiding O'Neal.
Plaintiffs' interpretation of who constitutes a beneficiary is too broad. The purpose of the fraudulent transfer provisions of the Bankruptcy Act "is clearly to preserve the assets of the bankrupt; they are not intended to render civilly liable all persons who may have contributed in some way to the dissipation of those assets." Mack v. Newton, 737 F.2d 1343, 1358 (5th Cir. 1984), quoting Elliottv. Glushon, 390 F.2d 514, 516 (9th Cir. 1967). Because these provisions are designed to facilitate the recovery of all of the fraudulently transferred property, the contemplated "benefit" of the transfer should be proportionate to the transfer itself. For instance, the Seventh Circuit's "paradigm 'entity for whose benefit such transfer was made'" is the guarantor of a debt that the transfer extinguished: "someone who receives the benefit but not the money." Bonded Financial Services, 838 F.2d at 895.
The fact that Roach and Ernst 85 Young might have received a remote benefit as a result of the transfer does not mean that the transfer was made for their benefit. "Someone who receives the money later on is not an 'entity for whose benefit such transfer was made'; only a person who receives a benefit from the initial transfer is within this language." Id. at 896. All of the loan transfers at issue here were received by O'Neal and his family. Whatever benefits Roach and Ernst 85 Young might have obtained after the transfers would have been "incidental, unquantifiable, and remote . . . bearing no necessary correspondence to the value of the property transferred or received." Mack, 737 F.2d at 1359-60.
In rejecting the characterization of Roach and Ernst 85 Young as "entit[ies] for whose benefit such transfer was made" the court does not mean to suggest that monies paid as compensation for facilitating a fraudulent transfer — even if that compensation is provided under the guise of fees for legitimate services — will never amount to a "benefit" under section 550 of the Bankruptcy Code. Nevertheless, in this case, to the extent that BOH and APAG seek to recover the fees paid to Ernst 85 Young as a "benefit" of the fraudulent conveyances, these claims would only duplicate Counts I through V, which seek to achieve the same result by characterizing the fees themselves as avoidable preferences and fraudulent conveyances.
BOH and APAG argue that even if the Bankruptcy Code does not impose liability for the fraudulent transfers on Roach and Ernst 85 Young as accessories, they are still liable under the Indiana Uniform Fraudulent Transfer Act (IUFTA), Ind. Code § 32-18-2-17, which is more expansive than the Bankruptcy Code. Essentially adopting the argument of the plaintiffs in Freeman v. First Union Nat'l, 329 F.3d 1231, 1233-34 (11th Cir. 2003), BOH and APAG contend that the "catch-all" provision in IUFTA grants the court broad equitable powers to provide for a right of recovery against an aider and abettor of a fraudulent transfer. The Eleventh Circuit certified this question to the Florida Supreme Court, which recently joined the multitude of other courts in holding that there is no accessory liability for fraudulent transfers under the Uniform Fraudulent Transfer Act. — So.2d-, 2004 WL 178598 (Fla. Jan 29, 2004); accord, Wortley v. Camplin, 2001 WL 1568368, *9 (D. Me. 2001); FDIC v. White, 1998 WL 120298, *2 (N.D. Tex. March 5, 1998); Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298, 309 (Conn.App. 2002).
Section 17(a)(3)(C) provides that in an action for relief from a fraudulent transfer, a creditor may obtain, subject to applicable principles of equity and rules of civil procedure, "any other relief the circumstances require."
Florida, like Indiana, has adopted the Uniform Fraudulent Transfer Act. The statute examined in Freeman is identical to the IUFTA in all relevant respects.
The court agrees with the results these other courts have reached. At most, IUFTA's "catch-all" provision gives a court flexibility to fashion remedies not explicitly provided for in the statute. The provision does not permit the court to assign liability where the Act did not, or to create out of whole cloth "substantive rights of action with accompanying damages which are not otherwise implied or stated in the statute." FDIC v. White, 1998 WL 120298 at *2. Accessory liability for fraudulent transfers cannot be supported by either the Bankruptcy Code or the IUFTA. Accordingly, Counts XII through XVI are dismissed.
Conclusion
Plaintiffs' motion for leave to amend the complaint is granted and the tendered Fourth Amended Complaint shall be deemed filed today. Defendants' motion to dismiss, as applied to the Fourth Amended Complaint, is denied with respect to Counts VI to XI and XVII, and granted with respect to Counts XII through XVI. Defendants shall respond to the remaining counts of the Fourth Amended Complaint no later than April 30, 2004.
So ordered.