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Buckley v. Deloitte & Touche USA LLP

May 22, 2007


The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge.


In 2003, a healthcare finance company called DVI, Inc. defaulted on the interest payment that was due on its public bond debt and subsequently filed for bankruptcy pursuant to Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. Subsequently, a plan for liquidation was confirmed by the bankruptcy court and plaintiff Dennis J. Buckley was named the Trustee of DVI's Liquidating Committee. He now brings this action against Deloitte & Touche USA LLP and Deloitte & Touche LLP (collectively, "Deloitte"), which served as public auditor and accountant to DVI in the decade leading up to the company's default and bankruptcy. Buckley's complaint alleges, inter alia, that Deloitte: was aware of and participated in the improper actions of certain DVI insiders, including its Chief Executive Officer and two Executive Vice Presidents; failed to scrutinize sufficiently the DVI insiders' allegedly improper accounting for related party transactions and other financial improprieties; improperly issued unqualified audit opinions on DVI's financial statements; participated in the DVI insiders' misrepresentations to the SEC and to DVI itself; and abruptly withdrew from its engagement with DVI prior to completing the auditing services it had contracted to perform. Buckley brings claims against Deloitte for: 1) professional malpractice; 2) breach of contract; 3) negligent misrepresentation; 4) common law fraud; 5) aiding and abetting fraud; 6) aiding and abetting breach of fiduciary duty; and 7) deepening insolvency. The parties have stipulated that Pennsylvania law governs all of these claims except for the sixth claim for aiding and abetting breach of fiduciary duty. (Stipulation dated May 7, 2007, ¶ 1.) The parties disagree regarding what law governs the latter claim.

Defendants have now moved pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the complaint asserting that because Buckley stands in the place of DVI, plaintiff's claims are barred by the doctrine of in pari delicto. This affirmative defense allows a Court to bar a wrongdoer from recovering against his fellow wrongdoer where the plaintiff bears at least substantially equal responsibility as the defendant for the violations he seeks to redress. The in pari delicto doctrine is based in equity, and therefore courts have discretion whether to apply the defense in any particular case. Here, Deloitte contends that the DVI insiders' actions were intended to benefit DVI, or at least stemmed from a dual motive of benefiting both DVI and themselves, and therefore this Court should impute their actions to DVI and apply in pari delicto. However, because this Court must draw all reasonable inferences in favor of plaintiff for purposes of this motion to dismiss, it cannot ignore the allegations within Buckley's complaint that suggest that the DVI insiders acted entirely for their own benefit. Thus, the Court will not -- based solely on the face of the pleadings it has before it -- impute the DVI insiders' allegedly improper conduct to DVI. Accordingly, the current motion to dismiss should be denied to the extent it is based on the affirmative defense of in pari delicto.

In addition, Deloitte also seeks to dismiss all seven of Buckley's claims based on multiple legal theories independent from the doctrine of in pari delicto. For the reasons expressed below, defendant's motion to dismiss must be denied in part and granted in part. Specifically, Deloitte's motion must be denied to the extent it seeks to dismiss Claim I, Claim II, Claim III, Claim IV, Claim VI, and Claim VII. However, because Pennsylvania law does not recognize a cause of action for aiding and abetting fraud, Deloitte's motion to dismiss Claim V is granted.

I. Background

The following facts are alleged in the complaint, and are accepted as true for purposes of this motion.

DVI, Inc. -- through its wholly-owned subsidiaries -- DVI Financial Services ("DVI-FS") and DVI Business Credit ("DVI-BC") -- was in the business of extending loans and lease financing to healthcare providers. (Compl. ¶ 2.) DVI-FS leased diagnostic imaging and other sophisticated medical equipment as well as lower cost medical devices. (Id. ¶ 3.) DVI-BC provided working capital loans to healthcare providers secured by their accounts receivable and other assets. (Id. ¶ 4.)

DVI and its subsidiaries (collectively, "DVI") retained Deloitte to serve as public accountant and independent auditor in 1994, and this engagement lasted until Deloitte withdrew its services in 2003. (Id. ¶ 33-34.) During that time period, the complaint alleges, "[i]nsiders at DVI prepared specious financial statements and engaged in fraudulent conduct in order to conceal operational losses." (Id. ¶ 67.) Through these actions, "DVI insiders defrauded DVI's investors, regulators, bond holders, note holders, creditors, and shareholders." (Id.) These "insiders" included: Michael O'Hanlon -- Chief Executive Officer, President, and a Director of DVI (id. ¶ 49); Steven Garfinkel -- Executive Vice President and Chief Financial Officer of DVI (id. ¶ 219); and Richard Miller -- Executive Vice President of DVI (id. ¶ 227). Specifically, these DVI insiders engaged in fraudulent activities including:

* "Repurchasing at par delinquent loans from securitizations into which they had been transferred without obtaining commensurate value;"

* "Transferring to various securitizations performing leases in exchange for delinquent leases without obtaining commensurate value;"

* "'Round-Tripping,' -- the practice of transferring funds from DVI-FS to DVI-BC for the purpose of DVI-BC advancing or over-advancing the same funds as working capital loans to troubled borrowers, who would in turn use the funds to repay their delinquent lease obligations to DVIFS or its securitization;"

* "Transferring delinquent leases to a select group of borrowers for the purpose of falsely recharacterizing such delinquent loans as performing loans;"

* "Pledging as collateral to lenders leases and loans that failed to meet the respective lender's eligibility criteria, in order to obtain otherwise unavailable advances from lines of credit;"

* "Pledging the same collateral to two or more lenders to obtain otherwise unavailable advances from lines of secured credit;"

* "Subverting, disregarding and/or failing to implement internal controls and financial reporting procedures, especially with respect to the credit-worthiness of borrowers and the impairment of assets pledged as collateral to lenders or transferred to securitizations;"

* "Willfully choosing not to recognize or write-off losses;"

* "Deliberately refusing to take adequate loss reserves;"

* "Awarding raises and severance packages to select employees to assure their continued acquiescence to, or cooperation in, the aforementioned activities;"

* "Failing to supervise the management and operations of DVI;"

* "Improperly recognizing gain on sale;" and

* "Improperly accounting for transactions with related entities and other borrowers."

(Id. ¶ 68.) Moreover, the complaint alleges that these DVI insiders acted contrary to DVI's interests and for their own gain:

O'Hanlon, Garfinkel and Miller . . . [k]new of DVI's financial support and investments in non-core businesses that diverted millions of dollars from DVI at times during which DVI was illiquid and could not otherwise afford such practice with the intent of supporting their friends and/or building a personal empire and with the intent of concealing the financial condition of DVI and continuing in their positions and personally profiting therefrom. (Id. ¶ 228.)

Despite these irregularities, Deloitte nevertheless "issued clean audit reports on DVI's financials." (Id. ¶ 70.) In addition to auditing DVI's annual reports and reviewing its quarterly financials during each of the relevant years, Deloitte also provided DVI with a number of consulting services, including advising DVI with regard to compliance with several "Statement of Financial Accounting Standards" and other accounting regulations, helping DVI implement cash control procedures, and assisting DVI in responding to multiple inquiries from the SEC. (Id. ¶¶ 37, 63.) By virtue of its extensive work for DVI during this almost ten-year period, Deloitte personnel had "continuous and unfettered access to, and knowledge of, DVI's confidential internal corporate, financial, operating and business information." (Id. ¶ 66.) Thus, Deloitte "had ample opportunity to examine and analyze DVI's accounting practices, test the transactions recorded in DVI's internal and publicly reported financial statements, and assess DVI's internal controls." (Id.)

Deloitte was DVI's auditor and accountant for nearly a decade before it abruptly resigned on June 2, 2003 -- shortly before DVI's default. (Id. ¶¶ 33-34, 36, 52, 63, 140.) Despite years of financial statements certified by Deloitte evidencing robust financial health, DVI defaulted on the interest payment that was due on its public bond debt on July 30, 2003. (Id. ¶¶ 13, 40.) DVI's default on its bond debt, and the discovery and disclosure of financial fraud by its management, allegedly led to a crisis of confidence on the part of both its customers and lenders, and ultimately forced DVI into bankruptcy. (Id. ¶¶ 12-14, 124.)

In August 2003, DVI filed for bankruptcy protection under Chapter 11 in the United States Bankruptcy Court for the District of Delaware. (Id. ¶ 14.) In September 2004, DVI and its subsidiaries filed a joint plan of liquidation with the U.S. Bankruptcy Court for the District of Delaware, and that Court confirmed an amended liquidation plan in November 2004. (Id. ¶ 25.) Pursuant to this plan, the DVI "[d]ebtors transferred all of their remaining assets to [the unsecured creditors], who in turn contributed assets to the DVI Liquidating Trust." (Id. ¶ 28.) The liquidating trust "was created to collect, hold, liquidate, and distribute the DVI trust estate and administer, compromise, settle, withdraw, object to, or litigate the 'Litigation Claims' as defined" in the liquidating plan.

(Id. ¶ 29.) Pursuant to his role as trustee of the liquidating trust organized pursuant to this plan, Buckley filed this lawsuit against Deloitte in April 2006.

Buckley has also filed a separate action against DVI's former officers and directors alleging that they engaged in a massive fraud to deceive DVI's creditors and shareholders, (see Complaint in Official Committee of Unsecured Creditors of DVI v. O'Hanlon, D. Del., No. 04-CV-955), as well as one against the law firm that previously represented DVI. See Buckley v. Clifford Chance, et al., E.D. Pa., No. 06-CV-1003; see also In re DVI, Inc. Sec. Litig., E.D. Pa, No. 03-CV-5336; WM High ...

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