IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION
Deloitte & Touche LLP (05cv2770) THIS DOCUMENT RELATES TO: Island Partners, et al.
OPINION AND ORDER
JESSE M. FURMAN, District Judge.
Plaintiffs James Rigas, John Rigas, Zito I, L.P. ("Zito"), and Zito Media, L.P. ("Zito Media") bring this action against accounting firm Deloitte & Touche LLP ("Deloitte"). Zito and Zito Media assert rights as the putative successors-in-interest to entities formerly controlled by James Rigas, John Rigas, and other members of their family. Specifically, Zito asserts its rights as the successor-in-interest to entities known as Highland Holdings, Highland Preferred Communications 2001 LLC ("Highland Preferred"), Highland Prestige Georgia, Inc. ("Highland Prestige"), Highland Video Associates, L.P. ("Highland Video"), and Hilton Head Communications, L.P. ("Hilton Head"). Zito Media asserts its rights as the successor-in-interest to an entity known as the Coudersport Television Cable Company ("Coudersport TV").
The action arises out of the 2002 failure of Adelphia Communications Corporation ("Adelphia") and ensuing civil and criminal investigations. The Plaintiffs bring claims against Deloitte, the former auditor and accountant for Adelphia and entities managed by Adelphia, for the firm's alleged role in Adelphia's failure. In essence, Plaintiffs claim that Deloitte directed the accounting decisions that ultimately ruined Adelphia, and then refused to stand behind these decisions once the government began to investigate the company. On June 7, 2013, Plaintiffs filed an Amended Complaint asserting seven causes of action against Deloitte: breach of contract, breach of professional duty, negligent misrepresentation, tortious interference, breach of fiduciary duty,  contribution, and indemnity. Deloitte now seeks to dismiss the Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
The following facts are taken from the Amended Complaint and are assumed to be true for purposes of this motion. See, e.g. , LaFaro v. N.Y. Cardiothoracic Grp., PLLC , 570 F.3d 471, 475 (2d Cir. 2009).
A. Adelphia, the Rigas Family, and Deloitte
In or about 1982, as the owner and co-owner of several cable television companies, John Rigas hired Deloitte to provide him and his companies with accounting and auditing services. (Am. Compl. ¶¶ 15-17). John Rigas ran the companies with his sons James, Timothy, and Michael; in July 1986, they reorganized five of the companies into a single holding company, Adelphia, which they subsequently took public. ( Id. ¶¶ 14, 19, 22). The Rigas family (including John, James, Timothy, Michael, and members of their immediate families) retained voting control over Adelphia, and also privately owned another set of companies, the Managed Entities, that were managed by Adelphia pursuant to management agreements: Highland Preferred, Highland Prestige, Highland Video, Hilton Head, and Coudersport TV. ( Id. ¶¶ 10-13 & n.3, 27). In addition, the Rigas family held partnerships (together with the Managed Entities, the "Rigas Family Partnerships" or "RFPs") that owned interests in the Managed Entities and in Adelphia securities, one of which was known as Highland Holdings. ( Id. ¶¶ 30-31). Over the next fifteen or so years, Deloitte provided advice to Adelphia and the RFPs with respect to the manner in which certain transactions between and among these entities (known as "related party transactions") were to be documented and disclosed to the public. Specifically, Deloitte advised that any receivables and payables among the RFPs, on the one hand, and Adelphia, on the other, should be disclosed on a net basis, rather than showing each balance individually. ( Id. ¶ 61). Deloitte also advised on the proper accounting treatment for transactions known as "co-borrowing agreements, " transactions into which Adelphia entered to acquire capital necessary to purchase new cable systems, upgrade older systems, and provide new services. ( Id. ¶¶ 67-73). These agreements turned previously existing RFP credit facilities into "co-borrowing" facilities, with both an RFP and an Adelphia subsidiary named as borrowers. ( Id. ¶ 75). Deloitte advised that funds drawn on these agreements did not need to be reflected on the Adelphia balance sheet so long as the RFP had the ability to repay the debt. ( Id. ¶¶ 82, 91).
Deloitte also oversaw the use of funds borrowed under these co-borrowing agreements - specifically, to purchase additional Adelphia securities - and did not advise that the use of the funds in this manner raised any accounting or disclosure issues. ( Id. ¶¶ 100-03). Finally, Deloitte approved of Adelphia's "marketing support" arrangements with its cable box vendors, agreements under which the vendors would provide funds to Adelphia and, in exchange, Adelphia would advertise for the vendors. ( Id. ¶¶ 106-09). At one point during its engagement, Deloitte apparently became concerned with certain unspecified accounting practices of James Brown, Adelphia's chief financial officer, but it did not communicate its concerns to the Rigases or to the Adelphia audit committee. ( Id. ¶ 152).
B. Adelphia's Failure and Subsequent Government Investigations
In early 2002, the Securities and Exchange Commission ("SEC") announced new guidance as to how public companies should disclose off-balance sheet debt. ( Id. ¶ 112). Deloitte interpreted this guidance to mean that Adelphia had to disclose the co-borrowing facilities going forward, but it did not determine that Adelphia's prior disclosures had been deficient. ( Id. ¶¶ 112, 117). In March 2002, after Deloitte had verbally approved a draft of Adelphia's 200110-K, but before the firm issued a formal audit opinion, Adelphia issued an earnings report that revealed the co-borrowing agreements, and held a conference call with analysts to discuss its earnings results. ( Id. ¶¶ 125-26).
Shortly thereafter, the SEC began to investigate Adelphia's accounting treatment and disclosure of the co-borrowing agreements. ( Id. ¶ 129). Eventually, Deloitte refused to sign the audit opinion, and Adelphia could not issue its 200110-K. ( Id. ¶ 138). Adelphia consequently defaulted under various agreements, its stock declined in value, and NASDAQ ultimately delisted the stock in June 2002. ( Id. ¶ 138). The RFPs, whose value was tied to Adelphia's in various ways, lost value as well. ( Id. ¶¶ 139-40).
Following Adelphia's failure, the federal government brought civil and criminal charges against Adelphia and members of the Rigas family. The SEC filed an action against Adelphia and John, James, Timothy, and Michael, and the federal government indicted John and Timothy on criminal charges relating to the practices discussed above, including Adelphia's treatment of netting, co-borrowing arrangements, purchases of Adelphia securities, and marketing support agreements. ( Id. ¶¶ 145-47). John and Timothy were eventually convicted of conspiracy, securities fraud, and bank fraud. ( Id. ¶ 157). Following their convictions, the Rigas family entered into a global settlement with the government, pursuant to which the family members forfeited all of their interests in Adelphia and the RFPs to the federal government. ( Id. ¶¶ 158-60). Prior to the forfeiture, however, Highland Holdings, Highland Preferred, Highland Prestige, Highland Video, and Hilton Head transferred all assets not retained in order to comply with the settlement agreement to Zito, including their litigation rights against Deloitte. ( Id. ¶¶ 157-63). Coudersport TV was not forfeited to the government, and subsequently became Zito Media. ( Id. ¶ 164).
C. Procedural History
Plaintiffs initially brought this suit against Deloitte in 2004 in the Court of Common Pleas of Philadelphia County. (Hoeffner Decl. (Docket No. 25), Ex. D). In their original Complaint, Plaintiffs asserted only three claims: breach of professional duty, contribution, and indemnity. ( Id. ¶¶ 36-49). In 2005, the case was designated as related to an existing multidistrict litigation in the Southern District of New York and was transferred to this Court. (Docket No. 1). In October 2012, the matter was reassigned to the undersigned. Thereafter, Plaintiffs were granted leave to file an Amended Complaint, and did so on June 7, 2013. (Docket Nos. 19, 22). Deloitte now moves to dismiss the Amended Complaint.
Deloitte raises three sets of arguments in support of its motion. First, Deloitte argues that one Plaintiff, Zito, lacks standing. (Def.'s Mem. (Docket No. 24) 6-7). Second, Deloitte advances several arguments for dismissal of most or all claims: (1) that they are derivative claims brought on Adelphia's behalf and thus covered by Adelphia's prior release of all claims against Deloitte ( id. 7-8); (2) that they are time barred ( id. 8-12); and (3) that they are barred by the doctrine of in pari delicto ( id. 12-13). Finally, Deloitte contends that each claim should be dismissed for failure to state a claim. ( Id. 14-24). The Court will address each set of arguments in turn.
A. Applicable Legal Standards
To survive a Rule 12(b)(6) motion, a plaintiff must generally plead sufficient facts "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009). More specifically, the plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully." Id. A complaint that offers only "labels and conclusions" or "a formulaic recitation of the elements of a cause of action will not do." ...