| Sacher v Beacon Assoc. Mgt. Corp. |
| 2014 NY Slip Op 00646 [114 AD3d 655] |
| February 5, 2014 |
| Appellate Division, Second Department |
| Joel Sacher et al., Respondents, v BeaconAssociates Management Corp. et al., Defendants, and Friedberg, Smith & Co., P.C.,Appellant. |
—[*1] Wolf Haldenstein Adler Freeman & Herz LLP, New York, N.Y. (Charles J. Hecht,Daniel Tepper, and Alan McDowell of counsel), for respondents.
In an action, inter alia, to recover damages for professional negligence, the defendantFriedberg, Smith & Co., P.C., appeals, as limited by its notice of appeal and a letter datedJune 5, 2013, from so much of an order of the Supreme Court, Nassau County (Bucaria,J.), entered April 28, 2010, as denied that branch of its motion which was pursuant toCPLR 3211 (a) to dismiss the amended complaint insofar as asserted against it.
Ordered that the order is affirmed insofar as appealed from, with costs.
This action involves losses sustained by an investment fund which invested with thefirm of Bernard Madoff, who was convicted of crimes related to his operation of a Ponzischeme. The plaintiffs are members of Beacon Associates, LLC II (hereinafter Beacon),and are suing derivatively on behalf of Beacon. The plaintiffs originally asserted claimsagainst, among others, Beacon Associates Management Corp. (hereinafter BAMC),which is the managing member of Beacon, BAMC's principals, the investment consultantIvy Asset Management, LLC (hereinafter Ivy), and Friedberg, Smith & Co., P.C.(hereinafter Friedberg), Beacon's independent auditor.
According to the amended complaint, Ivy introduced and recommended Madoff toBAMC and its principals to be an investment manager for a prospective fund whichwould become Beacon. Beacon offered limited liability membership interests to qualifiedinvestors through a confidential offering memorandum dated June 15, 2000. Pursuant toan operating agreement, BAMC was made managing member of Beacon, with fullcontrol over the operation of Beacon, entitling BAMC to a managing member fee. WhenMadoff's Ponzi scheme was discovered in December 2008, approximately 75% ofBeacon's assets, valued at approximately $75 million, was invested with Madoff's firm.
The ninth cause of action of the amended complaint seeks to recover damagesagainst Friedberg based upon its alleged professional negligence in connection with theauditing services it provided to Beacon. Friedberg moved, inter alia, pursuant to CPLR3211 (a) to dismiss the [*2]amended complaint insofar asasserted against it, and the Supreme Court denied that branch of its motion.
Initially, the Supreme Court properly denied that branch of Friedberg's motion whichwas pursuant to CPLR 3211 (a) (3) to dismiss the amended complaint insofar as assertedagainst it for lack of standing. The plaintiffs sufficiently pleaded with particularity thatdemand upon BAMC to assert the claim against Friedberg on Beacon's behalf wouldhave been futile (see Business Corporation Law § 626 [c]; Bansbach v Zinn, 1 NY3d1, 9 [2003]; Marx v Akers, 88 NY2d 189, 200-201 [1996]). The amendedcomplaint alleges that BAMC had a direct financial interest in Friedberg's issuance ofclean audit opinions in the form of continued higher fees for maintaining the investmentwith Madoff, as well as inflated fees based on a percentage of Beacon's fictitious profits.Further, it alleges that BAMC's principals did not fully inform themselves about thechallenged transaction to the extent reasonably appropriate under the circumstances (see Matter of Comverse Tech., Inc.Derivative Litig., 56 AD3d 49, 55 [2008]).
The Supreme Court also properly denied that branch of Friedberg's motion whichwas pursuant to CPLR 3211 (a) (7) to dismiss the amended complaint insofar as assertedagainst it for failure to state a cause of action. On a motion to dismiss pursuant to CPLR3211 (a) (7), the complaint is to be afforded a liberal construction (see CPLR3026). The facts alleged are presumed to be true, the plaintiff is afforded the benefit ofevery favorable inference, and the court is to determine only whether the facts as allegedfit within any cognizable legal theory (see Leon v Martinez, 84 NY2d 83, 87[1994]; Thomas v LaSalle BankN.A., 79 AD3d 1015 [2010]).
Contrary to Friedberg's contention, the plaintiffs sufficiently pleaded that Friedberghad a duty to discover Madoff's fraud and that its negligence proximately caused Beaconto sustain damages. The scope of the duty owed by a defendant is defined by the risk ofharm which was reasonably foreseeable (see Sanchez v State of New York, 99NY2d 247, 252 [2002]). "Although the precise manner in which the harm occurred neednot be foreseeable, liability does not attach unless the harm is within the class ofreasonably foreseeable hazards that the duty exists to prevent" (Sanchez v State ofNew York, 99 NY2d at 252; see Di Ponzio v Riordan, 89 NY2d 578, 584[1997]). Fraud is within the class of reasonably foreseeable hazards that an auditor's dutyexists to prevent, and the amended complaint alleges departures from professionalstandards related to the auditing of securities investments. Further, the question ofwhether responsibility for Beacon's losses may be reasonably attributed to Friedberg'salleged negligence in light of Madoff's criminal scheme is an issue for determination bythe fact-finder (see Bell v Board of Educ. of City of N.Y., 90 NY2d 944, 947[1997]; Kush v City of Buffalo, 59 NY2d 26, 33 [1983]; Derdiarian v FelixContr. Corp., 51 NY2d 308, 315 [1980]).
Friedberg further contends that because the amended complaint alleges that BAMCcommitted wrongful acts that could be imputed to Beacon, the plaintiffs' derivative claimagainst Friedberg on behalf of Beacon is barred by the doctrine of in pari delicto. "Thedoctrine of in pari delicto is an equitable defense based on agency principles which bars aplaintiff from recovering where the plaintiff is itself at fault" (Symbol Tech., Inc. v Deloitte &Touche, LLP, 69 AD3d 191, 196 [2009]). The defense requires intentionalconduct on the part of the plaintiff or its agents (see Kirschner v KPMG LLP, 15 NY3d 446, 474 [2010]).Here, the amended complaint does not allege that BAMC intentionally providedinaccurate financial statements to Friedberg for auditing (cf. Symbol Tech., Inc. vDeloitte & Touche, LLP, 69 AD3d at 197-198) or engaged in any other intentionalconduct. Accordingly, Friedberg's contention in this regard is without merit. Rivera, J.P.,Leventhal, Chambers and Lott, JJ., concur.