KATZ v. HOLZBERG et al

Filing 126

OPINION/ORDER granting in part and denying in part 113 Motion to Dismiss the Amended Cross-Claims of Defendants McEnerney, Brady & Company, LLC, Hodulik & Morrison, P.A., and David Roberts; that Defendant Roberts cross-claims for indemnification and contribution against the HHI Board Defendants are DISMISSED; that Defendant H&Ms cross-claim for indemnification against the HHI Board Defendants is DISMISSED; that Defendant McEnerneys cross-claim for indemnification against the HHI Board Defendants is DISMISSED. Signed by Judge Faith S. Hochberg on 11/4/13. (DD, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

BERNARD A. KATZ, IN HIS CAPACITY AS
DEBTOR REPRESENTATIVE AND
LIQUIDATING TRUSTEE, OF THE ESTATE
HUDSON HEALTHCARE, INC.,
Plaintiff,
v.
HARVEY HOLZBERG, et al.,
Defendants.

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: Civil Case No. 13-1726 (FSH)
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: OPINION & ORDER
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: Date: November 4, 2013
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HOCHBERG, District Judge:
This matter comes before the Court upon Defendants Fred Desanti, Andrew Greene,
Anthony Leitner, and Spiros Hatiras’s (“the HHI Board Defendants”) Motion to Dismiss the
Amended Cross-Claims of Defendants McEnerney, Brady & Company, LLC, Hodulik &
Morrison, P.A., and David Roberts (Dkt. No. 113). The Court has reviewed the submissions of
the parties and considers the motions on the papers pursuant to Federal Rule of Civil Procedure
78.
I.

BACKGROUND 1
Plaintiff, Bernard A. Katz, in his capacity as Debtor Representative and Liquidating

Trustee of the estate of Hudson Healthcare, Inc. (“HHI” or the “Debtor”), brought this action
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A more detailed factual background may be found in the Court’s prior Opinion addressing the
Former Authority Board Members (Dkt. No. 114).

against several parties for alleged injuries caused to HHI and its creditors. The allegations by
Plaintiff against the HHI Board Defendants, Hodulik & Morrison, P.A. (“H&M”) and
McEnerney, Brady & Company, LLC (“McEnerney”) are relevant to the present motion to
dismiss. Plaintiff alleges that H&M and McEnerney both committed accountant malpractice—
H&M with respect to its audit of HHI’s 2007 and 2008 financial statements and McEnerney with
respect to its audit of HHI’s 2009 financial statements. (Dkt. No. 1, Counts IX and X.) Plaintiff
alleges that these failures caused HHI damage by allowing HHI to continue to operate and accrue
expenses it was unable to pay, deepening its insolvency. (Id.) Plaintiff alleges that the HHI
Board Defendants breached their fiduciary duties to HHI between 2007 and 2010 by, inter alia,
failing to hold regular board meetings, failing to require regular document financial reporting,
and wasting corporate assets by continuing to pay Defendant DiVito even after firing him. (Dkt.
No. 1, Counts III and V.) Plaintiff alleges that this breach of fiduciary duty allowed the hospital
to continue operating at a substantial loss, permitted HHI’s insolvency to deepen, and caused
HHI to accrue liabilities that it was unable to satisfy. (Id.)
At issue are cross-claims for indemnification and contribution filed by Defendants
McEnerney, H&M, and David Roberts (“Roberts”) against the HHI Board Defendants. Roberts
and McEnerney have not filed oppositions to the HHI Board Defendants’ motion to dismiss their
cross claims.
II.

STANDARD OF REVIEW
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 129 S.
Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also
Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (“[S]tating . . . a claim requires

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a complaint with enough factual matter (taken as true) to suggest the required element. This
does not impose a probability requirement at the pleading stage, but instead simply calls for
enough facts to raise a reasonable expectation that discovery will reveal evidence of the
necessary element.”) (internal quotations omitted).
When considering a motion to dismiss under Iqbal, the Court must conduct a two-part
analysis. “First, the factual and legal elements of a claim should be separated. The District
Court must accept all of the complaint’s well-pleaded facts as true, but may disregard any legal
conclusions. Second, a District Court must then determine whether the facts alleged in the
complaint are sufficient to show that the plaintiff has a plausible claim for relief.” Fowler v.
UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009) (internal citations and quotations
omitted). “A pleading that offers labels and conclusions or a formulaic recitation of the elements
of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertions
devoid of further factual enhancement.” Iqbal, 129 S. Ct. at 1949 (internal quotations and
alterations omitted).
“As a general matter, a district court ruling on a motion to dismiss may not consider
matters extraneous to the pleadings.

However, an exception to the general rule is that a

‘document integral to or explicitly relied upon in the complaint’ may be considered ‘without
converting the motion [to dismiss] into one for summary judgment.’” In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (internal citations omitted) (emphasis in
original).
III.

DISCUSSION
The HHI Board Defendants move to dismiss the indemnification and contribution cross-

claims of Defendants Roberts, McEnerney, and H&M. The HHI Board Defendants argue that

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the indemnification cross-claims should be dismissed for two reasons: (1) no “special legal
relationship” exists among the HHI Board Defendants and the cross-claimants, and (2) the crossclaimants cannot be passively or vicariously liable to Plaintiff and, therefore, cannot seek
indemnification. The HHI Board Defendants argue that the contribution cross-claims should be
dismissed for two reasons: (1) there is no joint tortfeasor liability among the cross-claimants and
the HHI Board Defendants, and (2) the HHI Board Defendants and the cross-claimants are not
responsible for the “same injury” to Plaintiff. The Court addresses the cross-claimants separately
below.
a. H&M’s Cross-Claims
H&M is the only defendant that opposes the HHI Board Defendants’ motion to dismiss
these cross-claims for indemnification and contribution.

H&M argues that a special legal

relationship exists between H&M and the HHI Board Defendants such that a cross-claim for
indemnification is properly pled. It also argues that its amended cross-claim for contribution
pleads sufficient facts to support the allegation that the HHI Board Defendants are joint
tortfeasors with H&M.
i. Indemnification
“Indemnification is available under New Jersey law in two situations: when a contract
explicitly provides for indemnification or when a special legal relationship between the parties
creates an implied right to indemnification.” Allied Corp. v. Frola, 730 F. Supp. 626, 639
(D.N.J. 1990); see also Ferriola v. Stanley Fastening Sys., L.P., Civ. No. 04-4043, 2007 WL
2261564, at *2 (D.N.J. Aug. 1, 2007); Ramos v. Browning Ferris Indus. of S. Jersey, Inc., 103
N.J. 177, 189 (1986). But a party is only entitled to indemnification if they are without fault or
their liability is purely constructive, secondary, or vicarious. Allied, 730 F. Supp. at 639; see

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also Ramos, 103 N.J. at 189-91 (“As a general rule, a third party may recover on a theory of
implied indemnity from an employer only when a special legal relationship exists between the
employer and the third party, and the liability of the third party is vicarious.”).
For a relationship to be a “special legal relationship,” it must be “sufficient to impose
certain duties and [such that] a subsequent breach of those duties [] permits an implied
indemnification.” Ruvolo v. U. S. Steel Corp., 133 N.J. Super. 362, 367 (Ch. Div. 1975).
“Examples of the special relationship that will support a third party’s claim for indemnification
include that of principal and agent, bailor and bailee, and lessor and lessee.” Ramos, 103 N.J. at
189 (internal citations omitted).

Indeed, “implied indemnification by way of a special

relationship is a ‘narrow doctrine’ that is not frequently stretched beyond the examples of
principal-agent, employer-employee, lessor-lessee, and bailor-bailee.” SGS U.S. Testing Co.,
Inc. v. Takata Corp., Civ. No. 09-6007, 2012 WL 3018262, at *5 (D.N.J. July 24, 2012).
H&M does not allege that the HHI Board Defendants have express indemnification
obligations through a contract between the parties. Instead, H&M alleges that a special legal
relationship existed between H&M and the HHI Board Defendants due to duties and obligations
between the parties. (Dkt. No. 101, ¶ 93.) Specifically, H&M alleges the following: (1)
pursuant to an agreement with H&M, the HHI Board Defendants were required to establish and
maintain effective internal controls (including monitoring ongoing activities), were responsible
for the fair presentation in the financial statements of the financial position, were responsible for
changes in financial position and cash flows in conformity with U.S. generally accepted
accounting principles, were responsible for evaluating the adequacy of the results of H&M’s
services, and accepting responsibility for those services (Dkt. No. 101, ¶ 91); and (2) the HHI
Board Defendants owed a duty to H&M whereby they were responsible for making all financial

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records and related information available to H&M and for the accuracy and completeness of that
information, adjusting the financial statements to correct material misstatements, for the design
and implementation of programs and controls to prevent and detect fraud, for informing H&M
about all known or suspected fraud or illegal acts affecting HHI, and ensuring that HHI complies
with applicable laws and regulations (Dkt. No. 101, ¶ 92). 2
H&M argues that its contract with HHI 3 to provide audit services created the required
“special legal relationship” for implied indemnification. Auditor-auditee is not one of the four
traditional relationships that qualify as “special legal relationships” under New Jersey law. See
SGS U.S. Testing, 2012 WL 3018262, at *5 (listing principal-agent, employer-employee, lessorlessee, and bailor-bailee as the traditional relationships).

This relationship is more closely

analogous to the vendor-vendee relationship that has been rejected by New Jersey courts. 4
Ramos, 103 N.J. at 189; see also Mayorga v. Russo Family Ltd. P’ship, Civ. No. A-2124-09T3,
2010 WL 2471419, at *3 (N.J. Super. Ct. App. Div. June 21, 2010); Robinson v. Rheon
Automatic Mach. Co., Ltd., Civ. No. 10-1916, 2011 WL 832241, *2-*3 (D.N.J. Mar. 3, 2011).
Specifically, the fact that HHI contracted with H&M to conduct auditing services does not imply
that there was a “special legal relationship” between the HHI Board Defendants and H&M such
that implied indemnification should exist. Even assuming, without deciding, that there was a
contract directly between the HHI Board Defendants and H&M, the mere presence of a
contractual relationship is not enough, by itself, to establish the “special legal relationship,”
2

Although these duties are disputed by the parties, the Court will accept them as true for
purposes of evaluating this motion to dismiss H&M’s cross-claims.
3

The parties dispute whether the contract was between HHI and H&M or the HHI Board
Defendants and H&M.
4

Courts have also rejected the argument that a “longstanding business relationship” can support
a “special legal relationship.” SGS U.S. Testing Co., 2012 WL 3018262, at *5.
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whereby an implied right of indemnification might arise. Miller v. Hall Bldg. Corp., 210 N.J.
Super. 248, 251 (Ch. Div. 1985). Notably, H&M has failed to cite a single case where an
auditor-auditee relationship was found to be a “special legal relationship” such that an implied
right of indemnification existed.

This is not surprising, as such an implied right of

indemnification would create negative incentives for auditors, create a moral hazard, and
undermine the very purpose of an audit. Without the presence of a “special legal relationship,”
H&M’s cross-claim for indemnification must be dismissed.
The HHI Board Defendants also argue that H&M’s cross-claim for indemnification
should be dismissed because H&M cannot be passively or vicariously liable to Plaintiff for the
claims asserted against them.

As noted above, in order to state a claim for implied

indemnification, the cross-claimant must be without fault.

Ramos, 103 N.J. at 188-89.

Plaintiff’s claim against H&M is based on accountant malpractice. (See Dkt. No. 1, Count IX.)
In order to prove a claim for accountant malpractice, Plaintiff “must prove the applicable
standard of care, that a deviation has occurred, and that the deviation proximately caused the
injury.” Verdicchio v. Ricca, 179 N.J. 1, 23 (2004) (internal citations omitted). Thus, to incur
liability under the complaint, H&M would have to be found at fault. Under these circumstances,
H&M is precluded from claiming indemnity on the basis of vicarious or constructive liability.
See In re Tarragon Corp., Civ. No. 09-10555, 2010 WL 3928496, *5 (Bankr. D.N.J. Oct. 1,
2010) (“To incur liability under the Association’s complaint would necessitate a finding of fault.
Thus, the Third-Party Plaintiffs are precluded from indemnity on grounds of vicarious or
constructive liability.”); see also New Jersey Office Supply, Inc. v. Feldman, Civ. No. 89-3990,
1990 WL 74477, at *4 (D.N.J. June 4, 1990) (rejecting a claim of indemnification on the basis
that to be found liable for fraud, conversion, or breach of fiduciary duty there would necessarily

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be a finding of intentional wrongdoing); Arcell v. Ashland Chem. Co., Inc., 152 N.J. Super. 471,
493 (Ch. Div. 1977) (“Defendants’ liability, if any, cannot be viewed as constructive, vicarious
or imputive. It is primary and they will be held responsible only for their own conduct. Their
allegations of various derelictions by [another party] may well provide them with a defense, but
these allegations cannot serve as a basis for a claim of indemnification.”). H&M’s conclusory
statement that their liability would be secondary or vicarious without factual support need not be
accepted by the Court. Iqbal, 129 S. Ct. at 1949. H&M’s cross-claim must be dismissed on this
separate and independent ground. 5
ii. Contribution
The HHI Board Defendants move to dismiss H&M’s cross-claim for contribution for two
reasons. First, the HHI Board Defendants argue that they are not joint tortfeasors with H&M.
Second, the HHI Board Defendants argue that they did not cause the same injury.
Under the New Jersey Joint Tortfeasors Contribution Law (“JTCL”), liability for
contribution exists among “joint tortfeasors.” N.J.S.A. § 2A:53A-2 (“The right of contribution
exists among joint tortfeasors.”). The act defines “joint tortfeasors” as “two or more persons
jointly or severally liable in tort for the same injury to person or property.” N.J.S.A. § 2A:53A1. “[T]he very essence of the action of contribution is common liability.” Tomkovich v. Pub.
Serv. Coordinated Transp., 61 N.J. Super. 270, 274 (App. Div. 1960) (internal quotation marks
omitted). Moreover, “the true test [for joint tortfeasor contribution] is joint liability and not joint,
common or concurrent negligence.” Cherry Hill Manor Associates v. Paul Faugno, Rogan &
Faugno, Harleysville Ins. Co. of New Jersey, 182 N.J. 64, 72 (2004) (emphasis in original); see
also Markey v. Skog, 129 N.J. Super. 192, 200 (Law Div. 1974) (“It is common liability at the
5

Indeed, H&M failed to respond to the HHI Board Defendants’ arguments with respect to
vicarious liability at all.
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time of the accrual of plaintiff’s cause of action which is the Sine qua non of defendant’s
contribution right.”).

“Where the pleadings show separate torts, severable as to time and

breaching different duties, rather than a joint tort, dismissal of the third-party action is
appropriate.” Finderne Mgmt. Co., Inc. v. Barrett, 355 N.J. Super. 197, 208 (App. Div. 2002).
But there is no requirement that the parties be liable for the same tort. See Cartel Capital Corp.
v. Fireco of New Jersey, 81 N.J. 548, 566-67 (1980).
In order to trigger the provisions of the JTCL, the act of the alleged joint tortfeasor must
have also resulted in the “same injury.” Cherry Hill, 182 N.J. at 74. “[T]he term ‘same injury’
in its definition of joint tortfeasor relate[s] to the harm the tort victim suffered and not to the
cumulative damages the tort victim sustained as a result of multiple disparate injuries caused by
multiple tortfeasors.” Id., at 75; see also Finderne Mgmt. Co., 355 N.J. Super. at 209 (rejecting
the argument that the cross-claim defendant aggravated the alleged losses thereby creating a
single economic loss as the “same injury”).
Although Plaintiff’s allegations against the HHI Board Defendants and H&M differ, there
is no requirement that the parties be liable for the same tort in order to state a claim for
contribution. See Cartel Capital, 81 N.J. at 566-67. It is possible that H&M may be able to
show that the HHI Board Defendants are joint tortfeasors responsible for the same alleged injury
to Plaintiff. 6 Indeed, their alleged tortious acts overlap in time and are alleged to have caused the

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The HHI Board Defendants argue that if the parties commit different torts, they cannot be
“joint tortfeasors.” As support for this proposition, they cite the following cases: Ciemniecki v.
Parker McCay P.A., Civ. No. 09-6450, 2010 WL 4746214 (D.N.J. Nov. 15, 2010); Brunetti v.
Bocra, No. L-234-07, 2009 WL 2844405 (N.J. Law Div. Aug. 18, 2009); Mathis v. Camden
Cnty., Civ. No. 08-6129, 2009 WL 4667094 (D.N.J. Dec. 3, 2009); Finderne, 355 N.J. Super. at
209; Prospect Ashley Condo. Ass’n, Inc. v. Lookout Builders, Inc., A-2494-06T5, 2008 WL
108178 (N.J. Super. Ct. App. Div. Jan. 11, 2008). First, this proposition is wrong as a matter of
law. Parties can be joint tortfeasors even if they are accused of committing different torts. See
Cartel Capital, 81 N.J. at 566-67. Second, all of the cases the HHI Board Defendants rely on are
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same injury, to wit, the deepening of HHI’s insolvency and its inability to satisfy its liabilities.
(Dkt. No. 1, Count III and Count IX.) Under the facts as alleged, H&M states a claim for relief
that is plausible on its face, and the HHI Board Defendants’ motion to dismiss H&M’s crossclaim for contribution is denied.
b. McEnerney’s Cross-Claims
Defendant McEnerney failed to oppose the HHI Board Defendants’ motion to dismiss its
amended cross-claims.
i. Indemnification
McEnerney’s cross-claim for indemnification fails to provide anything more than bare
conclusions and a recitation of legal elements. (See Dkt. No. 103, ¶ 10.) This is not enough to
survive a motion to dismiss. Iqbal, 129 S. Ct. at 1949; see also Ciemniecki, 2010 WL 4746214,
at *5-*6 (dismissing a similar cross-claim for indemnification); Ford Motor Co. v. Edgewood
Properties, Inc., Civ. No. 06-1278, 2008 WL 4559770, at *18 (D.N.J. Oct. 8, 2008) (same);
Mathis, 2009 WL 4667094, at *12 (same).
McEnerney’s vague statement that “[McEnerney] is also entitled to indemnification and
contribution pursuant to any applicable contracts or agreements between the parties” does not
provide facts to raise McEnerney’s cross-claims to the level of “plausible” on the face of the
cross-claim. Iqbal, 129 S. Ct. at 1949; see also Standard Fire Ins. Co. v. MTU Detroit Diesel,
Inc., Civ. No. 07-3827, 2010 WL 1379751, at *6 (D.N.J. Mar. 30, 2010). This allegation
distinguishable because they involve torts that were separable in time or involve torts that caused
different injuries. See Ciemniecki, 2010 WL 4746214, at *4-*5 (noting there were different
injuries, that the cross-claim lacked factual support, and dismissing without prejudice); Brunetti,
2009 WL 2844405, at *7 (noting the torts were separated in time); Mathis, 2009 WL 4667094, at
*11-*12 (noting the torts were separated by a decade); Finderne, 355 N.J. Super. at 209 (noting
the torts were separated by time and caused different injuries); Prospect Ashley Condo. Ass’n,
2008 WL 108178 (noting the cross-claims were never served and that the cross-claimant had no
evidence to support its theory).
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contains no facts to support the existence of a contract, let alone the existence of one with an
indemnification provision that could apply to the HHI Board Defendants. Indeed, McEnerney’s
new allegation directly contradicts its prior position that it did not have a contract with the HHI
Board Defendants. (See Dkt. No. 86 at 15 (“McEnerney concedes that it does not have a contract
with the individual HHI Board Defendants, and thus, any claim for indemnification cannot be
predicated upon a contract.”).) In addition, McEnerney’s reliance on future discovery to uncover
a possible basis for indemnification is not a ground to survive a motion to dismiss. See Ogbin v.
GE Money Bank, Civ. No. 10-5651, 2011 WL 2436651, n.3 (D.N.J. June 13, 2011) (“A
plaintiff’s request for discovery cannot serve as a basis to deny a defendant’s motion to dismiss,
as the filing of such a motion serves to protect a defendant from being subjected to discovery,
during which a plaintiff hopes that facts will be unearthed to support plaintiff’s speculation.”);
see also Giovanelli v. D. Simmons Gen. Contracting, Civ. No. 09-1082, 2010 WL 988544, at *5
(D.N.J. Mar. 15, 2010) (“Discovery . . . cannot serve as a fishing expedition through which
plaintiff searches for evidence to support facts he has not yet pleaded.”) McEnerney’s crossclaim for indemnification is dismissed.
ii. Contribution
Like H&M’s cross-claim for contribution, McEnerney’s cross-claim for contribution
against the HHI Board Defendants includes sufficient factual allegations to support a claim under
the JTCL. It is possible that McEnerney may be able to show that the HHI Board Defendants are
joint tortfeasors responsible for the same harm. The claims against these defendants overlap in
time and allege the same injury (i.e., the deepening of HHI’s insolvency). The HHI Board
Defendants’ motion to dismiss McEnerney’s contribution cross-claim is denied.

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c. Roberts Cross-Claims
Roberts’ cross-claims for indemnification and contribution were premised on his liability
to Plaintiff. Because the Court dismissed Plaintiff’s only claim against Roberts, Roberts’ crossclaims against the HHI Board Defendants, which are predicated on his liability to Plaintiff, are
also dismissed.
IV.

CONCLUSION & ORDER
For the reasons stated above;
IT IS on this 4th day of November 2013,
ORDERED that the HHI Board Defendants’ Motion to Dismiss the Amended Cross-

Claims of Defendants McEnerney, Brady & Company, LLC, Hodulik & Morrison, P.A., and
David Roberts (Dkt. No. 113) is GRANTED-IN-PART AND DENIED-IN-PART; and it is
further
ORDERED that Defendant Roberts’ cross-claims for indemnification and contribution
against the HHI Board Defendants are DISMISSED; and it is further
ORDERED that Defendant H&M’s cross-claim for indemnification against the HHI
Board Defendants is DISMISSED; and it is further
ORDERED that Defendant McEnerney’s cross-claim for indemnification against the
HHI Board Defendants is DISMISSED.

IT IS SO ORDERED.
/s/ Faith S. Hochberg__________
Hon. Faith S. Hochberg, U.S.D.J.

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