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Matlack Leasing, LLC v. Morison Cogen

January 13, 2010

MATLACK LEASING, LLC; PENN INTERMODAL LEASING, INC.; AND VASILI KRISHNAMURTI; PLAINTIFFS,
v.
MORISON COGEN, LLP, AND JAMES M. BURNS, CPA, DEFENDANTS.



The opinion of the court was delivered by: DuBOIS, J.

MEMORANDUM

I. INTRODUCTION

This is an action against an accounting firm and one of its partners for breach of contract, fraudulent misrepresentation and tort liability. Presently before the Court is defendants' motion to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), all six counts of the Complaint for failure to state a claim and to dismiss Count VI, pursuant to Rule 12(b)(7) for failure to join a necessary party under Rule 19. For the reasons discussed below, the Court grants defendants' motion to dismiss Counts II and III of the Complaint. Defendants' motion is denied in all other respects.

II. BACKGROUND*fn1

Richard Parillo negotiated an agreement to purchase Matlack Leasing Corporation ("Matlack") in 2000. (Compl. ¶ 17.) In order to close on the purchase, Parillo sought and received a $1 million investment from Vasili Krishnamurti's investment company, Penn Intermodal Leasing ("Penn"). (Compl. ¶¶ 18 - 20.) In return for this investment, Penn received a 40% equity interest in Matlack. (Compl. ¶ 21.) Sometime around November 15, 2000, Matlack, Penn, and Parillo entered into a written Operating Agreement for Matlack. (Compl. ¶ 22.) This agreement formalized Penn's 40% interest in Matlack and appointed Parillo, who held the remaining 60%, as the company's Managing Member responsible for day-to-day operations. (Compl. ¶ 23 - 25.)

The Operating Agreement contained several clauses designed to protect Penn as the minority member. First, the agreement prohibited Parillo from approving any expense not included in Matlack's annual budget that exceeded $25,000 per expenditure or $250,000 in aggregate per year without the written consent of 90% of Matlack's members. (Compl. ¶ 26.) Second, the agreement stipulated that Matlack's approved annual budget would govern the use and expenditure of Matlack funds, except for individual expenditures of less than $25,000 or annual aggregate purchases less than $250,000. (Compl. ¶ 27.) Finally, the agreement provided that Parillo was prohibited from violating the term of the Operating Agreement without the prior written consent of 100% of Matlack's members. (Compl. ¶ 28.)

Matlack hired Morison Cogen ("MoCo") to audit its financial statement for the fiscal years 2001 through 2006. (Compl. ¶ 31-33.) James M. Burns served as the MoCo partner in charge of each of these audits. (Compl. ¶ 33.) After each of these audits, MoCo certified that Matlack's annual financial statements were audited in accordance with Generally Accepted Auditing Standards ("GAAS") and that the statements presented Matlack's financial position fairly in all material respects. (Compl. ¶ 35.)

Matlack's Operating Agreement gave Parillo the authority to make distributions from Matlack's cash flow. (Compl. ¶ 105.) When exercising this authority Parillo was required to make the distributions in proportion to the members' percentages of ownership: Parillo was to receive 60% of any distribution, Penn 40%. (Compl. ¶ 106.)

Plaintiffs allege that Parillo distributed money to himself, but never to Penn, in a series of allegedly improper transactions designed to finance several businesses owned and operated entirely by Parillo. First, the Complaint alleges that between 2001 and 2006 Parillo used Matlack funds to purchase property, capital, and to pay salaries and expenses for businesses owned entirely by Parillo. These businesses included Brite Clean, LLC ("BCL"), Brite Clean, Inc. ("BCI"), Brite Clean, NJ, Inc. ("BCNJ"), US Liquids Terminal Services Inc. ("US Liquids"), Brite Clean Houston ("BCH"), RAP Beaumont Properties, LP, ("RAP-BP") and Brite Clean Chicago, LLC ("BCC"). (Compl. ¶¶ 36-98.) Penn did not approve these purchases, did not receive an equity stake in the purchased companies, and did not receive its 40% share of the money Parillo distributed to himself in order to make these purchases. (Compl. ¶ 45, 48 - 50, 52, 62, 65, 66, 75 - 78, 83, 85, 95, 97, 113(b) - (g), 114.) Second, Parillo and BCH took improper loans from Matlack and never paid them back. (Compl. ¶¶ 99 - 104, 113(h).) Third, between April 13, 2006 and October 9, 2006, Parillo distributed $952,110.60 of Matlack funds to himself, but not to Penn. (Compl. ¶¶ 105 - 112.) Fourth, in 2000, Parillo issued checks from Matlack to himself for a total of $59,000 of "financing costs" that are alleged to have actually been disguised contributions to Parillo. (Compl. ¶ 113(a).) Finally, Parillo used Matlack's American Express credit card for personal expenses and for expenses related to his various businesses. (Compl. ¶ 113(i).) All told, plaintiffs allege that they are entitled to 40% of the amount of these distributions -- a sum in excess of $1 million. (Compl. ¶115.)

Sometime around February 2, 2007, Krishnamurti agreed to purchase Parillo's 60% membership interest in Matlack. (Compl. ¶ 116.) Krishnamurti determined the purchase price for Parillo's interest by relying, in part, on Matlack's audited financial statements. (Compl. ¶ 119.) Because these statements did not disclose the improper distributions made to Parillo's side-businesses, or the loans, credit-card purchases and "finance fees" paid to Parillo, Krishnamurti alleges that he paid much more for Parillo's interest than he otherwise would have. (Compl. ¶ 121.)

Plaintiffs allege that they could not have discovered Parillo's undisclosed distributions from reading Matlack's financial statements, in part because Matlack's MoCo-audited financial statements did not contain any "related party" disclosures before 2006. (Compl. ¶¶ 125, 126.) When related party disclosures were made in Matlack's 2006 statement, they were in a summary form that did not identify the entities involved or the amounts of the transactions. (Compl. ¶127). Plaintiffs acquired control of Matlack's electronic and paper records sometime around April 30, 2007. (Compl. ¶ 122.) They allege that they did not discover the improper BCL, BCNJ, and some of the BCH transfers until Autumn 2007 and did not discover other BCH transfers, the RAP-BP and BCC transfers until Spring 2008. (Compl. ¶ 128.) After discovering the improper transfers, plaintiffs filed suit against Parillo and each of the various Brite Clean entities. (Compl. ¶ 129).

The claims in plaintiffs' Complaint stem from the actions of MoCo and Burns. Plaintiffs allege that (1) MoCo and Burns know about BCI and BCL as "related parties" at the time of the 2001 audit, (2) MoCo and Burns served as accountants for the Brite Clean entites, and (3) MoCo served as Parillo's personal accountant. (Compl. ¶¶ 132 -135.) Because of these relationships, MoCo had access to the financial books and records of Parillo and the Brite Clean businesses and access to Brite Clean employees. (Compl. ¶ 136.)

In Count One of the Complaint, Matlack claims that it suffered over $1 million of losses as a result of MoCo and Burns's professional negligence in preparing Matlack's financial statements in the years 2001 through 2006. (Compl. ¶¶ 137 - 144.)

In Count Two of the Complaint, Matlack alleges that MoCo breached a contract between the organizations to provide accounting and auditing services, and that this breach caused Matlack the loss of valuable assets and funds, lost opportunities to develop its business, and lost opportunities to stop Parillo from creating losses, which exceed $1 million dollars. (Compl. ¶145 - 151.)

Penn alleges in Count Three of the Complaint that it was a third-party beneficiary of the contract between Matlack and MoCo. (Compl. ¶ 157.) It further alleges that it relied on MoCo's financial statements, that MoCo knew Penn would rely on the statements, that the circumstances of MoCo's retention by Matlack indicate that MoCo intended Penn to be a beneficiary of MoCo's auditing agreement with Matlack, and that Penn was damaged by an amount in excess of $1 million when MoCo breached its contract. (Compl. ¶ 158, 159.)

Count Four of the Complaint is an allegation of negligent misrepresentation against MoCo by each of the plaintiffs. Plaintiffs allege that MoCo negligently supplied false information to the plaintiffs, that plaintiffs relied upon the statements, and that this reliance caused damages in excess of $1 million. (Compl. ¶ 160 - 170.)

In Count Five of the Complaint, plaintiffs allege that MoCo fraudulently misrepresented Matlack's financial condition in the 2001 through 2006 audits. Plaintiffs justifiably relied on this misrepresentation, which caused damages in excess of $1million. (Compl. ¶ 171 - 177.)

Finally, Count Six of the Complaint is a claim by the plaintiffs that MoCo and Burns aided and abetted Parillo's breach of fiduciary duty, an act that caused damages to the plaintiffs in excess of $1 million. (Compl. ¶ 178 - 186.)

III. JURISDICTION

Matlack is a limited liability company organized under the laws of Pennsylvania. (Compl. ¶ 9). Neither the Supreme Court or the Third Circuit has addressed the question of how to determine the citizenship of a limited liability company. Kimberly-Clark Pennsylvania, LLC v. Delaware Reg'l Water Quality Control Auth., 527 F. Supp. 2d 430, 432-433 (E.D. Pa. 2007). However, in Carden v. Arkoma Assocs., the Supreme Court held that a limited partnership shares the citizenship of each of its partners. 494 U.S. 185, 195-96 (1990). Subsequently, the Third Circuit explained that "it is clear that Carden tells us that a court must take into account not less than all of the entities' members when determining the citizenship of an artificial entity." Emerald Investors Trust v. Gaunt Parsippany Partners, 492 F. 3d 192, 205 (3d Cir. 2007).

Currently, Matlack's sole member is Penn, a Delaware Corporation with its principal place of business in New York. (Compl. ¶ 8). The citizenship of corporations, unlike the citizenship of limited liability companies, is specified by statute. According to 28 U.S.C. § 1332(c), corporations are citizens of the states in which they are incorporated and of the states in which they have their principal place of business. Accordingly, Penn is a citizen of both Delaware and New York. Because, under Carden and Emerald Investors, Matlack is a citizen of all of the states of which its members are citizens, Matlack is a citizen of both Delaware and New York. There is no dispute that plaintiff Krishnamurti is a citizen of New York. (Compl. ¶ 7.)

MoCo is a limited liability partnership, (Compl. ΒΆ 10), and, like Matlack, it is an artificial entity whose citizenship is determined by reference to the citizenship of all of its members. Each of its members, including defendant Burns, is a citizen of either New Jersey or Pennsylvania. Because the dispute concerns an amount controversy greater than $75,000 and there is complete diversity between the parties -- plaintiffs Matlack and Penn are citizens of New York and Delaware and plaintiff Krishnamurti is a citizen of New York, (Compl. ...


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