ROSENBACH v. DIVERSIFIED GROUP, INC

Factual and Procedural Background

In a prior arbitration proceeding, defendants and third-party plaintiffs, collectively referred to as DGI, were found to have defrauded plaintiffs by selling a tax shelter investment that was later disallowed by the IRS. DGI alleged that plaintiffs’ losses were partly caused by negligent tax advice from their attorneys and accountants. Consequently, DGI asserted third-party claims for contribution against Kostelanetz Fink LLP (KF), plaintiffs' tax lawyers, and Weiss Company (Weiss), the accounting firm that prepared the plaintiffs' relevant tax returns. The Supreme Court, New York County, denied motions by KF and Weiss to dismiss these contribution claims, and this appeal challenges that denial.

Legal Issues Presented

Whether the doctrine of collateral estoppel bars DGI’s contribution claims against KF and Weiss.

Whether DGI’s prior fraud liability precludes contribution claims against KF and Weiss, who are alleged to have been negligent rather than fraudulent.

Whether the doctrine of unclean hands bars DGI's contribution claims under CPLR article 14.

Whether the doctrine of in pari delicto, as interpreted in Kirschner v KPMG LLP, requires dismissal of DGI’s contribution claims against KF and Weiss.

Whether the third-party complaints sufficiently state causes of action against KF and Weiss based on alleged omissions and unreasonable tax advice.

Arguments of the Parties

Kostelanetz Fink LLP and Weiss Company

Argued that the doctrine of collateral estoppel bars DGI’s contribution claims because KF’s and Weiss’s liability was necessarily decided in the prior arbitration.

Contended that DGI’s established fraud liability precludes contribution claims against parties alleged only to have been negligent.

Asserted that the doctrine of unclean hands bars contribution claims by DGI.

Relied on Kirschner v KPMG LLP to argue that the doctrine of in pari delicto bars DGI’s claims because DGI was an active wrongdoer.

Moved to dismiss the third-party claims for failure to state valid causes of action.

Defendants/Third-Party Plaintiffs (DGI)

Argued that collateral estoppel does not apply because KF’s and Weiss’s liability was not necessarily decided in the prior arbitration.

Maintained that contribution claims are permissible even when the primary party is liable for fraud and the others are alleged to be negligent.

Asserted that CPLR article 14 codifies equitable contribution among tortfeasors, precluding dismissal based on unclean hands.

Distinguished Kirschner by emphasizing that contribution claims seek reimbursement for payments beyond equitable shares, not recovery for one’s own wrongdoing.

Alleged that KF failed to disclose material legal information, and Weiss lacked a reasonable basis for tax shelter advice, establishing valid causes of action.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Matter of Hofmann, 287 AD2d 119, 123	Collateral estoppel requires that an issue was necessarily decided in a prior proceeding.	Used to reject collateral estoppel as a bar because KF’s and Weiss’s liability was not necessarily decided in the prior arbitration.
Corva v United Servs. Auto. Assn., 108 AD2d 631; Taft v Shaffer Trucking, 52 AD2d 255, 259-260	Contribution claims are not barred simply because one party was found liable for fraud while others are negligent.	Supported the principle that differing degrees or types of fault do not bar contribution claims.
Dole v Dow Chem. Co., 30 NY2d 143; Board of Educ. of Hudson City School Dist. v Sargent, Webster, Crenshaw Folley, 125 AD2d 27, 29; affd 71 NY2d 21	CPLR article 14 codifies equitable contribution among tortfeasors regardless of fault type or degree.	Confirmed that unclean hands doctrine does not bar contribution claims under CPLR article 14.
Kirschner v KPMG LLP, 15 NY3d 446	Doctrine of in pari delicto bars recovery by a wrongdoer for injuries resulting from its own intentional wrongdoing.	Distinguished by the court as inapplicable to contribution claims seeking reimbursement among joint tortfeasors.
Chemical Bank v Stahl, 237 AD2d 231, 232	Defines in pari delicto as requiring immoral or unconscionable conduct equal or greater than the party asserting it.	Referenced to explain the in pari delicto doctrine’s scope.
Kelly v Long Is. Light. Co., 31 NY2d 25, 29	Contribution claims are permitted among joint or concurrent tortfeasors regardless of fault degree or nature.	Supported the longstanding principle permitting contribution claims among tortfeasors.
Mas v Two Bridges Assoc., 75 NY2d 680, 689-690; County of Westchester v Welton Becket Assoc, 102 AD2d 34, 46, affd 66 NY2d 642	Contribution applies among tortfeasors who are in pari delicto, involving apportionment of responsibility.	Used to affirm that contribution claims are viable even when tortfeasors share equal fault.
Rosner v Foley, 65 NY2d 736, 738	Distinguishes claims involving material omissions from mere errors of judgment.	Applied to determine that KF’s alleged failure to disclose material legal information states a cause of action.

Precedent

Rule or Principle Cited For

Application by the Court

Matter of Hofmann, 287 AD2d 119, 123

Collateral estoppel requires that an issue was necessarily decided in a prior proceeding.

Used to reject collateral estoppel as a bar because KF’s and Weiss’s liability was not necessarily decided in the prior arbitration.

Corva v United Servs. Auto. Assn., 108 AD2d 631; Taft v Shaffer Trucking, 52 AD2d 255, 259-260

Contribution claims are not barred simply because one party was found liable for fraud while others are negligent.

Supported the principle that differing degrees or types of fault do not bar contribution claims.

Dole v Dow Chem. Co., 30 NY2d 143; Board of Educ. of Hudson City School Dist. v Sargent, Webster, Crenshaw Folley, 125 AD2d 27, 29; affd 71 NY2d 21

CPLR article 14 codifies equitable contribution among tortfeasors regardless of fault type or degree.

Confirmed that unclean hands doctrine does not bar contribution claims under CPLR article 14.

Kirschner v KPMG LLP, 15 NY3d 446

Doctrine of in pari delicto bars recovery by a wrongdoer for injuries resulting from its own intentional wrongdoing.

Distinguished by the court as inapplicable to contribution claims seeking reimbursement among joint tortfeasors.

Chemical Bank v Stahl, 237 AD2d 231, 232

Defines in pari delicto as requiring immoral or unconscionable conduct equal or greater than the party asserting it.

Referenced to explain the in pari delicto doctrine’s scope.

Kelly v Long Is. Light. Co., 31 NY2d 25, 29

Contribution claims are permitted among joint or concurrent tortfeasors regardless of fault degree or nature.

Supported the longstanding principle permitting contribution claims among tortfeasors.

Mas v Two Bridges Assoc., 75 NY2d 680, 689-690; County of Westchester v Welton Becket Assoc, 102 AD2d 34, 46, affd 66 NY2d 642

Contribution applies among tortfeasors who are in pari delicto, involving apportionment of responsibility.

Used to affirm that contribution claims are viable even when tortfeasors share equal fault.

Rosner v Foley, 65 NY2d 736, 738

Distinguishes claims involving material omissions from mere errors of judgment.

Applied to determine that KF’s alleged failure to disclose material legal information states a cause of action.

Court's Reasoning and Analysis

The court began by rejecting the application of collateral estoppel, finding that KF’s and Weiss’s liability was not necessarily decided in the prior arbitration that found DGI liable for fraud. It further held that DGI’s fraud liability does not preclude contribution claims against parties alleged only to have been negligent, consistent with established New York law allowing contribution among tortfeasors regardless of fault degree or nature.

The court addressed the doctrine of unclean hands, concluding it does not bar contribution claims because CPLR article 14 codifies equitable contribution among tortfeasors. Regarding the in pari delicto defense, the court distinguished the present contribution claims from the direct recovery claims barred in Kirschner v KPMG LLP. It emphasized that in pari delicto prevents a wrongdoer from recovering for its own injuries but does not bar contribution claims seeking reimbursement among joint tortfeasors, even if they are in pari delicto.

Finally, the court found that the third-party complaints sufficiently state causes of action. KF is alleged to have failed to disclose material legal information, which is more than a mere error of judgment, and Weiss is alleged to have lacked a reasonable basis for believing the tax shelter would be accepted by the IRS, supporting claims of negligence.

Holding and Implications

The court unanimously affirmed the Supreme Court’s denial of the motions by Kostelanetz Fink LLP and Weiss Company to dismiss the third-party plaintiffs' contribution claims against them, with costs.

This decision allows DGI’s contribution claims to proceed against KF and Weiss, preserving the right of joint tortfeasors to seek equitable apportionment of damages regardless of differing degrees of fault or the presence of intentional wrongdoing by one party. The court did not establish new precedent but reaffirmed established principles governing contribution claims and the limited scope of the in pari delicto defense.

GARY ROSENBACH et al., Plaintiffs, v. THE DIVERSIFIED GROUP, INC., et al., Defendants. THE DIVERSIFIED GROUP, INC., et al., Third-Party Plaintiffs-Respondents-Appellants,

In a prior arbitration proceeding, defendants/third-party plaintiffs (collectively, DGI) were found to have defrauded plaintiffs by selling them a tax shelter investment that was subsequently disallowed by the IRS. DGI, alleging that plaintiffs' losses resulted in part from the negligent tax advice they received from their attorneys and accountants, asserts third-party claims for contribution against, inter alia, KF, plaintiffs' tax lawyers, and Weiss, the accounting firm that prepared plaintiffs' relevant tax returns. For the reasons set forth below, we affirm Supreme Court's denial of the respective motions by KF and Weiss to dismiss DGI's contribution claims against them.

The doctrine of collateral estoppel does not bar DGI's claims for contribution because the issue of KF's and Weiss's liability was not necessarily decided in the prior arbitration proceeding ( see Matter of Hofmann, 287 AD2d 119, 123). Contrary to KF's and Weiss's further contention, that DGI has been found liable for fraud, while KF and Weiss are alleged only to have been negligent, does not bar DGI's contribution claims ( see Corva v United Servs. Auto. Assn., 108 AD2d 631; Taft v Shaffer Trucking, 52 AD2d 255, 259-260, appeal dismissed 42 NY2d 974). Nor does the doctrine of unclean hands bar a claim for contribution, since the entire purpose of CPLR article 14 is to codify the changes in tort law as to equitable contribution among tortfeasors announced by the Court of Appeals in Dole v Dow Chem. Co. ( 30 NY2d 143; see Board of Educ. of Hudson City School Dist. v Sargent, Webster, Crenshaw Folley, 125 AD2d 27, 29, affd 71 NY2d 21).

We reject KF's argument that Kirschner v KPMG LLP ( 15 NY3d 446) requires dismissal of DGFs contribution claims. The doctrine of in pari delicto bars a party that has been injured as a result of its own intentional wrongdoing from recovering for those injuries from another party whose equal or lesser fault contributed to the loss ( see id. at 464 [in pari delicto "mandates that the courts will not intercede to resolve a dispute between two wrongdoers"]; Chemical Bank v Stahl, 237 AD2d 231, 232 [in pari delicto "requires immoral or unconscionable conduct that makes the wrongdoing of the party against which it is asserted at least equal to that of the party asserting it"]). In Kirschner, the Court of Appeals held, among other things, that in pari delicto survived the establishment of the comparative fault regime under CPLR 1411 because "there is no reason to suppose that the statute did away with commonlaw defenses based on intentional conduct, such as in pari delicto" ( 15 NY3d at 474).

Critically, the claims that the Kirschner Court found to be precluded by in pari delicto sought recovery for the wrongdoer's own injuries. In this case, by contrast, we are concerned with contribution claims under CPLR article 14 that seek reimbursement for the wrongdoer's payment of more than its alleged equitable share of the damages suffered by third parties. Ever since Dole was decided nearly 40 years ago, this state has permitted contribution claims "among joint or concurrent tortfeasors regardless of the degree or nature of the concurring fault" ( Kelly v Long Is. Light. Co., 31 NY2d 25, 29; see also Board of Educ. of Hudson City School Dist. v Sargent, Webster, Crenshaw Folley, 71 NY2d at 27 [CPLR 1401 "applies not only to joint tort-feasors, but also to concurrent, successive, independent, alternative, and even intentional tortfeasors"]). Indeed, the Court of Appeals has expressly recognized that contribution applies among tortfeasors "in pari delicto" ( Mas v Two Bridges Assoc., 75 NY2d 680, 689-690; see also County of Westchester v Welton Becket Assoc, 102 AD2d 34, 46, affd 66 NY2d 642 ["Contribution involves an apportionment of responsibility where wrongdoers are in pari delicto"]). Nothing in Kirschner indicates any change in New York's adherence to this long-standing principle.

Specifically, Kirschner held that in pari delicto barred claims asserted in the names of two corporations (in one case, by shareholders suing derivatively; in the other case, by a bankruptcy litigation trustee) against the corporations' outside advisors for failing to prevent fraudulent schemes perpetrated by corporate officers acting on behalf of the corporations. In each case, the misconduct of the corporate officers was found to be imputable to the corporation as a matter of law. Notably, the two hypothetical examples of the operation of in pari delicto posited in Kirschner both concerned a wrongdoer seeking recovery for his own injuries ( see 15 NY3d at 464 ["A criminal who is injured committing a crime cannot sue the police officer or security guard who failed to stop him; the arsonist who is singed cannot sue the fire department"]).

The third-party complaint states a cause of action against KF by alleging that the law firm failed to disclose material legal information to its client in advising whether or not to apply for a tax amnesty. This allegedly material omission takes the claim out of the realm of "error of judgment" ( see Rosner v Foley, 65 NY2d 736, 738). Similarly, the third-party complaint states a cause of action against Weiss by alleging that the accounting firm, as tax preparer, lacked a reasonable basis for believing the tax shelter at issue would be accepted by the IRS.