Epiphany Community Nursery Sch. v Levey  2019 NY Slip Op 00842  Decided on February 5, 2019  Appellate Division, First Department  Singh, J., J. is not primarily about accounting malpractice.  That nugget is merely part of a much larger fraud which seemed to swamp a NYC private school.  The intra-familial fraud is stunning.

“In 1973 Wendy Levey (Wendy) married defendant Hugh Levey (Hugh). Two years later Wendy founded Epiphany, a not-for-profit corporation that operates a kindergarten and nursery school on the Upper East Side of Manhattan.

Hugh is an investment banker with an undergraduate degree from Yale University and a M.B.A. from Harvard. Hugh and defendant Claire Gruppo co-founded defendant Gruppo Levey & Co. (GLC), a small investment banking firm that provides strategic advice and private capital raising services to businesses, financial sponsors and management teams throughout the United States. Defendant Gruppo, Levey Holdings Inc. (GLH) is GLC’s parent company, and defendant Frog Pond Partners L.P. (Frog Pond) is a limited partnership owned indirectly by Hugh and Gruppo. Of this group, all but Hugh are the “collateral defendants.” Defendant Davie Kaplan CPA, P.C. (Davie Kaplan) was an outside auditor for Epiphany from 2010 to 2012.

The complaint alleges two sets of fraudulent acts. These acts were allegedly uncovered in a matrimonial action between Wendy and Hugh that was settled in October 2016. Wendy and Hugh are now divorced.

The first series of fraudulent acts occurred between 2002 and 2003 when Hugh induced Epiphany to sell its extracurricular programs to nonparty Magic Management LLC (Magic) for an unreasonably low price. At that time, Hugh had a 100% ownership interest in defendant January Management, Inc., general partner of nonparty January Partners, L.P., which was the sole member of Magic.

Pursuant to an asset purchase agreement dated February 12, 2003, Epiphany sold its extracurricular programs to Magic for $300,000, $30,000 of which was paid in cash and the remaining $270,000 was to be paid pursuant to a promissory note payable over 10 years in installments of $27,000, plus interest. Magic also agreed to pay monthly rent to use Epiphany’s facilities. Hugh claimed that although Magic occupied less than 10% of Epiphany’s space, Magic’s rent would be $481,026. Magic’s rent was represented to be more than $100,000 above Epiphany’s rent for the building.

Wendy, Epiphany’s Executive Director, did not have a financial background. She believed it was in the school’s best interest to have someone with Hugh’s financial expertise to assist with Epiphany’s financial affairs. Wendy signed the asset purchase agreement on Epiphany’s behalf without obtaining her own appraisal or verifying whether Magic paid the school what it owed.

The complaint alleges that the $300,000 purchase price was based on a fraudulent valuation commissioned by Hugh, which was “substantially inaccurate.” By applying false figures, Hugh allegedly reduced the purchase price by $1.5 million. The complaint further alleges that if the valuation had been properly calculated the purchase price would have exceeded $1.8 million.

In addition, Magic failed to pay rent or the amount owed on the promissory note. The complaint alleges that Hugh manipulated Epiphany’s corporate and financial records to hide Magic’s failure to pay.

The second set of fraudulent acts allegedly took place between 2007 and 2013. Hugh made unauthorized transfers of over $5.9 million from Epiphany’s bank accounts to himself and some of the collateral defendants by linking the bank accounts to his private banking portfolio. Hugh, with the assistance of Davie Kaplan, falsely recorded these transfers in Epiphany’s general ledgers as “loans.” However, there were no documents to memorialize these “loans.” Nor were [*2]any loan payments ever made. The “loans” were subsequently characterized as “other receivables.” At the end of each year, the other receivables were offset by fake charges Epiphany owed GLC or GLH for “consulting fees” and “lease commissions.”

In September 2010, Hugh allegedly arranged for his long-time personal accountant, David Pitcher, who was employed by defendant Davie Kaplan to serve as Epiphany’s outside auditor. Davie Kaplan delivered 2010, 2011, and 2012 audit reports. Davie Kaplan also performed an audit for fiscal year 2013 but it did not issue a 2013 audit report.

Epiphany commenced this action on August 31, 2016. It alleges 13 causes of action, including: (1) fraud by Hugh and Davie Kaplan; (2) aiding and abetting fraud by collateral defendants and Davie Kaplan; (3) breach of fiduciary duty by Hugh; and (4) aiding and abetting breach of fiduciary duty by the collateral defendants and Davie Kaplan.”

“Finally, we affirm Supreme Court’s dismissal of the fraud, aiding and abetting fraud and breach of fiduciary claims against Davie Kaplan as duplicative of Epiphany’s untimely accounting malpractice claim (see Murray Hill Invs. v Parker Chapin Flattau & Klimpl, LLP, 305 AD2d 228 [1st Dept 2003] [affirming dismissal of fraud claim as duplicative of the untimely legal malpractice claim, and noting that it was asserted in an attempt to circumvent the legal malpractice limitations period])”