Apple Bank for Sav. v PricewaterhouseCoopers, LLP

[*1] Apple Bank for Sav. v PricewaterhouseCoopers, LLP 2008 NY Slip Op 50340(U) [18 Misc 3d 1137(A)] Decided on February 5, 2008 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on February 5, 2008
Supreme Court, New York County

Apple Bank for Savings, Plaintiff,

against

PricewaterhouseCoopers, LLP, Defendant.



603492/06



Foley & Lardner

By: Jeremy L. Wallison, Esq.

Peter N. Wang, Esq.

90 Park Ave.

New York, NY 10016

Attorneys for Plaintiff

Curtis, Mallet-Prevost, Colt & Mosle LLP

By: Eliot Lauer, Esq.

Theresa Foudy, Esq.

Daniel R. Marcus, Esq.

101 Park Avenue

New York, NY 10178

Attorneys for Defendant

Bernard J. Fried, J.

In this action alleging accounting malpractice, defendant, PricewaterhouseCoopers, LLP ("PWC") moves pursuant to CPLR 3211(a)(7) to dismiss plaintiff's malpractice claims for the years 2000, 2001 and 2002 as time barred.[FN1]

The complaint alleges that in 1999, plaintiff, Apple Bank for Savings, ("the Bank") consulted with PWC, which had served as the Banks's auditor since 1992, regarding the tax consequences if the Bank entered into a stock redemption agreement with the estate of its deceased sole stockholder, Stanley Stahl. The Bank alleges that PWC informed it that the stock redemptions would not cause the Bank to incur any negative income tax consequences. [*2]

It is undisputed that PWC prepared the Bank's year end financial statements and income tax filings for 2000 through 2004 and that the year end financial statements and the tax returns for each of these years expressly treated the redemptions as if they had not triggered any negative tax consequences.

However, in July, 2005, after the Bank had made stock redemptions in 2000, 2001, 2002, 2003 and 2004, PWC advised the Bank that it was now of the opinion that the stock redemptions had caused the Bank to incur substantial income tax liability and that its year end financial statements for 2000 through 2004 and its income tax filings for 2000 through 2003 were incorrect.[FN2] In August, 2005, the Bank and PWC had several conversations about how to remediate the problem and in November 29, 2005, at PWC's urging, the Bank filed amended tax returns for 2000, 2001, 2002 and 2003. As a result, the Bank was required to pay $12,000,000 in back taxes and interest.

The complaint, which the Bank filed in October, 2006, states two causes of actionthe first for professional negligence and the second for breach of contract.

In support of the motion to partially dismiss the complaint, PWC contends that, based on Williamson v. PricewaterhouseCoopers, 9 NY3d 1 (2007) the Bank's malpractice claims that are based on the 2000, 2001 and 2002 financial statements; the 2000 and 2001 tax filings and the allegedly negligent tax advice that PWC provided in 1999 must be dismissed as time barred by CPLR 214(6)'s three year statute of limitations. PCW argues that it did not continuously represent the Bank from 1999 through 2005. Rather, it claims that the preparation of each financial statement (2000, 2001 and 2002) and tax filing (2000 and 2001) was governed by an individual engagement letter and that each engagement terminated when PWC delivered the financial statement or tax return to the Bank[FN3]. It is PWC's contention that every cause of action that accrued before June, 23, 2003, is time barred.

In opposition,the Bank argues that the "continuous representation" doctrine, which is an exception to the statute of limitations, applies in this case because each year, from 2000 through 2004, PWC prepared the Bank's financial statements and tax filings and each year it affirmatively applied its erroneous advice to the share redemption program. In addition, it claims that when PWC discovered the error in 2005, it provided assistance to the Bank to remediate the problems. The Bank claims that this continuous representation tolled the statute of limitations until the representation ended in 2005. Alternatively, the Bank argues that there is a question of fact as to whether PWC provided it with continuous representation.On a motion addressed to the sufficiency of the pleadings, the court must accept every factual allegation as true, and liberally construe the allegations in a light most favorable to the pleading party. (Guggenheimer v. Ginzburg, 43 NY2d 268 [1977]; see CPLR 3211[a][7]). "We . . . determineonly whether the facts as alleged fit within any cognizable legal theory." (Leon v. Martinez, 84 [*3]NY2d 83, 87-88 [1994]) "The motion must be denied if from the pleadings' four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law.'" (511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 NY2d 144, 151-152 [2002][internal citations omitted])

When a defendant moves to dismiss a cause of action on the ground that it is barred by the statute of limitations, "the defendant bears the burden of establishing such ground by prima facie proof that the time in which to sue has expired." (Hertzberg & Sanchez, P.C. v. Friendship Dairies, Inc., 2007 WL 488141[NY Sup. App. Term] In order to make a prima facie showing, the defendant must establish, inter alia, when the cause of action accrued. (See, Swift v. New York Med. College, 25 AD3d 686 [ 2nd Dept 2006]) The burden then shifts to the plaintiff to come forward with evidentiary facts establishing that the cause of action falls within an exception to the statute of limitations or to raise a question of fact as to whether an exception applies. (Gravel v. Cicola, 297 AD2d 620 [2nd Dept 2002])

CPLR 214(6) provides that professional malpractice claims, other than those alleging medical, dental or podiatric malpractice, must be commenced within three years of accrual. (CPLR 214(6); Giarratano v. Silver, 847 NYS2d 698, 701 {46 AD3d 1053} [3rd Dept 2007]citing Ackerman v. Price Waterhouse, 84 NY2d 535, 541[1994]). The three year time period governs all professional malpractice claims whether they are framed as negligence or breach of contract. (CPLR 214(6); see, In re R.M. Kliment & Francis Halsband, 3 NY3d 538, 541-542 [2004][in professional malpractice cases based upon "failure to utilize reasonable care or where acts or omissions of negligence are alleged or claimed, the statute of limitations shall be three years . . . regardless of whether the theory is based on tort or breach of contract."]) The three year period begins to run and a malpractice cause of action against an accountant accrues "upon receipt of the accountant's work product." (Ackerman v. Price Waterhouse, 84 NY2d at 541). This accrual date is used "even if the aggrieved party is then ignorant of the wrong or injury. " (Ackerman v. Price Waterhouse, 84 NY2d at 541; see also, Williamson v. PricewaterhouseCoopers, LLP 9 NY3d at**4 ["A claim accrues when the malpractice is committed, not when the client discovers it."])

Apple does not dispute PWC's computation of the respective time limitations period or PWC's recitation of which claims are time barred if the continuous representation doctrine does not apply. (Memo in Opp, p.3, n 1) Thus, because the action was not commenced until October, 2006, more than three years after the statute of limitations ran, the Bank's claims that: (1) PWC allegedly provided negligent tax advice in 1999-2000 regarding share redemptions;(2) PWC was allegedly negligent in its audits of the Bank's financial statements for the years 2000, 2001 and 2002; and(3) PWC was allegedly negligent in its preparation of the Banks tax returns for 2000 and 2001

are time barred unless the "continuous representation" doctrine applies.

The continuous representation doctrine derives from the "continuous treatment" doctrine in medical malpractice cases and it: [*4]

tolls the running of the statute of limitations on a

claim arising from the rendition of professional

services only so long as the defendant continues

to advise the client in connection with the

particular transaction which is the subject of the

action and not merely during the continuation of

a general professional relationship.

(Booth v. Kriegel, 36 AD3d 312 [1st Dept 2006][internal citations and quotations omitted]

"A recurring use of a professional's services does not constitute continuous representation if the later services are not related to the original services which gave rise to the action." (Giarratano v. Silver,-AD2d- 847 N.Y.S2d 698 [3rd Dept 2007]) In McCoy v. Feinman, 99 NY2d 295, 306 (2002) the Court held that, "the continuous representation doctrine tolls the statute of limitations . . . where there is a mutual understanding of the need for further representation of the specific subject matter underlying the malpractice claim." (See also, Zorn v. Gilbert, 8 NY3d 933, 934 [2007])

In Williamson v. PricewaterhouseCoopers, 9 NY3d at **7, the Court of Appeals held that "continuous representation" does not apply to a continuing general relationship between the parties. Rather, the court held "that the nature and scope of the parties' retainer agreement [engagement] play a key role in determining whether continuous representation' was contemplated by the parties." Williamson concluded that the continuous representation doctrine did not apply because, for the years in question, the plaintiff entered into annual engagements with the defendant for the provision of separate and discrete audit services for plaintiff's year end financial statements and , "once defendant performed the services for a particular year, no further work as to that year was undertaken."

Audit Engagement Letters

Each of PWC's audits of the Bank's year end financial statements for the years 2000, 2001 and 2002 was governed by a separate and discrete engagement letter. (Foudy Reply Aff., Exs. A-C) Each letter indicates that once PWC performed the work outlined in the engagement letter for a particular year, no further audit work was contemplated as a result of that specific engagement. Each letter specifically states that it is an "engagement letter" for a particular year and that PWC will, "audit the consolidated financial statements of the Bank . . . for the year then ending. Upon completion of our audit we will provide you with the audit report . . . ." Each letter also states that "[a]ny additional services that you may request and we agree to provide will be the subject of separate written agreements." In addition, each engagement letter has been signed by both parties. (Foudy Repy Aff. Ex. A-C, p.1, 4)

Thus, in this case, as in Williamson, the continuous representation doctrine does not apply to toll the statute of limitations with respect to the Bank's claims arising from the 2000, 2001 and 2002 audits of the Bank's year-end financial statements because each was governed by a separate engagement letter and each engagement ended more than three years before Apple's complaint was filed. Those engagement letters did not contemplate that further work would be required. Accordingly, the claims based on the 2000, 2001 and 2002 audit engagement letters are time barred. [*5]

Income Tax Advice and Preparation

As to PWC's income tax advice and preparation, there exists a question of fact regarding whether PWC provided continuous representation to the Bank concerning tax advice and tax preparation services that precludes dismissal of the Bank's claims based on the 1999 share redemption tax advice and the 2000 and 2001 tax returns.

Although PWC characterizes the letters dated August 17, 1999; August 10, 2000 and July 16, 2001 as engagement letters (Foudy Reply, Aff., paras. 7, 8 and 9), those letters, unlike the audit engagement letters, do not state that they are "engagement letters", but rather, they state that they are "estimates of professional fees for preparation of the Federal, state and local income tax returns . . . and review of the estimated tax declarations." (Foudy Reply Aff., Ex. D,E, and F, p. 1) The letters are signed by PWC but, unlike the audit engagement letters, the "estimate letter" do not contain a signature line for the Bank to indicate that it had accepted the terms stated in the letter.

Moreover, unlike the audit engagement letters that state that additional services will be subject to a "separate written agreement", the estimate letters merely state that "our fee does not include other special services such as responding to inquiries or tax examinations by the IRS . . . . We will provide you with a separate fee estimate for such services."Thus, it appears that the in the "estimate letters" need for additional services was contemplated, albeit for an increased fee. (Id, Exs. D and E, p. 2, Ex. F, p.1) These "estimate letters" are insufficient to establish that PWC's tax services were subject to separate, discrete agreements for each year and that once PWC delivered the returns no further services were contemplated. In addition, the Bank has produced a 2004 formal engagement letter regarding the preparation of that year's tax return.

The Bank also has produced an unsigned October 29, 2001 "engagement letter to provide tax services" that states, "[f]rom time to time, [the Bank] may request [PWC] to provide tax services that will not be the subject of a separate engagement letter. This engagement letter and the attached Terms of Engagement to Provide Tax Services . . . summarize the scope of services we will perform . . . ." (emphasis in the original) The list of services in the letter includes recurring tax consulting services (e.g. "advice, answers to questions and/or opinions on tax planning or reporting matters,". . . .") and advice and assistance regarding matters involving the IRS or local taxing authorities. (Rawden Aff., Ex. E). Although the terms of the 2004 letter are not directly relevant to this motion, the existence of 2004 tax preparation engagement letter and the unsigned 2001 tax consultation letter raise questions about whether, in prior years, the parties entered into formal engagement letters or other written agreements regarding PWC's preparation of tax returns or its rendition of tax advice. Discovery is necessary to resolve these questions. (See, e.g. Cerchia v. V.A. Mesa, Inc., 191 AD2d 377 [1st Dept 1993])

Moreover, the Bank's claims regarding PWC's alleged malpractice in preparing the Bank's tax returns are based on PWC's allegedly erroneous advice regarding the tax consequences of the share redemptions.

Ackerman v. Price Waterhouse, 252 AD2d 179, 205-206 (1st Dept., 1998), in affirming the lower court's decision that denied dismissal of accounting malpractice claims on statute of limitations grounds, stated:

plaintiffs provided ample evidence supporting the

the application of continuous [*6]

representation, including the repeated use of an

improper accounting method and the repeated

failure to disclose the risks associated with the

same (see, Zwecker v. Kulberg, 209 AD2d 514,

515 [continuous treatment applicable where limited

partners alleged that defendant accountant

continued to utilize deductions in preparing their

tax returns despite knowledge that IRS would likely

invalidate the deduction]).

Here, as in Ackerman and Zwecker, the malpractice claims are based on allegedly erroneous advice given, or reaffirmed, in successive years with regard to the tax treatment of a specific investment. Specifically, the complaint alleges:

12. PWC continued to perform services for the Bank from

2000 through 2004, preparing the Bank's year-end financials

and the Bank's income tax filings for those years.

Throughout PWC's continuing representation of the Bank

during those years, PWC at no time advised the Bank that the

Redemptions would trigger a recapturing of the Bank's bad

debt reserve.

13. Although PWC specifically and consistently had been

made aware of the Redemptions . . ., PWC prepared the

Bank's income tax filings and year-end financials for tax

and fiscal years 2000 through 20004, without accruing

any added income tax liability as a result of the Redemptions.

(Foudy Aff, Ex. A, paras. 12 and 13)

Thus, the Bank has raised questions of fact regarding whether PWC knew, or should have known, that its tax advice regarding the share redemptions was erroneous, and whether, despite this knowledge it continued to prepare the Bank's tax filings, based on this erroneous advice.

Accordingly, it is ORDERED that the motion to dismiss the complaint is granted to the extent that any portions of the Banks causes of action that are based on PWC's allegedly negligent audits of the Bank's financial statement for the years 2000, 2001 and 2002 are dismissed as time barred; and it is further

ORDERED that the branch of the motion that seeks to dismiss the Bank's claims based on the tax advice PWC provided regarding the share redemptions and PWC's preparation of the Bank's 2000 and 2001 tax returns is denied.

This decision constitutes the order of the court.

DATED:

________________________________

J.S.C. [*7]

Footnotes

Footnote 1:Plaintiff contends that, because defendant is alleging a statute of limitations defense pursuant to CPLR 214(6), defendant should have properly moved pursuant to CPLR 3211(a)(5).

Footnote 2:In April 2005, the Bank informed PWC that, on a going forward basis, it would no longer be retaining PWC's services however, PWC did prepare the Bank's 2004 income tax filing.

Footnote 3:The parties entered into a tolling agreement that went into effect on May 15, 2006 and which terminated on August 26, 2006.