ATC Healthcare Inc. v Goldstein, Golub & Kessler LLP

[*1] ATC Healthcare Inc. v Goldstein, Golub & Kessler LLP 2009 NY Slip Op 52777(U) [28 Misc 3d 1237(A)] Decided on October 19, 2009 Supreme Court, Nassau County Warshawsky, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 October 19, 2009
Supreme Court, Nassau County

ATC Healthcare Inc., Plaintiff,

against

Goldstein, Golub & Kessler LLP, McGLADRY & PULLEN LLP, NEAL ROSENBERG and JOEL STEINBERG, Defendants.



002126/2009

Ira B. Warshawsky, J.

The Defendants move to dismiss Plaintiff's complaint pursuant to Civil Practice Law and Rules §3211(a)(7) for failure to state a cause of action. Alternatively, Defendants move to dismiss Plaintiff's second and third cause of action as redundant.

BACKGROUND

Plaintiff, ATC Healthcare, is a temporary staffing agency that provides healthcare workers throughout the United States. Defendants were the Certified Public Accountants, ("CPA"s), hired by Plaintiff to audit its financial statements for a number of years including 2004 through 2007.

Plaintiff, in bringing an action against the Defendants for (1) Accounting Malpractice, (2) Breach of Contract, and (3) Negligence, alleges that Defendants negligently conducted audits of Plaintiffs Annual and Quarterly Reports, failed to follow proper audit procedures in accordance with Generally Accepted Auditing Standards, ("GAAS"), and failed to understand Plaintiff's internal control system. Plaintiff claims that the damages it suffered such as the devaluation of its stock and being delisted from the American Stock Exchange were a direct result of Defendants' malpractice. [*2]

Defendants in their motion to dismiss allege that there is no causal link between the purported negligent acts of Defendants and the damages claimed by Plaintiff, but rather that the damages were a result of the company's precarious financial condition and the actions of management. Additionally, Defendants seek to have the breach of contract and negligence causes of actions dismissed as being redundant.

DISCUSSION

CPLR 3211(a)(7) allows a party to move to dismiss a claim against him where the pleading fails to state a cause of action. In deciding such a motion the court is required to accept as true the facts alleged in the pleadings and "resolve all inferences in favor of the plaintiff regardless of whether the plaintiff will ultimately prevail on the merits". (Grand Realty Company v City of White Plains, 125 AD2d 639, [2d Dep't 1986]). However, the court is not required to accept as true facts that are either "inherently incredible or flatly contradicted by documentary evidence". (Peters v Accurate Bld. Inspectors Div. Of Ubell Ent., Inc., 29 AD3d 972 [2d Dep't 2006]).

Since no documentary evidence has been presented to contradict Plaintiff's claims, we accept as true, for purposes of this motion, the facts in Plaintiff's complaint. Thus, Defendants failed to comply with Generally Accepted Auditing Standards, ("GAAS"), while auditing Plaintiff's financial statements and internal controls and as a result Defendants failed to identify a number of misstatements in the financial statements and deficiencies with the company's underlying systems. These misstatements and deficiencies include: (1) differences in the amount of payroll tax due reported on the payroll processing system and the system used to prepare the payroll tax returns, (2) over-depreciation of fixed assets, (3) overstatement of prepaid expenses, and (4) bank reconciliations with negative check amounts. Plaintiff further alleges that even though its financial statements did not conform with Generally Accepted Accounting Principals, ("GAAP"), as a result of the deficiencies, that Defendants nevertheless issued unqualified opinions representing that Plaintiff's financial statements were in fact fairly presented and in conformity with GAAP.

In order to prevail on its accounting malpractice claim, Plaintiff must prove that the Defendants (1) failed to exercise due care, (2) materially deviated from the recognized and accepted professional standards for accountants and auditors, and (3) that these actions were the proximate cause of Plaintiff's damages. (Davison v Margolin Winer & Evens LLP,14 Misc 3d 1240(A) [Sup. Ct. Nassau Co. 2007]).

Based on the above discussion, there is sufficient evidence to satisfy the first and second elements of Plaintiff's malpractice claim. We then turn to the final element, proximate cause which is met when, "it is reasonably foreseeable that the damages incurred would follow from the wrongful act." (In re Allou Distributors, Inc., 395 B.R. 246 [Bankr. E.D.NY 2008]). Or more simply put, it has two elements foreseeability, and cause in fact.(F.D.I.C. v Ernst & Young, 967 F.2d 166 [5th Cir. 1992]).

Plaintiff alleges that Defendants' failure to conduct a proper audit and its approval of Plaintiff's financial statements resulted in, among other things, (1) penalty and interest charges to be paid with amended payroll tax returns, (2) the filing of notice with the SEC of the withdrawal of the audited financial statements (3) the delisting of the company's stock on the American Stock Exchange, (4) costs to restate and audit the financial statements. Defendants counter that there is no link between their alleged negligence and Plaintiff's damages because Plaintiff (1) would be in the same condition even if Defendants had not issued clean audit opinions, (2) did [*3]not detrimentally rely on Defendants' work because Plaintiff possessed the same information that Defendants used to issue its audit opinions and (3) was responsible for its own financial statements and internal controls.

Proximate cause has been found to exist where the plaintiff's losses could have been significantly reduced (In re Allou), or where additional damages would not have otherwise been incurred if not for defendant's actions. (Nomura Asset Capital Corp v Cadwalader, Wickersham & Taft LLP, 23 Misc 3d 1134(A), 2009 WL 1543682, [NY Sup, 2009]). Accepting as true the facts alleged, it is reasonably foreseeable that Plaintiff's damages would have been limited or avoided completely had the Defendants not acted as they did. The Supreme Court has held that well pleaded complaints may proceed even if recovery appears remote or unlikely. (Bell Atlantic v Twombly,550 US 544, [2007]). While Defendants may be able to show that their actions did not substantially cause Plaintiff's injuries, the evidence presented does not clearly contradict the allegations such that a motion to dismiss can be granted. Nomura at 1143.

Generally, where the allegations of breach of contract or negligence are premised on the same allegations of a professional's failure to exercise due care or to abide by general professional standards that give rise to a professional malpractice claim, the claims for breach of contract and negligence will be dismissed as being duplicative. (Sage Realty Corp v. Proskauer Rose LLP,251 AD2d 35, [1st Dept 1998]). However, where breach of contract or negligence claims stem from a specific promise to achieve a particular result or a actions other than those in support of the professional malpractice claim they will not be held to be redundant of the malpractice claim. Id.

In the current case, Plaintiff's allegations of breach of contract and negligence are based on the same actions of misconduct that give rise to the accounting malpractice claim. As such, these causes of action are redundant of the malpractice claim and shall be dismissed.

CONCLUSION

Defendant's motion to dismiss for failure to state a cause of action is denied. The motion to dismiss Plaintiff's second and third cause of action dismissed as duplicative is granted.

This constitutes the Decision and Order of the Court

Dated: October 19, 2009

J.S.C.