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THE COMPLAINT STATED CAUSES OF ACTION AGAINST AN ACCOUNTING FIRM FOR MALPRACTICE, FRAUD AND AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY; BOTH MOTHER AND SON ARE OWNERS OF A RESTAURANT; IT WAS ALLEGED THE SON’S TAKING A LARGE SALARY AND RECEIVING MILLIONS IN LOANS AGAINST THE BUSINESS WERE DOCUMENTED BY THE ACCOUNTING FIRM BUT NOT DISCLOSED TO MOTHER (FIRST DEPT). ​

The First Department, in a full-fledged opinion by Justice Renwick, determined the malpractice, fraud and breach of fiduciary duty causes of action against defendant accounting firm should not have been dismissed. Both plaintiff Ellen and her son Kenneth are owners of a restaurant. The complaint alleged Kenneth was looting the restaurant by taking a large salary and talking out loans against the business without Ellen’s knowledge. It was alleged defendant accounting firm had a duty to inform Ellen of Kenneth’s financial dealings but did not. The accounting firm argued there was no duty-breach and no fraud because all of Kenneth’s financial activities were documented in the accountant’s records and in the business tax returns. The First Department simply held the complaint stated causes of action for accountant malpractice, fraud and aiding an abetting a breach of fiduciary duty:

Plaintiffs’ claims … are not that defendant was hired to discover Kenneth’s wrongdoing, but rather that information obtained by defendant during its business interactions with Kenneth and information used by defendant in order to prepare tax returns and financial statements put defendant on notice about the impropriety of Kenneth’s loans to himself such that defendant had a duty to inform plaintiffs of the questionable payments. The law is very clear that an agreement to perform unaudited services does not shield an accountant from liability because an accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent … .

In addition, “[o]ne who aids and abets a breach of a fiduciary duty is liable for that breach as well, even if he or she had no independent fiduciary obligation to the allegedly injured party, if the alleged aider and abettor rendered ‘substantial assistance’ to the fiduciary in the course of effecting the alleged breaches of duty” … 1650 Broadway Assoc., Inc. v Sturm, 2024 NY Slip Op 01864, First Dept 4-4-24

Practice Point: An accounting firm has a duty to disclose fraud. Here the firm documented the potentially fraudulent financial activities of one of the owners of the restaurant but did not disclose those activities to the other owner. The allegations stated causes of action for accountant malpractice, fraud and aiding and abetting breach of a fiduciary duty.

 

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PLAINTIFF DID NOT DEMONSTRATE DEFENDANT ACCOUNTANT DEPARTED FROM THE PROFESSIONAL STANDARD FOR TAX PREPARATION SERVICES (FIRST DEPT).

The First Department, reversing Supreme Court, determined plaintiff did not demonstrate defendant accountant departed from the professional standard for tax preparation:

“A party alleging a claim of accountant malpractice must show that there was a departure from the accepted standards of practice” … . Plaintiff does not identify any applicable professional standard which would have required defendants to inquire whether the transactions at issue were approved in accordance with the procedures contained in the operating agreement. To the contrary, the standards proffered by plaintiff’s expert permit an accountant engaged for tax preparation services to rely on information furnished by the taxpayer unless it appears to be incorrect, incomplete or inconsistent. There is no allegation here that the information provided to defendants was incorrect, incomplete or inconsistent. Deane v Brodman, 2021 NY Slip Op 01842, First Dept 3-25-21

 

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QUESTIONS OF FACT WHETHER THE ADVERSE INTEREST EXCEPTION TO THE IN PARI DELICTO DEFENSE APPLIES IN THIS ACCOUNTANT MALPRACTICE CASE (FIRST DEPT). ​

The First Department, reversing Supreme Court, determined questions of fact were raised about whether the adverse interest exception bars the in pari delicto defense in this accountant malpractice case:

In this accounting malpractice action, plaintiffs, the liquidators of several hedge funds, allege that defendants failed to uncover fraudulent activity by the funds’ investment managers. The issue before us is whether the adverse interest exception to the equitable defense of in pari delicto bars the defense in this case (see Kirschner v KPMG LLP, 15 NY3d 446 [2010]). We find that plaintiffs raised issues of fact as to the adverse nature of their interests vis-a-vis those of their agents, the funds’ investment managers, that preclude summary dismissal of the complaint on the ground of the in pari delicto defense.

“To come within the exception, the agent must have totally abandoned his principal’s interests and be acting entirely for his own or another’s purposes” ,,, . The exception is applied only where the fraud is committed “against a corporation rather than on its behalf” … . “So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive — to attract investors and customers and raise funds for corporate purposes — this test is not met” … . Thus, we conclude that the mere continuation of a corporate entity does not per se constitute a benefit that precludes application of the adverse interest exception. …

… [R]eliance on speculation about the benefits to be derived from the continued existence of an entity is inconsistent with the analysis of the adverse interest exception in Kirschner. It may be possible in every case to construct a hypothetical scenario where the company teetering on the brink of insolvency because of its agent’s fraud meets with an opportune circumstance that allows it to resume legitimate business operations. Permitting such speculation would render the adverse interest exception meaningless. Further, an ongoing fraud and a continued corporate existence may harm a corporate entity: The agent may prolong the company’s legal existence so that he can continue to loot from it, as appears to have been the case here. Conway v Marcum & Kliegman LLP, 2019 NY Slip Op 07338, First Dept 10-10-19

 

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SEEKING ATTORNEY’S FEES FOR THE CLASS ACTION PURSUANT TO THE FEDERAL FAIR LABOR STANDARDS ACT (FLSA) CONSTITUTED SEEKING INDEMNIFICATION WHICH IS PROHIBITED BY THE ACT, THE BREACH OF CONTRACT ACTION IS NOT DUPLICATIVE OF THE ACCOUNTANT MALPRACTICE ACTION (FOURTH DEPT).

The Fourth Department, modifying Supreme Court, determined the request for attorney’s fees in this accountant malpractice action constituted a request for indemnification which was prohibited by the Federal Fair Labor Standards Act (FLSA). Plaintiffs alleged they hired defendant-accountants to make sure plaintiffs were in compliance with overtime compensation and wage notice requirements of the FLSA. Plaintiffs were subsequently sued on related claims and sought recover of the attorney’s fees expended to settle the suit. The Fourth Department noted that the breach of contract action was not the same as the accountant malpractice action, but that the negligence and breach of fiduciary duty actions were duplicative of the breach of contract action:

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It is well established that “there is no right of contribution or indemnity for employers found liable under the FLSA” … , and the FLSA preempts any conflicting provisions of state labor laws, including those of New York … . A party may not avoid this bar on indemnity by seeking indemnification damages through other legal theories … . In view of the foregoing, we agree with defendants that seeking attorneys’ fees associated with that underlying class action is a request for indemnity … . * * *

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.. .[w]e reject defendants’ contention that the breach of contract cause of action is duplicative of the accounting malpractice cause of action. The breach of contract cause of action is based on allegations that defendants breached their agreements with plaintiffs by failing to perform certain services, and that plaintiffs are entitled to recover all compensation paid to defendants for those unperformed services. That is separate and distinct from the allegations in the accounting malpractice cause of action, which seeks damages based on allegations that defendants did perform services pursuant to the contract but failed to comply with the accepted standards of care. Delphi Healthcare PLLC v Petrella Phillips LLP, 2018 NY Slip Op 01012,  Fourth Dept 2-9-18

NEGLIGENCE (ACCOUNTANT MALPRACTICE, SEEKING ATTORNEY’S FEES FOR THE CLASS ACTION PURSUANT TO THE FEDERAL FAIR LABOR STANDARDS ACT (FLSA) CONSTITUTED SEEKING INDEMNIFICATION WHICH IS PROHIBITED BY THE ACT, THE BREACH OF CONTRACT ACTION IS NOT DUPLICATIVE OF THE ACCOUNTANT MALPRACTICE ACTION (FOURTH DEPT))/EMPLOYMENT LAW (FAIR LABOR STANDARDS ACT, SEEKING ATTORNEY’S FEES FOR THE CLASS ACTION PURSUANT TO THE FEDERAL FAIR LABOR STANDARDS ACT (FLSA) CONSTITUTED SEEKING INDEMNIFICATION WHICH IS PROHIBITED BY THE ACT, THE BREACH OF CONTRACT ACTION IS NOT DUPLICATIVE OF THE ACCOUNTANT MALPRACTICE ACTION (FOURTH DEPT))/FAIR LABOR STANDARDS ACT (FLSA) (SEEKING ATTORNEY’S FEES FOR THE CLASS ACTION PURSUANT TO THE FEDERAL FAIR LABOR STANDARDS ACT (FLSA) CONSTITUTED SEEKING INDEMNIFICATION WHICH IS PROHIBITED BY THE ACT, THE BREACH OF CONTRACT ACTION IS NOT DUPLICATIVE OF THE ACCOUNTANT MALPRACTICE ACTION (FOURTH DEPT))/ACCOUNTANT MALPRACTICE (THE BREACH OF CONTRACT ACTION IS NOT DUPLICATIVE OF THE ACCOUNTANT MALPRACTICE ACTION (FOURTH DEPT))

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CAUSES OF ACTION AGAINST ACCOUNTANTS STEMMING FROM A WORKERS’ COMPENSATION TRUST FOUND TO BE $8 MILLION IN DEBT SURVIVED MOTIONS TO DISMISS, SIX YEAR STATUTE OF LIMITATIONS APPLIES TO INTENTIONAL (AS OPPOSED TO NEGLIGENT) CONDUCT.

The Third Department determined Supreme Court should not have dismissed the breach of fiduciary duty cause of action against defendant accountants (Fuller) stemming from a workers’ compensation trust found to be more than $8 million in debt. The 2nd Department also found Supreme Court properly applied the six year statute of limitations to the allegedly intentional acts by the defendant accountants (designed to conceal the debt). The defendant accountants unsuccessfully argued the three-year (negligence/malpractice) statute of limitations should apply. Regarding the breach of fiduciary duty cause of action, the 2nd Department explained:

Although the duty owed by an accountant is generally not fiduciary in nature … , a fiduciary relationship exists where the accountant is “under a duty to act for or to give advice for the benefit of [the client] upon matters within the scope of the relation” … . This inquiry is “necessarily fact-specific” … , and the dispositive factor is whether there is “confidence on one side and resulting superiority and influence on the other” … . Plaintiff alleged that Fuller held itself out to have the requisite skill and expertise to maintain the trust’s financial records, provide auditing services and — importantly — provide advice to the trust regarding the trust’s financial status. According to plaintiff, Fuller breached its fiduciary duty by knowingly and consistently concealing the trust’s true financial condition and failing to properly advise the trust regarding its solvency, causing over $8 million in damages. Accepting these allegations as true and giving plaintiff the benefit of every favorable inference … , we find that plaintiff’s cause of action for breach of fiduciary duty is sufficiently stated to survive Fuller’s motion to dismiss … .  New York State Workers’ Compensation Bd. v Fuller & LaFiura, CPAs, P.C., 2017 NY Slip Op 00225, 3rd Dept 1-12-17

 

WORKERS’ COMPENSATION LAW (CAUSES OF ACTION AGAINST ACCOUNTANTS STEMMING FROM A WORKERS’ COMPENSATION TRUST FOUND TO BE $8 MILLION IN DEBT SURVIVED MOTIONS TO DISMISS)/FRAUD (CAUSES OF ACTION AGAINST ACCOUNTANTS STEMMING FROM A WORKERS’ COMPENSATION TRUST FOUND TO BE $8 MILLION IN DEBT SURVIVED MOTIONS TO DISMISS)/CIVIL PROCEDURE (SIX YEAR STATUTE OF LIMITATIONS APPLIED TO INTENTIONAL ACTS BY ACCOUNTANTS, CAUSES OF ACTION AGAINST ACCOUNTANTS STEMMING FROM A WORKERS’ COMPENSATION TRUST FOUND TO BE $8 MILLION IN DEBT SURVIVED MOTIONS TO DISMISS)/FIDUCIARY DUTY (BREACH OF FIDUCIARY DUTY CAUSE OF ACTION AGAINST ACCOUNTANTS STEMMING FROM A WORKERS’ COMPENSATION TRUST FOUND TO BE $8 MILLION IN DEBT SHOULD HAVE SURVIVED MOTION TO DISMISS)/ACCOUNTANTS (CAUSES OF ACTION AGAINST ACCOUNTANTS STEMMING FROM A WORKERS’ COMPENSATION TRUST FOUND TO BE $8 MILLION IN DEBT SURVIVED MOTIONS TO DISMISS, SIX YEAR STATUTE OF LIMITATIONS APPLIED TO INTENTIONAL ACTS BY ACCOUNTANTS)/STATUTE OF LIMITATIONS CAUSES OF ACTION AGAINST ACCOUNTANTS STEMMING FROM A WORKERS’ COMPENSATION TRUST FOUND TO BE $8 MILLION IN DEBT SURVIVED MOTIONS TO DISMISS, SIX YEAR STATUTE OF LIMITATIONS APPLIED TO INTENTIONAL ACTS BY ACCOUNTANTS)

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Adverse Interest Exception to In Pari Delicto Defense May Apply—The Two Concepts Are Briefly Explained

In an accounting malpractice action, the Second Department determined the defendants’ motion to dismiss based upon the defense of in pari delicto defense was properly denied because the adverse interest exception may apply.  The court explained the two concepts:

The defendants contend that [the accounting malpractice] cause of action is barred by the doctrine of in pari delicto, “which mandates that the courts will not intercede to resolve a dispute between two wrongdoers” … . However, the adverse interest exception to the doctrine of in pari delicto provides that “when an agent is engaged in a scheme to defraud his principal, either for his own benefit or that of a third person, the presumption that knowledge held by the agent was disclosed to the principal fails because he cannot be presumed to have disclosed that which would expose and defeat his fraudulent purpose” … . Here, the documentary evidence submitted by the defendants did not conclusively foreclose the application of the adverse interest exception to the in pari delicto defense … . Schwartz v Leaf Salzman Mangenelli Pfiel, & Tendler LLP, 2014 NY Slip Op 08823, 2nd Dept 12-17-14

 

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Criteria for Accountant’s Liability to Third Parties in Absence of Contractual Relationship Explained

In finding that the complaint did not state a cause of action against an accountant for negligent misrepresentations made to third parties with no contractual relationship, the Second Department explained:

In certain circumstances, accountants may be held liable for negligent misrepresentations made to third parties with whom they have no contractual relationship, but who have relied to their detriment on inaccurate financial statements prepared by the accountant… . In order to establish such liability, the relationship between the accountant and the party must be found to approach privity, through a showing that the following prerequisites are satisfied: “(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance”… . Signature Bank v Holtz Rubenstein Reminick LLP, 2013 NY Slip Op 05564, 2nd Dept 8-7-13

 

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Criteria for Professional Negligence Actions Against Accountant Not in Privity with Plaintiff and Against Actuary

The Second Department explained the criteria for professional negligence actions against an accountant, with whom the plaintiffs were not in privity, and against an actuary:

Accountants may be “held liable in certain circumstances for negligent misrepresentations made to parties with whom they have no contractual relationship, but who have relied to their detriment on inaccurate financial statements prepared by the accountant” … . In order to establish such liability, the relationship between the accountant and the party must be found to approach privity, through a showing that the following prerequisites are satisfied: “(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance” … . *  *  *

Because an actuary is not required to be licensed, is not regulated, and is not subject to a State-created disciplinary system, an actuary is not a “professional” for purposes of a malpractice cause of action … . Nevertheless, an actuary, possessing special knowledge, can be held liable for the negligent performance of its services …. [T]he complaint sufficiently alleges a cause of action against [the actuary] on a theory of common-law negligence ….  Health Acquisition Corp v Program Risk Mgt, Inc, 2013 NY Slip Op 02714, 2nd Dept, 4-24-13

 

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