Opinion
No. 002126/2009.
2010-07-26
ATC HEALTHCARE INC., Plaintiff, v. GOLDSTEIN, GOLUB & KESSLER LLP, McGladry & Pullen LLP, Neal Rosenberg and Joel Steinberg, Defendants.
And, AU § 508.68 provides “if, during the current audit, an auditor becomes aware of circumstances or events that affect the financial statements of a prior period, he or she should consider such matters when updating his or her report on the financial statements of the prior period.” Based upon these guidelines, ATC Healthcare's expert opines that “there may be facts learned in the current year's audit that would require the auditor to analyze and reevaluate whether, if those facts had been known previously, the opinion originally issued on the prior year's financial statements would have been appropriate given the new facts.” Should these conditions occur, it typically results in a restated financial statement and a subsequent reaudit. The Court of Appeals' explanation also applies here:
IRA B. WARSHAWSKY, J.
This motion by Goldstein, Golub & Kessler LLP (“G, G & K”) for an order pursuant to CPLR 3211(a)(5) and 214(6) dismissing the complaint in part and/or an order dismissing this action pursuant to CPLR 305(b) is granted as provided herein.
The plaintiff ATC Healthcare Inc. commenced this action pursuant to CPLR 304(a) via the filing of a Summons with Notice on February 6, 2009 to recover for accounting malpractice. The attached notice provided “notice: the object of this action is for auditing and accounting malpractice. The relief sought is a money judgment for $20,000,000, plus interest according to law, cost, disbursements, and other just and proper relief.” This “Summons with Notice” was served on April 24, 2009, along with the complaint which was filed that day.
G, G & K's motion to dismiss this action pursuant to CPLR 305(b) is denied. Permission is required to make motions in the commercial part. While permission to seek dismissal of a portion of the complaint pursuant to CPLR 3211(a)(5), 214(6) was obtained, permission to seek dismissal pursuant to CPLR 305(b) was never sought let alone obtained. For that reason alone, the motion to dismiss pursuant to CPLR 305(b) should be denied.
In any event, addressing that application on the merits, it will nevertheless be denied. While a Notice of Appearance and/or a demand for a complaint does not constitute a waiver of the CPLR 305(b) defense which is jurisdictional (Parker v. Mack, 61 N.Y.2d 114 [1984] ), G, G & K's failure to raise the objection in its first 3211 motion, in its Answer and its Amended Answer precludes it from raising the objection to the defective Summons With Notice at this juncture. Sirkis v. Cohen, 23 AD3d 369 [2nd Dept.2005]; LeConte v. City of New York, 129 Misc.2d 719 (Supreme Court Queens County 1985).
In any event, the purpose of CPLR 305(b) is to put the defendant on adequate notice of the nature of the claims against him. Twenty-third Ann Report of N.Y. Judicial Conference, 1978, p. 273. As the Court stated in Parker v. Mack, supra, at p. 118 (1984), “[t]he Legislature, by its adoption of the amendment proposed by the Judicial Conference, has determined and fixed a defendant's entitlement at the time and as part of service of process to knowledge concerning the claim being asserted against him—an entitlement which imposes no conceivable burden or hardship on the plaintiff.” The mere filing of a defective Summons with Notice does not defeat that purpose if the transgression is remedied when, as here, the defendant is served. Indeed, in Parker v. Mack, ( supra at p. 117) the Court of Appeals noted that “no action is commenced if the manner of service of the summons is not in compliance with statutory requirements (emphasis added).” While the notice on the Summons with Notice was defective when filed in that it failed to adequately set forth “the nature of the action” ( see, Roth v. State University of New York, 61 AD3d 476 [1st Dept.2009] lv den.,13 NY3d 711 [2009];Scaringi v. Elizabeth Broome Realty Corp., 191 A.D.2d 223 [1st Dept.1993] ), Section 305(b) does not require dismissal here. That statute provides that “[i]f the complaint is not served with the summons, the summons shall contain or have attached thereto a notice stating the nature of the action and relief sought ... and the sum of money for which judgment may be taken in case of default (emphasis added).” Here, the complaint was in fact served with the summons. See, Andrulis v. Fox, 284 A.D.2d 1006 (4th Dept.2001).
This action was commenced on February 6, 2009. G, G & K seeks dismissal of all claims sounding in accounting malpractice which accrued prior to February 6, 2006 pursuant to CPLR 214(6) and Ackerman v. Price Waterhouse, 84 N.Y.2d 535, 541 (1994) and Williamson ex rel. Lipper Convertibles, L.P. v. PricewaterhouseCoopers LLP, 9 NY3d 1, 9–10 (2007).
The pertinent facts are as follows:
The plaintiff ATC Healthcare originally hired G, G & K to perform quarterly reviews and audits of its financial statements for its 2004 fiscal year which ran from March 1, 2003 to February 28, 2004. That arrangement was renewed annually and quarterly via written engagement letters until February 6, 2008 when ATC Healthcare terminated its relationship with G, G & K. G, G & K's engagement letters provided “[o]ur responsibilities as auditors is limited to the period covered by our audit and does not extend to any later periods for which we are not engaged as auditors.”
G, G & K issued annual audit opinion letters for ATC Healthcare's financial statements for its 2004, 2005, 2006 and 2007 fiscal years. Each opinion letter however referred specifically to prior years' statements. As an example, G, G & K's April 28, 2006 opinion letter provided:
We have audited the accompanying consolidated balance sheets of ATC ... as of February 28, 2006 and 2005 and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended February 28, 2006....
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ATC ... as of February 28, 2006 and 2005 and the results of their operations and their cash flows for each of the years in the period ended February 28, 2006 in conformity with U.S. generally accepted accounting principles.
In our opinion, the information included on Schedule II relating to the years ended February 28, 2006, February 28, 2005 and February 29, 2004 are fairly stated in all material respects, in relation to the basic consolidated financial statements taken as a whole. Also, such schedule presents fairly the information set forth therein in compliance with the applicable accounting regulations of the Securities and Exchange Commission.
The 2007 opinion letter read similarly but with respect to 2005, 2006 and 2007. Nevertheless, because separate engagement letters were issued annually for each audit, “any later periods for which we are not engaged as auditors” must be interpreted as limited to that year's audit. None of G, G & K's audits and reviews were ever restated, revised or withdrawn from filing with the Securities and Exchange Commission.
The applicable Statute of Limitations in this action sounding in accounting malpractice is three years. CPLR 214(6); Symbol Technologies, Inc. v. Deloitte & Touche, LLP, 69 AD3d 191, 194 (2nd Dept.2009); see also, Matter of R.M. Kliment & Frances Halsband, Architects (McKinsey & Co., Inc.) 3 NY3d 538 (2004); Harris v. Kahn, Hoffman, Nonenmacher, & Hochman, LLP, 59 AD3d 390, 391 (2nd Dept.2009): RGH Liquidating Trust v. Deloitte & Touche, LLP, 47 AD3d 516, 517 (1st Dept.2008), lv dism., 11 NY3d 804 (2008). The three year Statute of Limitations for accounting malpractice accrues “upon the client's receipt of the accountant's work product ...” because “this is the point that a client reasonably relies on the accountant's skill and advice and ... when all the facts necessary to the cause of action have occurred and an injured party can obtain relief in court.” Ackerman v. Price Waterhouse, supra, at p. 54.
ATC Healthcare received G, G & K's audits of 2004 and 2005 on May 28, 2004 and June 13, 2005, respectively and it received the quarterly reviews for 2004 through 2006 before February 6, 2006. G, G & K has established that the causes of action sounding in accounting malpractice based upon those audits and reviews are untimely. The burden accordingly shifts to ATC Healthcare “to aver evidentiary facts establishing that the malpractice cause of action fell within an exception to the Statute of Limitations or to raise a questions of fact as to whether an exception is applicable.” Symbol Technologies, Inc. v. Deloitte & Touche, LLP, supra, at p. 195, citing Lessoff v. 26 Court Street Associates, LLC, 58 AD3d 610, 611 (2nd Dept.2009)Gravel v. Cicola, 297 A.D.2d 620 (2nd Dept.2002).
In its attempt to defeat dismissal of these claims as untimely, ATC Healthcare relies upon the continuous representation doctrine. According to ATC Healthcare's accounting expert Harris Devor, reference and comparison to the prior years in the annual audits was mandated by the Public Company Accounting Oversight Board's (“PCAOB”) guidelines. More specifically, AU § 508.65 requires a continuing auditor to “update the report on the individual financial statements of the one or more periods presented on a comparative basis with those of the current period” and AU § 508.66 provides:
During the audit of the current-period financial statements, the auditor should be alert for circumstances or events that affect the prior-period financial statements presented ... or the adequacy of informative disclosures concerning those statements.... In updating his or her report on the prior-period financial statements, the auditor should consider the effects of any such circumstances or events coming to his or her attention.
And, AU § 508.68 provides “if, during the current audit, an auditor becomes aware of circumstances or events that affect the financial statements of a prior period, he or she should consider such matters when updating his or her report on the financial statements of the prior period.” Based upon these guidelines, ATC Healthcare's expert opines that “there may be facts learned in the current year's audit that would require the auditor to analyze and reevaluate whether, if those facts had been known previously, the opinion originally issued on the prior year's financial statements would have been appropriate given the new facts.” Should these conditions occur, it typically results in a restated financial statement and a subsequent reaudit.
“The continuous representation doctrine is an exception to the Statute of Limitations and applies only where there is a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim.' “ Symbol Technologies, Inc. v. Deloitte & Touche, LLP, supra, at p. 195, quoting McCoy v. Feinman, 99 N.Y.2d 295, 306 (2002). That is, “the continuous representation must be in connection with the particular transaction which is the subject of the action and not merely during the continuation of a general professional relationship. Zaref v. Berk & Michaels, P.C., 192 A.D.2d 346, 347–348 (1st Dept.1993), citing National Union Fire Insurance Company of Pittsburgh v. Davis Wright, Todd, Reise & Jones, 157 A.D.2d 571 (1st Dept.1990); Nykorchuck v. Henriques, 78 N.Y.2d 255 (1991); Luk Lamellen U. Kupplungbau GmbH v. Lerner, 166 A.D.2d 505, 507 (2nd Dept.1990). “[T]he facts are required to demonstrate continued representation in the specific matter directly under dispute.” Zaref v. Berk & Michaels, P.C., supra, at p. 348.
These circumstances did not occur here. The reviews prior to February 6, 2006 and audits challenged here have not been revised or amended by G, G & K or any of ATC Healthcare's subsequent accountants. In fact, neither ATC Healthcare nor its expert accountant has cited subsequent facts causing its accountants to question the accuracy of G, G & K's reviews and audits for these periods. The mere possibility that that could have occurred does not give rise to the application of the continuous treatment doctrine where it in fact has not. Williamson ex rel. Lipper Convertibles, L.P. v. PricewaterhouseCoopers, LLP, supra; Apple Bank for Savings v. PricewaterhouseCoopers, LLC, 70 AD3d 438 (2nd Dept.2010); Zaref v. Berk & Michaels, supra.
In fact, the Court of Appeals' conclusion in Williamson ex rel. Lipper Convertibles, L.P. v. PricewaterhouseCoopers, LLP, (supra at p. 10–11) applies here:
Plaintiff's allegations make clear that for the years in question [ATC Healthcare] entered into annual engagements with defendant for the provision of separate and discrete audit [and review] services for [ATC Healthcare's] year end financial statements and once defendant performed the services for a particular year, no further work as to that year was undertaken (emphasis added).
The Court of Appeals' explanation also applies here:
Taken together, plaintiff's allegations establish defendant's [alleged] failures within a continuing professional relationship, not a course of representation as to the particular problems [conditions] that gave rise to plaintiff's malpractice claims. Plaintiff fails to allege that defendant and [ATC Healthcare] explicitly contemplated further representation regarding the [se] audits. Specifically, [ATC Healthcare] never engaged defendant to provide corrective or remedial services (e.g., to reexamine a prior year's financial statements or redo a prior year's audit). Nor [was ATC Healthcare] aware of the need for further representation as to the audits. Thus, the mutual understanding' required under the doctrine did not exist.
Symbol Technologies, Inc. v. Deloitte & Touche, LLP, supra, relied on by the plaintiff is readily distinguishable. In that case, the court did not rely on the mere possibility of restatements and reaudits based upon information subsequently discovered in applying the continuous treatment doctrine, but rather on that having actually occurred. To wit, the Second Department stated:
Symbol pleaded Deloitte had a continuing obligation to remedy defects found in [Symbol's financial] statements and, in fact, did so. Further, Symbol's allegation that Deloitte continued to provide auditing services through the end of 2003 in connection with the restatement of its (prior) audits without seeking the execution of new engagement letters suggests the continuation of their professional relationship for the years 1998 to 2001, inasmuch as each of the letters of engagement provided for new agreements to be executed for additional or different auditing services.... However, no separate engagement letter was obtained by Deloitte for the remedial accounting services it performed through the end of 2003 (emphasis added).” Symbol Technologies, Inc. v. Deloitte & Touche, LLP, supra, at p. 196.
Any claims of accounting malpractice premised upon reviews or audits predating February 6, 2006 are untimely and are dismissed.
To interpret and apply the continuous representation doctrine as ATC Healthcare would have this court could in effect eviscerate the Statute of Limitations for accounting malpractice for the duration of an accountant and his client's relationship particularly where, like here, a company is required to file comparative financial statements with The Securities and Exchange Commission. 17 CFR §§ 210.3–01, 210.3–02.