Opinion
No. X07 CV 07 5012262 S
June 12, 2008
MEMORANDUM OF DECISION
I
In this action, the plaintiff, Vigilant Insurance Company (Vigilant), seeks to recover monies paid to its insured, Conning Company (Conning), based upon the alleged failure of the defendant, Deloitte Touche, LLP (D T), to uncover embezzlement by one of Conning's employees. Vigilant alleges the following facts. Jeffrey F. Grous, who held several positions in the accounting and finance department at Conning, including controller, embezzled approximately $5.3 million from Conning from 1996 to 2002. For these losses, Vigilant paid Conning approximately $5.2 million as the fidelity insurer of Conning and its parent company, Swiss Re America Holding Company (SRAH). On July 2, 2001, SRAH acquired Conning from Metropolitan Life Insurance Company, Inc. (Met Life). D T, certified public accountants, were engaged by Met Life, for Conning, among others, to conduct audits for at least the year ending December 31, 2000. According to D T's August 28, 2000 engagement letter, the audits were to be conducted in accordance with generally accepted auditing standards (GAAS), "attestation standards established by the American Institute of Certified Public Accountants (AICPA)" and, as Conning is a broker-dealer and investment advisor, Rule 17a-5 of the Securities Exchange Act of 1934. In the year following D T's 2000 audit, Grous embezzled at least $481,466.11 from Conning. Vigilant seeks damages from D T for its alleged breach of contract to perform auditing services in conformance with GAAS, "attestation standards" of AICPA and Rule 17a-5 as it failed to discover Grous' embezzlement schemes.
In a companion lawsuit, Vigilant has sued Price Waterhouse Coopers, LLP (PWC), certified public accountants, as Conning's auditors for 2001-04 for losses sustained during that period. See Vigilant Ins. Co. v. PricewaterhouseCoopers, LLP, Superior Court, complex litigation at Hartford, Docket No. X07 CV 07 5010699.
Rule 17a-5, 17 C.F.R. § 240.17a-5(g), in relevant part, provides: "Audit objectives. (1) The audit shall be made in accordance with generally accepted auditing standards and shall include a review of the accounting system, the internal accounting control and procedures for safeguarding securities including appropriate tests thereof for the period since the prior examination date. The audit shall include all procedures necessary under the circumstances to enable the independent public accountant to express an opinion on the statement of financial condition, results of operations, cash flow, and the Computation of Net Capital under § 240.15c3-1, the Computation for Determination of reserve Requirements for Brokers or Dealers under Exhibit A of § 240.15c3-3, and Information Relating to the Possession or Control Requirements under § 240.15c3-3. The scope of the audit and review of the accounting system, the internal control and procedures for safeguarding securities shall be sufficient to provide reasonable assurance that any material inadequacies existing at the date of the examination in (a) the accounting system; (b) the internal accounting controls; (c) procedures for safeguarding securities; and (d) the practices and procedures whose review is specified in (I), (ii), (iii) and (iv) of this paragraph would be disclosed. Additionally, as specific objectives, the audit shall include reviews of the practices and procedures followed by the client;"
(I) In making the periodic computations of aggregate indebtedness and net capital under § 240.17a-3(a)(11) and the reserve required by § 240.15c3-3(e);
(ii) In making the quarterly securities examinations, counts, verifications and comparisons and the recordation of differences required by § 240.17a-13;
(iii) In complying with the requirement for prompt payment for securities of section 4(c) of Regulation T ( § 220.4(c) of chapter II of title 12) of the Board of Governors of the Federal Reserve System; and
(iv) In obtaining and maintaining physical possession or control of all fully paid and excess margin securities of customers as required by § 240.15c3-3. Such review shall include a determination as to the adequacy of the procedures described in the records required to be maintained pursuant to § 240.15c3-3(d)(4).
"(2) If the broker or dealer is exempt from § 240.15c3-3, the independent public accountant shall ascertain that the conditions of the exemption were being complied with as of the examination date and that no facts came to his attention to indicate that the exemption had not been complied with during the period since his last examination."
"(3) A material inadequacy in the accounting system, internal accounting controls, procedures for safeguarding securities, and practices and procedures referred to in paragraph (g)(1) of this section which is expected to be reported under these audit objectives includes any condition which has contributed substantially to or, if appropriate corrective action is not taken, could reasonably be expected to (i) inhibit a broker or dealer from promptly completing securities transactions or promptly discharging his responsibilities to customers, other broker-dealers or creditors; (ii) result in material financial loss; (iii) result in material misstatements of the broker's or dealer's financial statements; or (iv) result in violations of the Commission's recordkeeping or financial responsibility rules to an extent that could reasonably be expected to result in the conditions described in paragraphs (g)(3)(I), (ii), or (iii) of this section."
Vigilant's complaint consists of two counts: the first alleges breach of contract through equitable subrogation and the second alleges breach of contract through assignment. D T moves to strike both counts of the complaint arguing that Vigilant's complaint sounds in negligence and not contract. Hence, as this suit was commenced August 3, 2007, approximately six and one-half years after D T issued its audit opinion letters on February 5, 2001, D T argues that Vigilant is barred from bringing suit by the three-year negligence statute of limitations, General Statutes § 52-577, and that the six-year statute of limitations for contract actions, General Statutes § 52-576, is not applicable.
Section 52-577 provides: "No action founded upon a tort shall be brought but within three years from the date of the act or omission complained of."
Section 52-576, in relevant part, provides: "(a) No action for an account, or on any simple or implied contract, or on any contract in writing, shall be brought but within six years after the right of action accrues . . ."
In response, Vigilant argues that it may plead both in contract and in tort and that this is a properly pleaded contract action. Therefore, § 52-576 applies and its suit is timely. This court heard oral argument on the motion to strike on March 10, 2008.
Vigilant alleges that the parties entered into a tolling agreement which, in effect, provided that its claims are deemed to have been brought by January 19, 2007.
II
"A motion to strike challenges the legal sufficiency of a pleading . . . and, consequently, requires no factual findings by the trial court . . . [W]e construe the complaint in the manner most favorable to sustaining its legal sufficiency . . . [I]f facts provable in the complaint would support a cause of action, the motion to strike must be denied . . . Thus, we assume the truth of both the specific factual allegations and any facts fairly provable thereunder. In doing so, moreover, we read the allegations broadly . . . rather than narrowly." (Internal quotation marks omitted.) Batte-Holmgren v. Commissioner of Public Health, 281 Conn. 277, 294, 914 A.2d 996 (2007). "Although ordinarily — indeed, in most cases — in reviewing a motion to strike, the court must take the plaintiff's allegations at face value, that rule is not absolute." (Internal quotation marks omitted.) Pelletier v. Galske, 105 Conn.App. 77, 81, 936 A.2d 689 (2007), cert. denied, 285 Conn. 921, 943 A.2d 1100 (2008).
III
Vigilant properly argues that it may plead both in contract and tort. See Weiner v. Clinton, 106 Conn.App. 379, 383, 942 A.2d 469 (2008) ("Connecticut law recognizes that one may bring against an attorney an action sounding in both negligence and contract" [internal quotation marks omitted]). D T's central argument is, however, that Vigilant's allegations in paragraphs twenty-six and thirty-five sound in negligence. Paragraph twenty-six alleges, "Upon information and belief, D T, in the planning and performing of its audits and professional services rendered for fiscal year 2000, failed to understand Conning's internal controls, failed to report material weaknesses in internal controls that made Conning vulnerable to theft and/or other illegal activities, failed to conduct the audits in accordance with the professional standards and the applicable requirements of SEC Rule 17a-5, and failed to uncover the unauthorized expenditures from any of Grous' embezzlement schemes." Paragraph thirty-five states, "D T breached its contract by failing to provide attentive, competent and diligent professional service as accountants for Conning and failed to plan and perform audits in accordance with applicable professional standards and requirements." D T maintains that these paragraphs state a cause of action for negligence. Specifically, D T argues that Vigilant is not alleging that D T failed to perform the audit (a breach of contract claim), but, rather, that Vigilant is claiming that D T failed to perform the audit properly (a negligence claim). D T cites Gazo v. Stamford, 255 Conn. 245, 263, 765 A.2d 505 (2001), for the proposition that the court must "look beyond the language used in the complaint to determine what the plaintiff really seeks. Just as [p]utting a constitutional tag on a nonconstitutional claim will no more change its essential character than calling a bull a cow will change its gender . . . putting a contract tag on a tort claim will not change its essential character. An action in contract is for the breach of a duty arising out of a contract; action in tort is for a breach of duty imposed by law." (Citation omitted internal quotation marks omitted.)
While this issue has been addressed in a number of cases, two recent cases decided by our Appellate Court are instructive. The first is Connecticut Education Assn., Inc. v. Milliman USA, Inc., 105 Conn.App. 446, 938 A.2d 1249 (2008), in which the court stated, "It is well settled that an attorney may be subject to a claim for breach of contract arising from an agreement to perform professional services . . . In a claim such as this, the client [usually] has the option to sue for either breach of an implied contract, negligence or both . . . That is not to say, however, that a party may bring an action in both negligence and contract merely by couching a claim that one has breached a standard of care in the language of contract. Thus, we believe that a claim that a defendant promised to work diligently or in accordance with professional standards is not made a contract claim simply because it is couched in the contract language of promise and breach." (Citations omitted; internal quotation marks omitted.) Id., 457-58. The court highlighted two cases: Hill v. Williams, 74 Conn.App. 654, 659, 813 A.2d 130, cert. denied, 263 Conn. 918, 822 A.2d 242 (2003) that concluded that the allegations were more than negligence and went beyond "being merely couched in the language of tort" and Rosato v. Mascardo, 82 Conn.App. 396, 410, 844 A.2d 893 (2004) where the court found the claim "specified alleged acts of the defendant that would constitute a deviation from the alleged agreement between the parties." Id., 459. The court then stated, "[t]he plaintiff alleged that the defendant agreed to maintain the pension plan in compliance pursuant to the Internal Revenue Service code and ERISA and agreed, as part of said contract, to perform said services with due diligence and reasonable care. It further alleged that the defendant breached the contract, inter alia, by failing to provide competent and professional legal services necessary and appropriate to maintain the [pension plan] in good standing as a qualified defined benefit pension plan, and to perform said services with due diligence and reasonable care. We conclude that these allegations set forth a breach of contract claim, and are more than a malpractice claim couched in the language of promise and breach. The plaintiff's allegations refer to specific actions required by the plaintiff that is, that the defendant maintain the pension plan in compliance with the Internal Revenue Service code and ERISA. The operative complaint further sets forth a claim that the defendant had agreed to undertake those specific actions with due diligence and reasonable care. We conclude . . . that the plaintiff's claim does not functionally sound in tort." (Internal quotation marks omitted.) Id., 459-60. The court added, "[i]t was not a general allegation of a failure on the part of the defendant to exercise due diligence . . . Instead, it claimed that the defendant failed to act with due diligence and reasonable care with respect to a contract specifically obligating the defendant to maintain the pension plan in good standing under the Internal Revenue Service code and ERISA." Id., 461.
See, e.g., Caffery v. Stillman, 79 Conn.App. 192, 197-98, CT Page 9913 829 A.2d 881 (2003); Mac's Car City, Inc. v. DeNigris, 18 Conn.App. 525, 529-30, 559 A.2d 712, cert. denied, 212 Conn. 807, 563 A.2d 1356 (1989); Shuster v. Buckley, 5 Conn.App. 473, 478, 500 A.2d 240 (1985); see also Sutera v. Washton, Superior Court, judicial district of New London, Docket No. CV 0556177 (March 14, 2003, Corradino, J.) (34 Conn. L. Rptr. 388).
The second recent case is Weiner v. Clinton, supra, 106 Conn.App. 382, a legal malpractice action in which summary judgment was entered based § 52-577 despite the plaintiffs' argument that their second count sounded in contract. The court held that the tort and contract counts were identical as "[b]oth allege that the defendant failed to use reasonable care, skill and diligence in providing legal services to the plaintiffs." Id., 384. The court noted that the contract count "contains no allegations that refer to specific actions required by the defendant." Id., 385. The court added that, "[t]he second count does not assert that a defendant who is a professional breached an agreement to obtain a specific result . . . Rather, it simply repeats the allegation that the defendant breached the standard of care applicable to legal professionals. Accordingly, the court properly pierced the pleading veil and concluded that the plaintiffs' claim was one sounding in malpractice masked in contract garb." (Citation omitted; internal quotation marks omitted.) Id. 385-86.
In the present case, Vigilant argues that these cases support its argument that it has successfully pleaded a cause of action for breach of contract and devotes much of its memorandum of law in opposition to the motion to strike to arguing that it may plead both contract and tort causes of action in a professional services case. As noted in Milliman, that broad principle holds true. See Connecticut Education Ass'n, Inc. v. Milliman USA, Inc., supra, 105 Conn.App. 457-58. That is, however, not the inquiry in this case. Rather, the issue is whether Vigilant has properly and sufficiently pleaded a cause of action sounding in contract as opposed to tort. See id., 458 ("If a contract claim was set forth, then the six year statute of limitations applied. If a tort claim was set forth, then the court properly concluded that it was time barred by the three year statute of limitations.").
Vigilant also argues that the motion to strike should not be used to establish a statute of limitations defense. It cites Forbes v. Ballaro, 31 Conn.App. 235, 239, 624 A.2d 389 (1993) for the proposition that "[a] claim that an action is barred by the lapse of the statute of limitations must be pleaded as a special defense, not raised by a motion to strike." This point was not pressed at oral argument. Nevertheless, in the Appellate Court's recent opinion in Pelletier v. Galske, supra, 105 Conn.App. 83, the court held, "[n]otwithstanding that embedded in the language of the plaintiff's claim are the contractual rudiments of promise and breach, [w]here the plaintiff alleges that the defendant negligently performed legal services . . . the complaint sounds in negligence, even though he also alleges that he retained him or engaged his services . . . As a matter of law, the complaint sets forth a legal malpractice claim. As a malpractice claim, the sole count in the complaint is not governed by the six year statute for contract actions set forth in General Statutes § 52-576, but rather was time barred by the three year statute of limitations for tort claims set forth in § 52-577. The court, therefore, properly granted the defendant's motion to strike the plaintiff's complaint." (Citation omitted; internal quotation marks omitted.) Id. Forbes is not mentioned in the Pelletier opinion.
"[T]he interpretation of pleadings is always a question of law for the court." Id. Where the plaintiff's allegations refer to specific actions required by the plaintiff and where the complaint sets forth a claim that the defendant had agreed to undertake those specific actions with due diligence and reasonable care, the plaintiff's claim does not functionally sound in tort. Id., 459-60.
Construing the complaint most favorably for Vigilant, this court finds that Vigilant has sufficiently pleaded a cause of action in contract. D T was not simply required to perform an audit, which allegedly it failed to perform properly, but, rather, and controlling herein, it allegedly breached its engagement letter by failing to perform those specific requirements found in paragraphs nineteen through twenty-one of the complaint. Specifically, in paragraph nineteen of the complaint, Vigilant alleges: "D T's August 28, 2000 engagement letter specifically stated that D T will conduct `audits of the Company's . . . statutory and GAAP financial statements . . . in accordance with auditing standards generally accepted in the United States of America' or `GAAS.' Among other things, D T stated that its audit would include `obtaining an understanding of internal control sufficient to plan the audit and to determine the nature, timing, and extent of audit procedures to be performed.'" Additionally, in paragraph twenty of Vigilant's complaint, it alleges that "D T agreed to perform an examination in accordance with the attestation standards established by the American Institute of Certified Public Accountants (AICPA) and the issuance of an attestation report on management's written assertion regarding the effectiveness of [Conning's] internal control over financial reporting as of December 31, 2000 and to perform an examination of management's assertions regarding the Company's policies and procedures relating to information barrier controls . . ." Finally, Vigilant alleges that the D T audit of Conning was "also subject to the requirements of Rule 17a-5" in paragraph twenty-one of its complaint.
Because the action sounds in contract, § 52-576 is the relevant statute of limitations. Pursuant to the parties' tolling agreement, Vigilant brought its complaint within six years of the issuance of D T's audit opinion letters. Therefore, the court finds that Vigilant's suit is not barred by the statute of limitations. Accordingly, the motion to strike is denied.