Opinion
96 Civ. 0255 (MGC)
January 2000
WILLIAM, CUTLER PICKERING, Stephen E. Black, Esq., Charles E. Davidow, Esq., and Stuart F. Delery, Esq., for Plaintiff.
SIDLEY AUSTIN, Michael D. Warden, Esq., Alan C. Geolot, Esq., and John G. Hutchinson, Esq., for Defendant.
MEMORANDUM OPINION
The Common Fund has brought an action alleging professional malpractice, breach of contract, and negligent misrepresentation by its former accountants KPMG LLP based on KPMG's alleged failure to discover wrongdoing and lack of appropriate internal controls at First Capital Strategists, one of The Common Fund's fund managers and another defendant in this case. Several other motions were decided in open court after oral argument, but decision was reserved on KPMG's motion to dismiss The Common Fund's 1993 and 1994 contract claims on the ground that those claims are duplicative of the malpractice claims covering the same time period. The contract claims are based on letters that KPMG annually sent to The Common Fund describing KPMG's plan for that year's year-end audits ("planning letters"). For the following reasons the motion is denied.
KPMG was named in the Complaint as KPMG Peat Marwick LLP and is referred to throughout as Peat Marwick. The company's legal name is now KPMG LLP.
DISCUSSION
The discrete issue upon which decision was reserved is whether the contract claims based on the planning letters submitted by KPMG to The Common Fund in fiscal years 1993 and 1994 are duplicative of the malpractice claims for those years.
The law is well settled in New York that a breach of contract claim premised on a professional's failure to exercise due care or to abide by general professional standards is nothing but a redundant pleading of a malpractice claim. Levine v. Lacher Lovell-Taylor, 256 A.D.2d 147, 151, 681 N.Y.S.2d 503, 506 (1st Dep't 1998). In order to bring both a malpractice claim and a breach of contract claim the plaintiff must allege that the professional "promised to achieve a specific result or to perform a particular task and then breached that promise." Ayala v. Fischman, No. 97 Civ. 6698, 1998 WL 726005, at *4 (S.D.N.Y. Oct. 15, 1998). See also Fund of Funds, Ltd. v. Arthur Andersen Co., 545 F. Supp. 1314, 1364 (S.D.N.Y. 1982) (holding that accountants' specific undertaking to report "irregularities" to client was actionable as a contractual duty separate from the obligation to use due professional care in performing an audit).
I. The 1993 Claim
The prior rulings leave open the question of whether any or all of the terms in the planning letters are contractually binding. The 1993 planning letter provides that KPMG will "focus on risk." (Def. Ex. 78.) In this letter KPMG states "[o]ur risk assessment is designed to go beyond the financial statements and to address the business risks that may adversely affect your organization. We will focus on the more significant risks to evaluate whether there are appropriate systems and controls to identify, limit, and monitor these risks." (Id.)
The quoted language, assuming it is a binding promise, does not specifically mention any action to be taken with regard to First Capital. However, in his deposition, The Common Fund's accounting expert, Ernest L. Ten Eyck, stated that "going beyond the financial statements" is something more than an audit in accordance with Generally Accepted Auditing Standards. (Ten Eyck Dep. at 236.) KPMG does not refute this point. There is some evidence that The Common Fund asked KPMG to evaluate potential risks at First Capital throughout the period during which KPMG acted as The Common Fund's accountant. (Franzese Dep. at 131-34.) What the parties intended the language of the planning letter to mean and whether it constitutes a binding promise to investigate First Capital beyond Generally Accepted Auditing Standards is a material question of fact that the parties dispute. If the language does obligate KPMG to go beyond a typical audit, the claim that KPMG breached its promise to do so is not duplicative of the malpractice claim. Accordingly, the motion to dismiss the contract claim based on the 1993 planning letter is denied.
II. The 1994 Claim
This claim is based on a planning letter stamped "draft." However, the holding that there is a disputed question of material fact as to whether the planning letters are binding contracts applies to this document. The terms of this document may memorialize a contract between the parties. For purposes of this motion, it is assumed but not decided that the 1994 planning letter is a binding agreement.
The 1994 planning letter does specifically mention First Capital.
We have scheduled on-site meetings in early February with First Capital Strategists to review the reporting mechanisms by which management will monitor its compliance with The Common Fund's security lending guidelines, as well as review their internal reporting functions, the controls thereon, and the integrity of financial information which they provide to The Common Fund. We will also perform detailed tests to ascertain compliance with the aforementioned guidelines.
This paragraph contains a specific plan to perform "detailed tests" of First Capital to determine whether First Capital was complying with The Common Fund's security lending guidelines. The Common Fund alleges that KPMG failed to perform such tests. There is a genuine issue of disputed fact as to whether this statement created a binding agreement apart from the general obligation to act in accordance with professional standards of due care. Therefore, this claim cannot be dismissed as duplicative of the malpractice claim.
CONCLUSION
For the foregoing reasons, KPMG's motion for summary judgment on the 1993 and 1994 contract claims on the ground that they are duplicative of the malpractice claims is denied.
SO ORDERED.