Opinion
C.A. No. 06C-03-206 PLA.
Submitted: August 6, 2007.
Decided: September 20, 2007.
ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT, DENIED.
This 20th day of September, 2007, upon consideration of the Motion for Summary Judgment filed by Defendant Master Sidlow Associates, P.A. ("Master Sidlow"), it appears to the Court that:
1. In 1998, The Island Farm, Inc. ("Island Farm") sold a Preservation Easement on approximately 1,073 acres of land in Delaware to the Delaware Agricultural Lands Preservation Foundation ("DALPF"). The sale closed on July 28, 1998. On the Settlement Statement, the "Contract Sale Price" was $1,717,366.28. Deducted from that amount was $686,946.51 which represented a "donation."
Docket 28, ¶ 1.
2. Master Sidlow prepared Island Farm's 1998 Federal Tax Return. On the Tax Return, Master Sidlow reported the "donation" to DALPF correctly in the amount of $686,949.51. The Tax Return also reported the "sale price" of $1,717,366.28 as the amount received by Island Farm for the sale. In reality, however, Island Farm only received $1,030,400.80 from DALPF, which was the amount reflected on the Settlement Statement.
Id., ¶ 2.
3. I.R.S. Reg. § 1.1011-2(c) permits a reduction of the basis of land sold for discounted price, also called a "bargain sale," to a charitable organization, such as DALPF. Because Master Sidlow failed to apply for the allowable reduction under § 1.1011-2(c) and failed to include the proper sale price, Master Sidlow miscalculated Island Farm's Federal taxes by approximately $233,566.00. Island Farm also overpaid its Delaware taxes by a similar amount.
4. In 2001, Island Farm terminated its relationship with Master Sidlow and retained the accounting firm of Jefferson, Urian, Doane Sterner ("Jefferson Urian"). While conducting an audit of Island Farm for the year 2005, Jay Stevens, an accountant with Jefferson Urian, discovered the 1998 tax return error. He advised Island Farm of the error on May 18, 2005.
Docket 28, ¶ 3.
5. Island Farm filed its complaint against Master Sidlow on March 20, 2006 alleging that Master Sidlow negligently prepared its 1998 federal and state tax returns that were filed in October, 1999.
Docket 25, ¶ 1.
6. Master Sidlow has filed the instant Motion for Summary Judgment arguing that Island Farm's complaint should be dismissed because the three year statute of limitations under 10 Del. C. § 8106 has run. Master Sidlow contends that the rule of discovery is inapplicable in this case because Board members of Island Farm knew of the error as early as 1998. To support this claim, Master Sidlow argues that the Island Farm Board directed two accountants, Scott Rothenberger and Eugene Dvornick, to inquire into the sale of the preservation easement that was sold at a discount. Master Sidlow also submits that Rothenberger used the term "bargain sale" at the same meeting, thereby placing the Board on inquiry notice. Finally, Master Sidlow identifies an email sent by Mr. Dvornick to other Master Sidlow accountants involved with the Island Farm account that indicates that Mr. Dvornick questioned whether the DALPF sale was treated appropriately for tax purposes.
Section 8106 states, in pertinent part:
No action . . . to recover damages caused by an injury unaccompanied with force or resulting indirectly from the act of the defendant shall be brought after the expiration of three years from the accruing of the cause of such action. . . .
10 Del. C. § 8106.
Docket 25, ¶ 5; Id., Ex. A.
Id., ¶ 7-8.
Docket 28, ¶ 12; Id., Ex. I.
7. In response, Island Farm argues that, under the discovery rule, the statute of limitations was tolled until 2005, since Island Farm could not have known of the error until that time. Hence, it argues that this suit is timely. Specifically, Island Farm notes that Mr. Dvornick, an Island Farm accountant, has no recollection of using the term "bargain sale" and would have referred any tax matters to Master Sidlow. Moreover, Island Farm notes that the email made no mention of a "bargain sale," and Mr. Dvornick had no recollection of anything other than what was stated in that email. Island Farms also points out that deposition testimony of Island Farm board members suggests that they would not have understood the term "bargain sale" in this context and would have relied upon Master Sidlow's expertise in tax matters. As a result, Island Farm submits that there was nothing that would have alerted them to the 1998 error.
Docket 28, ¶ 11. Master Sidlow agrees that Mr. Dvornick had no recollection of the meeting. See Docket 25, ¶ 6.
Id., ¶ 12.
8. When considering a motion for summary judgment, the Court's function is to examine the record to ascertain whether genuine issues of material fact exist and to determine whether the moving party is entitled to judgment as a matter of law. The court must "view the evidence in the light most favorable to the non-moving party." "The moving party bears the initial burden of demonstrating that the undisputed facts support his legal claims." If the proponent properly supports his claims, the burden "shifts to the non-moving party to demonstrate that there are material issues of fact for resolution by the ultimate fact-finder." Summary judgment will not be granted if, after viewing the record in a light most favorable to the non-moving party, there are material facts in dispute or if judgment as a matter of law is not appropriate. If, however, the record reveals that there are no material facts in dispute and judgment as a matter of law is appropriate, then summary judgment will be granted.
Super Ct. Civ. R. 56(c).
Storm v. NSL Rockland Place, LLC, 898 A.2d 874, 880 (Del.Super.Ct. 2005).
Id. at 879.
Id. at 880.
Id. at 879.
Id.
9. A cause of action in Delaware begins to accrue under Section 8106 "at the time of the wrongful act, even if the plaintiff is ignorant of [it]." The limitations period, however, may be tolled in certain instances under the discovery rule. In this case, the alleged wrongful act occurred in 1998, and Island Farm filed its complaint after the three year statute of limitations had expired. Thus, Island Farm may only maintain this suit if the statute was tolled under the discovery rule.
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004).
Id.
Both parties agree that 10 Del. C. § 8106 is the applicable statute of limitations statute.
10. The discovery rule permits the Court to toll the statute where there is evidence of concealment or fraud, or where the injury is "inherently unknowable and the claimant is blamelessly ignorant of the wrongful act and the injury complained of." Where a party presents such evidence, the statute will run "only upon the discovery of facts `constituting the basis of the cause of action or the existence of facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery' of such facts." These facts must usually be observable or objective factors that would alert laymen to the problem. The Court, however, must evaluate all of the facts before it applies the discovery rule.
Wal-Mart Stores, Inc., 860 A.2d at 319.
Id. (citing Coleman v. Pricewaterhousecoopers, LLC, 854 A.2d 838, 842 (Del. 2004)).
Began v. Dixon, 547 A.2d 620, 623 (Del.Super.Ct. 1988).
Isaacson, Stolper Co. v. Artisans' Sav. Bank, 330 A.2d 130, 133-34 (Del. 1974).
11. In similar circumstances involving a negligence action against an accountant, the Delaware Supreme Court in Isaacson, Stolper Co. v. Artisans' Savings Bank applied the discovery rule, thereby tolling the limitations period under Section 8106. In that case, the plaintiff did not learn of a tax deficiency until the I.R.S. sent him a letter. Though the discovery of the injury arose as a result of a client-taxing authority relationship, the Delaware Supreme Court accepted that the discovery rule could apply in a client-accountant relationship depending on the facts:
Id.
On September 18, 1974 the New Mexico Court of Appeals in Chisholm v. Scott, 86 N.M. 707, 526 P.2d 1300 applied the `time of discovery' rule to a malpractice case against an accountant. The Court stated that in the relationship of accountant and client the trust and confidence that client places in the professional person places him in a vulnerable position should that trust and confidence be misplaced. Further the Court indicated that it is the policy of the law to encourage such trust and confidence, and likewise it is the duty of the law to protect the client from the negligent acts of the professional person. We agree in principle.
Isaacson, Stolper Co., 330 A.2d at 134 (citations omitted).
12. More recently, in Coleman v. Pricewaterhousecoopers, LLC, the Delaware Supreme Court applied the discovery rule where the plaintiff learned of his accountant's negligence only after the statute of limitations expired. In Coleman, plaintiffs sold their company to Lason, Inc., who was ultimately unable to pay the full purchase price after it was discovered that Lason engaged in fraudulent accounting practices. Plaintiffs sued their accountant, Pricewaterhousecoopers, LLC ("PWC"), after the statute of limitations period, alleging that PWC negligently failed to discover Lason's fraudulent accounting practices, thereby causing the plaintiffs to lose money on the sale. The Delaware Supreme Court first noted the applicability of the discovery rule:
854 A.2d 838 (Del. 2004).
This Court has applied the above-described "discovery rule" in cases claiming accounting and attorney malpractice, because of the special character of the relationship between the professional and the client, and the inability of a layperson to detect the professional's negligence. . . . The professional nature of the relationship between PWC and the plaintiffs; the plaintiffs' inability to acquire by other means, information about the accounting treatment of Lason's financial statements upon which the plaintiffs relied when DIT [the plaintiffs' company] was acquired; and the need for persons in the plaintiffs' position to rely upon the accounting work performed by PWC, permit no other conclusion.
Coleman, 854 A.2d at 842 (citations omitted).
After establishing that the discovery rule applied, the Delaware Supreme Court reversed the Superior Court's grant of summary judgment, noting that whether the Court should apply the discovery rule could not be determined from the record:
First, it is unclear, as a factual matter, whether or not the 1999 e-mail should have aroused the plaintiffs' suspicions to a degree sufficient to impose upon the plaintiffs a duty of further inquiry. Second, it is impossible to determine from the present record whether a more diligent investigation, even if pursued, would have uncovered facts sufficient to enable the plaintiffs to discover the basis of their accounting malpractice claim. . . . Thus, there was no "red flag" that clearly and unmistakably would have led a prudent person of ordinary intelligence to inquire whether PWC had negligently failed to determine that Lason's pre-acquisition accounting practices violated GAAP. . . . Those facts alone preclude a determination as a matter of law that a more diligent inquiry by plaintiffs would have enabled them to uncover the irregularities between January 1999 and January 2002.
Id. at 842-43.
13. After reviewing the record in this case, the Court similarly determines that there are material issues of fact precluding a finding that Island Farm's action is not subject to the discovery rule. As in Coleman, the record is unclear, as a factual matter, with respect to whether Rothenberger mentioned "bargain sale" at any Board Meeting or whether any Island Farm board member referred to the term in any email, thereby placing Island Farm on notice of the 1998 error. Though there was an email addressed to Island Farm from Mr. Dvornick asking about the tax consequences of the Preservation Easement sale, there was no mention of a "bargain sale" and no indication that any members of Island Farm knew what that term meant for tax purposes. Since the Court cannot determine whether "bargain sale" was mentioned at a meeting and, if it was, whether the mention of the term should have put Island Farm on inquiry notice of the 1998 error, this case is not ripe for summary judgment.
For example, Karla Draper testified that Island Farm relied on Master Sidlow's expertise: "I mean she [Nancy Blumberg] was our representation that we relied on heavily because we were not capable of it. Obviously none of us were CPAs. She was the CPA and she handled everything for us." Docket 28, Ex. G, at 24:17-21.
14. The Court is unable to determine, as it was unable to do in Coleman, whether there was any "red flag" that should have alerted Island Farm as an ordinary prudent person to find the 1998 error had it engaged in a diligent inquiry at that time. Island Farm appropriately relied upon Master Sidlow to determine the tax consequences without inquiring into the 1998 tax returns "because of the special character of the relationship between the professional and the client, and the inability of a layperson to detect the professional's negligence." Here, Island Farm has offered evidence that members of Island Farm's board did not understand the "bargain sale" concept and relied upon Master Sidlow's expertise for all tax matters. Thus, the Court cannot determine as a matter of law whether Island Farm would have discovered the 1998 error had it engaged in greater due diligence.
Coleman, 854 A.2d at 842.
Docket 28, Exs. C, D, E, F, G.
15. Because the record is unclear as to whether Island Farm knew that the sale to DALPF constituted the "bargain sale," whether Island Farm understood the meaning of a "bargain sale" for tax purposes, or whether the use of that term would put an ordinary prudent businessperson on inquiry notice of the tax consequences of that term, the Court cannot determine as a matter of law whether the statute of limitations should be tolled in this case.
16. Based on all the foregoing, the Court finds that there is a genuine issue of material fact about whether Island Farm should have been alerted to the 1998 tax return error before the 2005 Jefferson Urian audit. The Court also finds that there is a genuine issue of material fact about whether Island Farm would have discovered the 1998 tax return error had it engaged in diligent inquiry. Accordingly, Defendant's Motion for Summary Judgment is DENIED.
IT IS SO ORDERED.
Original to Prothonotary