Opinion
No. 2988–11.
2013-03-1
STATE OF NEW YORK WORKERS' COMPENSATION BOARD, in its capacity as the governmental agency charged with administration of the Workers' Compensation Law and attendant regulations, and in its capacity as the successor in interest to the New York Healthcare Facilities Workers' Compensation Trust, Plaintiff, v. Cathy MADDEN, Linda Villano, Phyliss Ettinger, Patricia Huber, Rosa Barksdale, Susan Olivet, Elizabeth Rosenberg, Sam Harte, Daniel Mushkin, Timothy Ferguson, Scott Lockwood, Lynn Edmonds, Berenson & Co., LLP, James Mcgarrity, Lorette Belgraier and Steven Glaser, Defendants.
Rupp, Baase, Pfalzgraf, Cunninghan & Coppola LLC, (Daniel E. Sarzynski and Charles D.J. Case, of counsel), Buffalo, Attorneys for Plaintiff. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, (Peter A. Lauricella, and Benjamin F. Neidl, of counsel), Albany, Attorneys for Cathy Madden, Linda Villano, Phyliss Ettinger, Patricia Huber, Elizabeth Rosenberg, Sam Harte, Timothy Ferguson and Lynn Edmonds.
Rupp, Baase, Pfalzgraf, Cunninghan & Coppola LLC, (Daniel E. Sarzynski and Charles D.J. Case, of counsel), Buffalo, Attorneys for Plaintiff. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, (Peter A. Lauricella, and Benjamin F. Neidl, of counsel), Albany, Attorneys for Cathy Madden, Linda Villano, Phyliss Ettinger, Patricia Huber, Elizabeth Rosenberg, Sam Harte, Timothy Ferguson and Lynn Edmonds.
Watson Bennett Colligan & Schechter LLP, (Scott M. Lupiani, of counsel), Buffalo, Attorneys for Daniel Muskin.
Landman Corsi Ballaine & Ford, P.C., (Louis G. Corsi, of counsel), New York, Attorneys for Lorette Belgraier.
Hiscock & Barclay, LLP, (David B. Cabaniss, of counsel), Albany, Attorneys for Steven Glaser.
Jaeckle Fleischmann & Mugel, LLP, (Charles C. Swanekamp, of counsel), Buffalo, Attorneys for Berenson & Co.
RICHARD M. PLATKIN, J.
This is a commercial action brought by plaintiff State of New York Workers' Compensation Board (“WCB”) in its capacities as the governmental entity charged with the administration of the Workers' Compensation Law and as successor in interest to the New York Healthcare Facilities Workers' Compensation Trust (“the Trust”). Five separate motions to dismiss the complaint pursuant to CPLR 3211 are pending before the Court.
BACKGROUND
As alleged in the WCB's complaint, the Trust was a group self-insured trust (“GSIT”) formed pursuant to Workers' Compensation Law (“WCL”) § 50–a. Its members were home health-care employers that conducted business in New York State and were required to provide workers' compensation insurance to their employees.
The Trust was formed on or about May 30, 1997 when the initial employer-members and board of trustees (“Board of Trustees” or “Board”) approved the trust agreement (“Trust Agreement”). On or about June 3, 1997, the Board approved by-laws (“By–Laws”). The WCB authorized the Trust to operate as a GSIT on or about July 1, 1997.
From December 15, 1997 to July 31, 2006, The Hamilton Wharton Group, Inc. (“HWG”) and Walter B. Taylor, its managing director, sole shareholder and sole employee, served as the Trust's group administrator and program administrator. On or about December 15, 1997, HWG and the Trust entered into a service agreement (“Service Agreement”) setting forth their respective obligations.
According to the complaint, the Trust operated at a loss every year between 1997 and 2006. As of July 31, 2006, the Trust had an accumulated deficit of approximately $33 million. It is the WCB's contention that defendants' actions and inactions caused the Trust to become underfunded and/or insolvent. As a result of the deficit, the WCB assumed administration and final distribution of the Trust's assets and liabilities on July 31, 2006. As of the date of the complaint, the remaining assets and available security of the Trust have been exhausted, and the Trust is insolvent within the meaning of 12 NYCRR § 317.20. As a result, the WCB meets the Trust's financial obligations and its own expenses of administering the Trust with monies from the WCB administrative fund. In accordance with 12 NYCRR § 317.20, the WCB is the successor in interest to the Trust.
While the specific factual allegations lodged against particular defendants will be detailed below, the complaint generally alleges that the trustees failed to devise and implement an appropriate strategy or policy for levying assessments on Trust members. According to the complaint, the Trust's governing documents required the trustees to levy assessments in the event that the Trust's assets actuarially were insufficient to discharge the Trust's legal liabilities ( see12 NYCRR § 317.9). However, an actuary was not retained until 2000, when the Trust already was operating at a deficit. Also in 2000, HWG retained the services of Ernst & Young (“E & Y”) to assist in the preparation of audited financial statements for 1997 through 1999.
On or about October 9, 2002, the WCB directed the Board of Trustees to suspend the addition of new members due to the Trust's underfunded status. The WCB also directed the Board to engage the services of outside audit consultants to examine the Trust's finances. By letter dated August 15, 2002, the Trustees, HWG and Taylor, detailed a multi-year plan of action to bring the Trust to a fully funded status. Subsequently, in several conversations and through correspondence with the WCB, the Board of Trustees continued to take the position that the Trust's underfunded status was not severe enough to imperil its continuation as a going concern.
In or about July 2003, the WCB retained PricewaterhouseCoopers (“PwC”) to conduct a fiscal and actuarial audit of the Trust. The audit found a deficiency of approximately $7.3 million as of the fiscal year ending 2002. In reviewing the Trust's audited financial statements for the fiscal year ending 2003, the WCB found a deficit of approximately $15.5 million.
By letter dated June 23, 2004, the WCB provided the Board of Trustees with a copy of PwC's report. This letter directed the Board and Taylor to submit a corrective action plan that addressed the deficit. By letter dated October 19, 2004, the WCB again directed the Board to supply the WCB with a corrective action plan.
On or about November 3, 2004, the WCB met with HWG and the Board of Trustees to discuss the Trust's deficit of more than $15 million. During this meeting, the WCB reiterated the need for the Board of Trustees and HWG to develop a plan to correct the Trust's underfunded status. The WCB recommended that the Board and HWG consider levying an immediate assessment on current and former Trust members. However, the Board of Trustees did not develop such a plan until April 2005.
The complaint alleges that defendants Madden, Villano, Ettinger, Huber, Barksdale, Olivet, Rosenberg, Harte, Mushkin, Ferguson, Lockwood, and Edmonds, all of whom are alleged to have been members of the Board of Trustees at pertinent times, breached their contractual and fiduciary duties to the Trust and its members. It is the WCB's contention that the numerous and persistent breaches of contract and fiduciary duty by the trustee defendants—including failures and deficiencies with respect to payroll audits, annual financial audits, safety programs, claims administration, underwriting and premium discounts—exacerbated the Trust's deficit of approximately $33 million (as of the date of the complaint).
The complaint further alleges that HWG and Taylor retained defendant McGarrity as the Trust's accountant in 2000. According to the complaint, McGarrity failed to perform certain of the work for which he was hired, including advising the Board of Trustees and Trust members of the Trust's financial status. Additionally, the WCB alleges that E & Y was poised to issue a qualified or going concern opinion letter that would have called into question the Trust's ability to meet its ongoing financial obligations, including the payment of workers' compensation benefits, and that McGarrity was instrumental in terminating the services of E & Y and substituting a different auditor before the letter could be issued. The complaint alleges that McGarrity's termination of E & Y was a deliberate act intended to conceal the Trust's true financial condition from the Trust, its members, and the WCB. Further, McGarrity is alleged to have knowingly withheld from the WCB annual reports that accurately portrayed the Trust's financial condition.
The complaint goes on to allege that McGarrity, HWG, and Taylor hired defendant Berenson & Co., LLP (“Berenson”) to replace E & Y to prepare the Trust's audited financial statements for the years 1997, 1998, and 1999. HWG and Taylor also are alleged to have hired defendant Belgraier to perform accounting functions for the Trust, including posting entries, preparing checks for issuance, and preparing schedules and internal financial statements. Finally, in or about 2000, HWG and Taylor retained Glaser as The Trust's counsel. The wrongful actions and inactions of these professional defendants all are alleged to have contributed to the Trust's deficits and underfunded status.
LEGAL STANDARD
Under CPLR 3211(a)(1), dismissal is warranted if documentary evidence conclusively establishes a defense as a matter of law (Haire v. Bonelli, 57 A.D.3d 1354, 1356, 870 N.Y.S.2d 591 [3d Dept 2008], citing Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324 [2007];see Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 [2002];Angelino v. Michael Freedus, D.D.S., P.C., 69 A.D.3d 1203, 1205, 893 N.Y.S.2d 668 [3d Dept 2010] ). On such a motion, “affidavits submitted by a defendant do not constitute documentary evidence upon which a proponent of dismissal can rely” (Crepin v. Fogarty, 59 A.D.3d 837, 838, 874 N.Y.S.2d 278 [3d Dept 2009] ).
On a motion to dismiss made pursuant to CPLR 3211(a)(7), “the Court must afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference” (EBC 1, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 19 [2005] ). The Court's “sole criterion is whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law a motion for dismissal will fail” (Polonetsky v. Better Homes Depot, 97 N.Y.2d 46, 54 [2001] [internal quotations omitted] ). The test is whether the plaintiff “has a cause of action, not whether he has stated one” (Leon v. Martinez, 84 N.Y.2d 83, 88 [1994];see also Matter of Niagara Mohawk Power Corp. v. State of New York, 300 A.D.2d 949, 954, 753 N.Y.S.2d 541 [3d Dept 2002] ). However, the Court need not “accept as true legal conclusions or factual allegations that are either inherently incredible or flatly contradicted by documentary evidence” (1455 Washington Ave. Assoc. v. Rose & Kiernan, 260 A.D.2d 770, 771, 687 N.Y.S.2d 791 [3d Dept 1999] [internal citations omitted] ).
Finally, dismissal is warranted under CPLR 3211(a)(5) where the movant establishes that a cause of action may not be maintained due to the expiration of the statute of limitations.
THE TRUSTEES
Defendants Cathy Madden, Linda Villano, Phyliss Ettinger, Patricia Huber, Elizabeth Rosenberg, Sam Harte, Timothy Ferguson and Lynn Edmonds move for dismissal of the three causes of action asserted against them: (1) breach of fiduciary duty; (2) breach of contract; and (3) implied indemnification. In addition, Daniel Mushkin moves separately for the same relief upon the same grounds, but submits additional documentary evidence in support of his motion. The foregoing defendants shall hereinafter be referred to collectively as the “Trustee Defendants” or “Trustees”.
Three of the named trustees, Rosa Barksdale, Susan Olivet and Scott Lockwood, have not participated in the instant motion practice.
A.Breach of Fiduciary Duty
The WCB alleges that the Trustees breached their fiduciary duties to the Trust by, among other things: disregarding their obligation to act for the Trust with due care and in a reasonable and prudent manner; failing to hold regular Board meetings; failing to oversee the Trust's day-to-day operations; failing to oversee the Trust's finances; failing to keep adequate records of their own activities; failing to perform due diligence in their retention of HWG and Taylor; failing to solicit the services of other group or program administrators; allowing HWG, its employees, and/or officers, including Taylor, to fabricate Board of Trustee meeting minutes and records; and by failing to oversee any the activities of HWG and Taylor. The Trustee Defendants contend that the WCB's cause of action for breach of fiduciary duty must be dismissed as barred by the applicable statute of limitations and the terms of the Trust Agreement.
The Court begins its analysis with the threshold issue of the timeliness of the claim. “New York law does not provide a single statute of limitations for breach of fiduciary duty claims. Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Where the remedy sought is purely monetary in nature, courts construe the suit as alleging injuries to property' within the meaning of CPLR 214(4), which has a three-year limitations period. Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213(1) applies” (IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 139–140 [2009] ). As the WCB's complaint seeks only monetary damages, the Trustees argue that plaintiff's cause of action is subject to a three-year limitations period.
In opposition, the WCB contends that the breach of fiduciary duty claim should be afforded the benefit of the six-year statute of limitations applicable to breach of contract claims because “all of [the Trustees'] potential liability arose out of the initial contractual agreement” (Memorandum of Law In Opposition, at 23). It is WCB's contention that the Trustees' fiduciary duties “arose out of the Trust Agreement and existed independently of the Trust Agreement. These fiduciary duties remain inextricably intertwined with the factual predicate of the breach of contract claim. Under such circumstances, the WCB's cause of action for breach of fiduciary duty is subject to the same six-year limitations period as the breach of contract action” ( id.)
The Court does not find plaintiff's argument persuasive. The principal case submitted by the WCB in support of this argument, Baff v. Redfield Blonsky & Co., 1995 WL 242107 (1995 U.S. Dist LEXIS 5400 [S.D.N.Y.1995] ), cites and relies upon Santulli v. Englert, Reilly & McHugh, P.C. (78 N.Y.2d 700 [1992] ). In Santulli, the Court of Appeals held that where a professional negligence claim arises out of a contractual relationship and the remedy sought is the recovery of damages to property or other pecuniary loss, the six-year limitations period of CPLR 213(2) applies (78 N.Y.2d at 707, 579 N.Y.S.2d 324, 586 N.E.2d 1014). However, the mode of analysis applied in Santulli was rejected by the State Legislature in 1996 when it amended CPLR 214(6) to clarify that “the limitations period in non-medical malpractice claims against professionals is three years, whether the underlying theory is based in contract or tort' “ (Chase Scientific Research v. NIA Group, 96 N.Y.2d 20, 27 [2001], quoting CPLR 214[6], as amended by L 1996, ch 623 [“Chapter 623”] ). Given the Baff court's reliance on pre-Chapter 623 doctrine, the case lacks precedential force today.
More fundamentally, the mode of analysis relied upon by the WCB directly is refuted by IDT, in which the New York State Court of Appeals held that “[w]here the remedy sought [in a claim for breach of fiduciary duty] is purely monetary in nature, courts construe the suit as alleging injuries to property' within the meaning of CPLR 214(4), which has a three-year limitations period” (12 N.Y.2d at 139–140, 237 N.Y.S.2d 308, 187 N.E.2d 769).
Indeed, the fiduciary relationship in IDT could be said to have arisen out of the parties' contractual relationship, which involved the defendant contracting to serve as an investment banker and financial adviser to the plaintiff, but the Court of Appeals nonetheless applied a three-year limitations period.
The other case relied upon by the WCB (Lavin v. Kaufman, Greenhut, Lebowitz & Forman, 226 A.D.2d 107, 109, 640 N.Y.S.2d 57 [1st Dept 1996] ) also is distinguishable as it concerned allegations of actual fraud.
Accordingly, IDT is controlling, and the WCB's claim for breach of fiduciary duty, which seeks purely monetary relief and is unsupported by allegations of actual fraud, is governed by a three-year statute of limitations.
Indeed, many claims for breach of fiduciary duty find their genesis in an initial contractual relationship, whether a trust agreement, a contract to render professional or advisory services or the governing documents of a corporation, partnership or other business entity.
The issue then becomes accrual. A claim for breach of fiduciary duty generally accrues “as soon as the claim becomes enforceable, i.e., when all elements of the tort can be truthfully alleged in a complaint. As with other torts in which damage is an essential element, the claim ... is not enforceable until damages are sustained” ( IDT, 12 N.Y.2d at 140–141, 237 N.Y.S.2d 308, 187 N.E.2d 769 [internal quotation marks omitted] ). Accordingly, the statute of limitations ordinarily begins to run on the earliest date upon which the alleged breach of duty causes the plaintiff to sustain damages ( see Cator v. Bauman, 39 A.D.3d 1263, 1264, 833 N.Y.S.2d 811 [4th Dept 2007]; Kaufman v. Cohen, 307 A.D.2d 113, 121, 760 N.Y.S.2d 157 n3 [1st Dept 2003] ). However, “[t]he statute of limitations is tolled until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated” (People v. Ben, 55 A.D.3d 1306, 1308, 866 N.Y.S.2d 464 [4th Dept 2008] ).
The Trustees argue that any fiduciary relationship was severed no later than July 31, 2006, when the WCB assumed administration of the Trust. On that basis, the Trustees argue that this action, commenced on May 2, 2011, is untimely. The WCB responds that its cause of action against the Trustees for breach of fiduciary duty accrued no later than February 19, 2008, when it received a forensic audit of the Trust, and no earlier than July 31, 2006, “when the fiduciary relationship was terminated” (Memorandum of Law In Opposition, at 24). However, application of the three-year limitations period of CPLR 214(4) leads to the conclusion that this cause of action is untimely under either of these accrual dates.
In any event, for substantially the reasons stated infra, the Court sees no basis for applying a February 19, 2008 accrual date. While a claim for breach of fiduciary duty is not enforceable until damages have been sustained, the Trust (and the WCB, as its successor-in-interest), did not sustain damages as a result of receipt of the forensic accounting report.
In this connection, the Court rejects the WCB's effort to raise questions of fact concerning the existence of a fiduciary relationship between the Trustees and the Trust on and after July 31, 2006, when the WCB assumed administration of the Trust (Complaint ¶ 78).
Given the WCB's takeover of the Trust on July 31, 2006 and the absence of allegations that the breaches of duty are of a type that survive termination of the fiduciary relationship ( cf. Country Club Partners, LLC v. Goldman, 79 A.D.3d 1389, 1391, 913 N.Y.S.2d 803 [3d Dept 2010] ), the Trustees' fiduciary relationship with the Trust must be deemed to have been severed by July 31, 2006.
While it is true that defendants have the initial burden of demonstrating that the alleged breaches of fiduciary duty occurred outside the applicable limitations period, the “burden then shift[s] to the plaintiff to raise a question of fact” upon such a showing (Macaluso v. Del Col, 95 A.D.3d 959, 960, 944 N.Y.S.2d 589 [2d Dept 2012] ).
This conclusion is entirely consistent with the purpose of the “open repudiation” rule, which is grounded upon the notion that “[u]ntil ... repudiation occurred, the beneficiaries of the [trust] were entitled to assume that the administrator would perform his trust responsibilities” (Tydings v. Greenfield, Stein, & Senior, LLP, 11 N.Y.3d 195, 202 [2008] ). No one reasonably could have assumed that the Trustees would have continued to perform trust responsibilities after the WCB takeover. In fact, the WCB's complaint refers to July 31, 2006 as the date of the Trust's “dissolution” ( see e.g. Complaint ¶¶ 107, 109, 111).
In view of the Court's conclusion that the breach of fiduciary duty claims asserted by the Trustee Defendants are time-barred, there is no need to consider the Trustees' alternative contention that the Trust Agreement relieved them of any common-law fiduciary duties that otherwise would be owed to the Trust.
Accordingly, the cause of action for breach of fiduciary duty is dismissed.
B.Breach of Contract
The second cause of action against the Trustees alleges that they breached their contractual obligations under the Trust Agreement, including “the duty to use the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and enterprise of a like character and with like aims.” In addition to the specific allegations of misconduct previously discussed, the contractual cause of action focuses on the Trustees' failure to ensure the Trust remained solvent and their alleged abdication of control over the Trust to HWG and Taylor.
The statute of limitations for a breach of contract claim is six years (CPLR 213[2] ). Under New York law, “a breach of contract cause of action accrues at the time of the breach” (Ely–Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402 [1993];seeCPLR 203[a] ). The date of the breach is controlling even where damages from the breach are not sustained until later and even where the “injured party may be ignorant of the existence of the wrong or injury” (Ely–Cruikshank, 81 N.Y.2d at 402–403, 599 N.Y.S.2d 501, 615 N.E.2d 985 [internal quotation marks omitted] ). Thus, accrual of plaintiff's cause of action for breach of contract is not tied to when the Trust allegedly sustained damages from the alleged breaches or when the Trust or WCB discovered the breaches ( see id.).
The Trustees argue that it is clear from the complaint that all of the alleged breaches of the Trust Agreement occurred prior to May 2, 2005, which is more than six years prior to commencement of this action. The Trustees observe that the allegations of trustee misconduct focus on the period between 1997 and April 2005, with the last specific factual allegation pertaining to April 11, 2005, when the trustees complied with the WCB's request to develop a corrective action plan. The Trustees further observe that the WCB's complaint alleges that certain of them ended their trusteeships outside the applicable six-year limitations period.
In opposition, the WCB contends that where a contract, such as the Trust Agreement, provides for continuing performance over a period of time, each breach begins the running of the statute of limitations anew, so that accrual occurs continuously. The WCB further maintains that its cause of action for breach of contract did not accrue until February 19, 2008, when it received a forensic report commissioned shortly after the takeover that “detailed the history of the administration of [the Trust] ... and provided a systematic review and evaluation of the circumstances surrounding the financial collapse of [the Trust]” (Affidavit of Michael Papa, ¶ 25). In support of these contentions, the WCB relies upon two fairly recent Appellate Division decisions: Inter–Community Mem. Hosp. of Newfane v. The Hamilton Wharton Group, Inc. (93 A.D.3d 1176, 941 N.Y.S.2d 360 [4th Dept 2012] ) and State of NY, Workers' Compensation Bd. v. A & T Healthcare, LLC (85 A.D.3d 1436, 927 N.Y.S.2d 165 [3d Dept 2011] ).
In Inter–Community, former members of a GSIT sued to recover damages for, among other things, assessments that had been levied against them on account of the GSIT's accumulated financial deficit. In reversing the dismissal of their breach of contract claims as time-barred, the Fourth Department concluded that despite the plaintiffs' withdrawal from active participation in the subject trust in 2001, the former members' joint and several liability continued under the operative trust documents. The Court further held that the statute of limitations ran anew for each alleged breach, and the record in that action did not disclose the “precise nature and timing” of the alleged breaches so as to conclusively defeat plaintiffs' contractual cause of action. Finally, the Fourth Department held that as damages are an essential component of a breach of contract claim and the plaintiffs could not allege damages for the pro rata deficit assessments until those assessments were actually levied against them, plaintiffs had six years from the date of the levy in which to commence suit.
A & T Healthcare, a decision of the Appellate Division, Third Department, concerned an action by the WCB to collect assessments from former GSIT members. In rejecting defendants' statute of limitations defense, the Third Department held that the WCB's cause of action for breach of contract accrued when the former trust members refused to pay the assessments in accordance with their obligation under the operative trust documents (83 AD3d at 1437–1438). In so doing, the Court rejected former the trust members' argument that the WCB's cause of action accrued when it was aware of deficits in the trust and could have levied against current and former trust members ( id.).
The Court concludes that neither Appellate Division decision is inconsistent with the Trustees's position that settled law bars plaintiff from relying upon claimed breaches of the Trust Agreement occurring more than six years prior to the commencement of this action. “[W]here a contract provides for continuing performance over a period of time, each breach may begin the running of the statute anew such that accrual occurs continuously and plaintiffs may assert claims for damages occurring up to six years prior to filing of the suit” (Airco Alloys Div. v. Niagara Mohawk Power Corp., 76 A.D.2d 68, 80, 430 N.Y.S.2d 179 [4th Dept 1980] ). However, “so much of the causes of action asserted by [plaintiffs] as accrued more than six years prior to the commencement of the instant action must be dismissed as time-barred” (Westchester County Corr. Officers Benevolent Assn., Inc. v. County of Westchester, 65 A.D.3d 1226, 1228, 885 N.Y.S.2d 728 [2d Dept 2009] ).
In this regard, Inter–Community merely establishes that the record in that case did not conclusively establish that all of the claimed breaches occurred more than six years prior to commencement of suit. Moreover, both Inter–Community and A & T Healthcare are distinguishable insofar as the claimed breaches pertained to an obligation by a present or former GSIT member to pay assessments. In A & T Healthcare, which was cited and relied upon in Inter–Community, the Third Department correctly recognized that a trust member does not breach its payment obligations under a trust agreement until it fails to pay an assessment required under the terms of said agreement (83 AD3d at 1437–1438). Here, the claimed breaches do not arise out of a trust member's continuing obligation to pay assessments; rather, plaintiff's complaint alleges that the Trustees breached specific contractual duties they owed under the Trust Agreement during their service as trustees, which terminated no later than July 31, 2006.
Indeed, A & T Healthcare relied upon the date of the alleged breach of the indemnity agreement even where plaintiff allegedly knew of the need for an infusion of funds prior to the date of assessment and the assessment could have been levied at such earlier time. Here, in contrast, plaintiff seeks to disregard the date of the alleged breaches in favor of the date when it learned of such alleged breaches.
To the extent that the WCB reads Inter–Community as holding that the accrual of a cause of action for breach of contract is dependent on the plaintiff sustaining actual damages, such a reading runs afoul of settled law from the New York State Court of Appeals squarely holding that “a breach of contract cause of action accrues at the time of the breach ... though no damage occurs until later” (Ely–Cruikshank, 81 N.Y.2d at 402, 599 N.Y.S.2d 501, 615 N.E.2d 985 [internal citations and quotation marks omitted] ). “Since nominal damages are always available in breach of contract actions, all of the elements necessary to maintain a lawsuit and obtain relief in court” are present at the time of an alleged breach ( id. [internal citations and quotation marks omitted] ).
Likewise, the WCB's argument that it did not know the full nature and extent of the Trustees' wrongdoing or the resulting damages until it received the forensic audit report on February 19, 2008 stands on even weaker footing. “[K]nowledge of the occurrence of the wrong on the part of the plaintiff is not necessary to start the Statute of Limitations running in a contract action” ( id. [internal citations and quotations omitted] ).
The issue then becomes whether any breaches of the Trust Agreement are alleged to have occurred on or after May 2, 2005, six years prior to the commencement of this action. As the Trustees correctly note, the complaint does not specifically identify actions or inactions of the Trustees occurring after April 11, 2005. However, reading the complaint liberally and giving the WCB the benefit of all reasonable inferences, the Trustees' abdication of their duties and failure to restore the Trust to solvency continued throughout their terms of service on the Board.
In view of this conclusion, the Court must address the contention of certain Trustees that their trusteeships terminated prior to the WCB takeover of July 31, 2006, when their service to the Trust was severed as a matter of law. The complaint generally alleges that the Trustees continued to serve “until an undetermined time” or until the Trust's “dissolution of July 31, 2006”.
However, the Trustees submit documentation produced by the WCB to defendant Mushkin's counsel in response to a Freedom of Information Law (“FOIL”) request showing that the terms of the many of the defendant Trustees expired prior to May 2, 2005. While this documentation culled from the regulatory agency's own files lends support to the Trustees' statute of limitations defense, it falls short of conclusively and definitively establishing the Trustees' end dates of service. There simply is no proof of the circumstances by which these documents were created and made part of the WCB's files and, more fundamentally, no proof demonstrating that the information set forth therein is reliable and reflective of the Trustees' actual service to the Trust.
While the complaint could be read to suggest that the trusteeships of defendants Madden, Villano and Edwards terminated by June 1999 (Complaint ¶¶ 100–101, 104), it is noted that these allegations refer to service as the chairperson or secretary/treasurer and do not expressly negate the possibility of continued membership on the Board.
The Court further notes that the purported resignation letter of defendant Mushkin merely reflects an intention to resign his trusteeship and does not conclusively establish when his duties to the Trust terminated.
Based on the foregoing, the Court concludes that so much of the Trustees' motion to dismiss the breach of contract claim must be denied with respect to alleged breaches on and after May 2, 2005.
C.Implied Indemnification
The third cause of action, which is alleged against the Trustees and all of the other defendants, is denominated as one seeking recovery in implied common-law indemnity. The WCB contends that through no fault of its own, it was required to assume administration of the Trust because of the actions and inactions of the defendants (Complaint ¶ 507). The complaint further alleges that the Trust, through no fault of its own, incurred and paid damages in the form of liability for payment of unnecessary workers' compensation claims and increased administrative expenses as a result of the WCB takeover ( id. ¶¶ 508–509, 599 N.Y.S.2d 501, 615 N.E.2d 985). On the basis of these allegations, the WCB claims that the Trustees (and the other defendants) are obligated to indemnify the WCB, as successor in interest to [the Trust], for all past and future expenses, fees, response costs, and direct and indirect damages, including but not limited to, amounts incurred as a result of significant additional administrative expenses of [the Trust] that are above and beyond what it ordinarily would have incurred in the administration of [the Trust], and in amounts to be determined based upon the amount of [the Trust's] total deficit attributable to the actions, inactions, and breaches of the defendants', which currently is believed to exceed $33 million ( id. ¶ 510, 599 N.Y.S.2d 501, 615 N.E.2d 985).
The Court of Appeals has offered the following description of implied indemnification:
Implied indemnity is a restitution concept which permits shifting the loss because to fail to do so would result in the unjust enrichment of one party at the expense of the other. Generally, it is available in favor of one who is held responsible solely by operation of law because of his relation to the actual wrongdoer, but authorities have noted that the principle is not ... limited to those who are personally free from fault' (Prosser and Keeton, Torts § 51, at 342 [5th ed]; see also,Restatement [Second] of Torts § 886B [2], comment k).... The purpose of all contribution and indemnity rules is the equitable distribution of the loss occasioned by multiple defendants. In furtherance of that purpose the courts have granted relief in a variety of cases in favor of the party who, in fairness, ought not bear the loss, allowing it to recover from the party actually at fault. They have found indemnity appropriate because of a separate duty owed the indemnitee by the indemnitor (thus the indemnitee may recover for the wrong to it), because there is a great difference in the gravity of the fault of the two tort-feasors, or because the duties owed to the injured plaintiffs and causing injury are disproportionate. (Mas v. Two Bridges Assoc., 75 N.Y.2d 680, 690–691 [1990] [internal citations and quotation marks omitted] ).
In other words, “[t]he underpinning of indemnity actions is the prevention of unjust enrichment. In cases where such unfairness would arise from the assumption by a third party of another's debt or obligation, a contract to reimburse or indemnify is implied by law' “ (State of New York v. Stewart's Ice Cream Co., 64 N.Y.2d 83, 88 [1984] [internal citation omitted] ). In such a case, “the key element ... is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indemnitee by the indemnitor.' The duty that forms the basis for the liability arises from the principle that every one is responsible for the consequences of his own negligence, and if another person has been compelled to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him” (Raquet v. Braun, 90 N.Y.2d 177, 183 [1997] [internal citation omitted] ).
Applying these principles, the Court rejects the WCB's contention that “defendants are obligated to indemnify the WCB, as successor in interest to [the Trust]” (Complaint ¶ 510). In its capacity as successor in interest, the WCB stands in the shoes of the Trust, but it acquires no greater rights than its predecessor. Insofar as the Trust has sustained damages in the form of increased administrative expenses or the payment of unnecessary claims due to the wrongful actions and omissions of the Trustees and the Trust's professional advisors ( see Complaint ¶¶ 508–509), the Trust possesses claims sounding in contract or tort, which the WCB may pursue in its capacity as successor in interest. However, the Court is unpersuaded that the Trust possesses a right of indemnification against the Trustees and its professional advisers that may be asserted in addition to, or in lieu of, direct claims.
Courts must look to the reality and essence of the causes of action alleged in the complaint (Brick v. Cohn–Hall–Marx Co., 276 N.Y. 259, 264 [1937] ), and a claim does not become one “for indemnity merely because the pleader has so denominated it” (Bunker v. Bunker, 80 A.D.2d 817, 817–818, 437 N.Y.S.2d 326 [1st Dept 1981] ). The key element of a cause of action for common-law indemnification is an implied duty running from the indemnitor to the indemnitee, separate from any direct duty owed by the indemnitor to the injured party (Raquet, 90 N.Y.2d at 183, 659 N.Y.S.2d 237, 681 N.E.2d 404). But where the injured party and the indemnitee are one and the same, there is no need to imply a separate restitutionary duty, as the injured party can pursue direct claims ( see Peoples' Democratic Republic of Yemen v. Goodpasture, Inc., 782 F.2d 346, 350 [2d Cir1986] ). For this reason, a party cannot obtain the advantage of the generous statute of limitations applicable to indemnity claims by styling its direct claims as ones for indemnity ( see Bunker, 80 A.D.2d at 818, 437 N.Y.S.2d 326). And since the Trust cannot pursue indemnification from defendants, neither can the WCB in its capacity as successor in interest.
While the complaint specifically alleges that the WCB's cause of action for implied indemnification is brought as the successor in interest to the Trusts ( see Complaint ¶¶ 510 [“defendants are obligated to indemnify the WCB, as successor in interest to [the Trust]”], 511), there are several references in the complaint to the WCB suing in its governmental capacity as the State agency charged with administration of the Workers' Compensation Law (“WCL”). And as pertinent here, the cause of action for implied indemnification does refer to the WCB having been required under the WCL to assume administration of the Trust due to defendants' actions and inactions (Complaint ¶ 507) and to meet the Trust's obligations out of its administrative fund ( id. ¶ 67, 437 N.Y.S.2d 326). However, even if the cause of action for implied indemnification could be understood as having been brought in the WCB's governmental capacity, the Court nonetheless concludes that the complaint fails to state a viable cause of action.
As discussed previously, implied indemnity is a common law concept intended to equitably distribute a loss occasioned by multiple defendants by implying a restitutionary duty in favor of the party who ought not to bear the loss (Raquet, 90 N.Y.2d at 183, 659 N.Y.S.2d 237, 681 N.E.2d 404;Mas, 75 N.Y.2d at 690–691, 555 N.Y.S.2d 669, 554 N.E.2d 1257). In the context of this action, the Court recognizes that the WCB is responsible for paying out of its administrative fund the compensation and benefits that may be unpaid due to the insolvency of the Trust and the expenses associated with winding down the Trust ( seeWCL §§ 50[5][f], 51). However, this alleged “loss” purely is the product of a legislative determination of New York State regarding the continuation of benefits to injured workers. And the same statutory scheme by which the State Legislature has made the WCB the payor of last resort establishes a process for infusing the necessary funds into the agency's administrative fund through assessments on the self-insurance industry ( see id.). In light of the nature and source of the WCB's obligation and the presence of a comprehensive statutory scheme that does not include a right of indemnification, the Court sees no basis in law or appellate precedent for implying separate duties running from the former trustees or professional advisors of GSITs to the WCB.
Insofar as Supreme Court, Niagara County has held otherwise, this Court respectfully disagrees.
Further, allowing government agencies to pursue a claim of implied indemnification in cases like this would disregard important and longstanding rules of privity and eviscerate the principles of finality and repose embodied in statutes of limitations. Under the WCB's theory, a government agency could bring suit against the officers, directors, managers, employees and trustees of a entity as well as the professionals and others who rendered services to the entity despite the absence of any professional, contractual or fiduciary relationship between the agency and the defendants ( cf. Gray v. Wallman & Kramer, 224 A.D.2d 275, 275, 638 N.Y.S.2d 18 [1st Dept 1996]; Breen v. Law Off. of Bruce A. Barket, P.C., 52 A.D.3d 635, 636–637, 862 N.Y.S.2d 50 [2d Dept 2008] ). Moreover, notwithstanding the strict three-year limitations period applicable to claims of non-medical malpractice and accrual rules that generally measure a plaintiff's time to sue from the date of the allegedly wrongful conduct, the government agency would have six years from the date on which it made any payment of funds attributable to defendants' alleged misconduct in which to commence suit ( see Bunker, 80 A.D.2d at 817, 437 N.Y.S.2d 326).
Accordingly, the Court concludes that the sixteenth cause of action must be dismissed against the Trustees and other moving defendants for failure to state a cause of action.
LORETTE BELGRAIER
According to the complaint, Lorette Belgraier is a certified public accountant who was retained by HWG and Taylor “to perform accounting services for [the Trust], including posting entries, preparing checks for issuance and preparing schedules and internal financial statements” from May 2003 through July 2006. In addition to providing the foregoing services to the Trust, the complaint alleges that Belgraier provided accounting services to HWG and Taylor. Plaintiff alleges that Belgraier was paid a total of $325,328, all from Trust funds.
The WCB's claim for breach of contract is founded upon allegations that Belgraier failed to account for the hours she worked, received excessive compensation that was not justified by the services she provided, failed to perform her agreed-upon accounting duties, and showed up to work only “sporadically, at best.” According to the WCB, these breaches led directly to the Trust's insolvency.
The cause of action for breach of fiduciary duty is premised upon allegations that Belgraier failed to identify the dangers posed by the Trust's underfunded status and to notify the Trust and its members of such dangers. The complaint further alleges that Belgraier performed services for HWG and Taylor at the same time as she was performing services for the Trust but was paid only from Trust funds—conduct allegedly constituting a breach of her duty of loyalty to the Trust and its members.
The unjust enrichment cause of action is premised upon the same allegations of simultaneous representation, together with allegations that Belgraier did not perform her duties on behalf of the Trust, did not attend work regularly, worked limited hours for the Trust, and did not perform her services for the Trust in a competent manner. The damages sought under this cause of action are the professional fees paid by the Trust to Belgraier.
Finally, the fourth cause of action alleged against Belgraier seeks recovery in implied common-law indemnity.
Belgraier move for dismissal of all of these causes of action as time-barred and for failure to state a cause of action.
A.Breach of Fiduciary Duty
Belgraier argues that the claim for breach of fiduciary duty and all of the other causes of action alleged against her are, in fact, a single claim of professional malpractice that is untimely under three-year limitations period of CPLR 214(6).
“A cause of action charging that [an accounting] professional failed to perform services with due care and in accordance with the recognized and accepted practices of the profession is governed by the three-year Statute of Limitations applicable to negligence actions” (Ackerman v. Price Waterhouse, 84 N.Y.2d 535, 541 [1994], citing CPLR 214[6] ). “In the context of a malpractice action against an accountant, the claim accrues upon the client's receipt of the accountant's work product since this is the point that a client reasonably relies on the accountant's skill and advice.... This is the time when all the facts necessary to the cause of action have occurred and an injured party can obtain relief in court ...” ( id.). However, the accrual date may be tolled where the parties engaged in a continuous professional relationship (Giarratano v. Silver, 46 A.D.3d 1053, 1055, 847 N.Y.S.2d 698 [2d Dept 2007] ).
The three-year statute of limitations of CPLR 214(6) applies to all claims that “arise out of the accounting services provided by the defendant pursuant to a contract ..., and out of the accountant-client relationship which resulted therefrom” (Harris v. Kahn, Hoffman, Nonenmacher & Hochman, LLP, 59 A.D.3d 390, 391, 871 N.Y.S.2d 919 [2d Dept 2009]; see Matter of R.M. Kliment & Frances Halsband, Architects [McKinsey & Co. Inc.], 3 N.Y.3d 538, 542 [2004] ). Accordingly, even a claim for breach of an express contractual promise against a professional is subject to CPLR 214(6) provided that the promise is one that the professional might be expected to accomplish using due care even in the absence of a specific contractual term (Kliment, 3 N.Y.3d at 542, 788 N.Y.S.2d 648, 821 N.E.2d 952;see Winegrad v. Jacobs, 171 A.D.2d 525, 525, 567 N.Y.S.2d 249 [1st Dept 1991] ).
Applying these principles, the Court concludes that the WCB's claim for breach of fiduciary duty is subject to the three-year statute of limitations of CPLR 214[6] ). Specifically, the WCB alleges that Belgraier failed to identify the dangers posed by the Trust's underfunded status and to notify the Trust and its members of the same. This allegation clearly arises out of the accounting services provided by Belgraier to her client, the Trust, and alleges that her actions (or failures to act) fell outside the recognized standards of the accounting profession. Likewise, insofar as the breach of duty claim may be read as alleging that the accounting services and advice Belgraier rendered to the Trust were colored by her simultaneous rendition of services to HWG and Taylor, such a claim necessarily implicates the quality of the accounting services she provided. Thus, regardless of the manner of pleading, it is clear that the WCB's allegations of wrongdoing arise out of the accountant-client relationship and challenge the professional accounting services rendered by Belgraier to her client.
As it is undisputed that Belgraier's professional relationship with the Trust was terminated no later than July 31, 2006, following the WCB's takeover, the claim for breach of fiduciary duty is barred by the three-year statute of limitations of CPLR 214(6).
In any event, settled principles of New York law hold the duty owed by an accountant to a client generally is not fiduciary in nature (Bitter v. Renzo, 101 A.D.3d 465, 955 N.Y.S.2d 332[1st Dept]; Able Energy, Inc. v. Marcum & Kliegman LLP, 69 A.D.3d 443, 444, 893 N.Y.S.2d 36 [1st Dept 2010]; Friedman v. Anderson, 23 A.D.3d 163, 166, 803 N.Y.S.2d 514 [1st Dept 2005]; DG Liquidation v. Anchin, Block & Anchin, 300 A.D.2d 70, 70–71, 750 N.Y.S.2d 753 [1st Dept 2002] ). Moreover, plaintiff has not shown that this case falls into the special, limited circumstances where such a duty might arise ( see e.g. Lavin v. Kaufman, Greenhut, Lebowitz & Forman, 226 A.D.2d 107, 109, 640 N.Y.S.2d 57 [1st Dept 1996] [discretionary investment authority]; Kanev v. Turk, 187 A.D.2d 395, 395, 590 N.Y.S.2d 211 [1st Dept 1992] [advice regarding the making of an unsecured loan] ).
B.Contractual and Quasi–Contractual Causes of Action
Similar reasoning compels the dismissal of so much of the WCB's claim for breach of contract and unjust enrichment as are based upon allegations that Belgraier failed to render accounting services in a competent and capable manner. As stated above, these allegations arise out the accountant-client relationship and challenge the quality of the professional services rendered by Belgraier.
However, insofar as the WCB seeks the recovery of professional fees on the basis of allegations that Belgraier failed to perform the accounting duties for which she was paid, work the required number of hours on behalf of the Trust, show up for work as required or that she was paid from Trust funds for services actually rendered to another party, the Court concludes that factual allegations relied upon and the measure of damages sought are sufficiently distinct from a malpractice claim as to fall outside the scope of CPLR 214(6) (Natural Organics, Inc. v. Anderson Kill & Olick, P.C., 67 A.D.3d 541, 542, 891 N.Y.S.2d 321 [1st Dept 2009]; Henry v. Brenner, 271 A.D.2d 647, 648, 706 N.Y.S.2d 465 [2d Dept 2000] ). Under the six-year statue of limitations applicable to contract actions, the WCB may pursue alleged breaches of contract that occurred on and after May 2, 2005 (CPLR 213[2]; see supra [rejecting WCB's claim that its receipt of forensic accounting report marked accrual date] ).
Finally, given that there is no dispute as to the existence of a binding and enforceable contract between the Trust and Belgraier, the cause of action seeking recovery in quasi-contract must be dismissed (Kosowsky v. Willard Mtn., Inc., 90 A.D.3d 1127, 1131, 934 N.Y.S.2d 545 [3d Dept 2011] ). Accordingly, the allegations of plaintiff's complaint appearing under the rubric of unjust enrichment shall be deemed to be part of its claim for express breach of contract (Polonetsky, 97 N.Y.2d at 54, 735 N.Y.S.2d 479, 760 N.E.2d 1274).
As the measure of damages pleaded with respect to the remaining allegations of breach of contract pertain to the professional fees paid by the Trust, the Court has no occasion to consider Belgraier's alternative argument that the complaint fails to articulate a credible narrative to support the claim that her alleged acts or omissions proximately caused the Trust's substantial insolvency.
C.Indemnification
For the reasons stated previously, the indemnification cause of action is dismissed as against defendant Belgraier.
CLAIMS AGAINST STEVEN GLASER
Attorney Steven Glaser allegedly was retained by HWG and Taylor in or about 2000 to serve as the Trust's counsel, and he served in such capacity through 2006. According to the complaint, Glaser served as an attorney for HWG and Taylor prior to and during the period in which he rendered legal services to the Trust, and this relationship constituted a conflict of interest that was not disclosed to the Board of Trustees. Glaser allegedly was paid $587,905 for legal services by the Trust, a portion of which allegedly represented payment for legal services actually rendered to HWG and Taylor.
Glaser allegedly became more involved in the Trust and HWG's day-to-day operations after the WCB increased its oversight, with Glaser attending meetings of the Board and recording and maintaining minutes of the meetings. At a May 4, 2005 Board meeting, Trustee Lockwood is alleged to have questioned Glaser as to whether Trust members had been apprised of the deficit. The complaint alleges, upon information and belief, that:
Glaser advised the board of trustees that a discussion about [the Trust's] deficit and/or the steps taken or not taken to inform [Trust] members of the deficit might not be confidential in the context of a board of trustees' meeting and, therefore, could result in statements that would be against the interests of the board of trustees, collectively and individually. Glaser, therefore, suggested that the trustees speak to him individually about this issue so that the discussions could be protected by the attorney-client privilege (Complaint ¶ 249).
The complaint also refers generally to Glaser counseling the Board of Trustees not to discuss certain aspects of the Trust's deficit at its meetings. According to the WCB, Glaser's actions resulted in HWG, Taylor and the Board of Trustees concealing information from Trust members and the WCB, precluded the Board from discussing methods of remedying the deficit, and contributed to the Trust's deficit and underfunded status.
On the basis of the foregoing, the WCB alleges that Glaser aided and abetted breaches of fiduciary duty committed by the Trustees, HWG and Taylor by “tender [ing] legal advice and guidance ... that was adverse to [the Trust's] best interests”. According to the complaint, when Glaser advised the trustees not to discuss the deficit at the May 4, 2005 meeting, he allegedly had actual knowledge that the Trustee Defendants, HWG and Taylor had breached their fiduciary duties to the Trust, would continue to do so in the future, and that the legal advice he provided would assist them in continuing to breach such duties. The quasi-contractual cause of action alleges that Glaser was unjustly enriched by the receipt of legal fees from the Trust due to undisclosed conflicts of interest and by providing legal services to HWG and Taylor out of Trust funds. Finally, Glaser is sued under a theory of common-law indemnification. Glaser moves to dismiss the complaint as against him as timed-barred and for failure to state a cause of action.
A.Aiding and Abetting
Glaser argues that the aiding and abetting cause of action sounds in legal malpractice and, therefore, is governed by CPLR 214(6). The Court agrees.
Regardless of the manner of pleading, a claim arising out of the attorney-client relationship alleging an attorney's failure to use due care or other professional negligence in the rendition of legal services is subject to CPLR 214(6) (Kliment, 3 N.Y.3d at 542, 788 N.Y.S.2d 648, 821 N.E.2d 952;Kinberg v. Garr, 60 A.D.3d 597, 597, 874 N.Y.S.2d 907 [1st Dept 2009] ). Accordingly, claims against an attorney that arise out of the attorney-client relationship normally are treated as one for malpractice only (Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, 56 A.D.3d 1, 6, 865 N.Y.S.2d 14 [1st Dept 2008] [collecting authorities] ).
“A legal malpractice claim accrues when all the facts necessary to the cause of action have occurred and an injured party can obtain relief in court. In most cases, this accrual time is measured from the day an actionable injury occurs, even if the aggrieved party is then ignorant of the wrong or injury. What is important is when the malpractice was committed, not when the client discovered it” (McCoy v. Feinman, 99 N.Y.2d 295, 301 [2002] [internal citations and quotation marks omitted] ).
By application of these principles, the Court concludes that the WCB's cause of action against Glaser for aiding and abetting a breach of fiduciary duty is subject to the three-year statute of limitations of CPLR 214(6). The complaint makes clear that the cause of action arises directly out of legal advice provided by Glaser to his client in the course of the attorney-client relationship. Even accepting the WCB's allegations that Glaser's legal advice was tainted by an undisclosed conflict of interest and Glaser knew that HWG, Taylor and the Trustees had breached their fiduciary duties in the past and would continue to do so in the future, the fact remains that the only “substantial assistance” allegedly provided by Glaser was providing legal counsel to the Trust and its governing body concerning issues of privilege and confidentiality (Buchwald v. Renco Group, Inc. [In re Magnesium Corp. of Am.], 399 B.R. 722, 747 [SDNY 2009] [“To the extent, if any, to which aiding and abetting a fraudulent conveyance is actionable, when that is done by reason of nothing more than providing the services that lawyers provide, it is not unlike malpractice [subject to CPLR 214(6) ]”]; see also Ulico, 56 A.D.3d at 8, 865 N.Y.S.2d 14 [conflict of interest alone not actionable unless divided loyalty results in malpractice] ).
Given that Glaser's representation of the Trust terminated by July 31, 2006, it is clear that the WCB's effort to challenge the legal advice he provided to the Trust and the Trustees is time-barred under CPLR 214(6), regardless of the fact that the claim is pleaded as one for aiding and abetting a breach of fiduciary duty rather than as professional malpractice ( see Harris, 59 A.D.3d at 391, 871 N.Y.S.2d 919 [“the plaintiff's claims sound in [professional] malpractice and are time-barred by the three-year statute of limitations set forth in CPLR 214(6)”] ).
In reaching the foregoing conclusions, the Court necessarily rejects plaintiff's reliance upon American Mfrs. Mut. Ins. Co. v. Payton Lane Nursing Home, Inc., 2010 WL 652829 (2010 U.S. Dist LEXIS 15269 [E.D.N.Y.2010] ), which holds that “ Kliment does not prohibit an injured party from bringing a breach of contract claim against an architect or other professional and no subsequent case has so held.” The issue is not whether the WCB can proceed against Glaser under a theory of aiding and abetting a breach of fiduciary duty based upon the legal advice he rendered to his client ( but see CRT Invs., Ltd. v. BDO Seidman, LLP, 85 A.D.3d 470, 472, 925 N.Y.S.2d 439 [1st Dept 2011] [“The complaint fails to plead a factual basis for inferring that [the accountant] did anything more than perform the routine business of auditing.”] ). Rather, the issue is determination of the statute of limitations that applies to the claim. Kliment plainly holds that regardless of the theory upon which plaintiff's cause of action is pleaded, the timeliness of a challenge to the legal advice rendered by an attorney or a claim that such advice was not rendered in accordance with relevant professional standards is “essentially” a malpractice claim that falls within the ambit of CPLR 214(6) ( see Kliment, 3 N.Y.3d at 542, 788 N.Y.S.2d 648, 821 N.E.2d 952).
And even if the aiding and abetting claim were grounded upon conduct separate and distinct from professional malpractice, the cause of action would in any event be time-barred. Where, as here, the remedy sought is purely monetary and essential allegations of actual fraud are not pleaded,
the three-year limitations period of CPLR 214(4) applies ( IDT, 12 N.Y.2d at 139–140, 237 N.Y.S.2d 308, 187 N.E.2d 769). Additionally, for the reasons stated above, the fact that Glaser's alleged aiding and abetting arose out of a contractual agreement to serve as attorney to the Trust is of no moment. Further, the WCB's claim accrued no later than July 31, 2006, when Glaser's representation of the Trust terminated. And even if the WCB's receipt of the forensic audit on February 19, 2008 had any bearing on the accrual of the cause of action, which it does not, the claim still would be untimely under the three-year limitations period prescribed by CPLR 214(6).
While plaintiff argues that Glaser may be guilty of fraudulent conduct, the complaint fails to plead a claim of actual fraud against him or otherwise allege the necessary elements of such claim.
Accordingly, the cause of action for aiding and abetting a breach of fiduciary duty must be dismissed as untimely.
B.Unjust Enrichment
The Court reaches a different conclusion, however, with respect to plaintiff's claim seeking the recovery of the professional fees paid to Glaser. Among other things, plaintiff alleges that Glaser was paid by the Trust for performing legal services for HWG and Taylor. For the reasons stated above, these allegations suffice to state a claim for breach of express contract with respect to the period on and after May 2, 2005.
However, as there is no dispute as to the existence of a binding and enforceable contract between the Trust and Glaser, the cause of action seeking recovery in quasi-contract must be dismissed, and the allegations of plaintiff's complaint appearing under the rubric of unjust enrichment shall be deemed to allege a claim for express breach of contract.
In contrast, allegations with regard to Glaser's alleged conflict of interest sound in professional malpractice and, therefore, are barred by a three-year statute of limitations.
C.Implied Indemnification
For the reasons stated previously, the indemnification cause of action is dismissed as against defendant Glaser.
BERENSON
Berenson, a certified public accounting firm, allegedly was retained by McGarrity, HWG and Taylor in or about 2000 to replace E & Y in preparing audited financial statements for the Trust. Plaintiff alleges, upon information and belief, that Berenson considered issuing a qualified or going concern letter that would have called the Trust's financial viability into question. Berenson allegedly should have issued such a letter, but failed to do so, thereby contributing to the Trust's accumulated deficit and underfunded status.
The breach of contract claim alleges that Berenson failed or refused to: “originate, follow and/or consistently apply generally accepted accounting principles”; offer an accurate analysis of [the Trust's] financial condition”; and “identify the dangers [the Trust's] deficit posed to its solvency” (¶¶ 326, 331–333). The cause of action for breach of fiduciary duty is premised upon allegations that Berenson allowed its decision whether or not to issue a qualified or going concern letter to be influenced by factors other than the Trust's financial condition and that it failed to issue such a letter and identify the dangers posed by the Trust's deficits (¶¶ 314–316). Additionally, the WCB claims that Berenson engaged in actual fraud by knowingly misrepresenting the Trust's financial condition and the dangers posed by its underfunded status. These alleged misrepresentations of the Trust's financial condition, which continued through 2005, were intended to conceal the Trust's true financial condition and were detrimentally relied upon. The aiding and abetting claim alleges that Berenson's failure to issued a qualified or going concern letter constituted knowing and substantial assistance to the Trustees, HWG, Taylor and McGarrity in connection with their alleged respective breaches of fiduciary duty. Finally, the WCB's claim for common-law implied indemnity is alleged against Berenson.
Berenson moves to dismiss the foregoing causes of action as time-barred and for failure to state a cause of action.
Common law indemnification is not discussed in Berenson's initial moving papers. Nonetheless, as the issue has been squarely presented to the Court through the submissions of the other defendants and fully responded to by the WCB, the Court will, in the exercise of its discretion and the interests of justice, consider this argument to properly be before the Court.
A.Non–Fraud Claims
As with defendants Belgraier and Glaser, Berenson first argues that the claims asserted against it represent a single claim of professional malpractice that is untimely under CPLR 214(6).
Insofar as the breach of contract claim alleges that Berenson failed to render accounting services in accordance with professional accounting standards—whether by neglecting or refusing to issue a qualified or going concern letter, by failing to offer accurate analysis of the Trust's financial condition in accordance with generally accepted accounting principles or by otherwise neglecting or refusing to identify the dangers that the Trust's deficit posed to its solvency—the allegations “arise out of the accounting services provided by [Berenson] pursuant to a contract ..., and out of the accountant-client relationship which resulted therefrom” (Harris, 59 A.D.3d at 391, 871 N.Y.S.2d 919) and claim nothing more than what Berenson would “be expected to accomplish using [professional] due care” (Kliment, 3 N.Y.3d at 542, 788 N.Y.S.2d 648, 821 N.E.2d 952). As such, the claim is governed by CPLR 214(6). Further, this claim accrued no later than the Trust's receipt of Berenson's final work product in or about April 2006. Accordingly, the breach of contract claim is time-barred.
Similar considerations compel the dismissal of the breach of fiduciary duty and the aiding and abetting claims. The complaint alleges that Berenson breached its fiduciary obligations by failing or refusing to issue a going-concern letter that was warranted under relevant professional standards and by allowing its decision whether or not to issue such a letter to be influenced by extraneous considerations. Likewise, the aiding and abetting claim represents a further challenge to Berenson's failure or refusal to issue a going-concern letter. As these allegations arise directly from the accountant-client relationship and the accounting and auditing services rendered by Berenson to its client, the claims are governed by the three-year limitations period of CPLR 214(6) and, therefore, are untimely.
B.Fraud
Unlike the claims asserted against the other defendants, the WCB further alleges that Berenson was a knowing participant in an intentional scheme to defraud the Trust, its members and the WCB. Claims of fraud generally are subject to a six-year statute of limitations, but may be commenced within “two years from the time the [plaintiff] ... discovered the fraud, or could with reasonable diligence have discovered it” (CPLR 213[8] ). This limitation period “is generally applicable where there would be no injury but for the fraud” (Scott v. Fields, 85 A.D.3d 756, 758, 925 N.Y.S.2d 135 [2d Dept 2011]; see New York Seven–Up Bottling Co. v. Dow Chem. Co. ., 96 A.D.2d 1051, 466 N.Y.S.2d 478 [2d Dept 1983], affd61 N.Y.2d 828 [1984] ). Where, however, “the allegations of fraud are only incidental to another cause of action, the fraud Statute of Limitations cannot be invoked” (Seven Up, 96 A.D.2d at 1053, 466 N.Y.S.2d 478).
In seeking to deny plaintiff the benefit of the limitations period applicable to claims of fraud, Berenson argues principally that the fraud claim relies upon the same alleged failures to render accounting and auditing services in accordance with professional standards that underlie the time-barred claims for breach of contract, breach of fiduciary duty and aiding and abetting ( see Seven–Up, 96 A.D.2d at 1053, 466 N.Y.S.2d 478) and seeks the same measure of damages, the accumulated Trust deficit ( see Saint Alexander's Church v. McKenna, 294 A.D.2d 695, 697, 742 N.Y.S.2d 165 [3d Dept 2002]; LaBrake v. Enzien, 167 A.D.2d 709, 711, 562 N.Y.S.2d 1009 [3d Dept 1990]; Powers Mercantile Corp. v. Feinberg, 109 A.D.2d 117, 120, 490 N.Y.S.2d 190 [1st Dept 1985), affd, 67 N.Y.2d 981 [1986] ).
Where a claim of fraud arises in the context of the professional relationship between an accountant and a client, “a separate cause of action for fraud may be established where exposure to liability is not based on errors of professional judgment, but is predicated on proof of the commission of an intentional tort” (LaBrake, 167 A.D.2d at 711, 562 N.Y.S.2d 1009;see White of Lake George v. Bell, 251 A.D.2d 777, 778, 674 N.Y.S.2d 162 [3d Dept 1998], appeal dismissed92 N.Y.2d 947, 681 N.Y.S.2d 477, 704 N.E.2d 230). However, “[i]n addition to establishing each element of fraud, plaintiff has the burden of proving that the alleged fraud caused additional damages, separate and distinct from those generated by the alleged malpractice' “ (Kaiser v. Van Houten, 12 A.D.3d 1012, 1014, 785 N.Y.S.2d 569 [3d Dept 2004], quoting White of Lake George, 251 A.D.2d at 778, 674 N.Y.S.2d 162).
Accordingly, a claim of fraud alleged in connection with the rendition of professional services only is sustainable where the alleged fraud is independent of any obligation on the part of the professional to render services with due care and results in damages distinct from those recoverable in a malpractice action alleging a lack of due care (LaBrake, 167 A.D.2d at 711, 562 N.Y.S.2d 1009;White of Lake George, 251 A.D.2d at 778, 674 N.Y.S.2d 162;Kaiser, 12 A.D.3d at 1014, 785 N.Y.S.2d 569;see RGH Liquidating Trust v. Deloitte & Touche LLP, 47AD3d 516, 517 [1st Dept 2008], lv dismissed11 NY3d 804;Ruggiero v. Powers, 284 A.D.2d 593, 595, 725 N.Y.S.2d 759 [3d Dept 2001]; see also Daniels v. Turco, 84 A.D.3d 858, 859, 923 N.Y.S.2d 848 [2d Dept 2011]; Mecca v. Shang, 258 A.D.2d 569, 570, 685 N.Y.S.2d 458 [2d Dept 1999]; Sabo v. Alan B. Brill, P.C., 25 A.D.3d 420, 421, 808 N.Y.S.2d 194 [1st Dept 2006]; Rochester Fund Muns. v. Amsterdam Mun. Leasing Corp., 296 A.D.2d 785, 788, 746 N.Y.S.2d 512 [3d Dept 2002] ). These cases recognize that a party cannot circumvent the limitations period applicable to a claim of professional malpractice by recasting its claims as ones for fraud or other causes of action with potentially lengthier periods in which to commence suit ( see Abramo v. Teal, Becker & Chiaramonte, CPAs, P.C., 713 F. Supp 2d 96, 108–109 [NDNY 2010] ).
Applying these principles, the Court concludes that plaintiff's claim of actual fraud cannot be sustained insofar as the WCB challenges the propriety of Berenson's failure or refusal to issue a qualified or going-concern letter under applicable professional standards or asserts that Berenson's actions were colored by a conflict of interest. This alleged fraud cannot be said to be independent of Berenson's professional obligation to render accounting services with due care and in accordance with relevant professional standards.
However, construing plaintiff's complaint liberally at this early stage of the litigation and giving the WCB the benefit of all reasonable inferences, the complaint also can be read to allege a scheme whereby Berenson became a knowing participant in an intentional scheme to defraud the Trust and its members by misrepresenting the financial condition of the Trust. In this respect, the fraud cause of action claims that Berenson became a knowing conspirator in the efforts of HWG, Taylor and McGarrity to avoid the issuance of a qualified or going concern letter by terminating E & Y's services before such a letter could be issued and retaining a more pliant firm that would decline to exercise its independent accounting judgment and, instead, deliberately misrepresent the Trust's finances to further this scheme to defraud.
Thus, the alleged fraud here is not based solely upon mere accounting errors, disagreements concerning the exercise of professional judgment or a failure to disclose any such errors, but rather “defendants [also] are alleged to have perpetrated [an intentional] fraud on plaintiff from the time they were retained to provide accounting services” (Mitschele v. Schultz, 36 A.D.3d 249, 255, 826 N.Y.S.2d 14 [1st Dept 2006]; see also Serio v. PricewaterhouseCoopers LLP, 9 A.D.3d 330, 331, 781 N.Y.S.2d 7 [1st Dept 2004]; Balta v. Ayco Co., LP, 626 F.Supp.2d 347, 358 [WDNY 2009]; Malmsteen v. Berdon, LLP, 477 F Supp 2d 655, 662–663 [SDNY 2007] ). In other words, the intentional misrepresentations allegedly made in Berenson's work product and its concealment of material information from the Trust were the means by which Berenson participated in the scheme to defraud allegedly perpetrated by HWG, Taylor and McGarrity.
“Since [this branch of] plaintiff's fraud cause of action is not merely a malpractice claim with a claim for concealment of malpractice superimposed on it, the parallel nature of the damages is not determinative of whether the fraud claim is governed by [CPLR 214(6) ]” (Mitschele, 36 A.D.3d at 255, 826 N.Y.S.2d 14). And since such a claim is not premised solely upon a failure to exercise due care or errors in professional judgment, but is also predicated on allegations of the commission of an intentional tort, application of the fraud statute of limitations does not run afoul of the Legislature's intent in adopting CPLR 214(6) ( id.).
Of course, plaintiff's allegations of fraud are just that: mere allegations. And virtually all of these allegations rest solely upon information and belief and are supported by only limited evidentiary facts. Nonetheless, liberally construing the complaint and giving the WCB the benefit of all reasonable inferences, the branch of the motion seeking dismissal of the fraud claim must be denied in accordance with the foregoing.
C.Indemnification
For the reasons stated previously, the indemnification cause of action is dismissed as against defendant Berenson.
CONCLUSION
Accordingly,
The Court has considered the parties' remaining arguments and contentions but finds them unavailing or unnecessary to the disposition ordered herein.
ORDERED that defendants' motions are granted in part and denied in part in accordance with the foregoing; and it is further
ORDERED that within thirty days from service of this Decision & Order upon defendants with notice of entry, the parties shall confer and plaintiff shall contact Chambers with three proposed dates and times for the holding of a preliminary conference; and finally it
ORDERED that prior to said preliminary conference, counsel shall consult and confer in accordance with Rule 8 of the Commercial Division.
This constitutes the Decision and Order of the Court. This Decision and Order is being transmitted to plaintiff's counsel for filing and service. The signing of this Decision and Order shall not constitute entry or filing under CPLR Rule 2220, and counsel is not relieved from the applicable provisions of that Rule respecting filing, entry and Notice of Entry.
Papers Considered:
Notice of Motion, dated November 21, 2011;
Defendant's Memorandum of Law, dated November 21, 2011;
Declaration of Louis G. Corsi, Esq., dated November 21, 2011, with attached exhibit A;
Affidavit of Lorette Belgraier, sworn to November 7, 2011, with attached exhibits A–C;
Plaintiff's Memorandum of Law, dated March 23, 2012, with attached exhibits;
Affirmation of Daniel E. Sarzynski, dated March 23, 2012;
Defendant's Reply Memorandum of Law, dated April 17, 2012;
Notice of Motion, dated November 30, 2011;
Affirmation of Peter A. Lauricella, Esq., dated November 30, 2012, with attached exhibits A–D;
Defendants' Memorandum of Law, dated November 30, 2012;
Affidavit of Michael Papa, Esq., dated March 21, 2012, with attached exhibits A–B;
Plaintiff's Memorandum of Law, dated March 23, 2012, with exhibit;
Affirmation of Daniel E. Sarzynski, Esq., dated March 23, 2012;
Defendants' Reply Memorandum of Law, dated April 17, 2012;
Reply Affirmation of Peter A. Lauricella, Esq., dated April 17, 2012;
Notice of Motion, dated December 9, 2011;
Defendant's Memorandum of Law, dated December 9, 2011;
Affidavit of David B. Cabaniss, Esq., sworn to December 9, 2011, with attached exhibit A;
Plaintiff's Memorandum of Law, dated March 23, 2012, with attached exhibit;
Affirmation of Daniel Sarzynski, Esq., dated March 23, 2012;
Defendant's Reply Memorandum of Law, dated April 17, 2012;
Notice of Motion dated January 11, 2012;
Affidavit of Scott M. Lupiani, Esq., sworn to January 11, 2012, with attached exhibits A–B;
Defendant's Memorandum of Law, dated January 11, 2012;
Reply Affirmation of Scott M. Lupiani, Esq., dated April 13, 2012;
Notice of Motion, dated March 28, 2012;
Defendant's Memorandum of Law, dated March 28, 2012;
Affirmation of Charles C. Swanekamp, Esq., dated March 28, 2011, with attached exhibit A;
Plaintiff's Memorandum of Law, dated May 1, 2012, with attached exhibit;
Affidavit of Michael Papa, Esq., sworn to April 27, 2012, with attached exhibits A–C;
Affirmation of Daniel E. Sarzynski, Esq., dated May 1, 2012;
Reply Memorandum of Law, dated May 15, 2012;
Reply Affirmation of Charles C. Swanekamp, Esq., dated May 15, 2012.