SUPREME COURT STATE OF NEW YORK COUNTY OF NASSAU. Plaintiff. Defendants.

Transcription

1 SHORT FORM ORDER SCAN SUPREME COURT STATE OF NEW YORK COUNTY OF NASSAU PRESENT: HON. IRAB. WARSHAWSKY Justice. TRIAL/IAS PART 8 A TC HEAL THCARE INC. -against - Plaintiff INDEX NO. : /2009 MOTION DATE: 07/ MOTION SEQUENCE: 002 GOLDSTEIN, GOLUB & KESSLER LLP McGLADRY & PULLEN LLP, NEAL ROSENBERG and JOEL STEINBERG Defendants. The following papers read on this motion: Notice of Motion, Affirmation & Exhibits Annexed... Goldstein Golub Kessler LLP', Neal Rosenberg s and Joel Steinberg Memorandum of Law in Support of Their Motion to Dismiss... Additional Exhibits to the Affirmation of Veronica E. Rendon in Support of Goldstein Golub Kessler LLP', Neal Rosenberg s and Joel Steinberg Motion to Dismiss... "'" ""'"'' Affrmation of Eric B. Levine in Opposition to Motion to Dismiss, Affidavit in Opposition of Harris L. Devor & Exhibits Annexed... 4 Memorandum of Law in Opposition to Defendants ' Motion to Dismiss... 5 Goldstein Golub Kessler LLP', Neal Rosenberg s and Joel Steinberg s Reply Memorandum of Law in Further Support of Their Motion to Dismiss & Exhibits Annexed... This motion by Goldstein, Golub & Kessler LLP (" G&K") for an order pursuant to CPLR 3211(a)(5) and 214(6) dismissing the complaint in par and/or an order dismissing this action pursuant to CPLR 305(b) is granted as provided herein.

2 The plaintiff ATC Healthcare Inc. commenced this action pursuant to CPLR 304(a) via the filing of a Summons with Notice on February 6, 2009 to recover for accounting malpractice. The attached notice provided "notice: the object of this action is for auditing and accounting malpractice. The relief sought is a money judgment for $ , plus interest according to law, cost, disbursements, and other just and proper relief. " This "Sumons with Notice" was served on April 24, 2009, along with the complaint which was filed that day. G&K' s motion to dismiss this action pursuant to CPLR 305(b) is denied. Permission is required to make motions in the commercial par. While permission to seek dismissal of a portion of the complaint pursuant to CPLR 3211(a)(5), 214(6) was obtaned, permission to seek dismissal pursuant to CPLR 305(b) was never sought let alone obtained. For that reason alone the motion to dismiss pursuant to CPLR 305(b) should be denied. In any event, addressing that application on the merits, it wil nevertheless be denied. While a Notice of Appearance and/or a demand for a complaint does not constitute a waiver of the CPLR 305(b) defense which is jurisdictional (Parker v Mack, 61 NY2d 114 (1984)), G&K' s failure to raise the objection in its fust 3211 motion, in its Answer and its Amended Answer precludes it from raising the objection to the defective Sumons With Notice at this juncture. Sirkis v Cohen, 23 AD3d 369 (2 Dept. 2005); LeConte v City of New York 129 Misc. 2d 719 (Supreme Court Queens County 1985). In any event, the purose of CPLR 305(b) is to put the defendant on adequate notice of the natue of the claims against him. Twenty-third Ann Report ofn.y. Judicial Conference 1978, p As the Court stated in Parker v Mack supra, at p. 118 (1984), "(t)he Legislature, by its adoption ofthe amendment proposed by the Judicial Conference, has determined and fixed a defendant's entitlement at the time and as par of service of process to knowledge concerning the claim being asserted against him - - an entitlement which imposes no conceivable burden or hardship on the plaintiff." The mere filing of a defective Sumons with Notice does not defeat that purose if the transgression is remedied when, as here, the defendant is served. Indeed, in Parker v Mack (supra at p. 117) the Court of Appeals noted that "no action is commenced if the manner of service of the summons is not in compliance with statutory requirements (emphasis added)." While the notice on the Sumons with Notice was defective when fied in that it failed

3 ... to adequately set forth "the nature of the action (see Roth v State University of New York, 61 AD3d 476 (1 st Dept. 2009) lv den, 13 NY3d 711 (2009); Scaringi v Elizabeth Broome Realty Corp, 191 AD2d 223 (pt Dept. 1993)), Section 305(b) does not require dismissal here. That statute provides that " (i)f the complaint is not served with the summons, the summons shall contain or have attached thereto a notice stating the nature of the action and relief sought and the sum of money for which judgment may be taken in case of default (emphasis added). Here, the complaint was in fact served with the sumons. See Andrlis v Fox, 284 AD2d 1006 Dept. 2001). This action was commenced on Februar 6, G G&K seeks dismissal of all claims sounding in accounting malpractice which accrued prior to Februar pursuant to CPLR 214(6) and Ackerman v Price Waterhouse, 84 NY2d (1994) and Wiliamson ex rei. Lipper Convertibles. L.P. v PricewaterhouseCoopers LLP, 9 NY3d 1 10 (2007). The pertinent facts are as follows: The plaintiff A TC Healthcare originally hired G G&K to perform quarerly reviews and audits of its financial statements for its 2004 fiscal year which ran from March 1, 2003 to Februar That arangement was renewed annually and quarerly via written engagement letters until Februar 6, 2008 when A TC Healthcare terminated its relationship with G&K. G G&K' s engagement letters provided "(o)ur responsibilities as auditors is limited to the period covered by our audit and does not extend to any later periods for which we are not engaged as auditors. G&K issued annual audit opinion letters for ATC Healthcare s financial statements for its 2004, 2005, 2006 and 2007 fiscal years. Each opinion letter however referred specifically to prior years' statements. As an example, G G&K' s April 28, 2006 opinion letter provided: We have audited the accompanying consolidated balance sheets of ATC... as of Februar and 2005 and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each ofthe three years in the period ended Februar In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ATC...as of Februar and 2005 and the results of their

4 , " operations and their cash flows for each of the years in the period ended February 28, 2006 in conformity with U. S. generally accepted accounting principles. In our opinion, the information included on Schedule II relating to the years ended Februar , Februar and Februar are fairly stated in all material respects, in relation to the basic consolidated financial statements taken as a whole. Also, such schedule presents fairly the information set forth therein in compliance with the applicable accounting regulations of the Securities and Exchange Commission. The 2007 opinion letter read similarly but with respect to and Nevertheless because separate engagement letters were issued anually for each audit any later periods for which we are not engaged as auditors" must be interpreted as limited to that year s audit. None ofg G&K' s audits and reviews were ever restated, revised or withdrawn from fiing with the Securities and Exchange Commission. The applicable Statute of Limitations in this action sounding in accounting malpractice is three years. CPLR 214(6); Symbol Technologies. Inc. v Deloitte & Touche. LLP, 69 AD3d (2 Dept. 2009); see also Matter of R.M. Kliment & Frances Halsband. Architects (McKinsey & Co.. Inc. 3 NY3d 538 (2004); Haris v Kah. Hoffman. Nonenmacher. & Hochman. LLP, 59 AD3d (2 Dept. 2009): RGH Liquidating: Trust v Deloitte & Touche. LLP, 47 AD3d 516, 517 (IS! Dept. 2008), lv dism, 11 NY3d 804 (2008). The three year Statute of Limitations for accounting malpractice accrues "upon the client's receipt of the accountant's work product... " because "this is the point that a client reasonably relies on the accountant' s skil and advice and... when all the facts necessar to the cause of action have occured and an injured par can obtain relief in cour. at p. 54. Ackerman v Price Waterhouse supra ATC Healthcare received G G&K' s audits of2004 and 2005 on May and June 2005, respectively and it received the quarerly reviews for 2004 though 2006 before Februar 6, G G&K has established that the causes of action sounding in accounting malpractice based upon those audits and reviews are untimely. The burden accordingly shifts to A TC Healthcare "to aver evidentiar facts establishing that the malpractice cause of action fell

5 ' " within an exception to the Statute of Limitations or to raise a questions of fact as to whether an exception is applicable. Symbol Technolog:ies. Inc. v Deloitte & Touche. LLP supra, at p. 195 citing Lessoffv 26 Cour Street Associates. LLC, 58 AD3d (2 Dept. 2009) Gravel v Cicola, 297 AD2d 620 (2 Dept. 2002). In its attempt to defeat dismissal of these claims as untimely, ATC Healthcare relies upon the continuous representation doctrine. According to ATC Healthcare s accounting expert Haris Devor, reference and comparison to the prior years in the anual audits was mandated by the Public Company Accounting Oversight Board' s ("PCAOB") guidelines. More specifically, AU requires a continuing auditor to "update the report on the individual financial statements of the one or more periods presented on a comparative basis with those of the curent period" and AU provides: During the audit of the current-period financial statements, the auditor should be alert for circumstances or events that affect the prior-period financial statements presented... or the adequacy of informative disclosures concernng those statements.... updating his or her report on the prior-period financial statements the auditor should consider the effects of any such circumstances or events coming to his or her attention. And, AU provides ", during the curent audit, an auditor becomes aware of circumstances or events that affect the financial statements of a prior period, he or she should consider such matters when updating his or her report on the financial statements of the prior period." Based upon these guidelines, A TC Healthcare ' s expert opines that "there may be facts leared in the curent year s audit that would require the auditor to analyze and reevaluate whether, if those facts had been known previously, the opinion originally issued on the prior year s financial statements would have been appropriate given the new facts. " Should these conditions occur, it tyically results in a restated financial statement and a subsequent reaudit. The continuous representation doctrine is an exception to the Statute of Limitations and applies only where there is a ' mutual understanding of the need for fuher representation on the specific subject matter underlying the malpractice claim. Symbol Technologies. Inc. v Deloitte & Touche. LLP, supra, at p. 195, quoting McCov v Feinman, 99 NY2d (2002). That is

6 the continuous representation must be in connection with the paricular transaction which is the subject of the action and not merely during the continuation of a general professional relationship. Zarefv Berk & Michaels. P., 192 AD2d 346, (pt Dept. 1993), citing National Union Fire Insurance Company ofpittsburg:h v Davis Wright Todd. Reise & Jones, 157 AD2d 571 (pt Dept. 1990); Nykorchuck v Henriques, 78 NY2d 255 (1991); Luk Lamellen U. Kupplungbau GmbH v Lerner, 166 AD2d 505, 507 (2 Dept. 1990). "(T)he facts are required to demonstrate continued representation in the specific matter directly under dispute. Zarefv Berk & Michaels. P. supra, at p These circumstances did not occur here. The reviews prior to Februar and audits challenged here have not been revised or amended by G G&K or any of ATC Healthcare subsequent accountants. In fact, neither A TC Healthcare nor its expert accountant has cited subsequent facts causing its accountants to question the accuracy ofg G&K' s reviews and audits for these periods. The mere possibility that that could have occured does not give rise to the application of the continuous treatment doctrine where it in fact has not. Wiliamson ex rei. Lipper Convertibles. L.P. v PricewaterhouseCoopers. LLP supra Apple Ban for Savings v PricewaterhouseCoopers. LLC, 70 AD3d 438 (2 Dept. 2010); ZarefV Berk & Michaels supra In fact, the Cour of Appeals ' conclusion in Wiliamson ex rei. Lipper Convertibles. L.P. v PricewaterhouseCoopers. LLP (supra at p ) applies here: Plaintiff s allegations make clear that for the years in question (A TC Healthcare) entered into anual engagements with defendant for the provision of separate and discrete audit ( and review) services for (ATC Healthcare s) year end financial statements and once defendant performed the services for a paricular year, no further work as to that year was undertaken (emphasis added). The Cour of Appeals' explanation also applies here: Taken together, plaintiffs allegations establish defendant's (alleged) failures within a continuing professional relationship, not a course of representation as to the paricular problems (conditions) that gave rise to plaintiff s malpractice claims. Plaintiff fails to allege that defendant and (A TC Healthcare) explicitly contemplated further representation regarding the ( se) audits. Specifically, (A TC Healthcare) never engaged defendant to provide corrective or remedial services (e., to reexamine a prior year

7 financial statements or redo a prior year s audit). Nor (was ATC Healthcare) aware of the need for fuer representation as to the audits. Thus, the ' mutual understanding' required under the doctrine did not exist. Symbol Technologies. Inc. v Deloitte & Touche. LLP, supra, relied on by the plaintiff is readily distinguishable. In that case, the cour did not rely on the mere possibility of restatements and reaudits based upon information subsequently discovered in applying the continuous treatment doctrine, but rather on that having actually occured. To wit, the Second Deparment stated: Symbol pleaded Deloitte had a continuing obligation to remedy defects found in (Symbol' s financial) statements and, in fact, did so. Furer, Symbol' s allegation that Deloitte continued to provide auditing services through the end of2003 in connection with the restatement of its (prior) audits without seeking the execution of new engagement letters suggests the continuation of their professional relationship for the years 1998 to 2001, inasmuch as each of the letters of engagement provided for new agreements to be executed for additional or different auditing services.... However, no separate engagement letter was obtained by Deloitte for the remedial accounting services it performed through the end of2003 (emphasis added). Symbol Technologies. Inc. v Deloitte & Touche. LLP, supra, at p Any claims of accounting malpractice premised upon reviews or audits predating Februar 6, 2006 are untimely and are dismissed. To interpret and apply the continuous representation doctrine as ATC Healthcare would have this cour could in effect eviscerate the Statute of Limitations for accounting malpractice for the duration of an accountant and his client' s relationship paricularly where, like here, a company is required to fie comparative financial statements with The Securities and Exchange Commission. 17 CFR ~g Dated: July J5 hj ENTERED JUL NASSAW COUNTY COUNTY CLERK' S OFFICE