Opinion
Plaintiff Robert Czajkowski (Appellant) filed this action for damages against defendants Haskell & White, LLP, an accounting firm and
In this action, Appellant claims Respondents breached the duties imposed on them by the engagement letters with the Company, by failing to disclose information that came to their attention in 2001 and 2002 about the nonpayment of such taxes caused by misconduct of the Company’s former chief financial officer (CFO Randy Siville; not a party here). Appellant asserts he excusably did not discover any basis for a claim against Respondents until 2008, when their auditing workpapers were subpoenaed by the government in the federal proceedings, and he obtained a copy.
Respondents brought demurrers to the first amended complaint (FAC), asserting all causes of action in this professional negligence action were barred by the two-year statute of limitations. (Code Civ. Proc., § 339, subd. I.)
Having reviewed the face of the pleadings in light of well-established limitations principles, we conclude Appellant has not successfully pled around the two-year statutory bar, nor has he supplied a showing of any realistic possibility of successful amendment. The trial court correctly analyzed the relevant issues and we affirm.
I
BACKGROUND: FILING OF ACTION
For purposes of analyzing the demurrer rulings, we take the facts properly pleaded to assess whether they may state their causes of action, as matters of
A third party creditor brought enforcement proceedings against the Company in 2002, resulting in the discovery of its large outstanding tax liabilities. Appellant participated in an internal investigation and in August 2002, he learned from the Company’s CFO that since 2001, the CFO had been diverting Company funds intended for tax payments, so the Company had failed to pay large sums of payroll withholding taxes. The Company went under and Appellant lost his job.
Originally, the State of California held Appellant personally liable for the unpaid payroll taxes, but after an investigation, it released him from liability, concluding he had no knowledge of the CFO’s misdeeds until August 2002 and he had not willfully withheld monies due.
In October 2006, the Internal Revenue Service (IRS) assessed Appellant personally for the Company’s unpaid payroll taxes and penalties. (26 U.S.C. § 6672.)
In March 2010, Appellant filed this state court complaint on theories of professional negligence, breach of contract and implied covenants, as well as negligent misrepresentation and constructive fraud. After a demurrer was sustained with leave to amend, he filed the FAC, expanding his discovery allegations. Appellant alleges that he had standing to sue as an express or intended third party beneficiary of the Company’s engagement agreements, due in part to his exposure to personal liability for the Company’s tax defaults. (26 U.S.C. § 6672.)
In the FAC, Appellant alleges he was unable to discover his claims until September 2008, because he did not have access to Respondents’ auditing workpapers until the government subpoenaed them in the federal proceedings. Appellant contended that since the CFO had successfully concealed his actions until August 2002, there was no reason to suspect that Respondents were aware of the misconduct at the time (failure to pay the payroll withholding taxes). When Appellant investigated in 2005, one of Respondents’ employees told him that any significant information would have been included in footnotes in financial statements. The reports did not include tax liability information.
Appellant therefore argued that it was not until September 2008, when his attorney obtained the subpoenaed accounting records in connection with the federal proceedings, that he became able to discover any basis to make a claim against Respondents to recover damages attributable to his assessed personal liability for the unpaid taxes. Specifically, Appellant claims that Respondents’ 2001 and 2002 auditing workpapers, provided in the federal discovery, showed there were payroll taxes payable, tax liability balances were increasing, and there were tax arrearages, although Respondents considered the matter to be minor, because the CFO told them he had recorded accruals for such a possibility. According to Appellant, these auditing work-papers reflect Respondents’ understanding and acknowledgment of lack of segregation of duties under the CFO, presenting a heightened risk of fraud or irregularity, which triggered their duty to disclose under the applicable accounting standards. Respondents allegedly breached their duties to report such a known “condition” or “illegal act,” i.e., the Company’s failure to pay its taxes, and caused harm to Appellant.
Thus, Respondents’ omission from their reports of any references to unpaid taxes was alleged to demonstrate they had contemporaneous knowledge of
H
DEMURRER TO FAC; RULING
Respondents filed their demurrer and motion to strike the FAC, first challenging the standing of Appellant to sue for professional negligence, on the grounds that the engagement letter was executed by the Company, without specifying Appellant as a party. Respondents further argued that the face of the pleading showed that the two-year statute of limitations started to run when Appellant received the confession from the CFO in August 2002 that the Company’s taxes had intentionally not been.paid. Alternatively, Respondents claimed the action was obviously time-barred, as shown by Appellant’s knowledge that he was being held personally liable for the unpaid taxes and penalties throughout the 2006-2009 proceedings. However, his complaint was not filed until March 2010. In support of their arguments, Respondents provided copies of the pleadings in the federal tax proceedings for judicial notice.
In opposition, Appellant contended he was an intended beneficiary of the engagement letters, but acknowledged that an audit was not guaranteed to detect fraud or illegal activity. He claimed the auditing materials were intended for the use of the Company’s board of directors and management, including Appellant.
Appellant sought a ruling he was excusably delayed in discovering Respondents’ potential liability, so the action did not accrue until 2008 because of Respondents’ alleged fraudulent concealment of their knowledge about the CFO’s wrongdoing, when it came to their attention. In support, he provided additional material for judicial notice, consisting of the standardized accounting principles that Respondents had allegedly violated, and a copy of the redlined FAC, showing the amendments recently made.
The trial court took judicial notice of the documents submitted, and agreed with Respondents that the facts pled on the face of the FAC disclosed that the action was untimely filed. Further, the court ruled that Appellant lacked sufficient standing to sue the Company’s auditor for alleged professional negligence. The demurrers were sustained without leave to amend, the motion to strike was deemed moot, and a judgment of dismissal was entered. This appeal followed.
APPLICABLE STANDARDS; APPROACH TO STANDING ISSUES
We apply well-established rules of review. “A demurrer tests the legal sufficiency of the complaint. [Citation.] Therefore, we review the complaint de novo to determine whether it contains sufficient facts to state a cause of action. [Citation.] ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.’ [Citation.] The trial court exercises its discretion in declining to grant leave to amend. [Citation.] If it is reasonably possible the pleading can be cured by amendment, the trial court abuses its discretion by not granting leave to amend. [Citation.] The plaintiff has the burden of proving the possibility of cure by amendment.” (Grinzi v. San Diego Hospice Corp. (2004)
On demurrer, a court must accept properly pleaded facts as true, but a demurrer does not admit the plaintiff’s contentions nor conclusions of law or fact. (People ex rel. Lungren v. Superior Court (1996)
In their demurrer and motion to strike, Respondents raised not only a limitations bar to the action, but also a lack of standing to sue. The trial court issued a ruling in favor of Respondents on the standing claim regarding the professional negligence cause of action (without reaching the contractual theories).
The FAC alleges that the engagement letters were entered into between Respondents and the Company, and Appellant was, ex officio, an express or intended third party beneficiary of the letters and of Respondents’ professional obligations, and thus the equivalent of a client for certain purposes. Admittedly, the issue of standing presents difficult analytical questions here, based on the following language in Bily, supra,
We need not express any substantive position on the standing issues, since the limitations issues are dispositive under these circumstances. We assume arguendo that Appellant can sufficiently assert standing to sue the Company’s auditors for alleged professional negligence and the related causes of action, and now turn to the discovery rule arguments.
IV
RULES REGARDING DISCOVERY OF FACTS CONSTITUTING THE CAUSES OF ACTION
A. Applicable Legal Principles
Where a demurrer raises the bar of the applicable statute of limitations, the court assesses whether “ ‘the complaint shows on its face that the statute bars the action.’ ” (E-Fab, Inc., supra,
The parties do not dispute that the two-year limitations period of section 339, subdivision 1 applies to each of the causes of action in the FAC, since they are all intertwined with the professional malpractice allegations (negligent misrepresentation, constructive fraud, breach of contract and implied covenants). (Curtis v. Kellogg & Andelson (1999)
However, when a plaintiff relies on the discovery rule or allegations of fraudulent concealment as excuses for an apparently belated filing of a complaint, “the burden of pleading and proving belated discovery of a cause of action falls on the plaintiff.” (Investors Equity Life Holding Co. v. Schmidt (2011)
In evaluating the reasonableness of a plaintiff’s reliance on alleged misrepresentations, the courts will consider what is apparent from the pleadings about the plaintiff’s knowledge and experience. “ ‘Generally, “[a] plaintiff will be denied recovery only if his conduct is manifestly unreasonable in the light of his own intelligence or information.” ’ ” (Broberg v. The Guardian Life Ins. Co. of America (2009)
B. Two Types of Injury?
Appellant claims that the injury he suffered had two concurrent causes; not only the misconduct of the CFO in not paying the taxes, but also Respondents’ misfeasance and concealment of facts in their auditing reports about the unpaid taxes, thus allegedly causing either the same or further harm to the Company and Appellant. He argues for justifiably delayed accrual of these claims against Respondents, because a limitations period should not start to run until the plaintiff is on notice of the facts constituting the separate injury. (Fox v. Ethicon Endo-Surgery, Inc. (2005)
In the context of professional negligence cases that assert negligent misrepresentations, the reasonableness of the plaintiff’s alleged reliance on the representations may be treated as a question of fact. Nevertheless, if the undisputed facts do not leave any room for reasonable differences of opinion, the question of when “a plaintiff reasonably should have discovered facts for purposes of the accrual of a cause of action or application of the delayed discovery rule . . .” should be decided as a matter of law, by evaluating the allegations in light of matters that are properly subject to judicial notice. (Broberg, supra,
C. Face of FAC and Appellant’s Arguments
In light of the above principles, we evaluate the sequence of events alleged in the FAC, and take into account the proposed amendment suggested in the reply brief (i.e., added allegations about Respondents’ silence during the Company’s internal investigations). (Blank v. Kirwan, supra,
Appellant has several theories why his FAC successfully alleges delayed discovery, in that he could not discover his claims against Respondents until September 2008. First, he reasonably assumed in 2002 that the CFO must have fooled Respondents as well as Appellant, so Appellant did not come under any duty to investigate the role of Respondents at that time.
Next, even if Appellant should have suspected some breach of duty by Respondents occurred during the 2001 and 2002 timeframe, he claims only factual questions may exist about whether an investigation would have been successful in uncovering the extent of their knowledge of the unpaid tax situation at that time. Appellant suggests the “accrual trigger” of the statutory period occurred only upon receipt of the 2008 discovery copies that he obtained from the government, when he learned that Respondents’ auditing papers showed they had some knowledge about the Company’s tax liabilities.
Appellant relies on Electronic Equipment Express, Inc. v. Donald H. Seiler & Co. (1981)
An example of a professional malpractice case held to be properly barred by the plaintiff’s lack of reasonable diligence in investigating the causes of an injury is Apple Valley Unified School Dist. v. Vavrinek, Trine, Day & Co. (2002)
Another example of such a correctly time-barred action is Curtis, supra,
D. Analysis
To address whether the discovery rule properly postponed accrual of these causes of action, we examine whether the face of the FAC sets forth such circumstances and sequences of events that should have reasonably served to alert Appellant that Respondents’ action or inactions had possibly caused injury to him. He had to allege not only late discovery, but also inability to discover the relevant facts earlier. It begs the question for Appellant to say that because the CFO had successfully covered up his own misconduct until August of 2002, Appellant could not reasonably have formed any suspicion until September 2008 that any other party, such as various financial professionals employed by the Company, had potentially contributed to the problem through negligence with respect to the tax deficiencies.
As shown on the face of the complaint, Respondents were retained by the Company for auditing purposes, and all parties acknowledge that Respondents were not investigators who were obligated to discover reportable conditions or illegalities. Instead, Respondents were obligated to disclose such material errors, illegalities or reportable conditions that came to their attention, unless such conditions were deemed inconsequential. The Company incurred significant tax liability in 2002, and after the Company folded, Appellant was being pursued for personal liability. It is not too much of a stretch to expect a reasonable person in Appellant’s shoes, a knowledgeable executive, to extrapolate from his 2002 knowledge of one cause of an injury (the CFO’s failure to pay taxes) that there might be other concurrent causes, in the actions or inactions of other retained professionals who had been dealing with or reporting on the Company’s finances.
In 2005, one of Respondents’ accountants told Appellant that information gained about unpaid taxes would have been placed in a footnote in the reports, and Appellant does not dispute that there was none, but he did not undertake any further investigation about what was known by Respondents, or when. He argues that Respondents never volunteered to supply their workpapers to him, or that an investigation would have been fruitless. But it was not “hitherto unknown information” that other parties, such as Respondents, had professional responsibilities in examining Company records in 2001 and 2002, particularly its tax records. (Electronic Equipment Express, supra,
From 2006 through 2009, Appellant was being pursued by the IRS until he settled the case, paying taxes and penalties attributable to the Company’s failure to pay taxes. The judicially noticed material about the federal proceedings shows that Appellant was challenging his personal tax liability. (E-Fab, Inc., supra,
Based on all the facts he knew before 2008, Appellant had a duty to investigate even a fiduciary’s actions, or inquire about the work done, because on an objective basis, all of these circumstances placed him on “ ‘notice of facts sufficient to arouse the suspicions of a reasonable man.’ [Citations.] If such facts actually do come to his attention he may not sit idly by for at that point the statute of limitations begins to run.” (Electronic Equipment Express, supra,
Judgment is affirmed. Respondents are awarded their costs on appeal.
Benke, Acting P. J., and Aaron, J., concurred.
Notes
Individual members of the respondent firm sued here are: Wayne Pinnell, David White II, Michelle McDuffie, Joyce Sailer and Todd Collins.
All further statutory references are to this code unless noted. Section 339, subdivision 1, imposes a two-year limitation period for “[a]n action upon a contract, obligation or liability not founded upon an instrument of writing.”
In Bily v. Arthur Young & Co. (1992)
Title 26 United States Code section 6672(a) imposes as a general rule that “Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of [such] tax . . . .”
After undergoing surgery, the plaintiff in Fox was able to promptly recognize she had a cause of action for medical malpractice against the defendant surgeon, and she was also allowed to assert justifiably delayed discovery of a related cause of action for products liability against a different defendant (medical device manufacturer). The two types of injuries did not necessarily accrue at the same time, based on the knowledge she had. (Fox, supra,
We need not decide the scope of an outside auditor’s fiduciary duty to its client or to the client’s CEO. (See Electronic Equipment Express, supra,