Opinion
23-CV-7454 (JGLC) (RFT)
04-08-2024
ROBERT R. GAGLIARDI and ROSITA GAGLIARDI, Plaintiffs, v. PRAGER METIS CPAS LLC and PHILIP D'ANGELO, Defendants.
REPORT AND RECOMMENDATION
ROBYN F. TARNOFSKY United States Magistrate Judge
TO THE HONORABLE JESSICA G.L. CLARKE, UNITED STATES DISTRICT JUDGE:
In their Amended Complaint (“AC”), Plaintiffs Robert R. Gagliardi and Rosita Gagliardi (“Plaintiffs”) bring this action against Defendants Prager Metis LLP (“Prager”), a New York-based accounting firm, and Phillip D'Angelo (“D'Angelo”), a certified public accountant, (collectively, “Defendants”) for professional negligence and unjust enrichment under New York state law. (See generally ECF 20, AC.)
Pending before this Court is a fully briefed motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Having carefully reviewed the filings on the docket, and for the reasons set forth below and as specified herein, I respectfully recommend that the motion to dismiss be GRANTED IN PART and DENIED IN PART.
FACTUAL BACKGROUND
For purposes of the motion to dismiss, I accept Plaintiffs' allegations as true and draw all reasonable inferences in their favor. See City of Providence v. BATS Glob. Mkts., Inc., 878 F.3d 36, 50 (2d Cir. 2017). The AC, which attaches, an affidavit from D'Angelo dated July 1, 2021, prepared in connection with Plaintiffs' request for an abatement of penalties for the late filing of Plaintiffs' 2017 tax return (the “2021 D'Angelo Decl.”), alleges as follows:
Prager is a New York limited liability company that provides accounting services. (See ECF 20, AC ¶ 3.) D'Angelo is a certified public accountant (“CPA”) and was an employee at Prager between 2013 and 2022. (See id. ¶ 4.) From 2012 through 2015, Plaintiffs were clients of Ralph Anderson (“Anderson”), a CPA who served as the managing director of a tax and financial services consulting firm. (See id. ¶ 8.)
Plaintiffs became clients of Prager in January of 2016, after Anderson joined that firm. (See id. ¶¶ 11, 14.) Plaintiffs engaged Anderson and Prager to (1) prepare and file Plaintiffs' United States tax returns for the years 2015, 2016, and 2017; (2) prepare and file “other documents with the relevant taxing authorities”; and (3) “respond to any inquiries and/or audits initiated by the IRS.” (See id. ¶¶ 9, 15, 26, 30.) D'Angelo and Anderson were the “main point persons” overseeing Plaintiffs' account at Prager. (See id. ¶ 12.) Anderson took a leave of absence from Prager beginning in August 2017 and left the firm in March 2018. (See id. ¶ 27.) Prager and D'Angelo had a duty to timely prepare and file the tax returns for the years 2015, 2016, and 2017 but failed to do so and that Plaintiffs were harmed as a result. (See generally id.)
The deadline to file Plaintiffs' 2015 tax return was October 15, 2016, as a timely extension request had been filed and granted. (See id. ¶¶ 20-21.) Although Defendants were aware that Plaintiffs' 2015 tax return had not been filed, let alone filed on time, Defendants withheld this information from Plaintiffs until November of 2018, when the IRS sent a Tax Notice assessing penalties against Plaintiffs. (See id. ¶¶ 23, 33, 36.) Defendants did not finalize and file Plaintiffs' 2015 tax return until 2020. (See id. ¶ 42.)
The deadline to file Plaintiffs' 2016 tax return was April 18, 2017. (See id. ¶ 24.) In March of 2017 Defendants prepared an extension request but failed to file it. (See id. ¶ 25.) Although Defendants were aware that Plaintiffs' 2016 tax return had not been filed, let alone filed on time, Defendants withheld this information from Plaintiffs until November of 2018, when the IRS sent a Tax Notice assessing penalties against Plaintiffs. (See id. ¶¶ 24-26, 33-36.) Defendants did not finalize and file Plaintiffs' 2016 tax return until 2020. (See id. ¶ 42.)
The deadline to file Plaintiffs' 2017 tax return was April 17, 2018. (See id. ¶ 29.) Defendants failed to obtain an extension of time to file Plaintiffs' 2017 tax return and did not finalize and file that tax return until October of 2018. (See id. ¶¶ 30-31.) Although Defendants were aware that Plaintiffs' 2017 tax return had not been timely filed, Defendants withheld this information from Plaintiffs until November of 2018, when the IRS sent a Tax Notice assessing penalties against Plaintiffs. (See id. ¶¶ 29-36.)
In November of 2018 the IRS sent a Tax Notice assessing penalties against Plaintiffs for failing to file their 2015 and 2016 tax returns and for the late filing of their 2017 tax return. (See id. ¶ 33.) It was at this time that Defendants first notified Plaintiffs that their 2015 and 2016 tax returns had not been filed and that the 2017 tax return had been filed late. (See id. ¶ 36.) Defendants assured Plaintiffs that the failures to file and late filing were due to Defendants' errors and that Defendants would fix the problem. (See id.)
“D'Angelo prepared revised 2015 and 2016 income tax returns and ensured that they were filed with the IRS and ensured that Plaintiffs' 2017 income tax return was technically sound” (id. ¶ 41), which must have occurred between November 2018 when the IRS assessed penalties and 2020 when the 2015 and 2016 returns were filed. Plaintiffs received a December 2020 invoice from Prager for “Professional Tax Controversy Services related to 2015-2017 IRS Penalty and Interest Assessments.” (Id. ¶ 44.) From 2021 through 2023 Defendants worked with Plaintiffs' tax counsel to (1) request a refund and abatement for IRS penalties associated with the 2017 tax return, (2) respond to an August 2021 IRS inquiry relating to Plaintiffs' 2015 and 2016 tax returns, and (3) appeal the IRS penalties assessed in connection with the 2015, 2016 and 2017 tax return. (See id. ¶¶ 45-47.) Plaintiffs replaced Defendants with new accountants in 2023. (See id. ¶ 48.)
Between 2016 and 2023, Plaintiffs paid Defendants over $135,000 for accounting, tax, and advisory services. (See id. ¶ 56.) Plaintiffs were assessed penalties of $432,837 in connection with the late filings of their 2015, 2016, and 2017 tax returns; Plaintiffs retained tax counsel to appeal the penalties and paid over $70,000 in fees to tax counsel in connection with that work. (See id. ¶ 52-53.)
PROCEDURAL HISTORY
On August 23, 2023, Plaintiffs filed a complaint against Defendants, alleging professional negligence, negligent supervision, and unjust enrichment. (See ECF 1, Compl.) On September 25, 2023, and subsequently on October 18, 2023, Defendants filed letter motions on consent for extensions of time to respond to the complaint (see ECF 10, 9/25/23 Letter Mot.; ECF 12, 10/18/23 Letter Mot.), which motions were granted (see ECF 11, 9/26/23 Order; ECF 13, 10/19/23 Order). On October 27, 2023, Defendants filed their motion to dismiss the complaint and a supporting brief (see ECF 16, Mot. To Dismiss; ECF 16-1, Defs.' First Suppl. Mem), and on November 6, 2023, Plaintiffs filed a response electing to amend the complaint (see ECF 17, Response to Mot. To Dismiss). On November 7, 2023, the parties filed a joint letter motion seeking to stay discovery pending the outcome of the motion to dismiss, (See ECF 18, 11/7/23 Joint Letter Mot.), which motion was granted (see ECF 18, 11/8/23 Order).
On November 15, 2023, Plaintiffs filed an amended complaint (“AC”), which provided additional information about the scope of their engagement with Defendants and removed their claim for negligent supervision. (See generally ECF 20, AC).
On November 29, 2023, Defendants filed a motion to dismiss the AC and a supporting brief. (See ECF 21, Mot. To Dismiss; ECF 21-1, Defs.' Mem.) Defendants argue that Plaintiffs' accountant malpractice claim should be dismissed because as time barred and barred by the doctrine of pari delicto, and because Plaintiffs failed to plead causation adequately. (See ECF 21-1, Defs.' Mem.) Additionally, Defendants argue that Plaintiffs' unjust enrichment claim is duplicative of the accountant malpractice claim. (See id. at 13-15.) In support of their motion, Defendants submitted a declaration by D'Angelo dated October 27, 2023 (“2023 D'Angelo Decl.”) that attaches email correspondence with Plaintiffs. (See ECF 21-5, 2023 D'Angelo Decl. Exs. 6-9 (Email Correspondence) Plaintiffs filed their opposition papers on January 3, 2024. (See ECF 26, Pls.' Opp.) Defendants filed their reply memorandum on January 10, 2024. (See ECF 29, Defs.' Reply.)
On January 3, 2024, Plaintiffs filed a letter motion requesting that the Court stay its consideration of Defendants' pending motion to dismiss until after completion of discovery (see ECF 25) and a letter request seeking leave to file a second amended complaint (see ECF 28). Defendants filed opposition papers to Plaintiffs' applications. (See ECF 30; ECF 31.)
By Order of Reference dated February 1, 2024 (ECF 32), Judge Jessica G.L. Clarke referred this case to Magistrate Judge Katharine H. Parker for general pretrial purposes and dispositive motions. On February 2, 2024, the case was reassigned to me.
On February 12, 2024, I held a telephonic status conference with the parties and issued an Order denying Plaintiffs' request that the Court stay its consideration of the pending motion to dismiss. (See ECF 43, 2/12/24 Order.) In that Order I also denied without prejudice Plaintiffs' requests to lift the stay of discovery and seeking leave to file a second amended complaint. (See id.) I heard oral argument on the motion to dismiss the AC on February 23, 2024. (See ECF 47.)
LEGAL STANDARD FOR MOTIONS TO DISMISS
A defendant may move to dismiss for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. 662 at 678.
In deciding a motion to dismiss, the Court “must accept as true all of the allegations contained in a complaint[,]” but “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citation omitted). Although Rule 8 “does not require ‘detailed factual allegations,' . . . it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. (quoting Twombly, 550 U.S. at 555). Determining whether a complaint states a plausible claim is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679 (citation omitted). When deciding a Rule 12(b)(6) motion, a district court may consider, in addition to the factual allegations in the complaint, “documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint.” DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).
DISCUSSION
I. Plaintiffs' Claims Are Not Time Barred
Defendants argue that under Rule 12(b)(6), Plaintiffs' claims are barred by the three-year statute of limitations governing professional malpractice claims under New York law. (See ECF 21-1, Defs.' Mem. at. 6-10.) In support of this argument, Defendants rely on the 2023 D'Angelo Declaration discussing the timing of the work performed by Defendants and attaching email correspondence between the parties. (See ECF 21-5, 2023 D'Angelo Decl. ¶¶ 6-8 & Exs. 69.)
A. Legal Principles Governing Statutes of Limitations
“Where the dates in a complaint show that an action is barred by a statute of limitations, a defendant may raise the affirmative defense in a pre-answer motion to dismiss.” Ghartey v. St. John's Queens Hosp., 869 F.2d 160, 162 (2d Cir. 1989). A statute of limitations defense may only be resolved on a pre-answer motion to dismiss where the complaint alleges specific information that would permit such a finding. See Harris v. City of New York, 186 F.3d 243, 250 (2d Cir. 1999). “The statute of limitations is an affirmative defense on which the defendant bears the burden of proof.” Ellington Long Term Fund, Ltd. v. Goldman, Sachs & Co., No. 09-CV-9802 (RJS), 2010 WL 1838730, at *2 (S.D.N.Y. May 4, 2010). A litigant is under no obligation to anticipate potential affirmative defenses. See Abbas v. Dixon, 480 F.3d 636, 640 (2d Cir. 2007).
Accounting malpractice claims governed by New York law are subject to a three-year statute of limitations. See N.Y. C.P.L.R. § 214(6) . “A claim accrues when the malpractice is committed not when the client discovers it.” Williamson v. PricewaterhouseCoopers LLP, 9 N.Y.3d 1, 7-8 (2007) (citing Glamm v. Allen, 57 N.Y.2d 87, 93 (1982) and other cases). An accounting malpractice claim accrues “when all the facts necessary to the cause of action have occurred.” Ackerman v. Price Waterhouse, 84 N.Y.2d 535, 541 (1994). It is generally measured from the day an actionable injury occurs. See Arnold v. KPMG LLP, 334 Fed.Appx. 349, 352 (2d Cir. 2009).
“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 further representation on the specific subject matter underlying the malpractice claim.'” Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372, 461 (S.D.N.Y. 2010) (quoting Symbol Tech. Inc. v. Deloitte & Touche, LLP, 69 A.D.3d 191, 888 (2d Dep't 2009)). When the continuous representation doctrine applies, “the limitations period does not start running ‘until the [professional] ceases representing the client in the specific matter at issue.'” Meskunas v. Auerbach, No. 17-CV-9129 (VB), 2022 WL 1214254, at *4, (S.D.N.Y. Apr. 25, 2022) (quoting Nobile v. Schwartz, 56 Fed.Appx. 525, 526 (2d Cir. 2003). For the limitations period to begin to run, “the end of the relationship of trust must be evinced by some outward manifestation by either client or [professional].” Esposito v. Gary, 844 Fed.Appx. 448, 449 (2d Cir. 2021).
“‘[T]he mere recurrence of professional services does not constitute continuous representation where the later services performed were not related to the original services ....'” Anderson v. Greene, No. 14-CV-10249 (KPF), 2016 WL 4367960, at *23 (S.D.N.Y. Aug. 10, 2016), aff'd, 774 Fed.Appx. 694 (2d Cir. 2019) (quoting Hall & Co., Inc. v. Steiner & Mondore, 147 A.D.2d 225, 228-29 (3d Dep't 1989)). The doctrine's application is limited “to instances where the professional's involvement after the alleged malpractice is for the performance of the same or related services and is not merely continuity of a general professional relationship.” Muller v. Sturman, 79 A.D.2d 482, 483 (4th Dep't 1981)).
B. Extrinsic Evidence
Defendants have moved to dismiss pursuant to Rule 12(b)(6), which means that the Court is restricted as to the materials it may consider. See DiFolco, 622 F.3d at 111. The 2023 D'Angelo Declaration does not fall within any exception to the general rule that a Court may rely only on the allegations in the complaint when deciding a Rule 12(b)(6) motion. See Goel v. Bunge, 820 F.3d 554, 559 (2d Cir. 2016) (“Generally, we do not look beyond ‘facts stated on the face of the complaint, . . . documents appended to the complaint or incorporated in the complaint by reference, and . . . matters of which judicial notice may be taken.'” (quoting Concord Assocs., L.P. v. Entm't Props. Tr., 817 F.3d 46, 51 n.2 (2d Cir. 2016))). The 2023 D'Angelo Declaration and its exhibits are not documents “attached to the complaint as exhibits,” “incorporated by reference in the complaint,” or integral to the complaint. DiFolco, 622 F.3d at 111.
Considering such “matters outside the pleadings” would require converting Defendants' motion to “one for summary judgment under Rule 56.” Fed R. Civ. P. 12(d), which a district court may do only upon giving all parties “a reasonable opportunity to present all the material that is pertinent to the motion.” Id. I recommend against doing so here, because the parties have not yet had an opportunity to engage in discovery. See Aetna Cas. & Sur. Co. v. Aniero Concrete Co., Inc., 404 F.3d 566, 573 (2d Cir. 2005); Access 4 All, Inc. v. Trump Int'l Hotel & Tower Condo., 458 F.Supp.2d 160, 165 (S.D.N.Y. 2006). My analysis therefore does not consider the 2023 D'Angelo Declaration.
C. Accrual Date
Defendants argue that Plaintiffs' claims began to accrue on the date the tax returns were considered late or, alternatively, when Plaintiffs were provided with draft tax returns. (See ECF 21-1, Defs.' Mem at 7-8.) Plaintiffs contest either date of accrual, primarily arguing that because the penalty a taxpayer faces is speculative or contingent from the date the tax return is due until the IRS imposes a specific penalty, the claims accrue only when the IRS announces the penalty. (See ECF 26, Plfs.' Opp. at 9-11.) Nothing in the complaint or the attachments thereto indicate the exact date the IRS announced the amount of penalties it assessed against Plaintiffs.
Plaintiffs' position is not supported by governing law. While the scope of the injury and ultimate costs the taxpayer faces may be speculative and contingent upon the penalty ultimately assessed, Plaintiffs' injury became “actionable” on the dates the 2015, 2016 and 2017 tax returns were deemed late. See Arnold, 334 Fed.Appx. at 352 (holding that a claim for malpractice accrues when the malpractice was committed). It was on those dates that Defendants breached their duty to timely prepare and file Plaintiffs' tax returns, and therefore it was on those dates that Plaintiffs' claims accrued. See id.
D. Tolling the Statute of Limitations Under the Continuous Representation Doctrine
Plaintiffs argue in the alternative that the statute of limitations has been tolled under the continuous representation doctrine until 2023, when Plaintiffs replaced Defendants with new accountants. (See ECF 26, Plfs.' Opp. at 12-14; ECF 20, AC ¶ 48.) Defendants respond that the continuous representation doctrine should not apply because timely filing did not require professional advice. (See ECF 29, Defs.' Reply. at 4.) They contend that if the Court does apply the continuous representation doctrine, the statute of limitations should not be tolled beyond the time the completed tax returns were provided to Plaintiffs because Plaintiffs engaged Defendants to prepare tax returns and not to handle tax controversy matters. (See id.) Defendants claim to have provided the completed 2015 and 2016 tax returns on September 17, 2019, and the completed 2017 tax returns in October 2018. During oral argument Defendants explained that the “gap” between the time the tax preparation services were provided to Plaintiffs and the time Defendants assisted with tax controversy matters arising out of penalties assessed by the IRS confirms that the continuous representation doctrine should not apply.
Defendants' argument that the continuous representation doctrine is inapplicable here because “unlike all of the other applications of the continuous representation doctrine, the alleged failure to timely file was not one that required a professional” is unavailing. The crux of the continuous representation doctrine is based on the idea that “a person seeking professional assistance has a right to repose confidence in the professional's ability and good faith.” Glamm, 57 N.Y.2d at 93. Here, Plaintiffs have alleged that in conjunction with the untimely filing of the 2015-2017 tax returns, Defendants also failed to timely prepare them and that they relied on Defendants' professional assistance thereafter in connection to the tax returns. (See ECF 27, Plfs.' Opp. at 16; ECF 20, AC ¶¶ 15, 35). Even though it requires no special training to ascertain a tax deadline or make sure it is met, retaining a professional to assist in performing duties that include timely filing of documents and providing substantive assistance in connection with a particular matter does not bar the application of the continuous representation doctrine. Cf. Glamm, 57 N.Y.2d at 96 (finding continuous representation doctrine to toll statute of limitations in legal malpractice suit where attorney in underlying personal injury lawsuit failed to timely file the requisite notice of claim with the municipality, but continued to represent plaintiff thereafter in seeking to recover damages from the municipality).
Defendants' alternative argument that the continuous representation doctrine should not apply because there were two distinct engagements - one for tax preparation services and one for assistance with tax controversies - is based on a factual premise that is inconsistent with the allegations in the AC. The AC contains the following allegations: “at all relevant times Defendants were charged with preparing as well as filing Plaintiffs' tax returns and other documents with the relevant taxing authorities and responding to any inquiries and/or audits initiated by the IRS.” (ECF 20, AC ¶ 15.) Accepting this allegation as true, as I must for purposes of this motion to dismiss, I conclude that Plaintiffs have adequately alleged that they originally engaged Defendants during the relevant period both to prepare their taxes and to handle any tax controversies that arose.
The AC goes on to allege that: Defendants continued to provide services during the 2017 and 2018 period and to “deal with matters arising in earlier years as appropriate” (id. ¶ 43); that “D'Angelo prepared revised 2015 and 2016 income tax returns and ensured that they were filed with the IRS and ensured that Plaintiffs' 2017 income tax return was technically sound” (id. ¶ 41), which must have occurred between November 2018 when the IRS assessed penalties and 2020 when the 2015 and 2016 returns were filed; and from 2021 through 2023 Defendants worked with Plaintiffs' tax counsel to request a refund and abatement for IRS penalties associated with the 2017 tax return, respond to an August 2021 IRS inquiry relating to Plaintiffs' 2015 and 2016 tax returns, and appeal the IRS penalties assessed in connection with the 2015, 2016 and 2017 tax return (see id. ¶¶ 45-47). These allegations support a conclusion that the parties had is “a mutual understanding of the need for further representation” to remedy problems relating to the at-issue tax returns, see Anwar, 728 F.Supp.2d at 461.
These allegations, contrary to Defendants' argument, reflect that Defendants continued doing work “related to the original services,” as required for the continuous representation doctrine to apply, Anderson, 2016 WL 4367960, at *23. The doctrine applies here because the AC alleges that “the professional's involvement after the alleged malpractice is for the performance of the same or related services and is not merely continuity of a general professional relationship.” Muller, 79 A.D.2d at 483.
This conclusion is supported by the allegation in the AC that Plaintiffs received a December 2020 invoice from Defendants for “Professional Tax Controversy Services related to 2015-2017 IRS Penalty and Interest Assessments,” (ECF 20, AC ¶ 44). Charging Plaintiffs for work performed relating to the assessment of an IRS penalty supports the inference that there was a continuous engagement.
While the AC is not entirely clear about how much work Defendants performed on the engagement between 2018 and 2020, Defendants have not pointed to anything in the AC suggesting that there had been “some outward manifestation” by either Plaintiffs or Defendants that the relationship of trust between the parties ended in 2018, Esposito, 844 Fed.Appx. at 449. To the extent there was a temporal gap in Defendants' services - and it is not evident from the AC that there was such a gap - that standing alone does not permit a conclusion at this stage of the litigation that the continuous representation doctrine is inapplicable: at most, the possibility of such a gap in services raises an issue of fact, which cannot be resolved on the pleadings. See Red Zone LLC v. Cadwalader, Wickersham & Taft LLP, 27 N.Y.3d 1048, 1049 (2016) (holding that the gap between periods of alleged representation raised triable issues of fact due to the “absence of any clear delineation of the period[s] of” representation).
Because I conclude that Plaintiff has adequately alleged that continuous representation doctrine applies, for purposes of this motion, the limitations period did not start running until Defendants stopped “representing the client in the specific matter at issue.” Meskunas, 2022 WL 1214254, at *4 (internal quotation marks omitted). Based on the allegations in the AC, that occurred when Plaintiffs replaced Defendants with new accountants in 2023. (See ECF 20, AC ¶ 48.)
Plaintiffs also take the position that “Defendants should be estopped from asserting the statutes of limitation.” (ECF 26, Plfs.' Opp. at 14.) Because I conclude that Plaintiffs have adequately alleged that the statute of limitations was tolled until 2023 under the continuous representation doctrine, I need not reach Plaintiffs' argument that Defendants should be estopped from raising a statute of limitations defense because Defendants' failure to inform Plaintiffs that their tax returns had not been timely filed delayed Plaintiffs' filing of this suit.
II. Plaintiffs' Non-Delegable Duty To Timely File Their Tax Returns Does Not Prevent
Them from Adequately Pleading Causation
To state a claim for accounting malpractice under New York law, a plaintiff must allege that: “(1) the accountant's conduct fell below the accepted standard of practice; and (2) the accountant's conduct was a proximate cause of the alleged injuries.” See Paladini v. Capossela, Cohen, LLC, No. 11-CV-2252 (LAP), 2012 WL 3834655, at *3 (S.D.N.Y. 2012) (citation omitted). To adequately plead proximate causation, a plaintiff must allege “(1) that the defendant's malpractice actually caused the plaintiff's injury; and (2) that the injury was a foreseeable consequence of the malpractice.” Id.
Defendants argue that Plaintiffs' claims should be dismissed because Plaintiffs had a non-delegable duty to timely file their tax returns and therefore that Plaintiffs cannot adequately plead proximate causation. (See ECF 21-1, Defs.' Mem. at 10-12.) In support of this argument, Defendants primarily rely upon McMahan v. Commissioner of Internal Revenue, 114 F.3d 366 (2d Cir. 1997), and Penner v. Hoffberg Oberfest, Burger & Berger, 303 A.D.2d 249 (1st Dep't 2003). Defendants' reliance on these cases is misplaced.
Critically, McMahan, which is binding precedent, was not an accountant malpractice action: it was brought by the IRS to assess tax liability against a taxpayer. Nothing in McMahan suggests that a taxpayer's non-delegable duty to timely file returns - a duty it owes to the government - forecloses any recourse the taxpayer may have against a tax preparer or accountant engaged to prepare the returns on the taxpayer's behalf. Indeed, the Court in McMahan specifically stated, “McMahan may well be able to recover the amount of the penalty he must pay from his attorney through a malpractice action or a claim for breach of fiduciary duty under state law.” McMahan, 114 F.3d 366 at 371.
In Penner, the Appellate Division, First Department, dismissed a malpractice claim based on an accountant's alleged failure to submit quarterly tax vouchers. 303 A.D.2d at 249. Penner is not binding on this Court. Where, as here, there is an absence of authoritative law from the state's highest court, “the job of the federal courts is carefully to predict how the highest court of the forum state would resolve the uncertainty or ambiguity.” Phansalkar v. Andersen Weinroth & Co., 344 F.3d 184, 199 (2d Cir. 2003) (quoting Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119 (2d Cir.1994)); accord DiBella v. Hopkins, 403 F.3d 102, 111 (2d Cir. 2005). “[W]e consider the language of the state intermediate appellate courts to be helpful indicators of how the state's highest court would rule. Although we are not strictly bound by state intermediate appellate courts, rulings from such courts are a basis for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise.” DiBella, 403 F.3d at 112 (internal quotations and citations omitted).
I do not believe Penner accurately reflects New York law on whether a taxpayer's nondelegable duty to timely file returns prevents the taxpayer from recovering from a negligent tax preparer or accountant engaged to prepare tax returns on the taxpayer's behalf. The relevant portion of the opinion is one sentence long and contains no analysis. It cites McMahan for the proposition that the taxpayer has a non-delegable duty to file tax returns, without mentioning that McMahan specifically noted the possibility of a claim by the taxpayer against the tax preparer for malpractice or breach of fiduciary duty. At least one New York court faced with this issue found that Penner should not be read to shield accountants from all liability in connection with failure to file tax returns on time. See Blumberg v. Altman, No. 118264/06, 2007 WL 1519067, at *2 (N.Y. Sup. Ct. May 25, 2007) (“To accept defendants' broad reading of Penner would amount to holding that tax preparers and accountants are not liable for any malpractice that results in a failure to file tax returns on time, even though a tax preparer or accountant may have been specifically engaged to prepare and file the tax returns.”). Under these circumstances, I recommend against following Penner to hold that Plaintiffs are precluded from suing Defendants for accountant malpractice.
Plaintiffs allege that Defendants' failure to prepare and timely file Plaintiffs' tax returns fell below the accepted standard of practice for accountants, that Defendants' malpractice caused Plaintiffs to incur IRS penalties and fees paid to tax counsel to seek an abatement of the penalties, and that the harm was a foreseeable result of the failure to prepare and timely file Plaintiffs' tax returns. (See ECF 20, AC ¶¶ 50-54.) I believe that these allegations adequately state a claim for accountant malpractice under New York law. See Paladini, 2012 WL 3834655, at *3.
III. Plaintiffs' Claims are Not Barred by the Doctrine of In Pari Delicto
Defendants argue that Plaintiffs' failure to sign the at-issue tax returns for timely filing makes Plaintiffs “willfully neglectful” and that as a result Plaintiffs' claims are barred by the in pari delicto doctrine. (See ECF 21-1, Defs.' Mem. at 12-13.) The doctrine of in pari delicto is an affirmative defense that “mandates that the courts will not intercede to resolve a dispute between two wrongdoers.” In re MF Global Holdings Ltd. Inv. Litig., 611 Fed.Appx. 34, 36 (2d. Cir. 2015) (citing Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464 (2010)). In appropriate cases - if the doctrine's applicability is “plain on the face of the pleadings[,]” In re Bernard L. Madoff Inv. Sec. LLC, 721 F.3d 54, 65 (2d Cir. 2013), - the defense may be applied at the pleading stage. See In re
MF Global Holdings, 611 Fed.Appx. at 36. The justice of the in pari delicto rule is most obvious when a willful wrongdoer sues a defendant that is alleged to be merely negligent. See Kirschner, 15 N.Y.3d at 464.
For purposes of the pending motion to dismiss, I am required to draw all inferences in Plaintiffs' favor. See BATS Glob. Mkts., Inc., 878 F.3d at 50. The AC alleges that Plaintiffs had given Anderson authorization to electronically file returns and other documents on their behalf, as well as power of attorney over their bank accounts to allow him to make tax payments on their behalf. (See ECF 20, AC ¶ 9.) This allegation supports the inference urged by Plaintiffs -that they were unaware that the at-issue tax returns had not been timely filed and therefore that they were not at fault for the failure to timely file those returns. (See ECF 26, Plfs.' Opp. at 18.) Accordingly, I conclude that Plaintiffs' claims are not barred by the doctrine of in pari delicto.
Even if Plaintiffs did share some of the blame for the failure to timely file the returns, this Court and New York State Courts have refused to shield accountants from liability when a plaintiff might have been partially at fault unless the plaintiff's negligence “contributed to the accountant's failure to perform” contractual duties. E.g., Shapiro v. Glekel, 380 F.Supp. 1053, 1058 (S.D.N.Y. 1974) (citing cases and discussing the policy consideration that “[a]ccountants should not be allowed to avoid liability resulting from their own negligence except upon a showing of substantial negligence or fault by their employer”). Therefore, even if Plaintiffs are seen as negligent for failing to realize their tax returns had not been filed, that would not prevent Plaintiffs from pursuing their accountant malpractice claim against Defendants.
IV. Plaintiffs' Unjust Enrichment Claim Should Be Dismissed as Duplicative of the Accountant Malpractice Claim
Defendants argue that Plaintiffs' unjust enrichment claim should be dismissed under Rule 12(b)(6) because the claim is duplicative of Plaintiffs' accounting malpractice claims. (S ee ECF 21-1, Defs.' Mem. at 13-15.) Redundant claims that “‘are predicated on the same allegations and seek relief identical to that sought in [a] malpractice cause of action' must be dismissed as duplicative.” Paladini, 2012 WL 3834655, at *5 (quoting Estate of Nevelson v. Carro, Spanbock, Kaster & Cuiffo, 290 A.D.2d 399, 400, (1st Dep't 2002)); see also Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, 56 A.D.3d 1, 8-9 (1st Dep't 2008) (collecting cases). Plaintiffs do not argue that the facts on which they base their unjust enrichment claim are distinct from the facts underlying their malpractice claim. Indeed, Plaintiffs conceded during oral argument that they cannot recover for both unjust enrichment and accountant malpractice.
Plaintiffs respond that they are permitted to plead unjust enrichment in the alternative, because it is not clear whether Defendants will argue that Plaintiffs cannot bring their accountant malpractice claim due to never having signed a retainer agreement with Defendants. (See ECF 26, Plfs.' Opp. at 19-20.) See also Tahirou v. New Horizon Enterprises, LLC, No. 20-CV-0281 (SVN), 2022 WL 596741, at *4 (D. Conn. Feb. 28, 2022) (“Pleading breach of contract and unjust enrichment claims in the alternative is particularly common where there is a dispute about whether there is an enforceable contract.”) However, Defendants have not disputed that they owed Plaintiffs a duty that could support a claim of accountant malpractice under appropriate circumstances. Accordingly, Plaintiffs' unjust enrichment claim should be dismissed as duplicative of the accountant malpractice claim. See Paladini, 2012 WL 3834655, at *5.
While as a general matter leave to amend should be “freely give[n] . . . when justice so requires[,]” Fed.R.Civ.P. 15(a)(2), such leave should be denied when it would be “futile,” and when the “plaintiff cannot cure the deficiencies in his pleadings to allege facts sufficient to support his claim.” Onibokun v. Chandler, 749 Fed.Appx. 65, 67 (2d Cir. 2019); see also Cuoco v. Moritsugu, 222 F.3d 99, 112 (2d Cir. 2000) (where the “problem with [a complaint] is substantive [and] better pleading will not cure it[,]” leave to amend should be denied as futile). Because Plaintiffs could not avoid dismissal by reformulating their unjust enrichment claim, I recommend dismissing that claim with prejudice.
CONCLUSION
For the foregoing reasons, I respectfully recommend that the motion to dismiss be GRANTED IN PART and DENIED IN PART. Specifically, I respectfully recommend that:
(1) Plaintiffs' accountant malpractice claim be allowed to proceed; and
(2) Plaintiffs' claim for unjust enrichment be dismissed with prejudice.
NOTICE OF PROCEDURE FOR FILING OBJECTIONS TO REPORT AND RECOMMENDATION
The parties shall have fourteen days (including weekends and holidays) from service of this Report and Recommendation to file written objections pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure to this Report and Recommendation. A party may respond to another party's objections within fourteen days after being served with a copy. Fed.R.Civ.P. 72(b)(2). Such objections, and any response to objections, shall be filed with the Clerk of the Court. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Clarke.
THE FAILURE TO OBJECT WITHIN FOURTEEN DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b); Thomas v. Arn, 474 U.S. 140 (1985).