Bank hires accountants. Accountants fail to file an extension. Bank loses $ 2.5 Million in carry-back losses. Seems simple, no? Not simple.
In First Cent. Sav. Bank v Parentebeard, LLC 2015 NY Slip Op 31921(U) October 13, 2015 Supreme Court, New York County Docket Number: 653680/2014 Judge: Shirley Werner Kornreich we see a limitation of liability in the retainer agreement that purports to shield the accountants from just about all mistakes.
“The Bank conducts business on a fiscal year ending September 30. if 16. For the fiscal year ending on September 30, 2010, the Bank was required to file its federal, state, and local tax returns by December 15, 2010. Id. The Bank alleges that “Parente agreed to file extensions with the various taxing authorities, which permitted [the Bank] to file its tax returns for the fiscal year ending September 30, 2010 on June 15, 2011.” if 17. The Bank further alleges that “[o]n or about December 15, 2010, Parente advised [the Bank] that it had electronically filed IRS form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns (“Form 7004″), with the Internal Revenue Service [the IRS] timely, thereby extending [the Bank’s] date to file its tax returns until June 15, 2011.” if 18. Approximately five months later, the Bank engaged Parente to file its federal, state, and local tax returns for the fiscal year ending September 30, 2010. if 19. Parente’s engagement is governed by a letter agreement dated May 2, 2011 (the Agreement). See Dkt. 9. The Agreement provides that the engagement is limited to the preparation and filing of the delineated 2010 tax returns, and in consideration for such services, the Bank agreed to pay Parente a fee of $7,000. See id. at 3. The Agreement is clear that “[Parente’s] work in connection with the preparation of [the Bank’s] corporate income tax returns does not include any procedures designed to discover fraud, defalcations, or other irregularities, should any exist” and that Parente was “undertaking this engagement based on [the Bank’s] express agreement that [the Bank is] releasing [Parente] from any liability for failure to detect fraud.” See id. (emphasis added). The Agreement further provides:
In recognition of the relative risks and benefits of this agreement to both [the Bank and Parente], [the Bank and Parente] have discussed and agreed on the fair 2 … [* 2] See id. allocation of risk between them. As such, [the Bank] agrees, to the fullest extent permitted by law, to limit the liability of [Parente to the Bank] for any and all claims, losses, costs, and damages of any nature whatsoever, so that the total aggregate liability of [Parente to the Bank] shall not exceed [Parente’s] total fee for Services rendered pursuant to this agreement [i.e., $7,000]. [The Bank and Parente] intend and agree that this limitation apply to any and all liability or cause of action against [Parente J, however alleged or arising, unless otherwise prohibited by law. see id.
Additionally, attached to the Agreement are “Additional Terms and Conditions.” See id. at 5-8. Condition 8 states:
Neither [the Bank or Parente] will, in any event, be liable to the other, for any reason, for any consequential, incidental, special, punitive, or indirect damages, including loss of profits, revenue, data, use of money or business opportunities, regardless of whether notice has been given or there is an awareness that such damages have been or may be incurred. See id. at 6.
Pursuant to the Agreement, Parente prepared and filed the Bank’s 2010 federal tax return. 1 Complaint~ 19. The IRS, however, rejected the tax return as untimely because it had no record of a Form 7004 being filed on the Bank’s behalf. Id. As a result of the late filing, the IRS disallowed the Bank’s right to carry-back $2,514,143 of net operating losses (the Tax Benefit). ~ 20. Though the Tax Benefit was disallowed by the IRS, it was nonetheless included on a September 30, 2010 financial statement issue by Parente (the Financial Statement). ~ 21. The complaint, however, does not state when Parente prepared or issued the Financial Statement or whether it was prepared pursuant to the Agreement or as part of a separate engagement.2″
“Parente argues that even if its liability is established, liability is capped at the $7 ,000 fee amount set forth in the Agreement. See Dkt. 9 at 3. Parente further argues that to the extent the complaint seeks consequential damages, such damages are also expressly precluded by the Agreement. See id With respect to the Bank’s first cause of action relating to Parente’s failure to file the Form 7004, the limitation of liability clauses do not apply because the Bank is not asserting a claim for negligently preparing its 2010 federal tax return. The Bank does not claim that the substance of the 2010 return was improper. Rather, the Bank claims that Parente previously failed to timely file the Form 7004, and as a result, the IRS disallowed the Tax Benefit. The disallowance was not the result of a negligently prepared return. Consequently, the Bank’s claim does not arise from the engagement governed by the Agreement, which was strictly limited to preparation of the Bank’s 2010 tax returns. Instead, the Bank’s claim arises from Parente’s alleged negligence committed five months prior to the engagement.”
Nowhere in the Agreement is there anything that states, as is common in contracts that purport to release all known and unknown claims between parties, that the Agreement releases or limits Parente’s liability for matters beyond the scope of the retention for the preparation of the Bank’s 2010 tax returns. Nor does the Agreement purport to waive or release claims for all wrongdoing that already occurred. Parente clearly understood the distinction between a retrospective release of claims and a prospective limitation ofliability, as the Agreement separately provides that the Bank “is releasing [Parente] from any liability for failure to detect fraud.” See Dkt. 9 at 3 (emphasis added). The failure to detect fraud is a wrong distinct from the mere negligent preparation of a tax return. Had Parente sought an express release for any other actions taken prior to the preparation of Parente’s 2010 returns, or indeed a release for all actions prior to the engagement, it could have so provided. Hence, the court rejects Parente’s argument that its liability for negligence committed with respect to its failure to file the Form 7004 is limited to $7,000.”