All too often in legal malpractice cases Courts seem willing, even eager, to dismiss at the CPLR 3211 stage.  We think, based upon anecdotal evidence, that the percentage of legal malpractice cases dismissed on this motion exceeds that of all other types of cases.  Leading Ins. Group Ins. Co., Ltd. v Friedman LLP  2016 NY Slip Op 30375(U)  March 3, 2016  Supreme Court, New York County  Docket Number: 651049/15  Judge: Saliann Scarpulla, an accounting malpractice case illustrates a comprehensive and thorough analysis of the complaint and an appropriate finding that in a complex professional negligence case much expert testimony is required, ruling out dismissal in lieu of an answer.

“Pursuant to an engagementl etter (“Engagement Letter”), dated October 24, 2012, Friedman agreed to perform an independent audit of LIGUSB ‘s Statutory Financial Statements for the year ending in December 21, 2012. In pertinent part, the Engagement Letter stated that: Friedman would “plan and perform the audit to obtain reasonable assurance about whether financial statements are free from material misstatement;” “[t]he objective of [the] audit is the expression of an opinion about whether [LIG’s] financial statements are fairly presented, in all material respects, in conformity with accounting practices prescribed or permitted by the [NYDFS];” and the “audit [would] be conducted in accordance with auditing standards generally accepted in the United States of America.” The Engagement Letter also contained the following qualifications, that: LIG”[was] responsible for establishing and maintaining internal controls, including monitoring ongoing activities;” “[b]ecause of the inherent limitations of an audit, combined with the inherent limitations of internal control, and because [Friedman would] not perform a detailed examination of all transactions, there [was] a risk that material misstatements may exist and not be detected by [Friedman], even though the audit is properly planned and performed in accordance with U.S. generally accepted auditing standards;” and the “audit is not designed to provide assurance on internal control or to identify deficiencies in internal control.”

” In approximately October 2013, “NYDFS advised LIG that red flags existed in LIG’s loss reserve estimates in its recent financial statements and required that LIG engage an independent external actuary to conduct a peer review of LI G’s internal actuary’s findings at LIG’s own expense.” LIG complied and, in approximately February 2014, “LIG discovered that its carried loss reserves were inadequate, contrary to what Friedman had concluded and reported in connection with its audit.” According to LIG, because its prior loss reserves were considerably understated, it had “to take immediate action to increase its reserves by approximately $37,000,000” and to “take aggressive and immediate measures to increase and improve its related internal controls and procedures.” LIG alleges that, as a result of Friedman’s failure to detect the errors in LIGUSB’s Statutory Financial Statements, LIG suffered a number of negative consequences, including: “the imposition by the NYDFS of an order dated March 7, 2014 restricting LIGUSB from issuing new policies and writing new business,” causing a loss of income greater than $69,600,000 for 2014; having “to pay numerous professionals and consultants to advise and assist LIG in connection with the regulatory action;” having “to secure an emergency $45,000,000 capital contribution from its parent company in order to cure the surplus impairment and avoid being forced into liquidation by the NYDFS” and, thereby, “incur[ring] increased and additional accounting-related fees;” and being required to pay for NYDFS’s “own full financial an~ actuarial audit of LIGUSB’s 2012 and 2013 financial statements.” According to LIG, “even though Friedman was still engaged as a CPA, financial advisor and independent auditor for LIG, Friedman was uncooperative and evasive in responding to demands from the NYDFS, as well as requests from LIG to assist with the NYDFS investigation and examination.” LIG alleges that “Friedman’s conduct only served to impede and undermine LIG’s efforts to rebuild its damaged credibility with the NYDFS.”

“To state a claim for professional negligence, the complaint must allege “that there was a departure from accepted standards of practice and that the departure was a proximate cause of the injury.” D.D. Hamilton Textiles v Estate of Mate, 269 AD2d 214, 215 (I st Dept 2000). Here, Friedman contends that the complaint fails to specify how Friedman allegedly deviated from acceptable standards of practice. In particular, it points to the allegation that a subsequent, independent actuary identified certain “red flags” that Friedman “inexplicably failed to identify,” without identifying those red flags or describing what Friedman should have done differently. However, the complaint contains numerous allegation detailing the ways in which LIG believes Friedman deviated from professional standards of care, including that it failed to comply with GAAS and SAP by, among other things, failing to implement appropriate and adequate audit procedure to verify the accuracy of the Statutory Financial Statements. See complaint, ilil 6, 37-41, 57, 59-63, 98-101. Moreover, this is a pre-answer motion to dismiss. Therefore, LIG need not “pro[ ve] that there was a departure from accepted standards of practice,” but rather, it need only make the necessary allegations. See D.D. Hamilton Textiles, 269 AD2d at 214- 215 (finding, in the context of a motion for summary judgment, that plaintiffs failed to prove defendant accountant’s work fell below applicable standards of care); see also EEC I, Inc., 5 NY3d at 19. Ultimately, LIG alleges that Friedman failed to identify deficiencies with LI G’s loss reserves; whether this failure “was [due to] a departure from professional accounting standards … is a question that requires expert evidence for its resolution.” Berg v Eisner LLP, 94 AD3d 496, 496 (1st Dept 2012) (reversing dismissal). Friedman also argues that “[p]laintiffs’ hypothetical causal chain and their gross speculation as to what Plaintiffs and /NY)DFS could or would have done, is … insufficient as a matter of law to satisfy the proximate causation element.” Friedman argues that this is particularly so because damages are attributable to LIG’s own failure to maintain adequate loss reserves. Friedman argues that LIG merely speculates about losses suffered and improperly seeks to recover consequential damages, including $69,600,000 in lost new business. Nothing in the complaint warrants dismissal at this early stage. LIG alleges that, “[b]ased ori Friedman’s audit and opinion … LIG found no reason to make adjustments to its estimated loss reserves, its methods and procedures for establishing its loss reserves, or other related business conduct.” In addition, LIG alleges that, because of Friedman’s clean audit, “LIG’s discovery of the understated reserves was belated, [and it] was forced to make emergency adjustments to correct the understated loss reserves,” which caused it to incur additional costs and suffer “significant regulatory action by the NYDFS.” As such, “[t]he complaint sufficiently asserts that ‘but for”‘ Friedman’s failure to identify the understated Joss reserves, LIG would have been able to take corrective actions sooner and would have avoided incurring costs in connections with its emergency measures. Fielding v Kupferman, 65 AD3d 437, 442 (1st Dept 2009) (finding proximate cause sufficiently alleged where plaintiff alleges that “he would not have incurred the tax liability that resulted from the withdrawal of funds from his retirement account,” but for defendants’ incorrect advice). “