1650 Broadway Assoc., Inc. v Sturm 2024 NY Slip Op 01864 Decided on April 04, 2024
Appellate Division, First Department Renwick, P.J. is the story of a Diner, a Family and Fraud.

“Plaintiff 1650 Broadway Associates, Inc. is the owner of the iconic Stardust Diner, a family business originally owned by Irving Sturm and plaintiff Ellen Sturm, and then in part by their son, defendant Kenneth Sturm. At all relevant times, Ellen, along with the two trust plaintiffs, together owned 89% of the Diner, and Kenneth owned 11%. After Irving’s death in 2010, Kenneth assumed day-to-day managerial responsibility for the Diner. Ellen was vice-president of the Diner, while Kenneth served as secretary and treasurer.

Plaintiffs allege that when Ellen stepped back from active operations of the Diner, Kenneth began looting the Diner. In particular, he gave himself large salary increases and, most damaging, he began to take unauthorized loans from the Diner. Over the course of several years, these loans amounted to some $12 million. Plaintiffs also allege that in 2016 and 2017, Kenneth obtained a $2.5 million line of credit from Citibank. Kenneth forged Ellen’s signature on loan documents that made Ellen the personal guarantor on the loans. The books and records of the Diner reflected the loans. They also reflected certain “reductions” in the amounts of the loans. Plaintiffs, however, allege that the records purporting to show the reductions were manufactured after the fact by Kenneth.

Defendant Getzel, Schiff & Pesce, LLP (defendant) is a public accounting firm. For a period including 2012 through 2019, defendant performed certain accounting services for plaintiffs, the Diner, and Kenneth. It provided these services through a series of year-after-year engagement letters. Under the terms of these letters, for each of the relevant years, defendant agreed to provide “compilation services” and to prepare the local, state, and federal tax returns for the clients. Between 2002 and 2008, defendant’s managing partner had annual meetings with Ellen at her home, during which the partner provided her only broad summary of the Diner’s finances but never disclosed any details about the Diner’s accounting, books and records.

In 2019, Ellen hired new personal accountants who uncovered the loans to Kenneth. Apparently, in addition to taking the money for himself, Kenneth also used the “loan” proceeds to finance various other business ventures. Plaintiffs allege that defendant was the accountant to these other businesses.”

“Plaintiffs sufficiently pleaded causes of action for accounting malpractice and aiding and abetting fraud, which are not utterly refuted by the documentary evidence.

“A party alleging a claim of accountant malpractice must show that there was a departure from the accepted standards of practice and that the departure was a proximate cause of the injury” (KBL, LLP v Community Counseling & Mediation Servs., 123 AD3d 488, 488 [1st Dept 2014]). A plaintiff alleging an aiding and abetting fraud claim must allege the existence of the underlying fraud, actual knowledge, and substantial assistance (see Oster v Kirschner, 77 AD3d 51, 55 [1st Dept 2010]).

Defendant makes no contention that the claims of accounting malpractice and aiding and abetting fraud by Kenneth are not sufficiently pleaded. Instead, defendant primarily argues that the malpractice and fraud claims are refuted by the fact that the accounting firm was hired to prepare tax returns and other financial statements that documented the loans at issue, and thus that investigating and reporting Kenneth’s alleged fraud were beyond its duties.

Plaintiffs’ claims, however, are not that defendant was hired to discover Kenneth’s wrongdoing, but rather [*3]that information obtained by defendant during its business interactions with Kenneth and information used by defendant in order to prepare tax returns and financial statements put defendant on notice about the impropriety of Kenneth’s loans to himself such that defendant had a duty to inform plaintiffs of the questionable payments. The law is very clear that an agreement to perform unaudited services does not shield an accountant from liability because an accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent (see 1136 Tenants’ Corp. v Rothenberg & Co., 36 AD2d 804 [1st Dept 1971], affd 30 NY2d 585 [1972]; see also William Iselin & Co., Inc. v Mann Judd Landau, 71 NY2d 420, 424-425 [1988]; United States v Natelli, 527 F2d 311, 320-321 [2d Cir 1975], cert denied 425 US 934 [1976]; Blakely v Lisac, 357 F Supp 255, 265-266 [D Or 1972]; Robert Wooler Co. v Fidelity Bank, 330 Pa Super 523, 531-535, 479 A2d 1027, 1031-1033 [1984]).

In addition, “[o]ne who aids and abets a breach of a fiduciary duty is liable for that breach as well, even if he or she had no independent fiduciary obligation to the allegedly injured party, if the alleged aider and abettor rendered ‘substantial assistance’ to the fiduciary in the course of effecting the alleged breaches of duty” (Caprer v Nussbaum, 36 AD3d 176, 193 [2d Dept 2006] [Where “the accountants had complete knowledge of the misuse of condominium funds, and were indispensable to the board-member defendants in their efforts to conceal the misuse of those funds, the accountants may be held liable for aiding and abetting the breach of fiduciary duty by the board-member defendants”]; see also Operative Cake Corp. v Nassour, 21 AD3d 1020 [2d Dept 2005]). In this case, it is alleged not only that the accountant had knowledge of Kenneth’s alleged improper transactions but that he participated in the alleged breaches.”

“Accordingly, the order of the Supreme Court, [*4]New York County (Andrew Borrok, J.), entered April 26, 2023, which, insofar as appealed from, granted defendant Getzel Schiff & Pesce, LLP’s motion to dismiss, should be reversed, on the law, without costs, and the motion denied.”

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Andrew Lavoott Bluestone

Andrew Lavoott Bluestone has been an attorney for 40 years, with a career that spans criminal prosecution, civil litigation and appellate litigation. Mr. Bluestone became an Assistant District Attorney in Kings County in 1978, entered private practice in 1984 and in 1989 opened…

Andrew Lavoott Bluestone has been an attorney for 40 years, with a career that spans criminal prosecution, civil litigation and appellate litigation. Mr. Bluestone became an Assistant District Attorney in Kings County in 1978, entered private practice in 1984 and in 1989 opened his private law office and took his first legal malpractice case.

Since 1989, Bluestone has become a leader in the New York Plaintiff’s Legal Malpractice bar, handling a wide array of plaintiff’s legal malpractice cases arising from catastrophic personal injury, contracts, patents, commercial litigation, securities, matrimonial and custody issues, medical malpractice, insurance, product liability, real estate, landlord-tenant, foreclosures and has defended attorneys in a limited number of legal malpractice cases.

Bluestone also took an academic role in field, publishing the New York Attorney Malpractice Report from 2002-2004.  He started the “New York Attorney Malpractice Blog” in 2004, where he has published more than 4500 entries.

Mr. Bluestone has written 38 scholarly peer-reviewed articles concerning legal malpractice, many in the Outside Counsel column of the New York Law Journal. He has appeared as an Expert witness in multiple legal malpractice litigations.

Mr. Bluestone is an adjunct professor of law at St. John’s University College of Law, teaching Legal Malpractice.  Mr. Bluestone has argued legal malpractice cases in the Second Circuit, in the New York State Court of Appeals, each of the four New York Appellate Divisions, in all four of  the U.S. District Courts of New York and in Supreme Courts all over the state.  He has also been admitted pro haec vice in the states of Connecticut, New Jersey and Florida and was formally admitted to the US District Court of Connecticut and to its Bankruptcy Court all for legal malpractice matters. He has been retained by U.S. Trustees in legal malpractice cases from Bankruptcy Courts, and has represented municipalities, insurance companies, hedge funds, communications companies and international manufacturing firms. Mr. Bluestone regularly lectures in CLEs on legal malpractice.

Based upon his professional experience Bluestone was named a Diplomate and was Board Certified by the American Board of Professional Liability Attorneys in 2008 in Legal Malpractice. He remains Board Certified.  He was admitted to The Best Lawyers in America from 2012-2019.  He has been featured in Who’s Who in Law since 1993.

In the last years, Mr. Bluestone has been featured for two particularly noteworthy legal malpractice cases.  The first was a settlement of an $11.9 million dollar default legal malpractice case of Yeo v. Kasowitz, Benson, Torres & Friedman which was reported in the NYLJ on August 15, 2016. Most recently, Mr. Bluestone obtained a rare plaintiff’s verdict in a legal malpractice case on behalf of the City of White Plains v. Joseph Maria, reported in the NYLJ on February 14, 2017. It was the sole legal malpractice jury verdict in the State of New York for 2017.

Bluestone has been at the forefront of the development of legal malpractice principles and has contributed case law decisions, writing and lecturing which have been recognized by his peers.  He is regularly mentioned in academic writing, and his past cases are often cited in current legal malpractice decisions. He is recognized for his ample writings on Judiciary Law § 487, a 850 year old statute deriving from England which relates to attorney deceit.