Lateral Inv. Mgt., LLC v Marcum, LLP 2024 NY Slip Op 33865(U) October 29, 2024 Supreme Court, New York County Docket Number: Index No. 154273/2023 Judge: Joel M. Cohen has a wealth of issues and lessons. The first principle to take from this case is what is negligence, what is “basically” negligence and what is not.

“This is an accounting malpractice and fraud case. Defendant Marcum LLP (“Marcum”) was retained by plaintiffs FTE Networks, Inc. (“FTE”) and Benchmark Builders, Inc. (“Benchmark”) to perform audits of their respective businesses. Defendant Markowitz, a partner at Marcum, oversaw the audits. According to Plaintiffs, during the course of the audit work FTE’s then-Chief Executive Officer Michael Palleschi and then-Chief Financial Officer David Lethem were engaged in a wide array of fraudulent schemes that ultimately resulted in criminal guilty pleas and an investigation by the Securities and Exchange Commission (“SEC”). Plaintiffs contend in this action that Marcum not only negligently failed to uncover and disclose the misconduct during the course of its audit, but that Marcum was made aware of the misconduct and assisted Lethem and Palleschi in concealing it.”

“According to the Complaint, the factual allegations of which are assumed to be true for purposes of this motion, Marcum was FTE’s “long-standing auditor[]” (NYSCEF 47 iJiJ 5, 60). The relationship was far reaching, and “had impacts on their relationship with several other of [Marcum’s] significant institutional clients” due to their relationship with a former Board Member of FTE, Luisa Ingargiola (id ,i,i 64, 66). Plaintiffs allege that these relationships motivated Marcum and Markowitz to engage effectively in a cover-up of misconduct by FTE’s CEO and CFO (id ,i 67). The Complaint states that “Ingargiola was one of-if not the onlyBoard member who had any idea” about an improper scheme by Lethem and Palleschi to issue undisclosed convertible notes (id ,i,i 56, 70). Furthermore, Plaintiffs allege “Defendants directly participated in Palleschi and Lethem’s embezzlement and conversion of Company funds as Palleschi and Lethem would convey trips, gifts and other perks to Markowitz in exchange for his willingness to participate in the fraud against FTE” (id ,i 145).”

“Under CPLR 214(6), a three-year statute of limitations applies to “an action to recover damages for malpractice, other than medical, dental or podiatric malpractice, regardless of whether the underlying theory is based in contract or tort” (see Maya NY, LLC v Hagler, I 06 AD3d 583, 586 [1st Dept 2013] [applying 3-year statute of limitations to claim for accountant malpractice]). By contrast, claims alleging fraud and breach of fiduciary duty based on fraud – if not deemed to be malpractice claims governed by CPLR 214(6)- are generally subject to a six-year statute of limitations, and potentially longer (two years after the plaintiffs actual or constructive discovery of the misconduct) in the case of fraud (CPLR 213(8); Kaufman v Cohen, 307 AD2d 113, 119 [I st Dept 2003] [ noting the statute of limitations for breach of fiduciary duty claims “based on allegations of actual fraud” is six years]; see also Monteleone v Monteleone, 162 AD3d 761, 763 [2d Dept 2018]). The same statute of limitations applies to claims for aiding and abetting breach of fiduciary duty and fraud (see Kaufman, 307 AD2d at 126-27; see also Wimbledon Financing Master Fund, Ltd v Hallac, 192 AD3d 617, 618 [I st Dept 2021]; Belair Care Ctr., Inc. v Cool Insuring Agency, Inc., 168 AD3d 1162, 1166 [3d Dept 2019])], again assuming they are not deemed to be malpractice claims subject to CPLR 214(6). a. Negligence and Gross Negligence Plaintiffs’ negligence and gross negligence claims are indisputably malpractice claims. Such claims accrue when the malpractice is committed, not when it is discovered (Williamson ex rel. Lipper Convertibles, L.P. v PricewaterhouseCoopers LLP, 9 NY3d 1, 7-8 [2007]). In the accounting context, the claim “accrues upon the client’s receipt of the accountant’s work product since this is the point that a client reasonably relies on the accountant’s skill and advice” (Ackerman v Price Waterhouse, 84 NY2d 535, 541 [1994]). Here, the negligence and gross negligence claims accrued when Marcum issued its audit reports, namely on May 11, 2017, and April 17, 2018 (NYSCEF 59, 62). Thus, even after considering the effect of COVID tolling covering a portion of 2020, this May 2023-initiated action is prima facie untimely. Thus, those claims are presumptively time-barred, subject to estoppel principles discussed infra.”

“Plaintiffs’ breach of contract claims are also presumptively untimely under CPLR 214(6) because they are malpractice claims “based in contract” (see also Pannone v Silberstein, 118 AD3d 413, 415 [l st Dept 2014]). Contrary to Plaintiffs assertions, the language of the FTE agreement, which provides that Marcum was “responsible to inform [the Client] … of all matters of fraud, material errors, and all illegal acts that may come to our attention” does not create an independent contractual duty removing the claim from the confines of CPLR 214( 6) (NYSCEF 47, ,i 40; NYSCEF 66-67).1 Rather, this language merely incorporates a professional accounting standard that would have been applicable in any event (see Auditing Standards 2401. 79 [“Whenever the auditor has determined that there is evidence that fraud may exist, that matter should be brought to the attention of an appropriate level of management.”]). c. The Remaining Claims As to Plaintiffs’ remaining claims for (1) fraud; (2) civil conspiracy and conspiracy to commit fraud; (3) breach of fiduciary duty; (4) aiding and abetting (a) fraud, (b) breach of fiduciary duty, (c) embezzlement, (d) breach of trust, and (e) conversion; and (4) commercial bad faith, Defendants do not in the present motion argue that these claims are untimely under their own respective statutes of limitations, but rather are-like the negligence and breach of contract claims discussed above-essentially malpractice claims that are subject to a three-year statute of limitations. In assessing whether a claim is subject to the three-year statute of limitations contained in CPLR 214(6), “the pertinent inquiry is … whether the claim is essentially a malpractice claim” (In re R.M Kliment & Frances Halsband, Architects, 3 NY3d 538, 541-42 [2004]). Plaintiffs’ allegations in connection with these claims, accepted as true and broadly construed, permit a reasonable inference that Defendants not only breached their professional obligations as auditors (that is, that they committed professional malpractice), but also that they knew of and participated in the fraudulent schemes and affirmatively concealed them. If true, that goes beyond the confines of professional malpractice. Accordingly, Plaintiffs remaining claims (if proven) are not subject to the three-year statute of limitations governing malpractice claims. “