First Cent. Sav. Bank v Parentebeard, LLC  2017 NY Slip Op 30974(U)  May 10, 2017
Supreme Court, New York County  Docket Number: 653680/2014  Judge: Shirley Werner Kornreich discusses the burden a defendant has in a professional negligence case.

“In short, this case concerns the IRS’ s disallowance of $2,514, 143 in net operating losses
(the Tax Benefit) claimed by plaintiff First Central Savings Bank (the Bank) on its 2010 tax
return. The IRS disallowed the Tax Benefit because, despite promising to do so, Parente failed
to file a Form 7004 seeking a filing deadline extension on behalf of the Bank. The Bank was not
informed by the IRS of the disallowance of the Tax Benefit until 2012. Prior to that revelation,
in 2011, Parente prepared a September 30, 2010 financial statement for the Bank (the Financial
Statement) based on the assumption that the Bank was entitled to claim the Tax Benefit. The
Bank, relying on the Financial Statement, conducted a Preemptive Rights Offering (the PRO) in
which it sold stock to its shareholders – including the individual plaintiffs (the Shareholder
Plaintiffs), some of whom were on the Bank’s board of directors. The Shareholder Plaintiffs
allege that they relied on the value of the Bank, as depicted in the Financial Statement, in
deciding to purchase additional shares of the Bank at the offering price of $7 per share. ”

“Defendants’ motion to dismiss the second cause of action – the Bank’s claim that Parente
negligently prepared the Financial Statement – is denied. Defendants’ argument is that Parente
had no reason to know that the IRS would disallow the Tax Benefit at the time the Financial
Statement was prepared in 2011 (as noted, the Bank found out in 2012). The relevant inquiry
appears to be whether a reasonably prudent accountant who arguably should have known that the
Bank did not get a filing extension (because the Form 7004 was never received by the IRS) acts
negligently when it prepares a financial statement inaccurately portraying the Bank’s value, not with bad intent, but under a false premise of value (i.e., that the Bank would be able to maintain
the Tax Benefit). See D.D. Hamilton Textiles. Inc. v Estate of Mate, 269 AD2d 214, 215 (1st
Dept 2000) (“A clairri of professional negligence requires proof that there was a departure from
accepted standards of practice.”). To be sure, the parties do not dispute that the Financial
Statement would have been correct if the Bank had the right to the Tax Benefit. However, the
requisite form to receive such Tax Benefit had not been filed at the time the Financial Statement
was prepared. The question of whether, under the somewhat unique facts of this case, Parente
acted negligently in preparing the Financial Statement would appear to require, as in most
professional malpractice cases, expert testimony. 4 See Gert/er v Sol Masch & Co., 40 AD3d 282
(1st Dept 2007); Tung v Mui, 260 AD2d 294 (1st Dept 1999). Defendants, who bear the burden
on a motion to dismiss of demonstrating that the plaintiff has no claim, did not support their lack
of negligence argument with any citation to authority, let alone any analogous case that grappled
with similar facts. See Dkt. 30 at 8-9. Instead, defendants simply rely on some of the court’s
dicta in the Prior Decision. See id. at 7-8. 5

Defendants’ approach is unavailing. 6 If the court thought that the negligence allegations
could not sustain a viable claim, leave to replead would not have been granted. Indeed, in the
Prior Decision, the court did not purport to rule on the substantive viability of the negligence with bad intent, but under a false premise of value (i.e., that the Bank would be able to maintain
the Tax Benefit). See D.D. Hamilton Textiles. Inc. v Estate of Mate, 269 AD2d 214, 215 (1st
Dept 2000) (“A claim of professional negligence requires proof that there was a departure from
accepted standards of practice.”). To be sure, the parties do not dispute that the Financial
Statement would have been correct if the Bank had the right to the Tax Benefit. However, the
requisite form to receive such Tax Benefit had not been filed at the time the Financial Statement
was prepared. The question of whether, under the somewhat unique facts of this case, Parente
acted negligently in preparing the Financial Statement would appear to require, as in most
professional malpractice cases, expert testimony. 4 See Gert/er v Sol Masch & Co., 40 AD3d 282
(1st Dept 2007); Tung v Mui, 260 AD2d 294 (1st Dept 1999). Defendants, who bear the burden
on a motion to dismiss of demonstrating that the plaintiff has no claim, did not support their lack
of negligence argument with any citation to authority, let alone any analogous case that grappled
with similar facts. See Dkt. 30 at 8-9. Instead, defendants simply rely on some of the court’s
dicta in the Prior Decision. See id. at 7-8. 5 “