Accounting malpractice is different from legal malpractice in several important ways. The first is the nature of yearly tax filings, which sets the structure for the application of the statute of limitations to a mistake in a single tax year and often rules out any question of the tolling of that statute because of continuing representation. A second difference is the prevalence of engagement letters that strongly favor the accountants and the general acceptance of such conditions as “gross negligence”, limitations of damages and the necessity of notice.
In Island Consol. v Grassi & Co., Certified Public Accountants PC 2025 NY Slip Op 30094(U) January 7, 2025 Supreme Court, New York County Docket Number: Index No. 451469/2023, Judge Margaret A. Chan works her way through many of these issues. The decision is fairly long (too long for a blog) but well worth reading.
“In this professional malpractice action, plaintiffs Island Consolidated, Eastern Materials Corp., Island International Exterior Fabricators Del LLC, and Island Exterior Fabricators LLC (hereinafter collectively referred to as “Island” or “Plaintiffs”) allege professional malpractice and gross negligence against their accountant, defendant Grassi & Co., Certified Public Accountants PC for the sales tax advice it gave plaintiffs in 2015. In reliance on defendant’s 2015 sales tax advice, plaintiffs sustained monetary damages through tax penalties and interests on repayment costs to the New York State Department of Taxation and Finance, costs, and lost profits. Defendant moves to dismiss plaintiffs’ Amended Complaint for failure to: (1) comply with the condition precedent before bringing a suit against defendant; (2) timely bring their claims within the three-year statute of limitations; and (3) state a cause of action with sufficiency. Alternatively, defendant urges dismissal of damages on the grounds that they are not recoverable and is limited by the parties’ agreement. Plaintiffs oppose the motion.”
“Defendant makes three arguments to dismiss the plaintiffs’ claims: (1) failure to comply with a condition precedent set forth in the Engagement Letters; (2) the
three-year statute of limitations bars this suit; and (3) plaintiffs fail to state a cause
of action based on documentary evidence, or allege their intentional misrepresentation with specificity, which claim is also duplicative of their professional malpractice claim, or allege their gross negligence claim with sufficiency. Each of the three arguments with plaintiffs’ corresponding opposition will be addressed in turn starting with defendant’s statute of limitations argument, followed by the condition precedent issue, the failure to state a cause of action arguments, and finally, the damages issue.”
“Defendant argues that plaintiffs’ causes of action based on malpractice for its sales tax advice in 2015 are barred by the three-year statute of limitations for professional malpractice (id. at 9-11). And because such a claim accrues when the malpractice is initially committed, plaintiffs’ claims for professional malpractice expired in 2018 (id. at 10). Defendant adds that the continuous representation doctrine did not toll the statute of limitations here because the recurrence of any professional relationship between the parties was limited to incidental and general advising and not specific to the 2015 advice (id. at 11).
In opposing defendant’s statute of limitations argument, plaintiffs contend that the parties had an understanding that more work is needed and that defendant had to engage in corrective measures or remedial measures (id. at 18). Citing Shumsky v Eisenstein (96 NY2d 164, 168 [2001]), plaintiffs assert that “[f]or accounting malpractice, the statute of limitations begins to run when the accounting representation is completed. The continuous representation doctrine tolled the statute of limitations for plaintiffs’ cause of action such that their complaint is timely” (id. at 18-19). Plaintiffs contend that defendant continued to provide their professional advice and guidance on the sales tax issues from 2015 through late 2021 and dealt with tax authorities to try to avoid the very sales taxes that defendant had claimed were not taxable (id.). Plaintiffs claim that defendants were engaged in continuous representant which tolls the statute of limitations for accounting malpractice (id. at 18 citing Lemle v Regen, Benz & MacKenzie, CPA, PC, 165 AD3d 414, 415 [1st Dept 2018]).”
“Here, plaintiffs have alleged sufficient facts establishing that the continuous
representation doctrine tolled the statute of limitations for professional malpractice
in this case. While the follow-up June 16, 2020, memorandum and follow-up 2021 emails do repeat, clarify, and elaborate on the advice first given, this alone is likely not sufficient to rise to what is needed to trigger the continuous representation doctrine (see Apple Bank for Sau., 70 AD3d at 438). However, plaintiffs here also allege and demonstrate that defendant continued to provide their professional advice and guidance regarding sales taxes by defending a tax appeal on the exact issues through late 2021 (see Lemle, 165 AD3d at 414). These allegations support a reasonable inference that the parties’ professional relationship was not just comprised of a recurrence of general duties.
Accordingly, defendant’s motion to dismiss the amended complaint as barred by the statute of limitations is denied.”