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.

We recently discussed the statute of limitations issues and now follow up on the balance of the decision.

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.

“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.
For the reasons stated below, defendant’s motion is denied.”

“Defendant raises the three-year statute of limitations for professional malpractice claims as barring plaintiffs suit on the 2015 sales tax advice that defendant did not work on since 2015 forestalling plaintiffs’ argument on continuous representation (id. at 9-11).

As to the plaintiffs’ claims for gross negligence and intentional misrepresentation, defendant argues that plaintiffs failed to state a cause of action for these claim as their allegations are insufficient. Further, defendant argue that the misrepresentation claim should be dismissed also because it is duplicative of the malpractice claim.

Finally, defendant argues that absent gross negligence, plaintiffs’ damages
claims are limited by the parties’ Engagement Letters.

“Defendant argues that because plaintiffs failed to comply with the terms of the Engagement Letters by failing to give defendant requisite notice of claim within
one year of completion of subject services and failing to seek mediation as a
condition precedent to bring suit, the complaint should be dismissed (NYSCEF # 39

Deft’s MOL at 5-9). Defendant contends that the Engagement Letters signed by both parties are binding and dispositive (id. at 5). Defendant states that plaintiffs agreed that written notice of the dispute was required to be provided within one year from the date of completion of the subject services and that mediation was a condition precedent to bringing suit (id. at 6-8). Defendant informs that while the alleged advice and services rendered occurred in 2015, plaintiffs’ notice of a potential claim came on June 6, 2022, and their request for mediation followed five months thereafter (id. at 8).
Plaintiffs assert that the Engagement Letters attached as defendants’ exhibits C-M (NYSCEF #’s 61-71) do not apply to the 2014-2015 sales tax advice because other “written communications” sufficiently document the advice and the subject services are not covered by any Engagement Letters (Pltfs’ MOL at 6). The sales tax advice at issue is evidenced in written communications and in emails from April 2015 and 2020-2021 (id. at 7). Thus, plaintiff concludes that the condition precedent in the Engagement Letters do not apply to the 2014-2015 sales tax advice.
In any event, plaintiffs address the required one-year notice of claims upon completion of services. Plaintiffs assert that in December 2021 they had asked defendants to let their insurer know to expect claims to be forthcoming, and in June 2022, defendant was put on notice of plaintiffs’ claim against it with the summons with notice for this suit (id. at 9; NYSCEF # 59, Exh A- Summons). Plaintiffs claim that the notice was timely because until at least October 28, 2021, defendant was working on the tax appeal on the 2015 sales tax advice. Hence, plaintiffs conclude that the “completion of services” was at the end of October 2021 (Pltfs’ MOL at 9).
Contractual provisions that place a requirement on plaintiffs to file a notice of claim or to seek mediation before they can bring suit are commonly approved and upheld by New York courts as valid conditions precedent (see A.H.A. General Const., Inc. v New York City Housing Authority, 92 NY2d 20, 31-32 [1998] [holding a provision requiring plaintiffs to serve a timely notice of claim was a valid condition precedent, and not an exculpatory clause]). Failure to comply has often been found as a reason for dismissal of a plaintiffs’ complaint (see Archstone Dev. LLC v Renval Constr. LLC, 156 AD3d 432, 433 [1st Dept 2017] [holding lower court correctly dismissed breach of contract claim on the ground that plaintiff failed to satisfy a condition precedent of pursuing mediation prior to bringing suit]; see also Centennial Elevator Industries, Inc. v JRM Construction Management, LLC, 212 AD3d 457, 458 [1st Dept 2023] [same].

Here, the Engagement Letters from 2012 to 2020 include provisions requiring plaintiffs to provide notice of claim within one year from the date of the completion of the subject services and to pursue mediation within 90 days after (see e.g. Exhs C through M). These provisions make it such that noncompliance renders a plaintiffs claim as waived (see David Fanara!, Inc. v Dember Const. Corp., 195 AD2d 346, 348 [1st Dept 1993]). However, none of these Engagement Letters cover the sales tax advice service. Thus, plaintiffs’ point that the condition precedent in the Engagement Letters does not cover the sales tax service is well taken.”

“Defendant argues that because gross negligence is different from ordinary negligence in that it is conduct that ‘smacks of intentional wrongdoing’, plaintiffs have failed to plead any facts that would arise to the level of gross negligence as a matter of law.
It is true that in the context of liability, “‘gross negligence’ differs in kind, not only degree, from claims of ordinary negligence [and] evinces a reckless disregard for the rights of others” (see Colnaghi, U.S.A. v Jewelers Protection Servs, 81 NY2d 821, 824 [1993]). Where a plaintiffs cause of action merely repeats the allegations for a negligence cause of action and simply adds a claim that the defendant recklessly disregarded facts, this allegation will be insufficient to meet any special pleading standards that may be required (see Credit Alliance Corp. v Arthur Andersen & Co, 65 NY2d 536, 554 [1985] [holding that where a cause of action for fraud repeats the allegations for negligence and merely adds a claim that defendant recklessly disregarded facts which would have apprised it that its reports were misleading, this allegation was insufficient under the special pleading standards required under CPLR 3016[b] and the case should have been dismissed]). Claims of gross negligence and recklessness have been found to be sufficiently particularized under CPLR 3016(b) where the complaint alleges that the defendant failed to independently verify provided information, despite having notice of particular circumstances raising doubts as to the verity of such information (see Foothill Capital Corp. v Grant Thornton LLP, 276 AD2d 437 [1st Dept 2000]).
Plaintiffs here have sufficiently pleaded their claim of gross negligence with sufficient particularity so as to survive the motion to dismiss. In their complaint, plaintiffs specifically allege that defendant acted with not just reckless disregard but that defendant provided different and correct sales tax advice and guidance to other similarly situated clients, while failing to notify plaintiffs of its error or take any remedial steps to mitigate the damage. Plaintiffs further allege that defendant took steps to intentionally conceal any such negligence by falsely representing to plaintiffs in 2020 that their newfound conclusions were a result of a change in law. Thus, plaintiffs have gone beyond merely adding a claim that defendant acted with a reckless disregard for plaintiffs’ right and have specifically enumerated factual allegations, which if taken as true as the court must do at the pleading stage, could reasonably be found by a fact-finder to evince an utter indifference to plaintiffs’ rights. Plaintiffs’ claim for gross negligence withstands defendant’s motion to dismiss.”