Czajkowski v. Haskell & White
Filed 7/18/12 Czajkowski v. Haskell & White CA4/1
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
ROBERT CZAJKOWSKI,
Plaintiff and Appellant,
v.
HASKELL & WHITE, LLP, et
al.,
Defendants and Respondents.
D059090
(Super. Ct. No. 37-2010-00087738-
CU-BC-CTL)
APPEAL from
a judgment of the Superior Court
of
County, Joel M. Pressman, Judge. Affirmed.
Plaintiff
Robert Czajkowski (Appellant) filed this action for damages against defendants
Haskell & White, LLP, an accounting firm and five of its members
(together Respondents)
name="_ftnref1" title="">[1],
alleging professional negligence and
related theories arising out of their performance, during 2001 and 2002, of
auditing duties for a company (MeltroniX; the Company) of which Appellant was
formerly the president and chief executive officer (CEO). The Company was forced to cease operations in
2002, largely due to its liability for unpaid payroll taxes, and in federal
proceedings lasting from 2006 to 2009, Appellant as its CEO was personally
assessed with over $500,000 in its unpaid federal income taxes and
penalties. In 2009, Appellant settled
the matter by paying the Company's back taxes and penalties of over $340,000,
and incurred attorney fees.
In
this action, Appellant claims Respondents breached the duties imposed on them
by the engagement letters with the Company, by failing to disclose information
that came to their attention in 2001 and 2002 about the nonpayment of such
taxes caused by misconduct of the Company's former chief financial officer (CFO
Randy Siville; not a party here).
Appellant asserts he excusably did not discover any basis for a claim
against Respondents until 2008, when their auditing work papers were subpoenaed
by the government in the federal proceedings, and he obtained a copy.
Respondents
brought demurrers to the first amended
complaint (FAC), asserting all causes of action in this professional
negligence action were barred by the two-year statute of limitations. (Code Civ. Proc., § 339, subd.
(1).)
Appellant lacked standing to sue upon the contractual engagement letters in
which he was not expressly named as a party.
The trial court sustained the demurrers without leave to amend.
Having
reviewed the face of the pleadings in light of well-established limitations
principles, we conclude Appellant has not successfully pled around the two-year
statutory bar, nor has he supplied a showing of any realistic possibility of
successful amendment. The trial court
correctly analyzed the relevant issues and we affirm.
I
FILING OF ACTION
For
purposes of analyzing the demurrer rulings, we take the facts properly pleaded
to assess whether they may state their causes of action, as matters of
law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Appellant alleges essentially the following
sequence of events. From September
2001 through September 2002, he was the CEO, president, and
director of the Company. Respondents are
qualified accounting professionals that were engaged by the Company in
2001, and again in 2002, to audit its financial statements for the previous
year and also to review its interim financial statements. In their engagement agreements with the
Company, Respondents agreed to inform it of any errors, fraud, illegal acts, or
reportable conditions that came to their attention (unless clearly
inconsequential).
title="">[3] Respondents created and delivered audit
reports and reviews to the Company and to Appellant in his official
capacity. The reports did not identify
any outstanding tax liabilities.
A
third party creditor brought enforcement proceedings against the Company in
2002, resulting in the discovery of its large outstanding tax liabilities. Appellant participated in an internal
investigation and in August 2002, he learned from the Company's CFO that since
2001, the CFO had been diverting Company funds intended for tax payments, so
the Company had failed to pay large sums of payroll withholding taxes. The Company went under and Appellant lost his
job.
Originally,
the State of California held Appellant personally liable for the unpaid payroll
taxes, but after an investigation, it released him from liability, concluding
he had no knowledge of the CFO's misdeeds until August 2002 and he had not
willfully withheld monies due.
In
October 2006, the Internal Revenue Service (IRS) assessed Appellant personally
for the Company's unpaid payroll taxes and penalties. (26 U.S.C. § 6672.)
filing a federal civil complaint for a refund of the penalties collected from
him for the unpaid payroll taxes (the federal proceedings). The United States counterclaimed against
Appellant for the outstanding payroll tax assessments. In that context, in June 2008, the
prosecution subpoenaed Respondents' accounting records from its engagements
with the Company. Respondents produced
the records and Appellant's counsel obtained a copy in September 2008. In March 2009, Appellant settled the matter by
stipulating to a judgment for back taxes and penalties, and incurred attorney
fees.
In March
2010, Appellant filed this state court complaint on theories of professional
negligence, breach of contract and implied covenants, as well as negligent
misrepresentation and constructive fraud.
After a demurrer was sustained with leave to amend, he filed the FAC,
expanding his discovery allegations.
Appellant alleges that he had standing to sue as an express or intended
third party beneficiary of the Company's engagement agreements, due in part to
his exposure to personal liability for the Company's tax defaults. (26 U.S.C. § 6672.)
In
the FAC, Appellant alleges he was unable to discover his claims until September
2008, because he did not have access to Respondents' auditing work papers until
the government subpoenaed them in the federal proceedings. Appellant contended that since the CFO had
successfully concealed his actions until August 2002, there was no reason to suspect
that Respondents were aware of the misconduct at the time (failure to pay the
payroll withholding taxes). When
Appellant investigated in 2005, one of Respondents' employees told him that any
significant information would have been included in footnotes in financial
statements. The reports did not include
tax liability information.
Appellant
therefore argued that it was not until September 2008, when his attorney
obtained the subpoenaed accounting records in connection with the federal
proceedings, that he became able to discover any basis to make a claim against
Respondents, to recover damages attributable to his assessed personal liability
for the unpaid taxes. Specifically,
Appellant claims that Respondents' 2001 and 2002 auditing work papers, provided
in the federal discovery, showed there were payroll taxes payable, tax
liability balances were increasing, and tax arrearages, although Respondents
considered the matter to be minor, because the CFO told them he had recorded
accruals for such a possibility.
According to Appellant, these auditing work papers reflect Respondents'
understanding and acknowledgment of lack of segregation of duties under the
CFO, presenting a heightened risk of fraud or irregularity, which triggered
their duty to disclose under the applicable accounting standards. Respondents allegedly breached their duties
to report such a known "condition" or "illegal act," i.e.,
the Company's failure to pay its taxes, and caused harm to Appellant.
Thus,
Respondents' omission from their reports of any references to unpaid taxes was
alleged to demonstrate they had contemporaneous knowledge of the Company's
failure to make the appropriate tax payments, but actively concealed this until
the subpoena production was made in 2008.
II
DEMURRER
TO FAC; RULING
Respondents
filed their demurrer and motion to strike the FAC, first challenging the
standing of Appellant to sue for professional negligence, on the grounds that
the engagement letter was executed by the Company, without specifying Appellant
as a party. Respondents further argued
that the face of the pleading showed that the two-year statute of limitations
started to run when Appellant received the confession from the CFO in August
2002 that the Company's taxes had intentionally not been paid. Alternatively, Respondents claimed the action
was obviously time barred, as shown by Appellant's knowledge that he was being
held personally liable for the unpaid taxes and penalties throughout the
2006-2009 proceedings. However, his
complaint was not filed until March 2010.
In support of their arguments, Respondents provided copies of the
pleadings in the federal tax proceedings for
In
opposition, Appellant contended he was an intended beneficiary of the
engagement letters, but acknowledged that an audit was not guaranteed to detect
fraud or illegal activity. He claimed
the auditing materials were intended for the use of the Company's board of
directors and management, including Appellant.
Appellant
sought a ruling he was excusably delayed in discovering Respondents' potential
liability, so the action did not accrue until 2008 because of Respondents'
alleged fraudulent concealment of their knowledge about the CFO's wrongdoing,
when it came to their attention. In
support, he provided additional material for judicial notice, consisting of the
standardized accounting principles that Respondents had allegedly violated, and
a copy of the redlined FAC, showing the amendments recently made.
The trial
court took judicial notice of the documents submitted, and agreed with
Respondents that the facts pled on the face of the FAC disclosed that the
action was untimely filed. Further, the
court ruled that Appellant lacked sufficient standing to sue the
Company's auditor for alleged professional negligence. The demurrers were sustained without leave to
amend, the motion to strike was deemed moot, and a judgment of dismissal was
entered. This appeal followed.
III
ISSUES
We apply
well-established rules of review.
"A demurrer tests the legal sufficiency of the complaint. [Citation.]
Therefore, we review the complaint de novo to determine whether it
contains sufficient facts to state a cause of action. [Citation.]
'We treat the demurrer as admitting all material facts properly pleaded,
but not contentions, deductions or conclusions of fact or law.' [Citation.]
The trial court exercises its discretion in declining to grant leave to
amend. [Citation.] If it is reasonably possible the pleading can
be cured by amendment, the trial court abuses its discretion by not granting
leave to amend. [Citation.] The plaintiff has the burden of proving the
possibility of cure by amendment."
(Grinzi v. San Diego Hospice Corp.
(2004) 120 Cal.App.4th 72, 78-79 (Grinzi); Blank v. Kirwan, supra,
39 Cal.3d 311, 318.)
On
demurrer, a court must accept properly pleaded facts as true, but a demurrer
does not admit the plaintiff's contentions nor conclusions of law or fact. (People
ex rel Lungren v. Superior Court (1996) 14 Cal.4th 294, 300-301.) It is appropriate to " 'consider
judicially noticed matters.' "
(E-Fab, Inc. v. Accountants, Inc.
Services (2007) 153 Cal.App.4th 1308, 1315 (E-Fab, Inc.).)
" 'Because the trial court's determination is made as a matter
of law, we review the ruling de novo.' " (Ibid.)
In their
demurrer and motion to strike, Respondents raised not only a limitations bar to
the action, but also a lack of standing to sue.
The trial court issued a ruling in favor of Respondents on the standing
claim regarding the professional negligence cause of action (without reaching
the contractual theories).
The
FAC alleges that the engagement letters were entered into between Respondents
and the Company, and Appellant was, ex officio, an express or intended third
party beneficiary of it and of Respondents' professional obligations, and thus
the equivalent of a client for certain purposes. Admittedly, the issue of standing presents
difficult analytical questions here, based on the following language in
footnote 16:
"In theory, there is an additional class of persons
who may be the practical and legal equivalent of 'clients.' It is possible the audit engagement contract
might expressly identify a particular third party or parties so as to make them
express third party beneficiaries of the contract. Third party beneficiaries may under
appropriate circumstances possess the rights of parties to the contract. [Citations.]
[However,] this case presents no third party beneficiary issue.
. . . [W]e have no occasion to decide whether and under
what circumstances express third party beneficiaries of audit engagement
contracts may recover as 'clients' under our holding."
We need not
express any substantive position on the standing issues, since the limitations issues
are dispositive under these circumstances.
We assume arguendo that Appellant can sufficiently assert
standing to sue the Company's auditors for alleged professional negligence and
the related causes of action, and now turn to the discovery rule arguments.
IV
RULES REGARDING
DISCOVERY OF FACTS
CONSTITUTING THE
CAUSES OF ACTION
A. Applicable Legal Principles
Where a
demurrer raises the bar of the applicable statute of limitations, the courts
assess whether " 'the complaint shows on its face that the statute
bars the action.' " (
Cal.App.4th 1308, 1315.) Such a defect
" 'must clearly and affirmatively appear on the face of the
complaint; it is not enough that the complaint shows merely that the action may
be barred.' [Citations.]" (Id. at
p. 316.)
The parties
do not dispute that the two-year limitations period of section
339, subdivision (1) applies to each of the causes of action in the FAC,
since they are all intertwined with the professional malpractice allegations
(negligent misrepresentation, constructive fraud, breach of contract and
implied covenants). (
73 Cal.App.4th 492, 503 (Curtis).) Generally, the bar of the statute of
limitations is raised as an affirmative defense, subject to proof by the
defendant. (Samuels v. Mix (1999) 22 Cal.4th 1, 10.)
However,
when a plaintiff relies on the discovery rule or allegations of fraudulent
concealment, as excuses for an apparently belated filing of a complaint,
" 'the burden of pleading and proving belated discovery of a cause of
action falls on the plaintiff.' "
(Investors Equity Life Holding Co.
v. Schmidt (2011) 195 Cal.App.4th 1519, 1533; April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 833
[" 'It is plaintiff's burden to establish "facts showing that he
was not negligent in failing to make the discovery sooner and that he had no
actual or presumptive knowledge of facts sufficient to put him on
inquiry." ' "].)
More
specifically, to overcome an apparent limitations bar, the plaintiff claiming
delayed discovery of the facts constituting the cause of action has the burden
of setting forth pleaded facts to show " '(1) the time and manner of
discovery and (2) the inability to have made earlier discovery despite
reasonable diligence. The burden is on
the plaintiff to show diligence, and conclusory allegations will not withstand
demurrer.' " (
In
evaluating the reasonableness of a plaintiff's reliance on alleged
misrepresentations, the courts will consider what is apparent from the
pleadings about the plaintiff's knowledge and experience. " 'Generally, "[a] plaintiff
will be denied recovery only if his conduct is manifestly unreasonable in the light
of his own intelligence or information." ' " (Broberg
v. The Guardian Life Ins. Co. of America (2009) 171 Cal.App.4th 912, 921 (
B. Two Types of Injury?
Appellant
claims that the injury he
suffered had two concurrent causes, not only the misconduct of the CFO in not
paying the taxes, but also Respondents' misfeasance and concealment of facts in
their auditing reports about the unpaid taxes, thus allegedly causing either
the same or further harm to the Company and Appellant. He argues for justifiably delayed accrual of
these claims against Respondents, because a limitations period should not start
to run until the plaintiff is on notice of the facts constituting the separate
injury. (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806-807 (
In the
context of professional negligence cases that assert negligent
misrepresentations, the reasonableness of the plaintiff's alleged reliance on
the representations may be treated as a question of fact. Nevertheless, if the undisputed facts do not
leave any room for reasonable differences of opinion, the question of when
"a plaintiff reasonably should have discovered facts for purposes of the
accrual of a case of action or application of the delayed discovery rule"
should be decided as a matter of law, by evaluating the allegations in light of
matters that are properly subject to judicial notice. (Broberg, supra, 171 Cal.App.4th 912,
921; see Rita v. Roman Catholic
Archbishop (1986) 187 Cal.App.3d 1453, 1460 [fraudulent concealment
allegations ineffective where plaintiff is otherwise on notice of potential
claim].)
C. Face of FAC and Appellant's Arguments
In light of
the above principles, we evaluate the sequence of events alleged in the FAC,
and take into account the proposed amendment suggested in the reply brief
(i.e., added allegations about Respondents' silence during the Company's
internal investigations). (
liability theory has consistently been that Respondents' reports showed the
Company had no significant payroll tax liabilities, although in meetings and
communications, Respondents had learned something about such liabilities, but
nevertheless they stood by silently in violation of their professional duties
to disclose that knowledge.
Appellant
has several theories why his FAC successfully alleges delayed discovery, in
that he could not discover his claims against Respondents until September
2008. First, he reasonably assumed in
2002 that the CFO must have fooled Respondents as well as Appellant, so
Appellant did not come under any duty to investigate the role of Respondents at
that time.
Next,
even if Appellant should have suspected some breach of duty by Respondents
occurred during the 2001 and 2002 time frame, he claims only factual questions
may exist about whether an investigation would have been successful in
uncovering the extent of their knowledge of the unpaid tax situation at that
time. Appellant suggests the "accrual trigger" of the statutory period
occurred only upon receipt of the 2008 discovery copies that he obtained from
the government, when he learned that Respondents' auditing papers showed they
had some knowledge about the Company's tax liabilities.
Appellant
relies on Electronic Equipment Express,
Inc. v. Donald H. Seiler & Co. (1981) 122 Cal.App.3d 834 (
support for the claim there was a fiduciary relationship between the Company
and Respondents, so that Appellant should be held to a lesser requirement of
diligent investigation of the circumstances surrounding the Company's tax
liabilities. The court in that case
further states that when a plaintiff asserts such a reduced requirement of
diligence, because of a fiduciary relationship with the defendant, the
plaintiff is still "required to establish facts sufficient to show that he
made an actual discovery of hitherto
unknown information within two years before the filing of the action in order
to satisfy the duty of diligence and to thereby come within the limitations
period. [Citations.] However, plaintiff does have a duty to
investigate even where a fiduciary relationship exists when 'he has notice of
facts sufficient to arouse the suspicions of a reasonable man.' [Citations.] If such facts actually do come
to his attention he may not sit idly by for at that point the statute of
limitations begins to run." (
An
example of a professional malpractice case held to be properly barred by the
plaintiff's lack of reasonable diligence in investigating the causes of an
injury is Apple Valley Unified School
Dist. v. Vavrinek, Trine, Day & Co. (2002) 98 Cal.App.4th 934, 939,
942-944 (Apple Valley). There, the appellate court applied the
discovery rule in the context of malpractice allegations against accountants,
brought by a third party that relied upon the accountants' reports, which were
inaccurate. The court analyzed the
circumstances outlined in the complaint to determine the time at which that
plaintiff "knew or should have known the alleged misrepresentations in
defendants' audit report . . . might be
incorrect." (Id. at p. 943.) The court
found the complaint was time barred, because the face of the pleadings showed
that more than two years before filing, the plaintiff was in possession of
facts that would have caused a reasonable plaintiff to suspect that the alleged
injury (improper reporting of school data, causing illegal public funding) was
caused by someone's wrongdoing: "It
is clear from the face of the complaint in this case that the District had at
least 'a suspicion of wrongdoing' [citation] by defendants more than two years
before it filed suit" (ibid.),
and "that suspicion was sufficient to satisfy the discovery element for
commencement of the statute of limitations." (Id.
at p. 944.)
Another
example of such a correctly time-barred action is Curtis, supra, 73 Cal.App.4th 492, 500-502. There, the client-plaintiffs' claims against
their former accountants were filed too late, when the clients were claiming
excusable delay because the defendants had not admitted to their own
professional negligence. When the court
examined the circumstances outlined in the pleadings, it determined that the
plaintiffs could have reasonably figured out from their IRS notice of
deficiency that their accountants' tax services might have been
substandard. The facts known to all
parties about the finances of the clients did not support allegations that the
accountants had concealed from the clients that there might be grounds for a
malpractice claim against them.
Specifically, the clients in Curtis
were aware they were being audited by the IRS and were given notice that the
IRS issued a tax deficiency letter, an excessive amount of time before the
action was filed: "These were the
critical facts which should have aroused the [clients'] suspicions about the
correctness of the actions previously undertaken by [accountants]." (Id.
at p. 502.) This was appreciable harm
that the clients could reasonably have suspected was caused by
"professional blundering." (
"responsibility to undertake basic inquiry to determine whether the
material facts of which [they were] fully aware could form the basis for a
legal claim." (Id. at p. 502.)
D. Analysis
To address
whether the discovery rule properly postponed accrual of these causes of
action, we examine whether the face of the FAC sets forth such
circumstances and sequences of events that should have reasonably served to
alert Appellant that Respondents' action or inactions had possibly caused
injury to him. He had to allege not only
late discovery, but also inability to discover the relevant facts earlier. It begs the question for Appellant to
say that because the CFO had successfully covered up his own misconduct until
August of 2002, Appellant could not reasonably have formed any suspicion until
September 2008 that any other party, such as various financial professionals
employed by the Company, had potentially contributed to the problem through
negligence with respect to the tax deficiencies.
As
shown on the face of the complaint, Respondents were retained by the Company
for auditing purposes, and all parties acknowledge that Respondents were not
investigators who were obligated to discover reportable conditions or
illegalities. Instead, Respondents were
obligated to disclose such material errors, illegalities or reportable
conditions that came to their attention, unless such conditions were deemed
inconsequential. The Company incurred
significant tax liability in 2002, and after the Company folded, Appellant was
being pursued for personal liability. It
is not too much of a stretch to expect a reasonable person in Appellant's
shoes, a knowledgeable executive, to extrapolate from his 2002
knowledge of one cause of an injury (the CFO's failure to pay taxes) that there
might be other concurrent causes, in the actions or inactions of other retained
professionals who had been dealing with or reporting on the Company's finances.
In
2005, one of Respondents' accountants told Appellant that information gained
about unpaid taxes would have been placed in a footnote in the reports, and
Appellant does not dispute that there was none, but he did not undertake any
further investigation about what was known by Respondents, or when. He argues that Respondents never volunteered
to supply their work papers to him, or that an investigation would have been
fruitless. But it was not "
other parties, such as Respondents, had professional responsibilities in
examining Company records in 2001 and 2002, particularly its tax records. (Electronic
Equipment Express, supra, 122 Cal.App.3d 834, 855.) The facts known to all parties, about (1) the
finances of the Company (investigation and notice from the IRS of tax
deficiencies), (2) the professional duties imposed on Respondents, and (3) the contents of their reports, do not provide support for his allegations
that there were no possible grounds, in the 2002-2004 time frame, for any
potential malpractice claim against the auditors. (Curtis,
supra, 73 Cal.App.4th 492, 500-502.)
From
2006-2009, Appellant was being pursued by the IRS until he settled the case,
paying taxes and penalties attributable to the Company's failure to pay
taxes. The judicially noticed material
about the federal proceedings shows
that Appellant was challenging his personal tax liability. (E‑Fab,
Inc., supra, 153 Cal.App.4th at p. 1315.)
However, it was not until the federal attorney propounded discovery in
2008, in connection with the counterclaim, that the auditing work papers were
produced. Appellant benefited from that
production, but has not shown why he could not or should not have pursued
similar production on his own behalf, at an earlier time. It is not an answer for Appellant to say,
"The very fact that [Respondents] argues [Appellant]
might have needed civil discovery to obtain the work papers highlights the fact
question of whether [Respondents] would have voluntarily handed over the work
papers that prove their deceit."
Instead, he makes only contentions or conclusions about why he
did not think he had to take any action earlier, to investigate whether there
was any factual basis for a claim against Respondents. (Fox, supra, 35 Cal.4th at p.
803.) Because he was always aware of the
general role of Respondents in examining the Company's finances, including its
taxation reports, he could not wait for any admission by them of fault, to form
at least "a suspicion of wrongdoing" when it all went bad. (Apple
Valley, supra, 98 Cal.App.4th at
p. 943.)
Based
on all the facts he knew before 2008, Appellant had a duty to investigate even
a fiduciary's actions, or inquire about the work done, because on an objective
basis, all of these circumstances placed him on " 'notice of facts
sufficient to arouse the suspicions of a reasonable man'. [Citations.] If such facts actually do come
to his attention he may not sit idly by for at that point the statute of
limitations begins to run." (
Cal.App.3d 834, 855; italics added.) On
this set of allegations, we believe that only one reasonable conclusion is
possible, that the FAC is barred by the applicable limitations period. On its face, it does not support any
interpretation that a reasonably diligent investigation at the relevant times,
within two years of August 2002 or even shortly thereafter, would not have
revealed some actual or presumptive knowledge of such facts and circumstances
as would have given him timely notice of some potential claim against the
Company's auditors. (
[plaintiff's burden to show lack of negligence in failure to make earlier
discovery of claim].) The FAC was
correctly dismissed.
DISPOSITION
Judgment is
affirmed. Respondents are awarded their
costs on appeal.
HUFFMAN, J.
WE CONCUR:
BENKE, Acting P. J.
AARON, J.
name="_ftn1" title="">[1] Individual
members of the respondent firm sued here are:
Wayne Pinnell, David White II, Michelle McDuffie, Joyce Saller and Todd
Collins.
name="_ftn2" title="">[2] All
further statutory references are to this code unless noted. Section 339, subdivision 1, imposes a two-year
limitation period for "[a]n action upon a contract, obligation or
liability not founded upon an instrument of writing . . . ."
