In Choi v. Sagemark Consulting, et al. (No. H041569, filed 11/16/17, certified for publication 12/11/17), the Sixth Appellate District affirmed a trial court’s grant of summary judgment in favor of financial advisor defendants who asserted that the claims against them for negligence were time-barred.
In the underlying action, plaintiffs filed an action against their former financial advisors centered on alleged wrongful advice concerning a financial plan which allegedly ignored known risks and increasing IRS scrutiny of such plans causing plaintiffs to suffer financial losses, increased tax liabilities, and penalties. Defendants moved for summary judgment on the basis that plaintiffs’ claims were time-barred. Specifically, defendants contended that plaintiffs’ claims were subject to a maximum three-year statute of limitations (Code of Civil Procedure § 338) and that an email sent to plaintiffs in September 2007 setting forth the threat of IRS penalties based on erroneous advice by the advisor constituted notice of potential damages at which point plaintiffs’ causes of action accrued. Plaintiffs did not file suit until November 2010.
At the time of the hearing on defendants’ motion for summary judgment, plaintiffs attempted for the first time to introduce supplemental evidence not contained in their opposition to the motion and requesting leave to file a motion to amend their separate statement in opposition. The trial court exercised its discretion and elected not to review any of plaintiffs’ proffered supplemental evidence which had not been included in their opposition and granted defendants’ motion for summary judgment finding that plaintiffs’ claims were time-barred.
On appeal, Plaintiffs asserted the trial court erred by (1) determining the limitations period began to run when plaintiffs were first “on notice” that the IRS would impose penalties rather than when those penalties were actually assessed, and (2) failing to consider any tolling effect created by the ongoing fiduciary relationship between defendants and plaintiffs.
In its review of the record, the appellate court found the trial court did not abuse its discretion in refusing to consider plaintiffs’ supplemental evidence presented on the day of the summary judgment hearing given plaintiffs’ failure to comply with statutory requirements and the unfairness to defendants who had no opportunity to respond to the late-presented evidence.
It is long-settled that statutes of limitation typically begin to run on the occurrence and discovery of appreciable and actual harm, however uncertain in amount. Under the so-called “discovery” rule, a cause of action accrues and the limitations period begins to run when a plaintiff discovers or should have discovered the facts constituting a cause of action. The appellate court noted that, in the underlying action, plaintiffs acknowledged they received the September 2007 email notifying them that the IRS intended to impose penalties on them. Plaintiffs, however, disputed the effect of that email arguing that the email included assurances that the penalties would be offset in some way by defendants and thus would not cause harm to plaintiffs.
While not briefed in their opposition to the summary judgment motion, Plaintiffs further argued on appeal that, even if the September 2007 email constituted notice of actual damages and caused the action to accrue, longstanding tolling rules applicable to professionals such as lawyers and doctors dictated that the statute of limitations did not run while the fiduciary relationship continued between the parties. Plaintiffs argued the trial court erred in failing to consider the continuing relationship between plaintiffs and defendants while they cooperatively sought to defeat or minimize the IRS penalties. Plaintiffs conceded there is no specific statutory tolling provisions for financial advisors, but argued instead that the rationale behind tolling in analogous circumstances, such as legal malpractice claims, applied. (Plaintiffs had argued that case law concerning the timing of the accrual of the limitations period applicable to accounting malpractice claims arising from claims of negligence in tax return engagements (i.e., late filing or other similar defect) should be applied. In the subject case, the statute of limitations was deemed to accrue only when the IRS formally assessed the applicable tax deficiency as against the taxpayer. The appellate court distinguished this line of cases and cited to other Supreme Court precedent expressly limiting the ‘date of assessment’ accrual date solely to negligence actions in tax return matters which had utilized the assessment date not because it settled the issue of the timing of injury but rather due to the need for uniformity of decision in such matters.)
The appellate court found that plaintiffs’ core argument failed as a matter of law because they were on notice as of September 2007 of the facts constituting their injury and indicating they had received bad advice. The appellate court further ruled that delayed accrual due to the fiduciary relationship does not extend beyond the bounds of the discovery rule for statutes of limitation. The nature of the relationship between plaintiffs and defendants did not prevent or delay plaintiffs from discovering defendants’ wrongdoing as of September 2007 in the form of the threat of IRS penalties, even though those penalties were not enumerated specifically. (In attorney malpractice matters, the “continuous representation” rule tolls the applicable limitations period so long as the attorney continues to represent the client on the same subject matter from which the alleged malpractice arose.) Accordingly, the appellate court affirmed the trial court’s summary judgment ruling.
With this ruling the appellate court made two material findings of note to attorneys generally, and specifically to professional liability litigators. First, it reaffirmed the weight of the discovery rule as the ‘gold standard’ for the accrual of claims. Second, the court also found that the threat of potential IRS penalties, before any such penalties are specifically levied, is sufficient to constitute “injury” for a statute of limitations to begin to run as against financial professionals, including accountants. Ultimately, regardless of the relationship between the parties, prospective claimants will doubtless remain aware of the time they discover or should have discovered the facts supporting potential claims and file suit accordingly so as to avoid pursuing claims which may ultimately be found time-barred.
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