Coulter v. Grant Thornton (CA1 1/3/17)

Concerning when accounting malpractice claims accrue.

Defendant set up various tax-avoidance mechanisms for Plaintiffs. The IRS eventually disapproved of them. Defendant assured Plaintiffs that they could beat the IRS in the Tax Court but, after lengthy litigation there, Plaintiffs ended up having to settle. They then sued Defendant for various torts but by that time more than three years had elapsed. The trial court granted Defendant’s motion to dismiss on the statutes of limitations. Plaintiffs appealed.

The Court of Appeals reverses. The trial court relied on precedent (CDT 2000) that the cause of action accrues from the time the taxing authority issues its final determination of a deficiency. This opinion distinguishes CDT because “it did not address the scenario in which, as here, the taxpayer continues to consult with the accountant . . . and . . . to rely on the accountant’s advice” even after the IRS determination. Some courts have ruled that this doesn’t change the accrual date, others that the accrual date becomes when the tax litigation is final. “We are persuaded,” the court says, “that neither bright-line rule adequately addresses discovery of a cause of action for accounting malpractice.” 

Having rejected both “bright-line” rules (“bright-line” in a discovery context being a bit of a contradiction) the court does not discuss the first one but, instead, two versions of the second. Accrual shouldn’t happen after the tax-court judgment but before appeal because that could force a taxpayer to decide whether to sue the accountants or accept their advice to appeal. Why that is an unreasonable or impermissible choice isn’t made clear except that a taxpayer and accountant can “reasonably continue to believe” that they are right even after a trial court tells them they’re wrong. (If the only argument against pre-appeal accrual is to deprecate the effect of a judgment then it can’t be as bad as it sounds.) The court says that accrual after appeal can’t be the rule either because by that time “a fact-finder could conclude” that the taxpayer already had knowledge of the accountants’ error. We’re not sure what that means; if it’s a bright-line rule then it’s a bright-line rule – the fact-finder is instructed that way (assuming the issue has become one of fact) and can’t “conclude” otherwise. (And so we won’t bother to point out that the court’s two hypothesized examples of post-appeal knowledge of error do nothing to distinguish that situation since both could occur pre-appeal as well.)

The court adopts a “fact-based approach” that it never really explains. What it appears to mean, though, is that judgments and appeals are simply facts to be considered, among all others in the case, to determine when the taxpayer should reasonably have known that the accountants’ advice was improper. The court relies on a bad-faith case in which the insurer didn’t know that its lawyers’ advice to deny coverage was wrong (the lawyers having overlooked the case on point) until it lost on summary judgment. But the court refers to it not as a summary judgment but simply as “a court ruling.” That means that knowledge of error can creep in anywhere along the way from any source including but not limited to appeal, judgment, or prior ruling. (Or maybe not even a ruling. If the insurer had seen a copy of the policyholders’ summary judgment opposition revealing the case on point, could that have been enough to trigger accrual? On the other hand, how can a ruling trigger anything since this court just told us that a litigant is entitled to keep an open mind even about a final judgment?)

This is what can happen in the lower fever-swamps of the discovery rule – the judgments of courts of law become no more important than miscellaneous happenstance and the “discovery” of facts becomes instead the development of attitudes and opinions.

The trial court also granted summary judgment on a couple of subsidiary points; the Court of Appeals reverses one, affirms another.

(Opinion: Coulter v. Grant Thornton L.L.P.)