Opinion
No. X04 CV 02 0100080 S
April 17, 2006
MEMORANDUM OF DECISION
The plaintiff Shepard Schwartz founded Shepard Steel, a steel fabrication and erection company, in approximately 1955, and engaged a predecessor of the defendant Blum, Shapiro Company ("Blum Shapiro") for accounting services in approximately 1956. In due course Schwartz was joined by several other owners in the business and ultimately formed a Subchapter S corporation, Shepard Steel Co., Inc. ("Shepard Steel"). Blum Shapiro continued to be the accountant both for the business and for the shareholders personally through all times relevant to this action, except that Schwartz engaged another accountant for personal matters in approximately 1999.
In the mid to late 1990s Schwartz wanted to sell his interest in the business. Apparently he made some inquiries about selling the business, but there was no interest in a satisfactory price because of "the financials" evident at the time. In 1998 and 1999 Schwartz engaged in negotiations with the other principals of Schwartz Steel with the goal of agreeing to a Stock Redemption Agreement ("SRA"). Such agreement was reached early in 2000. Schwartz sold back to Shepard Steel a significant portion of his stock, resigned from management responsibilities, and terminated the life insurance provision in return for approximately $1,800,000. Negotiations were premised, according to Schwartz, on values of Shepard Steel as reported in financial statements prepared by Blum Shapiro.
As it turns out, the financial statements on which the values were based were mistaken because of a "modeling error" in the accounting methods. The precise nature of the error is not material to the present dispute: at this point, it is sufficient to note that because of a variation in the accounting method for the cost of overhead, and thus inversely the amount of profit, in ongoing construction projects, income for years in the late '90s was significantly understated, such that Shepard Steel actually had roughly $4,000,000 more in operating profit than it had thought. The SRA was finalized in the time frame of the middle of February to early March 2000. The accounting error was discovered later: an audit opinion of December 3, 2001, addressed the issue and disclosed the problem to Shepard's board and shareholders. This action, seeking damages from Blum Shapiro as a result of the accounting error, was served on October 22, 2002.
The currently operative complaint contains five counts: breach of contract, professional negligence, breach of fiduciary duty, innocent misrepresentation and negligent misrepresentation. Blum Shapiro has moved for summary judgment as to all counts, on five sometimes overlapping grounds: statute of limitations, lack of duty, lack of reliance, lack of "special relationship" for purpose of a fiduciary duty, and lack of standing. Both sides filed original and reply briefs and argued the issues orally on March 30, 2006.
The first complaint, served on October 22, 2002, contained two counts, breach of contract and professional negligence. Counts alleging breach of fiduciary duty and negligent and innocent misrepresentation were added by virtue of an amendment dated April 28, 2004. In the motion for permission to amend, the plaintiff stated that the new counts were based on the same operative facts as the earlier complaint and that the amendment merely added theories of recovery. Whether the new counts in fact relate back was neither argued nor decided in the contours of this motion.
The first count, alleging breach of contract, was previously stricken. The count remains in the complaint presumably to avoid the prospect of being deemed to have waived appellate rights. No action is required as to the first count at this point.
Summary judgment "shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." LaFlamme v. Dallessio, 261 Conn. 247, 250 (2002); Practice Book § 17-49. The party moving for summary judgment bears the burden of proving the absence of a genuine dispute as to any material fact; and the party opposing such a motion must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact. "Equally well settled is that the trial court does not sit as the trier of fact when ruling on a motion for summary judgment . . . [T]he trial court's function is not to decide issues of material fact, but rather to determine whether any such issues exist." (Citations omitted; internal quotation marks omitted.) Field v. Kearns, 43 Conn.App. 265, 269-70, cert. denied, 239 Conn. 942 (1996). "To satisfy his burden the movant must make a showing that it is quite clear what the truth is, and that excludes any real doubt as to the existence of any genuine issue of material fact." Witt v. St Vincent's Medical Center, 252 Conn. 363, 373 n. 7 (2000); D.H.R. Construction Company v. Donnelly, 180 Conn. 430, 434 (1980). In deciding a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party. The test is whether a party would be entitled to a directed verdict on the same facts. Sherwood v. Danbury Hospital, 252 Conn. 193, 201 (2001); CT Page 7145 Serrano v. Burns, 248 Conn. 419, 424 (1999); Forte v. Citicorp Mortgage, Inc., 66 Conn.App. 475 (2000). In Connecticut, "[a] trial court should direct a verdict for a defendant if, viewing the evidence in the light most favorable to the plaintiff, [the trier of fact] could not reasonably and legally reach any other conclusion than that the defendant is entitled to prevail." (Internal quotation marks omitted.) Colombo v. Stop Shop Supermarket Co., 67 Conn.App. 62, 64 (2001), cert. denied, 259 Conn. 912 (2002).
I
The first issue to be considered is whether the action is barred by the applicable statute of limitations. It is agreed that the applicable statute of limitations is General Statutes § 52-577, which provides that any action founded on a tort (not otherwise provided for) must be brought within three years of the act or omission complained of. Although easy to state, the limitation is sometimes difficult to apply.
Blum Shapiro argues that the situation is quite straightforward. It claims that the last material act or omission on its part is the financial statement for the fiscal year ending October 31, 1998. The statement was promulgated on December 10, 1998. The action was brought in October 2002, close to four years after the event. Blum Shapiro has included facts which tend to support its point of view.
As noted above, the three counts of breach of fiduciary duty and negligent and innocent misrepresentation were added to the complaint by amendment in April 2004. If the professional negligence count, included in the original complaint, is barred, then presumably the later counts would fare no better.
Schwartz, however, references different factual claims. He argues that the December 1998, financial statement is relevant, to be sure, but also argues that the financial statement of December 3, 1999, which contained the same "modeling error" and perpetuated the misleading amount of income and profit was also relied on by the parties to the negotiation in general and by himself, his attorney and accountant in particular. He has supplied portions of deposition testimony supporting the position. Although the evidence may or may not be credited, I cannot find an absence of factual dispute. Summary judgment clearly cannot be rendered on the professional negligence count on the ground of statute of limitations.
Schwartz posits as well that the continuous representation doctrine or continuous course of conduct doctrines, as set forth in cases such as DeLeo v. Nussbaum, 263 Conn. 588 (2003), serve to extend the time in which the other counts may appropriately have been brought. The continuous representation doctrine states that the statute of limitations may be tolled "when the plaintiff can show: (1) that the defendant continued to represent him with regard to the same underlying matter; and (2) either that the plaintiff did not know of the alleged malpractice or that the attorney [or accountant] could still mitigate the harm allegedly caused by that malpractice during the continued representation period." (Emphasis supplied; footnotes omitted.) DeLeo, supra, 597. In application, the doctrine is "conspicuously fact-bound." Golden v. Johnson Memorial Hospital, 66 Conn.App. 518, 525 (2001).
If the additional counts relate back, of course, the argument is surplusage.
For the purpose of this motion, I think it appropriate to extend to accountants the considerations regarding tolling, at least in the circumstances of this case, where there is evidence that the relationship was in depth and of long standing. See, e.g., Hnath v. Vecchitto, 2003 Ct.Sup. 2578-1 (Aurigemma, J.) (2003).
Blum Shapiro argues that there was no continuous representation, at least from the time that Schwartz engaged an attorney and an accountant to represent him in the SRA negotiations, and that, in any event, Blum Shapiro's services in providing audited financial reports were rendered to the corporation, not to Schwartz individually. Were that so, the continuous representation doctrine would not serve to extend the statute of limitations.
Schwartz has produced facts which create a genuine issue as to those premises. Although he agrees that he engaged the services of an attorney and an accountant, both indicated that they in turn relied on the audited reports supplied by Blum Shapiro and no independent audit or combing of the corporation's books was performed. Hiring a professional for one purpose does not necessarily terminate a similar professional's services for that or other purposes. Blum Shapiro's reports are addressed to the board of directors and the shareholders of the corporation, and at all times Schwartz has been a shareholder. Further, a subchapter S corporation, though indeed an independent entity for many purposes, is treated as a partnership for other purposes, including taxation. Income of a subchapter S corporation is deemed to be income of the shareholder. Although this court is not deciding any factual issue, there is a factual issue as to whether Blum Shapiro continued to serve Schwartz throughout the period of time, including discovery of the "modeling" discrepancy. There of course is no question but that Schwartz was unaware of the error until it ultimately was addressed, and, at the very least until the time the SRA was signed, the error could have been "fixed."
If the continuing representation doctrine, defined above, or the continuous course of conduct doctrine tolls the statute of limitations until the parties were aware of the negligence — which in this case may be taken to be December 3, 2001, the date the corrected opinion was issued — then the counts filed in April 2004, would be timely even if they don't relate back to the filing of the original complaint. The continuous course of conduct doctrine has been described in some detail:
[W]hen the wrong sued upon consists of a continuing course of conduct, the statute does not begin to run until that course of conduct is completed . . . [I]n order [t]o support a finding of a continuing course of conduct that may toll the statute of limitations there must be evidence of the breach of a duty that remained in existence after commission of the original wrong related thereto. That duty must not have terminated prior to commencement of the period allowed for bringing an action for such a wrong . . . Where [our Supreme Court has] upheld a finding that a duty continued to exist after the cessation of the act or omission relied upon, there has been evidence of either a special relationship between the parties giving rise to such a continuing duty or some later wrongful conduct of a defendant related to the prior act . . . The continuing course of conduct doctrine is conspicuously factbound . . .
The continuing course of conduct doctrine reflects the policy that, during an ongoing relationship, lawsuits are premature because specific tortious acts or omissions may be difficult to identify and may yet be remedied . . . [T]he doctrine is generally applicable under circumstances where [i]t may be impossible to pinpoint the exact date of a particular negligent act or omission that caused injury or where the negligence consists of a series of acts or omissions and it is appropriate to allow the course of [action] to terminate before allowing the repose section of the statute of limitations to run . . .
In sum, a precondition for the operation of the continuing course of conduct doctrine is that the defendant must have committed an initial wrong upon the plaintiff . . . Second, there must be evidence of the breach of a duty that remained in existence after commission of the original wrong related thereto . . . [T]hat continuing wrongful conduct may include acts of omission as well as affirmative acts of misconduct . . ." (Citations omitted; internal quotation marks omitted.) [Giuletti v. Giuletti, 65 Conn.App. 813 (2001)] 833-35.
Rosenfield v. Rogin, Nassau, Caplan, Lassman Hirtle, LLC, 69 Conn.App. 151, 160-61 (2002).
The factual material submitted by Schwartz creates an issue as to whether representation continued at least until the time of disclosure. The "wrong" in question, the modeling error, continued until discovery late in 2001. Affirmative conduct in perpetuating the error continued until discovery. This court is not deciding whether either tolling doctrine, or both, succeed in saving any count. Schwartz has produced sufficient evidence to avoid the entry of summary judgment at this point on the ground of statute of limitations.
The court is specifically not deciding at this point whether the culmination of the SRA, in approximately March 2000, terminates any tolling.
II
The second issue presented is whether Blum Shapiro owed a duty to Schwartz. Though the issue was discussed in Part I in the context of tolling doctrines, the parties have addressed the question of duty separately as well. If there is no duty, there is no tort.
Blum Shapiro's position is that at least after the time that Schwartz retained his own "team of advisors" any duty which it may have previously owed to Schwartz ceased to exist, and that even previously the duty ran to the corporation rather than to any individual shareholder. Duty can be a complex creature: the context is frequently an important consideration, from which foreseeability and, perhaps, limitations founded on public policy, can appropriately be determined. See, e.g., Advanced Financial Services. Inc. v. Associated Appraisal Services, Inc., 79 Conn.App. 22, 52-54 (2003). Both sides in this case have referred to Twin Mfg. Co. v. Blum Shapiro Co., CT Page 7149 42 Conn.Sup. 119, 120 (1991) ( 5 Conn. L. Rptr. 560):
Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) The accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance. (Quotations and citations omitted).
Both parties also cite Restatement (2d) of Torts, § 552:
One who, in the course of his business, profession or employment . . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information . . .
As indicated above, there is evidence to the effect that Schwartz and his advisors continued to rely on the statements of Blum Shapiro during the course of the negotiations. Similarly, there is evidence that Blum Shapiro knew of the reliance, not only in the general sense that it knew financial statements were being provided specifically to Schwartz, but also it knew of the negotiations that were going on. Frederick "Rick" Kaplan, a principal in Blum Shapiro, attended at least some of the negotiation sessions in 1999 and it is reasonable to infer that he knew of reliance, at least in some fashion. Again. I do not find the lack of a genuine issue of fact.
The plaintiff argues as well that this court ought to follow the "law of the case" and reject the defendant's position on this ground because another judge, in a ruling several years ago, rejected the defendant's claim in the context of a motion to strike. Though the principles presented were similar to those in this motion, the context of a motion to strike is limited to the pleadings and a motion for summary judgment, of course, is usually dependent upon factual development. I do not think it appropriate to ground this decision on the prior decision, then, though I do not necessarily disagree with it.
III
Blum Shapiro similarly claims that there is no evidence of reliance for the purpose of the claims of negligent and innocent misrepresentation. Reliance is of course a necessary element of those torts. See generally Restatement (2d) of Torts, § 552, quoted above; Williams Ford, Inc. v. Hartford Courant Co., CT Page 7150 232 Conn. 559, 575 (endorsing the principles of the restatement). As noted in Williams Ford, supra, 579-80, "Although we conclude that no special relationship is required to state a claim of negligent misrepresentation, the plaintiff must allege and prove that the reliance on the misstatement was justified or reasonable. We have consistently held that reasonableness is a question of fact for the trier to determine based on all of the circumstances." Factual considerations discussed above foreclose the absence of a genuine issue.
IV
The defendant's next ground in support of summary judgment is that there was no fiduciary relationship between Blum Shapiro and Schwartz in the relevant time period, and thus there can be no breach of fiduciary duty. This issue presents a very close question.
A fiduciary duty has been aptly characterized as one which ought not be defined "in precise detail and in such a manner to exclude new situations"; instead, our Supreme Court has "chosen to leave `the bars down for situations in which there is a justifiable trust confided on one side and a resulting superiority and influence on the other.'" Dunham v. Dunham, 204 Conn. 303, 320 (1987) (internal citations omitted). While by no means is every commercial or personal relationship a fiduciary one, even if there is unequal power or authority; see Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 39-42 (2000); the inquiry is contextual. Id., Dunham, supra. Ordinarily for a finding of a fiduciary relationship, one side must be dominant, therefore creating a relationship of dependency, or under a specific duty to act for the benefit of another. Hi-Ho Tower, supra. In a somewhat different context, an accountant has been found to be acting in a fiduciary manner. Elm City Cheese Co. v. Federico, 251 Conn. 59 (1999).
There are some undisputed facts which tend not to show a fiduciary relationship. For example, Schwartz retained separate accounting services, and after 1999 Blum Shapiro no longer prepared personal income taxes for Schwartz. The latter was at all times a shareholder of Shepard Steel, however, and financial reports were specifically addressed to the very limited group of shareholders (and directors). Schwartz offered facts tending to show he was dependent upon Blum Shapiro for the valuation of Shepard Steel. On balance, the issue is best resolved on a full presentation of the facts.
V
Finally, Blum Shapiro claims that Schwartz has no standing to present his claims, because his claims against Blum Shapiro are no different from those of any other shareholder and the action has not been brought in a derivative capacity. Ordinarily, a shareholder does not suffer an injury subject to legal redress simply because the corporation suffers an injury; in order to maintain an individual action, the shareholder's injury must be distinct. "It is, however, well settled that if the injury is one to the plaintiff as a stockholder, and to him individually, and not to the corporation, as where an alleged fraud perpetrated by the corporation has affected the plaintiff directly, the cause of action is personal and individual." Yanow v. Teal Industries, Inc., 178 Conn. 262, 281-82 (1979).
It is reasonably clear in the context of this case that facts have been introduced to support the proposition that the injury was individual. Schwartz was on the other side of negotiations with the corporation, and his adversaries, if you will, were the other shareholders. The mistake of under-valuation may have had an adverse affect on the corporation as a whole, but it most certainly, according to the plaintiff's evidence, had a distinctly adverse affect as to him. The question of individual standing is at the least subject to a genuine dispute of fact.
The motion for summary judgment is denied.