| New York State Workers' Compensation Bd. v SGRisk,LLC |
| 2014 NY Slip Op 02373 [116 AD3d 1148] |
| April 3, 2014 |
| Appellate Division, Third Department |
| New York State Workers' Compensation Board, asAdministrator of the Workers' Compensation Law and Attendant Regulations, and asSuccessor in Interest to the Healthcare Industry Trust of New York, et al.,Appellant-Respondent, v SGRisk, LLC, et al.,Respondents-Appellants. |
—[*1] Hitchcock & Cummings, LLP, New York City (Terry Cummings of counsel), forSGRisk, LLC, respondent-appellant. Veeder Price, New York City (John H. Eickemeyer of counsel), for UHY, LLP,respondent-appellant.
McCarthy, J. Cross appeals from an order of the Supreme Court (Platkin, J.), enteredMarch 13, 2013 in Albany County, which partially granted defendants' motions todismiss the complaint.
Between 1999 and 2008, Compensation Risk Managers, LLC (hereinafter CRM)acted as the group administrator (see 12 NYCRR 317.2 [g]) for eight workers'compensation group self-insured trusts that were formed to provide workers'compensation coverage to employees of the trusts' members (see Workers'Compensation Law § 50 [3-a]; 12 NYCRR 317.2 [i]; 317.3). CRM contractedwith defendant UHY, LLP for accounting services that included the preparation ofannual audited financial statements that each trust was required to submit to plaintiff(see 12 NYCRR 317.19 [a] [2]). CRM contracted with defendant SGRisk, LLCfor actuarial services that included the preparation of annual actuarial reports that thetrusts were required to submit to plaintiff (see 12 NYCRR 317.19 [a] [3]). Atdifferent points between 2007 and January 2010, plaintiff deemed each of the trustsinsolvent and assumed their administration (see 12 NYCRR 317.20).Plaintiff subsequently obtained independent forensic accountings of each trust anddiscovered that the trusts had deficits ranging from $4 million to $170 million.
Plaintiff commenced this action, as the governmental entity charged withadministering the state's workers' compensation system and as successor in interest to thetrusts, asserting causes of action for breach of fiduciary duty, breach of contract, aidingand abetting breach of fiduciary duty, fraud and unjust enrichment. Basically, plaintiffalleged that SGRisk manipulated the trusts' future claims liabilities and UHY purposelyportrayed the trusts' financial conditions in a more favorable light for CRM's financialbenefit. UHY and SGRisk each moved pre-answer to dismiss the complaint. SupremeCourt partially granted the motions (38 Misc 3d 1229[A], 2013 NY Slip Op 50338[U][2013]). Plaintiff appeals and UHY and SGRisk each cross-appeal.
Supreme Court partially erred in granting the portion of UHY's motion to dismissplaintiff's breach of contract cause of action. A breach of contract cause of actiongenerally must be commenced within six years of the breach (see CPLR 203 [a];213 [2]; Town of Oyster Bay vLizza Indus., Inc., 22 NY3d 1024, 1030 [2013]), but where a plaintiff seeks "torecover damages for malpractice, other than medical, dental or podiatric malpractice," thecause of action must be commenced within three years "regardless of whether theunderlying theory is based in contract or tort" (CPLR 214 [6]; see Matter of R.M. Kliment &Frances Halsband, Architects [McKinsey & Co., Inc.], 3 NY3d 538, 541 [2004];City of Binghamton v HawkEng'g P.C., 85 AD3d 1417, 1418 [2011], lv denied 17 NY3d 713[2011]). "In the context of a malpractice action against an accountant, the claim accruesupon the client's receipt of the accountant's work product since this is the point that aclient reasonably relies on the accountant's skill and advice" (Ackerman v PriceWaterhouse, 84 NY2d 535, 541 [1994] [citations omitted]; see Mitschele v Schultz, 36AD3d 249, 252 [2006]). Plaintiff alleged that UHY breached its agreements withCRM, which contracts were for the benefit of the trusts, by, among other things, "failingto originate, follow, and/or consistently apply generally accepted accounting [principles]and generally accept[ed] auditing standards in its analysis of the [t]rusts' reserveliabilities and financial conditions," "failing or refusing to offer an accurate analysis ofthe [t]rusts' financial conditions," and "failing or refusing to identify the dangers the[t]rusts' liabilities posed to their solvency." These [*2]allegations are couched as breaches of contract, but couldbe construed as essentially a professional malpractice claim to the extent that theallegations are that UHY failed to perform its contractual services in a professional,nonnegligent manner (see City of Binghamton v Hawk Eng'g P.C., 85 AD3d at1418; Boslow Family Ltd.Partnership v Kaplan & Kaplan, PLLC, 52 AD3d 417, 417 [2008], lvdenied 11 NY3d 707 [2008]). To the extent that the complaint alleges negligentperformance of professional duties, the three-year statute of limitations applies toplaintiff's breach of contract cause of action against UHY (see Matter of R.M.Kliment & Frances Halsband, Architects [McKinsey & Co., Inc.], 3 NY3d at 543).As the complaint states that UHY prepared its last audited financial statements for eachtrust in 2006 or 2007, and the action was commenced in July 2011, that aspect of thebreach of contract cause of action is time-barred (see id.; City of Binghamtonv Hawk Eng'g P.C., 85 AD3d at 1418; RGH Liquidating Trust v Deloitte & Touche LLP, 47 AD3d516, 517 [2008], lv dismissed 11 NY3d 804 [2008]).
On the other hand, to the extent that plaintiff alleged that UHY breached thecontracts through intentional actions, such as by "refusing" to perform certain obligatoryfunctions, these allegations are not in essence a malpractice claim. Professionalmalpractice "is but a species of negligence" (Weiner v Lenox Hill Hosp., 88NY2d 784, 787 [1996]; see Scott v Uljanov, 74 NY2d 673, 674 [1989]; Driesv Gregor, 72 AD2d 231, 235 [1980]; see also Simcuski v Saeli, 44 NY2d442, 453-454 [1978]), and, thus, does not generally encompass intentional acts.Accordingly, the portion of the complaint alleging breach of contract through intentionalconduct is subject to a six-year statute of limitations (see CPLR 213 [2]),rendering the intentional portion of that cause of action timely.
Supreme Court did not err in converting a portion of plaintiff's unjust enrichmentcause of action into a breach of contract cause of action and denying UHY's motion todismiss as relates to that portion. The court dismissed as untimely that part of the unjustenrichment cause of action that challenged the competency of the professional servicesrendered, dismissed the remainder of that claim because there is an enforceable contractbetween the trusts and UHY, and converted the allegation that UHY did not performsome of the required services into part of plaintiff's breach of contract cause of action.The only portion of the unjust enrichment cause of action at issue on appeal is the lastportion. Plaintiff alleged that UHY was retained by CRM to perform accounting serviceson behalf of the trusts, was paid from the trusts' funds for performing services for thetrusts' benefit, and that UHY "did not perform some of the services for which it waspaid," resulting in damages to the trusts. Accepting these allegations as true andaffording plaintiff the benefit of every reasonable inference (see EBC I, Inc. v Goldman, Sachs& Co., 5 NY3d 11, 19 [2005]), Supreme Court properly determined thatplaintiff stated a cause of action for breach of contract (see Torok v Moore's Flatwork &Founds., LLC, 106 AD3d 1421, 1422 [2013]; Clearmont Prop., LLC vEisner, 58 AD3d 1052, 1055 [2009]), and properly converted that portion of theunjust enrichment claim into a breach of contract claim. These allegations do not addressnegligence in the performance of professional services, akin to malpractice, but allege apure breach of contract through an utter failure to perform part of the agreed-upon andpaid-for services. Thus, they are timely under the six-year statute of limitations(see CPLR 213 [2]).[*3]
Regarding the fraud cause of action againstUHY, plaintiff has not challenged Supreme Court's determination to dismiss the portionalleging fraudulent misrepresentation of the trusts' financial conditions in the annualaudit reports, on the basis that such actions are not independent from any professionalmalpractice. That leaves only the portion of the fraud claim alleging that UHYfraudulently misrepresented to the trusts that it would "accurately identify, and accuratelydisclose any changes in, the [t]rusts' financial statuses, including the danger of incurringoperating deficits." Because these allegations are essentially duplicative of the allegationsthat UHY intentionally breached the contracts, they do not give rise to a separate fraudcause of action and must be dismissed (see Kosowsky v Willard Mtn., Inc., 90 AD3d 1127, 1129[2011]).
Supreme Court did not err in partially denying SGRisk's motion as it sought todismiss the breach of fiduciary duty cause of action. Actuaries are not consideredprofessionals for the purpose of the shortened statute of limitations applicable tomalpractice claims (see HealthAcquisition Corp. v Program Risk Mgt., Inc., 105 AD3d 1001, 1004 [2013];Castle Oil Corp. v Thompson Pension Empl. Plans, 299 AD2d 513, 514 [2002]).Despite not being deemed professionals in that context, actuaries can still developrelationships of trust and confidence sufficient to give rise to a fiduciary duty. Courtsmust conduct a fact-specific inquiry to determine whether a fiduciary relationship existsbased on confidence on one side and "resulting superiority and influence on the other"(AG Capital Funding Partners,L.P. v State St. Bank & Trust Co., 11 NY3d 146, 158 [2008] [internal quotationmarks and citation omitted]; seeMarmelstein v Kehillat New Hempstead: The Rav Aron Jofen CommunitySynagogue, 11 NY3d 15, 21 [2008]). Plaintiff alleged that SGRisk "held itselfout as being a skilled and competent actuarial" firm that "adhered to acceptedprofessional standards," that it rendered services for the trusts' benefit, provided adviceand created "a relationship of trust and confidence between" itself and the trusts. Plaintiffalso alleged that SGRisk agreed to exercise "good faith and undivided loyalty" whendetermining appropriate valuation of the trusts' future claims liability and the trustsreasonably relied on this, placing confidence in SGRisk that it would accurately producetruthful annual actuarial reports with correct estimates of future claimsreserves.[FN*] Additionally, plaintiff alleged that SGRisk breached the duty by knowingly andconsistently underestimating the claims liabilities and necessary reserves and failing toidentify dangerous underfunding, causing nearly $557 million in damages. Letterssubmitted by SGRisk are not sufficient documentary evidence to mandate dismissal(see CPLR 3211 [a] [1]), as they do not "utterly refute[ ] plaintiff's factual [*4]allegations, conclusively establishing a defense as a matterof law" (Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326 [2002]; accord Mason v First Cent. Natl.Life Ins. Co. of N.Y., 86 AD3d 854, 855 [2011]; see Health AcquisitionCorp. v Program Risk Mgt., Inc., 105 AD3d at 1004). Under the applicable standard,plaintiff adequately stated a cause of action for breach of fiduciary duty (see EBC I,Inc. v Goldman, Sachs & Co., 5 NY3d at 19; ARB Upstate Communications LLC v R.J. Reuter, L.L.C., 93AD3d 929, 931 [2012]; compare AG Capital Funding Partners, L.P. v State St.Bank & Trust Co., 11 NY3d at 158).
Plaintiff stated a breach of contract cause of action against SGRisk. The elements ofthat cause of action are formation of a contract, performance by one party, failure toperform by another, and resulting damage (see Torok v Moore's Flatwork & Founds.,LLC, 106 AD3d at 1422). CRM entered into contracts with SGRisk for the benefitof the trusts, and the trusts are intended third-party beneficiaries of those contracts(see Health Acquisition Corp. v Program Risk Mgt., Inc., 105 AD3d at 1003; Saratoga SchenectadyGastroenterology Assoc., P.C. v Bette & Cring, LLC, 83 AD3d 1256, 1257[2011]). Plaintiff alleged that the trusts paid for actuarial services, but SGRisk breachedby "fail[ing] to perform the agreed-upon services" of applying actuarial standards,offering an accurate analysis of future claims liabilities and identifying dangers to thetrusts' future solvency based on the future claims liabilities, causing damages. We rejectSGRisk's argument that these allegations amount to mere common-law negligence,subject to a three-year statute of limitations; plaintiff has adequately alleged a breach ofcontract—subject to a six-year statute of limitations (see CPLR 213 [2]),which has not yet run—and has not asserted a tort claim, which must be based on aviolation of a legal duty independent of the contract (see Clark-Fitzpatrick, Inc. vLong Is. R.R. Co., 70 NY2d 382, 389 [1987]; Rothberg v Reichelt, 270AD2d 760, 762-763 [2000]; Fort Ann Cent. School Dist. v Hogan, 206 AD2d723, 724-725 [1994]).
Plaintiff adequately pleaded a fraud cause of action against SGRisk. The complaintalleges that SGRisk manipulated the actuarial reports and knowingly made falserepresentations about the financial status of the trusts and their future claims liabilities,and these representations were made to induce prospective members to join the trusts dueto low member contribution rates and the perception that the trusts were financiallystable. Plaintiff further alleged that the trusts relied on these representations, which led totheir insolvency, resulting in over $557 million in damages. These allegations arespecific enough to satisfy the pleading requirement of CPLR 3016 (b), which is intendedto "inform a defendant with respect to the incidents complained of" (Pludeman v Northern Leasing Sys.,Inc., 10 NY3d 486, 491 [2008]; see Sargiss v Magarelli, 12 NY3d 527, 530-531 [2009]).The disclaimers in the actuarial reports do not conclusively create a defense. Thosedisclaimers state that projecting losses and future "liabilities is an inexact process," sothere is "no guarantee." While this may have alerted the trusts that the projections maynot be accurate, SGRisk represented that the inaccuracy was attributable to the "inexactprocess," not to intentional manipulation of figures so as to make the trusts artificiallyappear financially stable. Notwithstanding the disclaimer, the projections, allegedlyknown to be false when made, could be construed as statements of fact rather than mereopinion so as to support the fraud claim (see CPC Intl. v McKesson Corp., 70NY2d 268, 286[*5][1987]; East 32nd St. Assoc. vJones Lang Wootton USA, 191 AD2d 68, 71 [1993]).
The cause of action for aiding and abetting breach of fiduciary duty is premised onSGRisk's knowledge of the fiduciary duties owed by CRM and UHY to the trusts, andallegations that SGRisk intentionally continued to underestimate the trusts' future claimsliabilities with the knowledge that this would aid and abet breaches of fiduciary duty byCRM and UHY. Because the allegations of fraud perpetrated by SGRisk are essential tothis claim, a six-year statute of limitations pursuant to CPLR 213 (8) is applicable (see IDT Corp. v Morgan StanleyDean Witter & Co., 12 NY3d 132, 139 [2009]; Paolucci v Mauro, 74 AD3d1517, 1519-1520 [2010]), rendering the claim timely.
As SGRisk did not raise the issue of plaintiff's standing in its initial moving papers,but instead waited to address this new argument in reply papers, the issue was notproperly before Supreme Court and was waived (see CPLR 3211 [e]; see alsoDougherty v City of Rye, 63 NY2d 989, 991-992 [1984]; Matter of Albany County Dept. ofSocial Servs. v Rossi, 62 AD3d 1049, 1050 [2009]).
Lahtinen, J.P., Stein and Garry, JJ., concur. Ordered that the order is modified, on thelaw, without costs, by reversing so much thereof as (1) granted that portion of defendantUHY, LLP's motion to dismiss the breach of contract cause of action based onallegations of intentional conduct, and (2) denied that portion of said motion to dismissthe fraud cause of action; motion denied to the extent in (1) and granted to the extent in(2); and, as so modified, affirmed.
Footnote *: We reject SGRisk'sargument that an actuary cannot be a fiduciary here because the workers' compensationregulations require actuarial reports "certified by an independent qualified actuary" (12NYCRR 317.19 [a] [3]). While a court or jury can consider that requirement ofindependence when determining whether a fiduciary relationship exists, we cannot saythat the regulation precludes a finding of such a relationship as a matter of law.