RTR Techs., Inc. v. Helming

Citation707 F.3d 84
Decision Date01 February 2013
Docket Number12–1362,Nos. 11–2252,12–1363.,s. 11–2252
PartiesRTR TECHNOLOGIES, INC. et al., Plaintiffs, Appellants/Cross–Appellees, v. Carlton HELMING et al., Defendants, Appellees/Cross–Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)

OPINION TEXT STARTS HERE

James C. Donnelly, Jr., with whom John T. McInnes, Amanda Marie Baer, and Mirick, O'Connell, DeMallie & Lougee, LLP were on brief, for plaintiffs.

Steven J. Bolotin, with whom Tory A. Weigand and Morrison Mahoney LLP were on brief, for defendants.

Before BOUDIN,*SELYA and STAHL, Circuit Judges.

SELYA, Circuit Judge.

These appeals call to mind that the law normally ministers to the vigilant, not to those who sleep upon perceptible rights. The tale follows.

These appeals trace their genesis to a suit brought by a Massachusetts corporation and its principals, citizens of Massachusetts, against their quondam accountant and his firm. Their complaint alleged that the defendants negligently advised them to file amended corporate and personal tax returns that had the effect of substantially increasing the principals' tax liability and destabilizing the company. The district court granted summary judgment in favor of the defendants but rejected their request for attorneys' fees. Both sides appeal. After careful consideration of a scumbled record, we leave the parties where we found them.

I. BACKGROUND

We briefly rehearse the facts in the light most favorable to the plaintiffs (who opposed summary judgment below). See Rared Manchester NH, LLC v. Rite Aid of N.H., Inc., 693 F.3d 48, 50 (1st Cir.2012).

RTR Technologies, Inc. (RTR or the company) is a subchapter S corporation, see26 U.S.C. § 1361, which develops heating and ice-melting systems for the rail and mass transit industries. Rosalie Berger is the company's owner and president. Her husband, Craig, is the company's director of marketing and sales. At the times material hereto, Rosalie and Craig Berger filed joint income tax returns.

RTR commenced operations in 1994 and in that year began making “loans” to Rosalie Berger. It continued doing so throughout the 1990s, even as the corporation itself received two loans backed by the United States Small Business Administration (SBA) totaling $725,000.

By the end of 2002, RTR's balance sheet reflected more than $1,000,000 in loans to Rosalie Berger and approximately $600,000 in overdue debts to its suppliers. That fall, the company nearly collapsed in the economic downturn that followed the terrorist attacks of September 11, 2001; a major customer curtailed a $3,000,000 order and RTR proved unable to pay either its trade creditors or its taxes on a current basis. In October 2002, the company sought help from the SBA, which extended a direct disaster loan of $687,500, subject to the condition that RTR not “make any distribution” or “any advance, directly or indirectly by way of Loan, gift, bonus or otherwise” to its principals, employees, or related entities.

The company did not adhere to this condition; yet, when it was unable to keep its loan payments current, it sought still more money from the SBA. The SBA denied this request, explaining that RTR “continued to loan the principals funds” that “represent[ed] valuable financial resources which could have been applied to the recovery effort following the disaster.” The SBA did agree, however, to enter into a forbearance agreement with RTR, which among other conditions required the company to hire a turnaround manager.

In September of 2003 (about two months after the forbearance agreement), RTR retained Carlton Helming, a Connecticut-based certified public accountant, and his firm, Helming & Co. (a Connecticut professional services corporation). Although initially hired as a turnaround specialist, Helming eventually took over tax preparation for RTR and the Bergers as well.

Over the next two years, he grew increasingly concerned about RTR's balance sheet; he repeatedly told both Rosalie Berger and RTR's general manager that he doubted that the transfers to Rosalie Berger could be regarded as bona fide loans for tax purposes. To cure this problem, Helming recommended that RTR and the Bergers amend their 2002 corporate and personal tax returns to reclassify the approximately $1,000,000 at issue as income to Rosalie Berger. Irony is no stranger to the law: part of the reason why Helming wanted to amend the previous returns rather than simply change the tax treatment of the transfers going forward was to make it easier for RTR to bring a malpractice suit against its previous accountant.

Rosalie Berger was dismayed with Helming's advice and sought “second opinions” from two tax attorneys. One apparently provided little insight into the matter; the other at least partially shared Helming's concern. Nevertheless, Rosalie Berger eventually followed Helming's recommendation; amended 2002 corporate and personal tax returns were filed in December 2005 and January 2006, respectively.

The Internal Revenue Service (IRS) accepted the amended returns and issued a deficiency assessment in May 2006. Two months later, the IRS lodged a tax lien of more than $525,000 against the Bergers.

Over time, the Bergers paid more than $110,000 in additional taxes, interest, and/or penalties. The plaintiffs contend that the amended returns had other adverse consequences as well. Specifically, they point out that by reclassifying the transfers to Rosalie Berger as salary payments, the net profit previously reflected on RTR's books was transmogrified into a net loss of nearly $1,500,000. They posit that reporting such a loss prevented RTR from securing bid and performance bonds and, thus, not only put certain business opportunities beyond its reach but also destabilized the business financially.

Notwithstanding this loss of equilibrium, the plaintiffs continued to retain Helming as their accountant; he prepared their corporate and personal tax returns for 2003, 2004, and 2005. It was not until 2008 that the plaintiffs replaced Helming with a new accountant, Edward Szwyd.

Rosalie Berger avers that she engaged Szwyd in part because she hoped that he would be able to reverse the amendment of the 2002 returns and reclassify RTR's transfers to her as loans. Szwyd agreed to adhere to this game plan and, in October 2008, RTR and the Bergers filed re-amended 2002 corporate and personal tax returns. The IRS accepted the re-amended returns and abated the lien and sundry penalties, although some state tax liability issues have yet to be resolved.

In October of 2009, the plaintiffs sued the defendants in a Massachusetts state court. They claimed that Helming's advice to amend the 2002 tax returns was negligent and that following it resulted in substantially increased tax liabilities and lost profits. Their six-count complaint charged malpractice, breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, negligent misrepresentation, and unfair trade practices. The defendants, citing diversity of citizenship and the existence of a controversy in the requisite amount, removed the action to the federal district court. See28 U.S.C. §§ 1332(a), 1441.

Following pretrial discovery, plethoric briefing, and oral argument, the district court granted summary judgment in favor of the defendants. RTR Techs., Inc. v. Helming, 815 F.Supp.2d 411, 415 (D.Mass.2011). The court concluded that the tort and contract claims were time-barred and that the unfair trade practices claim was deficient because it did not allege the requisite level of dishonesty, fraud, or deceit. See id. at 423–24, 434. The court subsequently denied the defendants' motion for attorneys' fees. These timely appeals ensued.

II. DISCUSSION

We subdivide our analysis into three segments. We look to Massachusetts for the governing law. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Rared Manchester, 693 F.3d at 52.

A. Tort and Contract Claims.

We start with the question of timeliness. In the circumstances of this case, this question is confined to the plaintiffs' tort and contract claims (that is, all of the plaintiffs' claims except their unfair trade practices claim). Our review of the lower court's ruling is de novo. Houlton Citizens' Coal. v. Town of Houlton, 175 F.3d 178, 184 (1st Cir.1999).

Generally speaking, the limitations period in Massachusetts is three years for tort claims, Mass. Gen. Laws ch. 260, § 2A, and six years for contract claims, id. § 2. But where, as here, claims sounding variously in tort and contract are premised on a common factual nucleus, the controlling principle is that “limitation statutes should apply equally to similar facts regardless of the form of proceeding.” Hendrickson v. Sears, 365 Mass. 83, 310 N.E.2d 131, 132 (1974). In harmony with this principle, the Massachusetts legislature has decreed that the three-year limitations period shall apply to all [a]ctions of contract or tort for malpractice, error or mistake against ... certified public accountants.” Mass. Gen. Laws ch. 260, § 4. The conclusion is inescapable, therefore, that a three-year limitations period applies to the entirety of the tort and contract claims asserted here.1

The plaintiffs' primary argument is that their suit is timeous because their causes of action accrued less than three years before they sued. Typically, a plaintiff's cause of action accrues when she is injured. See, e.g., Flannery v. Flannery, 429 Mass. 55, 705 N.E.2d 1140, 1143 (1999) (when contract is breached); Joseph A. Fortin Constr., Inc. v. Mass. Hous. Fin. Agency, 392 Mass. 440, 466 N.E.2d 514, 516 (1984) (when tort occurs). Here, however, Helming's allegedly wrongful conduct occurred some three years and nine months before the suit was commenced: the amended 2002 corporate return was filed with the IRS in December 2005 and the amended 2002 personal return was filed with the IRS the next month. The most serious tax consequences followed hot on the heels...

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