Capital Wireless Corp. v. Deloitte & Touche

• Decision Date: 08 June 1995
• Citation: 216 A.D.2d 663,627 N.Y.S.2d 794
• Parties: CAPITAL WIRELESS CORPORATION, Appellant, v. DELOITTE & TOUCHE, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 794

627 N.Y.S.2d 794

216 A.D.2d 663

CAPITAL WIRELESS CORPORATION, Appellant, v. DELOITTE & TOUCHE, Respondent.

Supreme Court, Appellate Division,

Third Department.

June 8, 1995.

Cooper, Erving, Savage, Nolan & Heller (Justin A. Heller, of counsel), Albany, for appellant.

Proskauer, Rose, Goetz & Mendelsohn (Leon P. Gold, of counsel), New York City, for respondent.

Before CARDONA, P.J., and MERCURE, WHITE, PETERS and SPAIN, JJ.

PETERS, Justice.

Appeal from an order of the Supreme Court (Plumadore, J.), entered February 23, 1994 in Saratoga County, which granted defendant's motion for summary judgment dismissing the amended complaint.

Plaintiff was incorporated in 1988 to design, manufacture, market and distribute television programming by microwave transmission to the greater Capital District area. From its inception, Gregg Oswald was the president and chief executive officer of plaintiff. Oswald was also a majority shareholder and officer of TriMark Communications Ltd., a corporation existing for the purpose of operating wireless cable television systems. TriMark was the majority shareholder of plaintiff and had a partnership interest in U.S. Microvision Limited Partnership.

Plaintiff alleges, through its amended complaint, that in approximately June 1992, it became aware that Oswald was fraudulently misstating critical information regarding plaintiff's financial condition to defendant, plaintiff's board of directors, lenders and investors. It alleged that Oswald had abandoned the interests of plaintiff and was acting entirely for his own or another's benefit by engaging in a fraudulent course of conduct that impacted on the financial stability and future profitability of plaintiff. According to plaintiff, Oswald was inflating the number and quality of plaintiff's subscribers and misreporting revenues and accounts receivable so that they would appear consistent with his exaggerated subscriber numbers. Plaintiff alleged that this conduct resulted in extensive overpayments to television programmers and severely limited its cash flow and ability to meet operational expenses. It contended that the purpose of this scheme was to create the appearance of success to lure others into investing money into both TriMark and a corporation related to plaintiff, Tennessee Wireless Cable System. Then, through TriMark, Oswald sought investors in U.S. Microvision by exaggerating the success of plaintiff. It was further alleged that Oswald made numerous undocumented withdrawals for expense reimbursement and used TriMark moneys to support his extravagant lifestyle.

Defendant was engaged to perform auditing services and prepare audited financial reports for plaintiff. In connection therewith, plaintiff's balance sheets and related statements of operations and deficit were provided. Recognizing defendant's representations that such audits were conducted in accordance with generally accepted auditing standards, plaintiff alleged that defendant failed to discover Oswald's misconduct in its preparation of audited financial reports.

On October 1, 1992, plaintiff filed a petition for relief under chapter 11 of the Bankruptcy Act. Plaintiff commenced this action alleging malpractice and breach of express and implied warranties. Defendant moved to dismiss the amended complaint pursuant to CPLR 3211(a)(1) and (7) or, in the alternative, for summary judgment pursuant to CPLR 3211(c). Supreme Court granted defendant's motion and dismissed the amended complaint. Plaintiff appeals.

We initially note that neither Supreme Court's decision nor the resultant order specifies the ground upon which it granted defendant's motion. Hence, we begin with the principle that where Supreme Court has not converted a motion made pursuant to CPLR 3211(a)(7) to one for summary judgment, such court would not be entitled to consider the merit of any defenses raised (see, Pietrosanto v. NYNEX Corp., 195 A.D.2d 843, 844, 600 N.Y.S.2d 802). The relevant inquiry thus remains whether the pleading states a cause of action for malpractice (see, Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275, 401 N.Y.S.2d 182, 372 N.E.2d 17) and, pursuant thereto, plaintiff's affidavits may be used to remedy defects in an inartfully pleaded but meritorious claim (see, Pietrosanto v. NYNEX Corp., supra ). Put to such purpose, we conclude that plaintiff has adequately pleaded a cause of action alleging malpractice (see generally, Matter of Gouiran Holdings, 158 B.R. 3, 7-8, revd. 165 B.R. 104).

While defendant's evidence may not have been relevant on a motion made pursuant to CPLR 3211(a)(7) (see, Pietrosanto v. NYNEX Corp., supra ), such evidence, consisting largely of correspondence, may be considered on a motion made pursuant to CPLR 3211(a)(1) (see, American Indus. Contr. Co. v. Travelers Indem. Co., 42 N.Y.2d 1041, 399 N.Y.S.2d 206, 369 N.E.2d 762). To be successful, such evidence must resolve all factual issues and definitively dispose of plaintiff's claim (see, Fern v. International Bus. Machs. Corp., 204 A.D.2d 907, 909, 612 N.Y.S.2d 492). Our review of the documentary evidence, most particularly defendant's engagement letters, reveals a failure to definitely dispose of plaintiff's claim. Although such letters placed responsibility for accurate financial statements onto plaintiff and notified plaintiff that irregularities resulting from forgery or collusion may not be detected, it further indicated that an audit is designed "to provide reasonable assurance of detecting errors and irregularities that are material to the financial statements". Accordingly, we find that it was error to dismiss the malpractice claim on this basis.

We do, however, affirm Supreme Court's dismissal of plaintiff's second and third causes of action since New York does not recognize a cause of action based upon breach of warranties arising out of the performance of services and the record does not indicate that the parties contracted for a standard of performance beyond traditional negligence (see, e.g., Milau Assocs. v. North Ave. Dev. Corp., 42 N.Y.2d 482, 486, 398 N.Y.S.2d 882, 368 N.E.2d 1247; County of Chenango Indus. Dev. Agency v. Lockwood Greene Engrs., 114 A.D.2d 728, 729, 494 N.Y.S.2d 832, appeal dismissed 67 N.Y.2d 757, 500 N.Y.S.2d 1027, 490 N.E.2d 1233).

In the...