CDT v. Addison, Roberts & Ludwig

• Citation: 198 Ariz. 173,7 P.3d 979
• Decision Date: 24 August 2000
• Docket Number: No. 2 CA-CV 99-0048.,2 CA-CV 99-0048.
• Parties: CDT, INC., an Arizona corporation, Plaintiff/Appellant, v. ADDISON, ROBERTS & LUDWIG, C.P.A., P.C., an Arizona professional corporation; C. Wesley Addison and Susan U. Philips, husband and wife; D. Jack Roberts and Mary T. Roberts, husband and wife; Christopher William Ludwig and Lore L. Ludwig, husband and wife, Defendants/Appellees.
• Court: Court of Appeals of Arizona

7 P.3d 979

198 Ariz. 173

CDT, INC., an Arizona corporation, Plaintiff/Appellant, v. ADDISON, ROBERTS & LUDWIG, C.P.A., P.C., an Arizona professional corporation; C. Wesley Addison and Susan U. Philips, husband and wife; D. Jack Roberts and Mary T. Roberts, husband and wife; Christopher William Ludwig and Lore L. Ludwig, husband and wife, Defendants/Appellees.

No. -0048.

Court of Appeals of Arizona, Division 2, Department A.

August 24, 2000.

Quarles & Brady L.L.P. By David A. Paige and C. Christine Burns, Phoenix, for Plaintiff/Appellant.

Fennemore Craig By Andrew M. Federhar and Theresa Dwyer, Tucson, for Defendants/Appellees.

OPINION

PELANDER, Judge.

? 1 In this accounting malpractice action, appellant CDT, Inc., challenges the trial court's order granting summary judgment in favor of appellees Addison, Roberts & Ludwig, P.C., and several of its individual shareholders (collectively, ARL) on statute of limitations grounds. We reverse.

BACKGROUND

? 2 Although most of the pertinent facts are essentially undisputed, we view the evidence and all reasonable inferences in the light most favorable to the party against whom summary judgment was entered. Doe v. Roe, 191 Ariz. 313, ? 14, 955 P.2d 951, ? 14 (1998); Logerquist v. Danforth, 188 Ariz. 16, 18, 932 P.2d 281, 283 (1996). CDT provides photocopying services in Arizona, California, Illinois, and Texas through the use of coin- or card-operated photocopy machines. In 1981, CDT hired Cox, an accounting firm, to provide accounting, auditing, and tax services, as well as management, financial, and tax advice, to CDT. In 1982, CDT expanded its business operations to California. From 1982 to 1990, Cox was responsible for ensuring that CDT was qualified to do business in California and operating in compliance with California tax laws. In late 1989 or early 1990, CDT terminated Cox's services and retained ARL, which provided accounting, auditing, and tax services for CDT's California activities through 1994.

? 3 In December 1994, the California State Board of Equalization (CSBE)¹ began a routine audit of CDT's California use tax account for the period October 1986 through December 1994. Based on its position that CDT was obligated to pay sales tax on its California copy machine sales during that period, CSBE audited CDT's records for one week in March 1995. At the conclusion of the audit, a CSBE field investigator orally informed CDT that he "believed [it] had a substantial tax liability." The auditor also informed CDT that "he intended to recommend that [it] be assessed an intentional evasion penalty of 50% of the unpaid tax." In January 1996, the field investigator issued a written recommendation to CSBE, urging it to find CDT liable for unpaid taxes, interest, and penalties totaling over $3.2 million. CSBE formally adopted that recommendation and assessed that amount in a "Notice of Determination" issued to CDT in April 1996.

? 4 CDT contested the tax assessment through a series of administrative hearings.² In addition, in September 1996, CDT filed this action against Cox.³ On July 9, 1997, CDT amended its complaint to add ARL as a defendant. As it had with Cox, CDT alleged claims for accounting malpractice, breach of fiduciary duty, negligent misrepresentation, and breach of contract against ARL.⁴ ARL moved for partial summary judgment on the first three counts, contending the two-year statute of limitations in A.R.S. ? 12-542 barred those claims. In granting the motion, the trial court reasoned:

After the March 1995 audit by the CSBE, the plaintiff knew or should have known that the defendant was negligent in not detecting the plaintiff's failure to pay California sales tax for the period of October 1, 1986, through December 31, 1994. The plaintiff also had knowledge that it had suffered appreciable non-speculative damage as a result of the defendants' negligent conduct because of the auditor's March 1995 determination that the plaintiff had substantial sales tax liability and would likely face severe penalties. Whether the plaintiff would ultimately be legally required to pay this liability and the precise calculation of amounts due and owing is irrelevant to this Court's determination of the accrual of the plaintiff's cause of action.⁵

This appeal followed the trial court's denial of CDT's motion for reconsideration and entry of judgment in favor of ARL.

DISCUSSION

? 5 CDT raises an issue of first impression in this state: When does a cause of action accrue for accountant malpractice that allegedly causes an assessment of delinquent taxes, interest, and penalties against the taxpayer? In reviewing the grant of summary judgment, "[w]e must determine de novo whether there are any genuine issues of material fact and whether the trial court erred in applying the law," Logerquist, 188 Ariz. at 18, 932 P.2d at 283, mindful that "the statute of limitations defense is not favored." Id. at 22, 932 P.2d at 287.

? 6 Section 12-542 requires certain actions to be "commenced and prosecuted within two years after the cause of action accrues, and not afterward." The statute applies to actions for accountant malpractice, breach of fiduciary duty, and negligent misrepresentation. Resolution Trust Corp. v. Blasdell, 930 F.Supp. 417, 427-28 (D.Ariz. 1994); Sato v. Van Denburgh, 123 Ariz. 225, 227, 599 P.2d 181, 183 (1979); Hydroculture, Inc. v. Coopers & Lybrand, 174 Ariz. 277, 284, 848 P.2d 856, 863 (1992). Under ? 12-542, "[t]he limitations period begins to run upon accrual." Doe, 191 Ariz. 313, ? 40, 955 P.2d 951, ? 40; see also Myers v. Wood, 174 Ariz. 434, 435, 850 P.2d 672, 673 (1992). In this case, then, CDT's action against ARL is time barred if it accrued before July 9, 1995. ? 7 Under the common law "discovery rule," "a cause of action does not accrue until the plaintiff knows or with reasonable diligence should know the facts underlying the cause." Doe, 191 Ariz. 313, ? 29, 955 P.2d 951, ? 29. See also Gust, Rosenfeld & Henderson v. Prudential Ins. Co., 182 Ariz. 586, 588, 898 P.2d 964, 966 (1995); Kowske v. Life Care Ctrs. of America, Inc., 176 Ariz. 535, 537, 863 P.2d 254, 256 (1993). "[A]ccrual requires not only negligence but damage." Myers, 174 Ariz. at 435,850 P.2d at 673. In other words, "the limitations period does not commence until actionable negligence exists, that is, negligence that results in appreciable, non-speculative harm to the client." Commercial Union Ins. Co. v. Lewis and Roca, 183 Ariz. 250, 254, 902 P.2d 1354, 1358 (1995). Cf. W. Page Keeton et al., Prosser and Keeton on The Law of Torts ? 30, at 165 (5th ed.1984).

? 8 ARL contends the trial court properly granted summary judgment because the limitations period began, at the latest, immediately after the CSBE field investigator informed CDT of its sales tax liability in March 1995. At that point, ARL argues, CDT "had begun to incur damage as a result of ARL's alleged negligence." In contrast, CDT argues that "the field investigator did not actually submit a written report until ten months later[,] a written recommendation that was subject to review and approval by the CSBE, which had the statutory authority to accept, reject or modify any submittal by a field investigator before deciding to make any type of delinquent tax assessment." Thus, CDT asserts, the field investigator's oral statement to CDT in March 1995 that it would face tax liability and possible penalties did not constitute "actual injury or damages from a delinquent tax liability assessment" that triggered the statute of limitations. Rather, CDT contends, the statute began to run, at the earliest, when CSBE issued its formal notice of determination in April 1996 because, until that time, CDT was not "legally required to pay any tax liability."

? 9 As it did in the trial court, CDT relies primarily on Commercial Union to support its argument. In that case, an insurance carrier filed a malpractice action against its former law firm based on faulty research and advice that had caused the carrier to deny coverage to its insured. The denial of coverage, in turn, had resulted in a subsequent action against the carrier for breach of contract and bad faith. In reversing a summary judgment for the defendant law firm, Division One of this court concluded that the carrier's malpractice action had not accrued until its motion for summary judgment in a separate coverage action had been denied. The court stated:

[W]e hold that a cause of action for legal malpractice accrues when the client both: (1) has sustained appreciable, non-speculative harm or damage as a result of such malpractice and (2) knows, or in the exercise of reasonable diligence should know, that the harm or damage was a direct result of the attorney's negligence. Thus, we hold that the discovery rule applies not only to the discovery of negligence, but also to discovery of causation and damage.

Commercial Union, 183 Ariz. at 252-53, 902 P.2d at 1356-57. See also Toy v. Katz, 192 Ariz. 73, 88-89, 961 P.2d 1021, 1036-37 (1997).

? 10 Although the trial court did not cite or address Commercial Union in its ruling, we find it instructive and supportive of CDT's position. As the court in that case noted, a cause of action for attorney negligence, "transactional or otherwise," "does not accrue until the plaintiff discovers the negligence and sustains ascertainable harm as a result of that negligence." Commercial Union, 183 Ariz. at 256, 902 P.2d at 1360. In our view, that principle applies to any negligence claim against professionals, including accountants.

? 11 ARL correctly points out that accrual requires only actual or constructive knowledge of the fact of damage, rather than of the total extent or calculated amount of damage. Id. at 255, 902 P.2d at 1359. But, as the court in Commercial Union observed, "negligence that results in no immediate harm or damage delays accrual of the cause of action until such damage is sustained." Id. at 254, 902 P.2d at 1358....