Coulter v. Grant Thornton, LLP

Decision Date03 January 2017
Docket NumberNo. 1 CA–CV 14–0625,1 CA–CV 14–0625
Parties William R. COULTER; Mark Tkach; and Mills A. Brown, Plaintiffs/Appellants, v. GRANT THORNTON, LLP, Defendant/Appellee.
CourtArizona Court of Appeals

Aiken, Schenk, Hawkins & Ricciardi, PC, Phoenix, By Joseph A. Schenk, J. Tyrrell Taber, Michael R. Devitt, Counsel for Plaintiffs/Appellants

Bryan Cave LLP, Phoenix and Kansas City, MO, By Lawrence G. Scarborough, James D. Smith, Craig S. O'Dear, Fred L. Sgroi, Counsel for Defendant/Appellee

Judge Kent E. Cattani delivered the opinion of the Court, in which Presiding Judge Diane M. Johnsen and Judge John C. Gemmill (retired) joined.



¶ 1 William R. Coulter, Mark Tkach, and Mills A. Brown (collectively, "Appellants") raise an issue of first impression relating to when accountant malpractice claims accrue for purposes of the statute of limitations. Consistent with the discovery rule, we hold that determining the accrual date is a fact- based inquiry that turns on when a party knew or reasonably should have known of facts establishing a basis for the claim. Accordingly, and for reasons that follow, we reverse the superior court's ruling dismissing Appellants' claims against the accounting and tax advisory firm Grant Thornton, LLP for breach of fiduciary duty, professional negligence, negligent misrepresentation, common law fraud, aiding and abetting, and racketeering. We affirm the merits-based dismissal of Appellants' breach of contract and breach of the implied covenant of good faith claims, and we remand for further proceedings.


¶ 2 In 2000, Appellants hired Grant Thornton to implement strategies intended to reduce their income tax liability arising from their financial interests in automobile and motorcycle dealerships in Arizona. Upon the recommendation of Blair Stover, a principal with Grant Thornton, Appellants each established an "ESOP/S" structure, which involved the creation of a single-owner employee stock ownership plan ("ESOP") holding the stock of a related S corporation.1 Appellants each used the ESOP/S structure in the 2002 tax year.

¶ 3 The IRS disapproved of the ESOP/S structure and issued a "Notice of Deficiency" to Coulter and Tkach in 2006 and 2007. The notices reflected millions of dollars in tax deficiencies and "accuracy related" penalties under Internal Revenue Code ("I.R.C.") § 6662. 26 U.S.C. § 6662.2 Stover assured Appellants that they would ultimately prevail against the IRS, and Coulter and Tkach challenged the deficiency determinations and penalties in United States Tax Court. Following lengthy litigation, they settled with the IRS in 2011, agreeing to pay taxes on the income that had been shielded from taxation by the ESOP/S structure.

¶ 4 Brown did not receive a notice of deficiency with respect to the ESOP/S structure, but he received a notice of deficiency with respect to a Roth/S structure that he had likewise implemented on Stover's recommendation. Brown entered into a "Closing Agreement" with the IRS in July 2011, under which he agreed to pay additional excise taxes in the amount of $254,938.20 as a result of his use of the Roth/S structure and to have all the monies used to fund his Roth IRA between 2002 and 2008 taxed as ordinary income.

¶ 5 In November 2011, Appellants filed a complaint in superior court against Grant Thornton and other defendants.3 Grant Thornton moved to dismiss several of Appellants' claims as barred by applicable statutes of limitations. The superior court granted the motion and dismissed those claims. Grant Thornton then filed a motion for partial summary judgment on Coulter and Tkach's breach of contract claim, which the court also granted. Finally, Grant Thornton filed a motion to dismiss or, in the alternative, for summary judgment on Appellants' remaining claims for fraudulent concealment and contractual bad faith. The superior court similarly granted this motion.

¶ 6 The court then entered final judgment under Arizona Rule of Civil Procedure ("Rule") 54(b) and awarded Grant Thornton $495,231.60 in attorney's fees. This timely appeal followed.

I. Dismissal Based on the Statute of Limitations.

¶ 7 We review de novo a dismissal under Rule 12(b)(6) for failure to state a claim. Coleman v. City of Mesa , 230 Ariz. 352, 355, ¶ 7, 284 P.3d 863 (2012). Dismissal under Rule 12(b)(6) is only appropriate if, assuming the truth of all well-pleaded factual allegations, "as a matter of law [ ] plaintiffs would not be entitled to relief under any interpretation of the facts susceptible of proof." Id. at 356, ¶¶ 8–9, 284 P.3d 863 (alteration in original) (citation omitted). Given our preference to resolve claims on their merits, "the statute of limitations defense is not favored." CDT, Inc. v. Addison, Roberts & Ludwig, C.P.A., P.C. , 198 Ariz. 173, 175, ¶ 5, 7 P.3d 979 (App. 2000) (quoting Logerquist v. Danforth , 188 Ariz. 16, 22, 932 P.2d 281, 287 (App. 1996) ). Nevertheless, "claims that are clearly brought outside the relevant limitations period are conclusively barred." Montaño v. Browning , 202 Ariz. 544, 546, ¶ 4, 48 P.3d 494 (App. 2002).

A. First Order of Dismissal.

¶ 8 Appellants argue that the superior court erroneously dismissed on limitations grounds their claims for breach of fiduciary duty, professional negligence, negligent misrepresentation, common law fraud, aiding and abetting, and racketeering. Because there is a question of fact as to when Appellants discovered or should have discovered that they were injured by Grant Thornton's actions, we reverse the superior court's dismissal of these claims.

¶ 9 A two-year limitations period applies to claims for breach of fiduciary duty, professional negligence, and negligent misrepresentation. See A.R.S. § 12–542 ; Sato v. Van Denburgh , 123 Ariz. 225, 227, 599 P.2d 181, 183 (1979) (professional negligence); Alaface v. Nat'l Inv. Co ., 181 Ariz. 586, 599, 892 P.2d 1375, 1388 (App. 1994) (negligent misrepresentation); Crook v. Anderson , 115 Ariz. 402, 403, 565 P.2d 908, 909 (App. 1977) (breach of fiduciary duty). A three-year limitations period applies to claims for common law fraud. See A.R.S. § 12–543(3) ; Coronado Dev. Corp. v. Superior Court , 139 Ariz. 350, 352, 678 P.2d 535, 537 (App. 1984). Likewise, a three-year statute of limitations applies to claims brought under Arizona's racketeering statute. See A.R.S. § 13–2314.04(F).

¶ 10 Accrual of these claims is governed by the discovery rule, which provides that "a cause of action does not ‘accrue’ until a plaintiff discovers or by the exercise of reasonable diligence should have discovered that he or she has been injured by the defendant's negligent conduct." Anson v. Am. Motors Corp. , 155 Ariz. 420, 423, 747 P.2d 581, 584 (App. 1987) ; see also Commercial Union Ins. Co. v. Lewis & Roca , 183 Ariz. 250, 254, 902 P.2d 1354, 1358 (App. 1995). We review for an abuse of discretion a superior court's factual determinations regarding the exercise of reasonable diligence, but we review de novo the question of when a cause of action accrues if the determination is based on a legal issue rather than on disputed facts. Montaño , 202 Ariz. at 546, ¶ 4, 48 P.3d 494.

¶ 11 Here, the superior court concluded that Appellants' claims accrued when the IRS issued notices of deficiency in 2006 and 2007, and that the claims (other than for breach of contract and breach of the implied covenant of good faith) were thus time-barred. The court relied on CDT v. Addison , in which this court addressed accrual of a cause of action for accountant malpractice alleged to have caused an assessment of delinquent taxes, interest, and penalties against the taxpayer. 198 Ariz. at 175, ¶ 5, 7 P.3d 979. There, the taxpayer had sued its accounting firm more than two years (the relevant limitations period) after the taxing authority's audit that exposed the taxpayer's underpayment (and of which the taxpayer was informed), but within two years of the taxing authority's formal adoption of the auditor's recommendation and assessment in a "Notice of Determination." Id. at ¶¶ 3–4. This court held that, as between the date a taxing authority notifies a taxpayer of potential liability and the date the taxing authority issues its final determination, the latter controlled for statute of limitations purposes; there was no "definitive assessment of tax liability against [the taxpayer]" until the taxing authority issued its formal assessment. Id. at 174–75, 179, ¶¶3, 20–21, 7 P.3d 979.

¶ 12 The instant case presents a different question, however. CDT did not address the scenario in which, as here, the taxpayer continues to consult with the accountant after the IRS's issuance of a notice of deficiency, and continues to rely on the accountant's advice in challenging the IRS's determination in the tax court.

¶ 13 Although Arizona appellate courts have not addressed this issue, courts in other jurisdictions have done so and have taken varied approaches. Some courts have concluded that the dispositive date in such a case is the date the taxpayer's liability is ultimately resolved—that is, after the final decision in the tax appeal—rather than when the IRS issued its final notice of deficiency. See Peat, Marwick, Mitchell & Co. v. Lane , 565 So.2d 1323, 1325 (Fla. 1990) ; Clark v. Deloitte & Touche LLP , 34 P.3d 209, 216, ¶ 23 (Utah 2001). Other courts have adopted a similar bright-line rule using the date of the IRS's notice of deficiency, regardless whether the taxpayer appeals the IRS's determination and regardless how long that appeal may take. See, e.g. , Curtis v. Kellogg & Andelson , 73 Cal.App.4th 492, 86 Cal.Rptr.2d 536, 542 (1999) ; Beane v. Dana S. Beane & Co., P.C. , 160 N.H. 708, 7 A.3d 1284, 1289 (2010). Finally, other courts have determined that neither of those dates is necessarily dispositive and have instead adopted a fact-based approach focused on when the plaintiff knew or should have known...

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