Curtis v. Kellogg & Andelson

• Decision Date: 12 July 1999
• Docket Number: No. B117633,B117633
• Citation: 86 Cal.Rptr.2d 536,73 Cal.App.4th 492
• Court: California Court of Appeals Court of Appeals
• Parties: , 99 Cal. Daily Op. Serv. 5558, 1999 Daily Journal D.A.R. 7059 Thomas A. CURTIS et al., Plaintiffs and Appellants, v. KELLOGG & ANDELSON et al., Defendants and Respondents.

Page 536

86 Cal.Rptr.2d 536

73 Cal.App.4th 492, 99 Cal. Daily Op. Serv. 5558,

1999 Daily Journal D.A.R. 7059

Thomas A. CURTIS et al., Plaintiffs and Appellants, v. KELLOGG & ANDELSON et al., Defendants and Respondents.

No. B117633.

Court of Appeal, Second District, Division 4, California.

July 12, 1999.

Rehearing Denied Aug. 9, 1999.

Liner, Yankelevitz, Sunshine, Weinhart & Regenstreif, Stuart A. Liner, Peter J. Pitchess, Santa Monica, and D. Michael Oberbeck, for Plaintiffs and Appellants.

Garrett & Tully, Stephen J. Tully and Daniel D. Kopman, Pasadena, for Defendant and Respondent Kellogg & Andelson.

Lewis, D'Amato, Brisbois & Bisgaard, Mary G. Whitaker and Wayne C. Smith, Los Angeles, for Defendant and Respondent Cohen, Primiani & Foster.

CURRY, J.

The issue raised in this appeal is whether either appellant Thomas A. Curtis, M.D. ("Dr.Curtis"), or his medical corporation, appellant Thomas A. Curtis, M.D., Inc. ("the Corporation"), have standing to pursue a claim for legal malpractice purportedly assigned to Dr. Curtis by the Chapter 7 trustee for the Corporation. We conclude, under the circumstances presented here, that only the trustee had standing to pursue the claim, and affirm the judgment of the trial court which sustained a demurrer to the complaint brought by appellants. We also affirm the trial court's determination that claims against the Corporation's former accountants were barred by the expiration of the applicable statute of limitations.

FACTUAL AND PROCEDURAL BACKGROUND

The underlying facts are not in dispute. Respondent Kellogg & Anderson ("K & A"), an accounting firm, gave tax advice to appellants, which resulted in the Corporation paying Dr. Curtis's wife $431,500 as employee compensation for the fiscal year April 30, 1988, and $510,500 for the fiscal year April 30, 1989, and prepared tax returns listing those expenses on the Corporation's income tax returns for the relevant years.

In 1990, the Internal Revenue Service ("IRS") conducted an audit of the two tax returns. Respondent Cohen, Primiani & Foster ("CP & F"), a law firm, was hired by the Corporation at K & A's recommendation to represent it in connection with the audit and the subsequent tax court review. On February 6, 1991, the IRS issued a notice of deficiency, stating that the amounts paid to Mrs. Curtis for fiscal years 1988 and 1989 exceeded a reasonable allowance for compensation and had to be reduced by $331,500 and $405,500, respectively. As a result, the Corporation owed in excess of $300,000 in back taxes plus substantial penalties and interest. ¹ The Corporation sought review, and on January 11, 1994, the tax court affirmed the IRS's determination.

On December 23, 1994, the Corporation filed for bankruptcy protection. By an agreement approved by the bankruptcy court on June 2, 1996, and signed by the trustee, Dr. Curtis purported to purchase all of the assets of the Corporation including "causes of action whether filed or unfiled...."

The Original Complaint

On October 9, 1996, Dr. Curtis, as sole named plaintiff, filed a complaint naming K & A and CP & F as defendants. The complaint purported to state claims for professional negligence, breach of fiduciary duty, fraud, and breach of contract. It stated that Dr. Curtis was the owner by assignment of claims possessed by the Corporation in that on June 15, 1996, Dr. Curtis purchased all of the assets, including all claims, whether filed or unfiled, of the Corporation.

The complaint alleged that due to advice received from K & A, the Corporation paid Mrs. Curtis an annual salary of $431,500 and $510,500 in 1988 and 1989, amounts which the United States tax court later ruled were excessive, ² and that K & A "fail[ed] to advise the Corporation that the amounts paid as compensation to Mrs. Curtis for FYE 1988 and 1989 were excessive or that the Corporation even faced the possibility of penalties, and by its failure to disclose its negligence to the Corporation." To support damages, the complaint alleged that "[a]s a direct and proximate result of K & A's negligence, carelessness, and recklessness, the Corporation was required to pay penalties to the IRS, retain an attorney to represent it in the Audit and subsequent Tax Court proceedings, and Plaintiff suffered mental, physical and emotional pain and suffered a divorce...."

Concerning the timeliness of the action, the complaint conceded that the IRS conducted an audit in 1990, and that the IRS's February 6, 1991, notice of deficiency informed the Corporation that the amounts paid to Mrs. Curtis in 1988 and 1989 exceeded a reasonable allowance for compensation and had to be reduced by $331,500 and $405,500, respectively. In order to justify the belated filing of the complaint, Dr. Curtis alleged that K & A "continued to represent the Corporation in its tax matters (including the Audit and trial of this matter) and has repeatedly attempted to suppress any indication of its negligent tax advice." Specifically, K & A "repeatedly reassured the Corporation that the Audit and subsequent trial and penalties relating to Mrs. Curtis' compensation was an aberration," that executive compensation had recently become a "hot button," that K & A "had no knowledge of this nor any way of predicting the IRS would scrutinize Mrs. Curtis' compensation," and that "it was, therefore, not at fault." The complaint further alleged that "pursuant to 11 U.S.C. 108, among others, any statute of limitations applicable to any claim possessed by the Corporation at that time, whether filed or unfiled, was extended for a two year period from the date the assets of the Corporation fell within the control of the Trustee.[ ³] Any and all claims asserted herein are being asserted in order to satisfy creditors of the Corporation and/or to pay the IRS."

Concerning CP & F, the complaint alleged that the law firm failed to exercise reasonable care and skill in undertaking to perform legal services for the Corporation "in that it failed to disclose or intentionally suppressed from the Corporation the fact that K & A had been negligent in relation to Mrs. Curtis' FYE 1988 and 1989 compensation." The damages allegations were the same as those asserted in the malpractice claim against K & A.

Essentially the same factual and damage allegations served as the basis for the separate

claims of breach of fiduciary duty, fraud, and breach of contract against K & A and CP & F. Respondents filed demurrers and motions to strike the original complaint based on the statute of limitations and the nonassignability of professional malpractice claims.

The Bankruptcy Court Order

On February 7, 1997, ⁴ the bankruptcy court approved and entered a stipulation and order which stated: "WHEREAS, this case was originally filed as a Chapter 11 bankruptcy and it has been subsequently converted to a Chapter 7[;][p] WHEREAS, on June 2, 1996, this court approved the sale by the Chapter 11 Trustee of all assets of the Debtor's estate to [Dr. Curtis] ...; [p] WHEREAS, the above mentioned sale occurred; [p] WHEREAS, included in the assets purchased by [Dr. Curtis] were all causes of action possessed by the Debtor, whether filed or unfiled, and the proceeds therefrom; [p] WHEREAS, certain claims purchased by [Dr. Curtis] including certain professional malpractice causes of action, must be asserted in the name of the original holder of the cause of action, [the Corporation]; [p] WHEREAS, the right to the proceeds from those non-assignable claims was included in the purchase by [Dr. Curtis]; [p] WHEREFORE, IT IS HEREBY STIPULATED AND AGREED that [Dr. Curtis] shall have the right to assert all claims and/or causes of action, including but not limited to, claims for professional malpractice, which the Debtor possessed on or before June 2, 1996, in the name of the Debtor."

The First Amended Complaint

Rather than opposing the demurrers and motions to strike the original complaint, appellants filed a first amended complaint on January 31, 1997, adding the Corporation as a named plaintiff. ⁵ In connection with the contention that Dr. Curtis had purchased the assets of the Corporation, including all its choses in action, appellants inserted a footnote which explained: "Obviously, only those claims which, pursuant to California state law, are assignable were sold to Dr. Curtis. As to those claims which, as a matter of law, are non-assignable, they are brought in the name of the Corporation." Elsewhere the first amended complaint similarly stated: "In the previous Complaint, Dr. Curtis alleged that all claims had been assigned to him following the purchase from the bankruptcy, including those claims that are non-assignable. That allegation was in error. Dr. Curtis purchased directly from the bankruptcy estate all claims which could lawfully be assigned. Any other assignment is of no effect. Those claims which are non-assignable are asserted by and on behalf of the Corporation."

The first amended complaint also added the allegation that CP & F's representation of the Corporation continued uninterrupted until "approximately September 19, 1995."

Respondents demurred and moved to strike on the same grounds as were asserted previously. They contended that the amendments concerning ownership of the claims were a "sham" which should be disregarded. They further contended that only the trustee had the power to assert the Corporation's claims.

The court sustained the demurrers based on Boykin v. Cobin (1994) 30 Cal.Rptr.2d 428 (nonpub. opn., rev. granted Aug. 18, 1994, rev. dismissed May 11, 1995) ⁶ ruling that the accounting firm

could not be held liable as a matter of law for any damages flowing from the IRS audit, and allowing appellants to amend the complaint.

The Second Amended Complaint

The allegations of the second amended complaint, filed May 5, 1997, were essentially the same as the first, although in conformance with the trial court's ruling appellants omitted reference to damages...