RTR Techs., Inc. v. Helming

• Decision Date: 19 September 2011
• Docket Number: C.A. No. 09–cv–30189–MAP.
• Citation: 815 F.Supp.2d 411
• Court: U.S. District Court — District of Massachusetts
• Parties: RTR TECHNOLOGIES, INC., Rosalie Berger, and Craig Berger, Plaintiffs v. Carlton HELMING and Helming & Co., P.C., Defendants.

815 F.Supp.2d 411

RTR TECHNOLOGIES, INC., Rosalie Berger, and Craig Berger, Plaintiffs

v.Carlton HELMING and Helming & Co., P.C., Defendants.

C.A. No. 09–cv–30189–MAP.

United States District Court, D. Massachusetts.

Sept. 19, 2011.

Christopher M. Hennessey, Thomas A. Pagliarulo, Cohen Kinne Valicenti & Cook, LLP, Leonard Cohen, Cain, Hibbard, Myers & Cook, Pittsfield, MA, for Plaintiffs.

Steven Joseph Bolotin, Morrison Mahoney LLP, Tory A. Weigand, Morrison, Mahoney, & Miller LLP, Boston, MA, for Defendants.

MEMORANDUM AND ORDER REGARDING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT & PLAINTIFFS' MOTION FOR LEAVE TO FILE SUR REPLY (Dkt. Nos. 22 & 33)

PONSOR, Senior District Judge.

I. INTRODUCTION

The background of this case is unusual and, to some extent, disturbing. Plaintiffs managed for many years to enjoy over $1,000,000, tax-free, by claiming on their tax returns that this money was a “loan” from a Subchapter S corporation they controlled, rather than income. When Defendants, an accounting firm, advised them to amend the return to recognize these funds as income, Plaintiffs followed the advice and incurred a tax liability. Now Defendants find themselves sued for this allegedly negligent advice.

More specifically, in their six-count complaint, Plaintiffs RTR Technologies, Inc., Rosalie Berger, and Craig Berger allege that Defendants Carlton Helming and Helming & Co., P.C. provided the negligent tax preparation advice. The primary target of Plaintiffs' complaint is Defendants' recommendation that Plaintiffs revise their 2002 personal and corporate tax returns to re-classify a one–million–dollar “Loan to Officer” entry as income to RTR's president and sole owner, Ms. Berger. Defendants contend that this correction was necessary because, in their view, the “Loan to Officer” was clearly not a bona fide loan given its size and history, RTR's lack of documentation on the loan, the absence of a repayment plan, and the Bergers' admitted inability to pay back the loan. Plaintiffs contend that the tax return revision was neither necessary nor prudent and resulted in substantial tax liability and lost profits.

For the reasons stated below—chiefly, Plaintiffs' failure to file the complaint within the prescribed statutory period, to produce evidence of damages, and to demonstrate that Defendants' advice was negligent—Defendants' Motion for Summary Judgment (Dkt. No. 22) will be allowed. Plaintiffs' Motion for Leave to File Sur Reply (Dkt. No. 33) will be denied.

II. FACTS

Viewed in a light most favorable to the non-moving parties, Plaintiffs in this case, the relevant facts are as follows.

A. The Parties.

Plaintiff RTR Technologies, Inc. (“RTR” or “the company”) is a Subchapter S corporation. It was incorporated in Massachusetts in 1994 to provide heating systems for rail and mass transit. RTR's sole owner and president is Plaintiff Rosalie Berger. Plaintiff Craig Berger is an RTR employee and husband of Rosalie Berger. His focus at RTR is in business and product development, engineering, and sales.

Defendant Helming & Company, P.C. (“H & C”) is a business consulting and public accounting firm with a principal place of business in Connecticut. Defendant Carl Helming is president of H & C and is certified as a public accountant, turnaround professional, insolvency reorganization advisor, and valuation analyst.

B. RTR's Financial Crisis.

RTR ran into financial difficulties in part as a result of the tragic events that unfolded in the United States on September 11, 2001. The company had been granted a large purchase order from the Long Island Railroad, which suffered from a significant drop in ridership following the 9/11 disaster in New York. The decrease in business substantially reduced the size of its purchase order from RTR. This chain of events, combined with a roughly $600,000 delinquency in monies owed to suppliers, created a severe strain on RTR's resources. RTR was temporarily unable to operate, and it could not pay its vendors or creditors, including the Internal Revenue Service (“IRS”).

Consequently, in October 2002, at Ms. Berger's direction, RTR applied for a loan through the Small Business Administration (“SBA”). The SBA had previously granted RTR two loans in 1997 and 1998 for $425,000 and $300,000, respectively. The SBA thereafter granted RTR's third loan application, titled Economic Injury Disaster Loan (“Disaster Loan”), in the amount of $687,500. The Disaster Loan stated that RTR could not “pay” or “make any distribution” or “make any advance, directly or indirectly by way of Loan, gift, bonus or otherwise to any other company, or to any officer, director or employee of [RTR], or of any such Company.” (Dkt. No. 22, Ex. 62.)

Despite this influx of capital, the company's financial problems continued, and it was unable to make payment on its loans from the SBA. In 2002 and 2003, RTR made additional requests to obtain loans from the SBA, which were denied. In his denial letter, the SBA loan officer noted that the company had “continued to loan the principals funds” and that “these funds represent valuable financial resources which could have been applied to the recovery effort following the disaster.” (Dkt. No. 22, Ex. 16.) RTR then entered into a forbearance agreement with the SBA that required it to employ a turnaround manager to help it recover from its financial difficulties. That agreement was extended a number of times, at least through July 2005, and also included a prohibition on loans, payments, or advances to related parties such as the individual plaintiffs here.

C. Plaintiffs Retain Philip + Company, Inc. to Provide Turnaround Services.

In 2003, Ms. Berger retained Philip + Company (“P+C”), a turnaround management firm, to help address the company's financial woes. In an engagement letter dated May 19, 2003, P+C observed that RTR suffered from a high level of longterm debt, that the company would experience a working capital shortfall of at least $340,000 by year-end, and that the company was “at risk of failure.” (Dkt. No. 22, Ex. 20.)

The letter also noted that “the balance sheet includes Loans to officer and related entities totaling $1.37 million.” ( Id.) Upon analysis, it emerged that between 1994 and 2003, Ms. Berger withdrew varying sums of money from RTR's accounts, which were recorded as a “Loan to Officer” on the company's books. RTR's balance sheet as of December 31, 2002, indicated that the Loan to Officer account totaled $1,008,966.42.¹ (Dkt. No. 22, Ex. 11.) During this time, RTR also provided substantial loans to three related companies, Transcom, NYBB, and Catbird Seat, LLC (“Related Party Loans”), all of which were owned by Ms. Berger and/or her husband. P+C's engagement letter concluded that “[t]he recovery of these loans is doubtful.” (Dkt. No. 22, Ex. 20, at 2.)

A month later, in June 2003, P+C produced a financing profile for the company, which described the loans to Ms. Berger and RTR's related entities as “a burden on RTR resources.” (Dkt. No. 22, Ex. 21, at 3.) It also provided that “RTR can no longer be the source of cash for related party activities, or for supplementing personal lifestyle costs” and, accordingly, suggested fixing the salaries of Rosalie Berger and Craig Berger at $104,000 and $90,000 respectively. ( Id. at 13.) An accompanying letter explained:

[T]he primary reason for [RTR's] current financial circumstances is inadequate financial management, and in particular the investment in the Stockbridge office and the advances to related parties ... [which] have drained in excess of $880,000 from the business.

(Dkt. No. 22, Ex. 22, at 1.) Further, “as a fundamental matter, if the Company had even a portion of the $880,000, its circumstances would be markedly different.” ( Id.) P+C then emphasized the need to limit Ms. Berger's involvement in the active management of the company, suggesting that “her value [to RTR] will only be realized ... if she withdraws from the day-to-day affairs of the Company and focuses on the strategic level of the business.” ( Id. at 2.)

Perhaps unsurprisingly, Plaintiff Rosalie Berger responded to P+C by letter on August 18, 2003, terminating their business relationship. She explained that P+C's “most major flaw was underestimating my value to the company, and their systematic approach to reduce, and/or even eliminate my involvement.” (Dkt. No. 22, Ex. 27.)

D. Plaintiffs Retain Defendants Helming and H & C.

On September 25, 2003, Plaintiffs entered into an agreement with Defendants (“the 2003 Agreement”) in which Defendants agreed to replace P+C as RTR's turnaround manager. ( See Dkt. No. 22, Ex. 26.) Defendants were initially hired only to provide business turnaround advice for the company and not to provide tax preparation services, as Plaintiffs had retained another accountant, Weinstein & Anastasio, to perform their tax-related services until 2005. Ms. Berger explained that they hired Defendants “to level us, to stabilize us, to stop the bleeding, to protect us from any creditors or taxing authorities ....” (Dkt. No. 22, Ex. 3, R. Berger Dep. 93:19–21.) Through a series of subsequent agreements, however, Defendants contracted with Plaintiffs to provide tax preparation services as well.² (Dkt. No. 22, Exs. 31, 57.)

Defendant Helming, like P+C, became concerned about payments to Ms. Berger being carried on the company's books as a loan. In Defendant Helming's opinion, “there were no loans. There were no documents, no attributes of any loans whatsoever. They were just surreptitious ... advances that were taken through the years and that we inherited.” (Dkt. No. 39, Ex. 4, Helming Dep. Vol. I 171:12–18.) Defendant Helming reached this conclusion after viewing the company's balance sheets and the Bergers' personal finances, and after Ms. Berger “expressed to me countless times she had no ability to repay.” (Dkt. No. 39, Ex. 5, Helming Dep. Vol. II 75:3–5.) As for the impact on the company, he explained:

[I]t's a turn...