TMG-II v. Price Waterhouse & Co.

• Decision Date: 11 July 1991
• Docket Number: TMG-II
• Citation: 572 N.Y.S.2d 6,175 A.D.2d 21
• Parties: , et al., Plaintiffs-Respondents-Appellants, v. PRICE WATERHOUSE & CO., Defendant-Appellant-Respondent, and Frank, Stefanou & Company, et al., Defendants.
• Court: New York Supreme Court — Appellate Division

Page 6

572 N.Y.S.2d 6

175 A.D.2d 21

TMG-II, et al., Plaintiffs-Respondents-Appellants, v. PRICE WATERHOUSE & CO., Defendant-Appellant-Respondent and Frank, Stefanou & Company, et al., Defendants.

Supreme Court, Appellate Division First Department.

July 11, 1991.

Before MURPHY, P.J., and CARRO, KUPFERMAN, ASCH and KASSAL, JJ.

MEMORANDUM DECISION.

Order of the Supreme Court, New York County (Burton S. Sherman, J.), entered on April 13, 1990, which, inter alia, granted defendant's motion to dismiss the complaint as untimely to the extent of dismissing all causes of action except the cause of action sounding in fraud, unanimously modified, on the law, to the extent of granting defendant's motion for summary judgment dismissing the complaint in its entirety, and the complaint is dismissed, without costs. The clerk is directed to enter judgment in favor of defendant Price Waterhouse & Co., dismissing and severing the complaint as against it.

Plaintiffs TMG Associates and TMG-II were formed in 1979 and 1980, respectively, as limited partnerships designed primarily for tax shelter investments. Plaintiffs also include numerous limited partners who lost virtually their entire investments in TMG and TMG-II.

The partnerships purported to return losses on a 4 to 1 ratio so that a $10,000 capital contribution returned $40,000 in ordinary losses. Unfortunately for the limited partners, the losses were derived from prearranged fictitious trades, and the business consisted of little more than marketing fraudulent tax losses. Edward Markowitz, a general partner of both TMG and TMG-II, perpetrated the fraudulent transactions and pleaded guilty to a 4 count federal information charging tax fraud.

From October 1979 until March 27, 1981, defendant Price-Waterhouse performed accounting services for TMG, including preparation of TMG's 1979 tax return for the three months of its existence in 1979. It is alleged that Price-Waterhouse authorized the inclusion of the 1979 financial statements in the 1980 TMG-II offering memorandum and assisted in preparation of projected tax consequences. There is no claim that Price Waterhouse performed services for TMG-II.

Price Waterhouse also allegedly participated in the fraudulent activities of Markowitz and failed to disclose the existence of transactions that it knew or should have known were sham and fraudulent. The record shows that on March 27, 1981, Price Waterhouse withdrew as auditors for TMG after TMG was unable to document to Price Waterhouse's satisfaction that the transactions were bona fide, and actually occurred. Price Waterhouse prepared a draft tax return for 1980, but withdrew before it was filed.

The dispositive issue on this appeal is the timeliness of the action under the two-year discovery rule for fraud [CPLR § 203(f); CPLR § 213(8) ]. Because we hold the action untimely, we do not reach the issue of whether the fraud is sufficiently pleaded. The Motion Court granted Price-Waterhouse's motion for summary judgment dismissing the complaint as untimely, except for the cause of action sounding in fraud. The Motion Court held that factual issues were presented as to when plaintiffs learned of the fraud. We disagree with respect to the timeliness of the fraud claim.

The two-year limitations period for fraud actions is measured from the time of discovery of facts constituting the fraud or from the time such facts could have been discovered with reasonable diligence. CPLR § 203(f), and § 213(8). On this record, we hold that the underlying facts of the fraud claim against Price Waterhouse, to the extent that they were not already known,...