Whitcomb v. Pension Development Co., Inc.

• Decision Date: 31 December 1986
• Docket Number: No. 86-1232,86-1232
• Citation: 808 F.2d 167
• Parties: Arthur K. WHITCOMB, et al., Plaintiffs, Appellants, v. PENSION DEVELOPMENT CO., INC., et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 167

808 F.2d 167

Arthur K. WHITCOMB, et al., Plaintiffs, Appellants, v. PENSION DEVELOPMENT CO., INC., et al., Defendants, Appellees.

No. 86-1232.

United States Court of Appeals, First Circuit.

Submitted Sept. 12, 1986.

Decided Dec. 31, 1986.

Edward O. Proctor, Jr. and Gaston Snow & Ely Bartlett, Boston, Mass., on brief, for plaintiffs, appellants.

D. Alice Olsen, James J. Moran, Jr. and Morrison, Mahoney & Miller, Boston, Mass., on brief, for defendants, appellees Pension Development Co., Inc. and Spurgeon S. Steeves.

Richard A. Freedman and Brody & Feinberg, Boston, Mass., on brief, for defendant, appellee Provident Life and Acc. Ins. Co.

Before COFFIN, BOWNES and TORRUELLA, Circuit Judges.

BOWNES, Circuit Judge.

Plaintiffs Arthur Whitcomb, Lena Whitcomb, and Arthur Whitcomb, Inc. appeal from a judgment granting summary judgment in favor of defendants Pension Development Co., Inc. ("Pension"), Provident Life and Accident Insurance Co. ("Provident"), and Spurgeon S. Steeves ("Steeves"). The district court held that plaintiffs' diversity action was barred by the applicable Massachusetts state statutes of limitations. We affirm.

In 1974, Arthur Whitcomb and other officers of Whitcomb, Inc. met with Steeves, the principal officer and shareholder of Pension, to discuss adoption of a proposed plan of group life insurance for Whitcomb, Inc. The plan included a term life insurance policy on the life of Arthur Whitcomb. Steeves allegedly represented that, under the Internal Revenue Code, the premiums for the life insurance policy on the life of Arthur Whitcomb would be deductible by Whitcomb, Inc., and would not be includible as income to Arthur Whitcomb or to Arthur's wife, Lena. Whitcomb, Inc. adopted the plan in November, 1974, and Provident issued the group policy. At that time, Whitcomb, Inc. surrendered another life insurance policy it had on the life of Arthur Whitcomb.

When Whitcomb, Inc. filed federal tax returns for 1974 and 1975, it claimed as deductions the premiums it had paid both years for Arthur Whitcomb's life insurance policy issued by Provident. When Arthur and Lena Whitcomb filed their joint federal tax returns for 1974 and 1975, they did not include as income the premiums Whitcomb, Inc. had paid for Arthur Whitcomb's life insurance policy.

The 1974 and 1975 tax returns filed by Whitcomb, Inc. and Arthur and Lena Whitcomb were audited by the Internal Revenue Service (IRS). In separate letters dated October 17, 1977, the IRS sent to Whitcomb, Inc. and to Arthur and Lena Whitcomb copies of examination reports concerning proposed adjustments in plaintiffs' tax liabilities. Specifically, the IRS notified Whitcomb, Inc. that it had disallowed the deductions Whitcomb, Inc. had claimed for the premiums it had paid on Arthur Whitcomb's life insurance policy. The IRS notified Arthur and Lena Whitcomb that the life insurance premiums that had been paid by Whitcomb, Inc. constituted additional income to Arthur and Lena, and that additional taxes were due.

Plaintiffs enlisted the accounting firm of Arthur Andersen & Co. to prepare protests In June, 1980, plaintiffs' counsel wrote to Provident and Steeves inviting them to participate in the Tax Court contest of the IRS determinations, and stating that if plaintiffs were unsuccessful in that contest, they would pursue their legal rights against Steeves, Pension and Provident. The Tax Court subsequently upheld the determinations of the IRS as to both Whitcomb, Inc. and Arthur and Lena Whitcomb. Counsel filed an appeal with this court solely on behalf of Whitcomb, Inc. This court affirmed the judgment of the Tax Court as to Whitcomb, Inc. on May 10, 1984.

in response to the IRS letters, which preparation began in October, 1977. In December, 1977, Arthur Andersen & Co. submitted written protests to the IRS on behalf of plaintiffs. On December 14, 1978, the IRS issued notices of deficiency to plaintiffs informing them of the additional amounts of tax owed for the years 1974 and 1975. On March 13, 1979, counsel filed petitions in the U.S. Tax Court on behalf of Whitcomb, Inc. and Arthur and Lena Whitcomb.

On March 23, 1984, plaintiffs filed a diversity action against defendants, contending that defendants were liable for damages which resulted when the IRS determined that the plan of group life insurance adopted by Whitcomb, Inc. did not qualify under a provision of the Internal Revenue Code, and that plaintiffs therefore owed additional taxes. The district court granted summary judgment in favor of defendants.

STATUTES OF LIMITATIONS

In their complaint and amended complaint, plaintiffs asserted causes of action based on tort, breach of contract, and Mass.Gen.Laws Ann. ch. 93A (the Massachusetts Consumer Protection Act). Plaintiffs' tort claims are governed by Mass.Gen.Laws Ann. ch. 260, Sec. 2A, which provides that tort claims must be filed within three years from the time the cause of action accrued. Under Mass.Gen.Laws Ann. ch. 260, Sec. 2, plaintiffs' contract claims had to be filed within six years from the time their cause of action accrued. Plaintiffs' claims under Mass.Gen.Laws Ann. ch. 93A had to be brought within four years. Mass.Gen.Laws Ann. ch. 260, Sec. 5A. The district court held that plaintiffs' claims accrued at the latest in 1977. Because plaintiffs did not file their diversity action against defendants until 1984, the district court held that all of their claims were time-barred.

Plaintiffs argue that the district court erroneously determined that their claims were time-barred. They disagree with the district court's assessment of when their claims accrued.

The Supreme Judicial Court of Massachusetts has held that a cause of action accrues when a plaintiff knows or reasonably should know of the harm caused by defendant's conduct. Franklin v. Albert, 381 Mass. 611, 619, 411 N.E.2d 458, 463 (1980); see Levin v. Berley, 728 F.2d 551, 556 (1st Cir.1984) (holding that plaintiff's claim under Mass.Gen.Laws Ann. ch. 93A was not barred by the statute of limitations, citing Franklin ). In addition, under Massachusetts law, a cause of action in tort generally accrues at the time the plaintiff is injured. Dinsky v. Framingham, 386 Mass. 801, 803, 438 N.E.2d 51, 52 (1982). A cause of action for breach of contract generally accrues at the time of breach, even if the amount of damages may be unknown or if damages might not be sustained until later. See Campanella & Cardi Construction Co. v. Commonwealth, 351 Mass. 184, 185, 217 N.E.2d 925, 926 (1966); DiGregorio v. Commonwealth, 10 Mass.App.Ct. 861, 862, 407 N.E.2d 1323, 1324 (1980) (rescript). Massachusetts courts also hold, however, that when a cause of action in either tort or contract is based on an inherently unknowable wrong, the cause of action accrues when the injured party knows or in the exercise of reasonable diligence should know the facts giving rise to the cause of action. Dinsky, 386 Mass. at 803, 438 N.E.2d at 52; Frank Cooke, Inc. v. Hurwitz, 10 Mass.App.Ct. 99, 106, 406 N.E.2d 678, 683 (1980).

Even assuming, arguendo, that defendants' alleged wrongful actions were at Plaintiffs nevertheless argue that the nature or extent of their injuries was not known and should not have been known (and hence, their cause of action did not accrue) until they received the notices of deficiency from the IRS in 1978, or until their counsel wrote to Provident and Steeves in June, 1980, advising them that plaintiffs would pursue their legal rights against defendants if plaintiffs' Tax Court litigation was unsuccessful. Alternatively, plaintiffs contend that their cause of action did not accrue until, in Arthur and Lena Whitcomb's case, the adverse Tax Court decision in 1983, and, in Whitcomb, Inc.'s case, until the 1984 adverse decision by this court in Whitcomb, Inc.'s appeal of the Tax Court decision.

some point inherently unknowable to plaintiffs, we agree with the district court that plaintiffs knew or reasonably should have known the facts giving rise to their cause of action at least in 1977 after receiving the IRS letters in October, 1977, and after having to enlist Arthur Andersen & Co. at that time to prepare the written protests on their behalf. The October, 1977, IRS letters to plaintiffs certainly put plaintiffs on notice that the IRS was contesting Whitcomb, Inc.'s claimed deductions for the life insurance policy, and Arthur and Lena Whitcomb's failure to include as income the premiums Whitcomb, Inc. had paid. The IRS letters were sent to plaintiffs over six years prior to the date plaintiffs filed their suit against defendants.

We reject plaintiffs' contentions. Although the 1978 IRS notices of deficiency clearly indicated that deficiencies had been imposed against plaintiffs, the IRS alerted plaintiffs as early as October, 1977, that it was challenging their position regarding the tax consequences of the group life insurance policy. After receiving the October, 1977, IRS letters, plaintiffs promptly enlisted Arthur Andersen & Co. to file with the IRS written protests on their behalf. At that point, plaintiffs knew or reasonably should have known of the harm caused by defendants' conduct, and the facts giving rise to their cause of action. Whatever the technical differences between the 1977 IRS letters and the 1978 IRS deficiency notices, the distinctions are insufficient to support plaintiffs' contention that they did not know and could not have known the source of their injuries until they received the 1978 notices of deficiency. ¹

We also note that even assuming, arguendo, that Arthur and Lena Whitcomb could not have known the total extent of their injuries until the Tax Court decision, and that Whitcomb, Inc. could not have known the extent of its injuries until our decision in its appeal of the Tax Court decision, the Supreme Judicial Court of Massachusetts has rejected the notion that knowledge of the extent of an injury should control accrual of a cause of...