In a recent ruling, RTR Technologies, Inc. v. Helming, et al., 2013 WL 388766 (1st Cir. 2013), the First Circuit clarified the standard Massachusetts courts are to apply when determining whether to save a plaintiff’s malpractice claim against a professional service provider under the discovery rule, rescuing only those claims which are truly undiscoverable rather than merely undiscovered. In RTR Technologies, the First Circuit affirmed the U.S. District Court’s summary judgment decision in favor of an accountant and his accounting firm (collectively, the “Accountant”), ruling the various tort and contract claims brought by the Accountant’s former clients, a Subchapter S Corporation and its principals, were time-barred because the Accountant’s former clients had an abundance of “warning signs” more than three years before filing suit that the Accountant had cause them harm by amending their 2002 corporate and personal tax returns.
In September, 2003, Rosalie Berger and her husband (the “Bergers”), the principals of RTR Technologies, Inc. (“RTR”), retained the Accountant to prepare their corporate and individual income tax returns. Over the course of the next two years, 2004 and 2005, the Accountant repeatedly advised the Bergers to amend RTR’s 2002 corporate tax returns and their personal tax returns to reclassify approximately $1 million of transfers from RTR to Rosalie Berger as income instead of loans because the Accountant doubted these transfers could be considered bona fide loans for tax purposes. The Accountant recommended amending the 2002 tax returns, as opposed to simply changing the tax treatment of these transfers going forward, in part, to make it easier for RTR and the Bergers to bring a malpractice suit against the predecessor accountant.
At first, the Bergers were hesitant to follow the advice of the Accountant because amending the tax returns would result in a significant, additional tax liability, as well as, penalties and interest. Accordingly, before agreeing to amend their 2002 tax returns, the Bergers sought a “second opinion” from two tax attorneys, one of whom was indifferent to the Accountant’s recommendation and the other of whom, at least partially, agreed with the recommendation. The Bergers ultimately agreed to amend the 2002 tax returns and, in December 2005, the Accountant filed RTR’s amended 2002 corporate tax returns with the Internal Revenue Service (“IRS”), and a month later, in January, 2006, the Accountant filed the Bergers’ amended 2002 tax returns with the IRS.
The IRS accepted the amended tax returns and, in May, 2005, issued a tax deficiency assessment against the Bergers. On July 16, 2006, the IRS filed a tax lien of more than $525,000 against the Bergers. In 2008, the Bergers and RTR replaced the Accountant with another accountant (the “Successor Accountant”) who re-amended RTR’s 2002 corporate tax returns and the Bergers’ 2002 tax returns. The IRS accepted these re-amended tax returns and abated the tax lien and the penalties assessed against the Bergers.
In October, 2009, the Bergers and RTR sued the Accountant under various tort and contract legal theories, alleging the Accountant’s advice to amend the 2002 tax returns resulted in substantially increased tax liabilities and lost business profits. The Accountant moved for summary judgment asserting all of the tort and contract claims were barred by the applicable three year statute of limitations. The U.S. District Court agreed with the Accountant and entered summary judgment in favor of the Accountant. The Bergers appealed.
On appeal, the Bergers did not challenge the U.S. District Court’s holding that the limitations period set forth under Section 4 of Chapter 260 of the Massachusetts General Laws, which applies to all “[a]ctions of contract or tort for malpractice, error or mistake against . . . certified public accountants,” applies to the Bergers’ various tort and contract claims against the Accountant. Instead, the Bergers argued the discovery rule tolled their tort and contract claims from the bar of the three year statute of limitations period. Specifically, the Bergers argued they did not know, nor should they have known, that they were harmed by the Accountant’s actions until August, 2008, when they retained the Successor Accountant who subsequently re-amended RTR’s 2002 corporate tax returns and the Bergers’ 2002 tax returns.
Before determining whether there was any evidence in the summary judgment record to support the Bergers’ argument, the First Circuit articulated the standard Massachusetts courts are to apply when determining whether a plaintiff’s claim is tolled, and thereby saved, by the discovery rule. The discovery rule provides that a cause of action accrues, and the statute of limitations begins to run, when a plaintiff knows or reasonably should know that he or she may have been harmed by a defendant’s conduct, even if the harm actually occurred earlier. The discovery rule, however, pertains only to those plaintiffs whose injuries are inherently unknowable. The First Circuit explained, an accountant’s clients, like the Bergers here, encompass those plaintiffs to whom the discovery rule applies because, absent some warning sign, the client is not expected to recognize the negligence of his or her accountant, as an accountant, like an attorney or a doctor, is an expert, whereas his or her client is not and thus cannot be expected to recognize the negligence of his or her accountant. But, the discovery rule does not apply when a client knows he or she has sustained appreciable harm as a result of the professional service provider’s (i.e., accountant, doctor, lawyer) conduct. This knowledge is sufficient to trigger the running of the statute of limitations period. Further, a client need not know the full extent of the injury, or know that the professional service provider was negligent, for the cause of action to accrue. Stated in another way, the discovery rule delays the running of the statute of limitations until the facts, as distinguished from the legal theory for the cause of action, remain inherently unknowable to the injured party.
Based on its independent review of the summary judgment record, the First Circuit affirmed the U.S. District Court’s ruling that RTR and the Bergers’ various tort and contract claims were time-barred because the Bergers were aware of all critical facts -- the alleged injury (the tax lien) and the alleged cause (the advice of the Accountant) -- by July 16, 2006, the date the IRS filed a tax lien of more the $525,000 against them. This was more than three years before October, 2009 when the Bergers filed suit against the Accountant. In support of its ruling, the First Circuit relied on the following facts from the summary judgment record: At her deposition, Rosalie Berger testified she sought out and hired the Successor Accountant in 2008 because “she did not agree with [amending the 2002 tax returns] to begin with” and she signed the amended tax returns “under duress, and it was very, very damaging to [her] company.” She also testified, even before the IRS filed its tax lien in July, 2006, she had concluded the Accountant’s advice to amend the tax returns was “poorly thought out,” “was probably some of the poorest advice [she] could have possibly taken,” and she “knew” that amending the tax returns “was not the right approach.” Further, before July 16, 2006, the Bergers sought “second opinions” from two tax professionals regarding the Accountant’s advice to amend the 2002 tax returns.
The First Circuit found nothing in the summary judgment record to suggest that in between July 16, 2006 and October, 2009, the Bergers received any information which made them believe anything other than the Accountant’s advice was wrong. The First Circuit analogized this case to one previously decided by the Massachusetts Supreme Judicial Court, where it was held a client could not invoke the discovery rule to toll the statute of limitations on a negligence claim against his former attorneys beyond the date on which he concluded his former attorneys “didn’t know what they were doing.” See Lyons v. Nutt, 436 Mass. 244 (2002).
The First Circuit’s ruling in RTR Technologies sends a strong message to those would-be plaintiff tax-payers who receive a tax deficiency notice from either the Massachusetts Department of Revenue or the IRS that they must exercise a reasonable modicum of diligence to determine who is at fault for the deficiency, whether it be their accountant, themselves, or someone else; otherwise, a court may determine they slept on their rights and rule their claim is time-barred.