Judicial dissolution proceedings have spawned legal malpractice cases; I once testified as an expert witness in such a case.  Likely there have been accountant malpractice cases as well, brought by company owners disappointed with their own accountant’s advice in connection with buyout negotiations or judicial valuation proceedings.

But until Anda Management, LLC v. Needlemen & Schacter, LLP, 2008 NY Slip Op 31534(U) (Sup Ct Nassau County May 20, 2008) (read decision here), I’d never heard of spin-off litigation involving charges against a professional for improperly taking sides in the underlying dissolution case.

Here’s what happened:  Anda Management and Wilmington Paper Corp. formed a Delaware LLC called Worldwide Fibers to market paper products overseas.  Worldwide retained the defendant accounting firm as its accountant without a written agreement.  Three years later, Worldwide’s principals had a falling out, prompting Wilmington to file a proceeding for judicial dissolution of Worldwide in Delaware Chancery Court.  Wilmington accused Anda’s principals of impermissibly withdrawing funds from Worldwide for personal reasons and then falsely booking them as legitimate business expenses.

The Delaware proceeding ultimately settled when Anda acquired Wilmington’s interest in Worldwide.

Anda and its principals subsequently brought a New York action against the accountant for breach of fiduciary duty and malpractice arising from its conduct in the Delaware case.  The plaintiffs alleged that the accountant consulted with and assisted Wilmington’s trial counsel by reviewing a proposed complaint, participating in conference calls with Wilmington’s counsel, and submitting affidavits supportive of Worldwide’s claims in which the accountant allegedly made false and contradictory statements concerning accounting advice previously given by the accountant to the plaintiffs prior to the dissolution.  The plaintiffs also alleged that the accountant was aware that the expenses challenged by Wilmington were proper, and that the accountant had affirmatively counseled the plaintiffs to take some of the disbursements challenged by Wilmington.  The plaintiffs further alleged that one of the accountant’s employees gave the social security numbers of Anda’s principals to Wilmington’s counsel in order to perform credit searches on them. 

The accountant denied plaintiffs’ allegations and, following discovery, moved for summary judgment.  The plaintiffs cross moved for leave to amend their complaint to add claims for fraud and violation of the Fair Credit Reporting Act.

In a decision by Nassau County Commercial Division Justice Ira B. Warshawsky, the court denied the accountant’s summary judgment motion and granted plaintiffs leave to amend their complaint.  Justice Warshawsky found that, viewing the evidence most favorably to plaintiffs, the plaintiffs adequately raised questions of fact

with respect to their assertions that the defendant acted faithlessly, recklessly and unprofessionally by affirmatively assisting the plaintiffs’ adversary in the Delaware-based dissolution proceeding through the submission of false and misleading affidavits allegedly arising out of, among other things, accounting advice the defendant itself had provided to plaintiffs.  *   *   *  Indeed, and viewed in a favorable light, the record suggests that the defendant allegedly and affirmatively dispensed expert accounting advice to Anda and its closely held and joint venturers relating to corporate disbursements, tax issues and financial matters impacting upon the internal accounting practices of Worldwide as well as its two, constituent members.  (Citations omitted.)  

In response to the accountant’s contention that there existed no fiduciary relationship with the plaintiffs, the court found that the absence of a formal retainer agreement was "not determinative" and that the "inconclusive evidence" did not rule out a finding of a relationship that "sufficiently approached privity" to sustain the malpractice claim.  Justice Warshawsky also cited case law sustaining analogous claims against accountants for failure to withdraw in the face of a conflict of interest.

It would be interesting to know what damages the plaintiffs seek to recover arising from the alleged misconduct, given that the Delaware litigation ended with a buyout.  The court’s decision does not say.

The moral of the story?  First, one cannot overstate the importance of a written engagement letter at the outset, delimiting the professional-client relationship and scope of services.  Second, in my experience the great majority of dissolution cases involve accounting issues which carry the potential for involving the company accountant as an important witness.  The accountant almost always better serves his or her own interests by maintaining strict neutrality during the course of the litigation between company owners.

Update February 23, 2012:   Another example of accountants caught in the crossfire is Gardner v Leitgeb & Vitelli, LLP, 2012 NY Slip Op 50282(U) (Sup Ct Suffolk County Feb. 17, 2012), in which the court dismisses most but not all claims against the company’s accounting firm hired by one of two sides in a shareholder dispute.