# Island Consol. v. Grassi & Co., Certified Public Accountants PC

> New York Supreme Court, New York County · January 7, 2025 · 2025 NY Slip Op 30094(U)

URL: https://www.frixlaw.com/law-library/cases/10785321

## Case

- **Court:** New York Supreme Court, New York County
- **Decided:** January 7, 2025
- **Citations:** 2025 NY Slip Op 30094(U)
- **Precedential status:** Unpublished
- **Opinion:** Opinion by Margaret A. Chan
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

Island Consol. v Grassi & Co., Certified Public
Accountants PC
2025 NY Slip Op 30094(U)
January 7, 2025
Supreme Court, New York County
Docket Number: Index No. 451469/2023
Judge: Margaret A. Chan
Cases posted with a "30000" identifier, i.e., 2013 NY Slip
Op 30001(U), are republished from various New York
State and local government sources, including the New
York State Unified Court System's eCourts Service.
This opinion is uncorrected and not selected for official
publication.
INDEX NO. 451469/2023
NYSCEF DOC. NO. 87 RECEIVED NYSCEF: 01/08/2025

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 49M
-----------------------------------------------------------------X
ISLAND CONSOLIDATED, EASTERN MATERIALS INDEX NO. 451469/2023
CORP., ISLAND INTERNATIONAL EXTERIOR
FABRICATORS LLC,ISLAND EXTERIOR FABRICATORS
LLC MOTION DATE 12/18/2023

Plaintiff, MOTION SEQ. NO. 001

- V -
DECISION+ ORDER ON
GRASSI & CO., CERTIFIED PUBLIC ACCOUNTANTS MOTION
PC,

Defendant.

--------------------- -------------X

HON. MARGARET A. CHAN:

The following e-filed documents, listed by NYSCEF document number (Motion 001) 57, 58, 59, 60, 61,
62,63,64,65,66,67,68,69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85
were read on this motion to/for DISMISS

In this professional malpractice action, plaintiffs Island Consolidated,
Eastern Materials Corp., Island International Exterior Fabricators Del LLC, and
Island Exterior Fabricators LLC (hereinafter collectively referred to as "Island" or
"Plaintiffs") allege professional malpractice and gross negligence against their
accountant, defendant Grassi & Co., Certified Public Accountants PC for the sales
tax advice it gave plaintiffs in 2015. In reliance on defendant's 2015 sales tax
advice, plaintiffs sustained monetary damages through tax penalties and interests
on repayment costs to the New York State Department of Taxation and Finance,
costs, and lost profits. Defendant moves to dismiss plaintiffs' Amended Complaint
for failure to: (1) comply with the condition precedent before bringing a suit against
defendant; (2) timely bring their claims within the three-year statute of limitations;
and (3) state a cause of action with sufficiency. Alternatively, defendant urges
dismissal of damages on the grounds that they are not recoverable and is limited by
the parties' agreement. Plaintiffs oppose the motion.

For the reasons stated below, defendant's motion is denied.

BACKGROUND

Defendant Grassi & Co., Certified Public Accountants P.C. (Grassi) is a
domestic professional service corporation having its principal place of business in
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New York (NYSCEF # 11-Amended Complaint [AC] ,r 7). Grassi held itself out to
be experienced in advising manufacturing and construction businesses, and
possessing the skill, ability and experience of certified public accountants and
auditors specially qualified to render advice concerning federal, state and local
taxes, particularly to manufacturing and construction companies concerning their
liability for payment of sales and use taxes in New York State (id. ,r 9).

Between 2009 and 2021, Island hired Grassi to perform services for within
New York as an independent certified public accountant (id. ,r 11). These services
included rendering professional advice regarding federal, state and local tax
matters, including sales tax matters, and preparing all of plaintiffs' federal, state
and local tax returns, and notably, those of its principals (id.). Prior to 2015, and
even prior to his regular assignment to the Island account at Grassi, Grassi
principal William Fischer, CPA approached and advised one of Island's principals,
Tim Stevens, on multiple occasions (id. ,r 15). Fischer advised Stevens that he
believed the Island entities were not availing themselves to state sales tax
exemptions afforded to manufacturers in New York, and that Island could realize a
significant savings if they allowed Grassi to advise them on reorganizing their
corporate structure (id.).

To retain Grassi, plaintiffs and their principals were required to and did
agree on at least eleven occasions to be bound by terms set forth in written
Engagement Letters between the parties (NYSCEF # 18 - Wilek Aff at ,r 4;
NYSCEF # 61 - 71, Exhs C through M - Engagement Letters [from 2009-2020]).
These Engagement Letters defined the scope of services to be provided and of
Grassi's responsibilities while also specifying that all managerial decisions and
compliance with any laws or regulations applicable to its activities were the sole
responsibility of Island (id.). The Engagement Letters contained a notice of claim
provision within the Fees subsection, requiring plaintiffs to notify Grassi of any
such claim within one year from the date of the completion of the subject services
and to pursue the prescribed mediation within 90 days of notice as a condition
precedent to bringing suit (id.). By entering into the Engagement Letters, plaintiffs
also agreed to limit Grassi's liabilities to the lesser of actual damages incurred or
two times the amount of the fee paid for the specific services from which the claimed
damages arose (see NYCSEF # 66 - 2015 Engagement Letter at Exh H). The
limitation of liability provision also specified that in no event shall Grassi be liable
for any punitive, consequential, lost profits, or benefit-of-the-bargain damages in
connection with the services rendered (id.).

On or about January 30, 2015, Grassi, through Fischer, agreed to meet and
provide sales tax advice and guidance to Island, and the parties scheduled a
meeting for April 10, 2015 (AC ,r 20). Between January 30, 2015 and April 9, 2015,
representatives from Island and Grassi exchanged numerous emails, and had
numerous verbal conversations, concerning the sales tax questions and issues - a
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period of nearly 70 days (id. ~ 26). At the April 10, 2015 meeting, Grassi advised
Island that the Island entities, which manufactured and installed the building
panels, were eligible for a manufacturer exemption which designates all material
purchases used in the manufacturing process as eligible for exemption of sales tax
(id. ~28). They further advised that these sales tax exemptions existed regardless of
whether the panels would be installed at property owned by an exempt organization
or government entity (id. ~ 29). As to the sales tax treatment and associated
manufacturing exemptions (if any) in Connecticut, Massachusetts, and
Pennsylvania, Grassi advised Island that they needed to and would research the
relevant rules in those states (id. ~ 30). But as to New York and New Jersey,
however, Grassi did not indicate any further investigation was required (id.).

Island acted upon Grassi's advice and guidance (id. at~ 42). By April 14,
2015, Island's controller advised Island's principals and other members of its
business team that immediate changes would need to be made to Island's systems
to reflect the tax exempt status of its materials purchases (id.). Island commenced
the "Sales Tax Recovery Project", the purpose of which was to: (1) implement
changes to Island's materials purchasing processes; (2) claim as tax exempt
purchases made for materials used as part of the manufacturing/fabrication process;
(3) reorganize how Island handled the performance of their fabrication and
installation obligations; and (4) pursue credits and/or reimbursement of sales tax
paid by Island in prior years (id. ~ 43). Island also implemented significant changes
to their bid and contracting processes - contract bids made by Island after April 10,
2015 accounted for a significantly lesser sales tax liability (id. ~ 44).

On May 5, 2015, Island directed Grassi to pursue reimbursement/credits with
New York and New Jersey to recover sales tax paid in prior years on Island's behalf
(id. ~ 45). Following the April 10, 2015 meeting, and on numerous occasions from
2015 through June 16, 2020, Grassi, through Fischer and McCullough, allegedly
consistently, continually, and repeatedly advised, both verbally and in writing, that
Island did not need to pay sales tax on materials purchased for fabrication of panels
at their New York facility (id. ~ 47).

On June 16, 2020, in response to a request for a written memorandum
detailing sales tax treatment to Island's operations, Grassi informed Island for the
first time that sales tax advice/guidance it had given was wrong (id. ~ 49). Plaintiffs
allege that Grassi's June 16, 2020 analysis directly and unambiguously contradicted
the sales tax advice and guidance that Grassi had previously provided to Island (id
~ 51). Fischer, in his email transmitting the sales tax memorandum to Island,
pointed out a section "highlighted in gray" where Grassi alleged that its 2020
findings were the result of New York state starting to challenge whether or not use
tax is required to be paid on self-installed manufactured goods (id. ~~ 52-53).

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Plaintiffs allege that Grassi's June 16, 2020 findings did not reflect a change
in New York state tax law (id. ,r 54). Rather, a NYSDTF Advisory Opinion TSB-A-
10(42)S, dated Sept 22, 2010, was directly on point and was contrary to the
advice/guidance continuously given by Grassi to Island for 5 years (id. at ,r,r 54-55).
Plaintiffs maintain that the opinion was accessible to the public at large and to
Grassi prior to the April 10, 2015 meeting, along with other earlier NYSDTF
Advisory Opinions that match the findings set forth in Grassi's June 16, 2020
memorandum (id. ,r,r 58-62).

According to plaintiffs, Grassi learned that the sales tax advice given to
Island concerning the so-called manufacturing exemption was incorrect after April
10, 2015, but continued to give Island the incorrect guidance while providing
different advice to other Grassi clients in the construction and manufacturing
industries (id. ,r 69). Grassi also has admitted in an email dated February 4, 2021,
that they failed to investigate and could not produce any writing documenting its
basis or rationale for its prior sales tax advice and guidance (id. at ,r,r 70-72).

On or about February 16, 2021, and as continuation of its representation of
Island concerning sales tax issues since at least April 10, 2014, Grassi undertook
the representation of Island in connection with a sales tax audit by the NYSDTF for
multiple plaintiff companies, and for a time frame of March 2016 through the end of
February 2020 (id. at ,r 7 4). Plaintiffs allege that this sales tax audit representation
undertaken by Grassi was and is a defense of the erroneous sales tax advice and
guidance Grassi had given to Island beginning in April, 2015 (id.).

Plaintiffs claim that Grassi's actions caused Island to suffer significant
monetary damages, which includes repayment of sales tax liabilities, penalties,
interest on the repayment amount, loss of profits, payment to Grassi in return for
defective professional services and other direct and proximate damages (id. ,r 75).

Defendant, in response to plaintiffs' claims, points out that the parties'
Engagement Letters from 2009 to 2020 that have the same or substantially the
same language with respect to plaintiffs' responsibilities, additional services, and
conditions precedent for commencing suit (NYSCEF # 58 - Wilek Aff; NYSCEF #s
61-71- Engagement Letters). Defendant argues that because plaintiffs failed to
comply with the condition precedent, their complaint must be dismissed (NYSCEF #
39 - Deft's MOL at 3-4; NYSCEF # 85 - Reply at 2-3; Wilek Aff ,r,r 39-40).
Defendant maintains that the Engagement Letters apply and are enforceable, as
plaintiffs themselves have acknowledged their applicability to this action (Deft's
MOL at 3). And contrary to plaintiffs' assertion no Engagement Letters were
entered into for the 2014-2015 sales tax advice, defendant argues that the
"ADDITIONAL SERVICES" provision in all the Engagement Letters clearly states
that "[a]ny additional services that you may request, that we agree to provide, may
be subject of separate written agreements ... [which] in the absence of any other
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written communication from us documenting such additional services, our services
will continue to be governed by the terms of this Engagement letter" (id. at 5).
Defendant states that no separate written agreement or amendment, other than the
Engagement Letter, was entered into with respect to the alleged advice that was
given in 2014-2015. Defendant claims that plaintiffs agreed to the specific terms
and conditions set forth in the Engagement Letters on at least seven occasions after
2012 without objection (id.).

Defendant raises the three-year statute of limitations for professional
malpractice claims as barring plaintiffs suit on the 2015 sales tax advice that
defendant did not work on since 2015 forestalling plaintiffs' argument on
continuous representation (id. at 9-11).

As to the plaintiffs' claims for gross negligence and intentional
misrepresentation, defendant argues that plaintiffs failed to state a cause of action
for these claim as their allegations are insufficient. Further, defendant argue that
the misrepresentation claim should be dismissed also because it is duplicative of the
malpractice claim.

Finally, defendant argues that absent gross negligence, plaintiffs' damages
claims are limited by the parties' Engagement Letters.

DISCUSSION

Defendant makes three arguments to dismiss the plaintiffs' claims: (1) failure
to comply with a condition precedent set forth in the Engagement Letters; (2) the
three-year statute of limitations bars this suit; and (3) plaintiffs fail to state a cause
of action based on documentary evidence, or allege their intentional
misrepresentation with specificity, which claim is also duplicative of their
professional malpractice claim, or allege their gross negligence claim with
sufficiency. Each of the three arguments with plaintiffs' corresponding opposition 1
will be addressed in turn starting with defendant's statute of limitations argument,
followed by the condition precedent issue, the failure to state a cause of action
arguments, and finally, the damages issue.

1
Plaintiffs preface their opposition to defendant's motion with an objection to defendant's submission
of an affirmation by its counsel, David Wilek, Esq., because Wilek cannot be a witness, his opinions
are inadmissible and his attached exhibits N-8, which Wilek uses as a basis of his conjectures are
also inadmissible (NYSCEF # 80, Pltfs' MOL at 4-5; NYSCEF #'s 72-77 exhs N-S [Tax Refund, email,
audit letter, app for refund, IRS audit schedule letter of 4/7/2020]). This argument prompted a reply
argument from defendant pointing to the affirmation by plaintiffs' counsel, William Vita, Esq., whom
defendant claims has no knowledge of the facts and whose speculation on possible forthcoming
unspecified evidence from plaintiff, as well as the entire affirmation, should be disregarded
(NYSCEF # 85 - Defts' Reply at 1). The parties' tit-for-tat arguments are unweleomed and will not
be addressed.
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On a motion to dismiss under CPLR 321l(a)(l), a party may move for
judgment dismissing one or more causes of action asserted against him on the
ground that a defense to the asserted claim is founded upon documentary evidence
(511 W 232nd Owners Corp. vJennifer Realty Co., 98 NY2d 144, 152 [2002]]). And
on a motion to dismiss under CPLR 32ll(a)(7), the court must accept the facts
alleged in the complaint as true and accord plaintiffs the benefit of every possible
favorable inference, determining only whether the facts as alleged "fit within any
cognizable legal theory" (Tax Equity Now NY. LLC v City ofNew York et al., 42
NY3d 1, 6 [2024], quoting Leon v Martinez, 84 NY2d 83, 87-88 [1994]). However, if
the allegations consist of bare legal conclusions and factual claims that are either
inherently incredible or flatly contradicted by documentary evidence, such benefit is
not warranted (511 W 232nd Owners Corp, 98 NY2d at 153 [denying defendant's
motion to dismiss because the documentary evidence did not clearly refute
plaintiffs allegations]).

1. Statute of Limitations

Defendant argues that plaintiffs' causes of action based on malpractice for its
sales tax advice in 2015 are barred by the three-year statute of limitations for
professional malpractice (id. at 9-11). And because such a claim accrues when the
malpractice is initially committed, plaintiffs' claims for professional malpractice
expired in 2018 (id. at 10). Defendant adds that the continuous representation
doctrine did not toll the statute of limitations here because the recurrence of any
professional relationship between the parties was limited to incidental and general
advising and not specific to the 2015 advice (id. at 11).

In opposing defendant's statute of limitations argument, plaintiffs contend
that the parties had an understanding that more work is needed and that defendant
had to engage in corrective measures or remedial measures (id. at 18). Citing
Shumsky v Eisenstein (96 NY2d 164, 168 [2001]), plaintiffs assert that "[f]or
accounting malpractice, the statute of limitations begins to run when the
accounting representation is completed. The continuous representation doctrine
tolled the statute of limitations for plaintiffs' cause of action such that their
complaint is timely" (id. at 18-19). Plaintiffs contend that defendant continued to
provide their professional advice and guidance on the sales tax issues from 2015
through late 2021 and dealt with tax authorities to try to avoid the very sales taxes
that defendant had claimed were not taxable (id.). Plaintiffs claim that defendants
were engaged in continuous representant which tolls the statute of limitations for
accounting malpractice (id. at 18 citing Lemle v Regen, Benz & MacKenzie, CPA,
PC, 165 AD3d 414, 415 [1st Dept 2018]).

Pursuant to CPLR 214[6], the statute of limitations for accounting
malpractice is three years. New York courts have held that a professional
malpractice claim accrues at the time "the malpractice is committed, not when the

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clients discover it" (Williamson ex rel. Lipper Convertibles, L.P. v
PricewaterhouseCoopers LLP, 9 NY3d 1, 8 [2007]); see also Lemle 165 AD3d at 414
[finding professional malpractice accrued when the client filed tax returns, not
when client discovered they were wrong]). However, the continuous representation
doctrine will toll a statute of limitations on a professional malpractice action when
there is a continuing professional relationship between parties that specifically
pertains to the matter in which the alleged malpractice was committed in the first
place (see Shumsky, 96 NY2d 164).

The continuous representation doctrine does not apply in cases where the
professional relationship merely continues with later services that are not related to
the original services (see Ackerman v PricewaterhouseCoopers, 252 AD2d 179 [1st
Dept 1998]; see also CLP Leasing Co., LP v Nessen, 12 AD3d 226 [1st Dept 2004]).
However, the continuous representation doctrine has been found to toll a statute of
limitations where defendant undertook to defend or explain earlier advice they had
provided or where the defendant represented plaintiffs in audited investigations by
the IRS (see Ackerman, 252 AD2d 179 [holding defendants' repeated use of an
improper accounting method, repeated failure to disclose risks associated with it,
and representations that it was handling an IRS audit in relation was enough
evidence to support the application of continuous representation]; see also Lemle,
165 AD3d 414 [holding continuous representation doctrine tolled statute of
limitations where without any new engagement by plaintiff, defendants undertook
to respond to audit letter and defend or explain the treatment given on an earlier
2012 return and service was related to the alleged malpractice in 2012]; cf. Apple
Bank for Sau. v PricewaterhouseCoopers LLP, 70 AD3d 438, 438 [1st Dept 2010]
[holding continuous representation doctrine did not toll statute of limitations even
where defendant audited plaintiffs year-end financial statements, prepared its tax
returns and provided ad hoc tax advice to plaintiff because the parties never had an
express, mutual agreement to advise plaintiff after the original advice]).

Here, plaintiffs have alleged sufficient facts establishing that the continuous
representation doctrine tolled the statute of limitations for professional malpractice
in this case. While the follow-up June 16, 2020, memorandum and follow-up 2021
emails do repeat, clarify, and elaborate on the advice first given, this alone is likely
not sufficient to rise to what is needed to trigger the continuous representation
doctrine (see Apple Bank for Sau., 70 AD3d at 438). However, plaintiffs here also
allege and demonstrate that defendant continued to provide their professional
advice and guidance regarding sales taxes by defending a tax appeal on the exact
issues through late 2021 (see Lemle, 165 AD3d at 414). These allegations support a
reasonable inference that the parties' professional relationship was not just
comprised of a recurrence of general duties.

Accordingly, defendant's motion to dismiss the amended complaint as barred
by the statute of limitations is denied.
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2. Condition Precedent

Defendant argues that because plaintiffs failed to comply with the terms of
the Engagement Letters by failing to give defendant requisite notice of claim within
one year of completion of subject services and failing to seek mediation as a
condition precedent to bring suit, the complaint should be dismissed (NYSCEF # 39
- Deft's MOL at 5-9). Defendant contends that the Engagement Letters signed by
both parties are binding and dispositive (id. at 5). Defendant states that plaintiffs
agreed that written notice of the dispute was required to be provided within one
year from the date of completion of the subject services and that mediation was a
condition precedent to bringing suit (id. at 6-8). Defendant informs that while the
alleged advice and services rendered occurred in 2015, plaintiffs' notice of a
potential claim came on June 6, 2022, and their request for mediation followed five
months thereafter (id. at 8).

Plaintiffs assert that the Engagement Letters attached as defendants'
exhibits C-M (NYSCEF #'s 61-71) do not apply to the 2014-2015 sales tax advice
because other "written communications" sufficiently document the advice and the
subject services are not covered by any Engagement Letters (Pltfs' MOL at 6). The
sales tax advice at issue is evidenced in written communications and in emails from
April 2015 and 2020-2021 (id. at 7). Thus, plaintiff concludes that the condition
precedent in the Engagement Letters do not apply to the 2014-2015 sales tax
advice.

In any event, plaintiffs address the required one-year notice of claims upon
completion of services. Plaintiffs assert that in December 2021 they had asked
defendants to let their insurer know to expect claims to be forthcoming, and in June
2022, defendant was put on notice of plaintiffs' claim against it with the summons
with notice for this suit (id. at 9; NYSCEF # 59, Exh A- Summons). Plaintiffs claim
that the notice was timely because until at least October 28, 2021, defendant was
working on the tax appeal on the 2015 sales tax advice. Hence, plaintiffs conclude
that the "completion of services" was at the end of October 2021 (Pltfs' MOL at 9).

Contractual provisions that place a requirement on plaintiffs to file a notice
of claim or to seek mediation before they can bring suit are commonly approved and
upheld by New York courts as valid conditions precedent (see A.H.A. General
Const., Inc. v New York City Housing Authority, 92 NY2d 20, 31-32 [1998] [holding a
provision requiring plaintiffs to serve a timely notice of claim was a valid condition
precedent, and not an exculpatory clause]). Failure to comply has often been found
as a reason for dismissal of a plaintiffs' complaint (see Archstone Dev. LLC v Renval
Constr. LLC, 156 AD3d 432, 433 [1st Dept 2017] [holding lower court correctly
dismissed breach of contract claim on the ground that plaintiff failed to satisfy a
condition precedent of pursuing mediation prior to bringing suit]; see also
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Centennial Elevator Industries, Inc. v JRM Construction Management, LLC, 212
AD3d 457, 458 [1st Dept 2023] [same].

If a condition precedent operates to potentially waive a claim before the
applicable statute of limitations has expired, it may be examined as to whether it
serves to make the time for bringing suit "unreasonably short" (see Planet Constr.
Corp. v Board of Educ. of City of N. Y., 7 NY2d 381, 385 [1960]). At the same time,
CPLR § 201 itself allows for written agreements to prescribe a shorter time within
which an action is to be commenced (see CPLR §201). New York courts have thus
upheld contractual limitations waiving claims not brought within a period of time
as short as one year or even 90 days (see Assured Guar. (UK) Ltd. v J.P. Morgan
Inv. Mgt. Inc., 80 AD3d 293, 304 [1st Dept 2010] [holding a 90 day limit for
asserting objections set forth in the parties' investment management agreement
was reasonable as a matter of law]; see also APR Energy Holdings Ltd. v Deloitte
Tax LLP, 209 AD3d 402, 403 [1st Dept 2022] [upholding a provision in engagement
letter that required suits to be commenced within 1 year of accrual]).

Here, the Engagement Letters from 2012 to 2020 include provisions requiring
plaintiffs to provide notice of claim within one year from the date of the completion
of the subject services and to pursue mediation within 90 days after (see e.g. Exhs C
through M). These provisions make it such that noncompliance renders a plaintiffs
claim as waived (see David Fanara!, Inc. v Dember Const. Corp., 195 AD2d 346, 348
[1st Dept 1993]). However, none of these Engagement Letters cover the sales tax
advice service. Thus, plaintiffs' point that the condition precedent in the
Engagement Letters does not cover the sales tax service is well taken.

In any event, even if the condition precedent were to apply, dismissal is not
appropriate at this point when the parties disagree over when "completion of
subject services" occurred. Defendant argues that "completion of subject services"
was limited and completed in 2015 and points to provisions within the Engagement
Letters that caution plaintiffs that advice may change over time and not be
applicable at a future date. However, plaintiffs point out that defendant continued
services directly related to the advice at issue until 2021 when the subject services
were completed.

As such, despite plaintiffs request to exclude the Engagement Letters in
defendant's exhibits C through M, these exhibits raise a question of fact as to
whether they apply to the sales tax advice and subsequent work thereon. Thus,
defendants' motion to dismiss the amended complaint for plaintiffs' failure to
comply with a condition precedent is denied.

3. Failure to State a Cause of Action

Intentional Misrepresentation
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Defendant argues that plaintiffs do not plead their claim for intentional
misrepresentation with the adequate level of specificity as required for claims of
fraud because the advice defendant gave was approved by the NYSDT.

Under New York law, to plead misrepresentation or fraud, "... though there is
no requirement of "unassailable proof' at the pleading stage," the complaint must
allege facts that "suffice to permit a reasonable inference of the alleged misconduct,"
(see Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 [2009)). '"[A]t
the pleading stage of a fraud case against an accountant, the plaintiff need not be
able to make an evidentiary showing of exactly what the accountant knew as to
falsehoods in the certified financial statements"' (Bullen v CohnReznick, LLP, 194
AD3d 637, 637 [1st Dept 2021] [internal citation omitted]). "[A]ctual knowledge[,]
[however,] need only be pleaded generally, [given], particularly at the prediscovery
stage, that a plaintiff lacks access to the very discovery materials which would
illuminate a defendant's state of mind [citation omitted]" (Cohen Brothers Realty
Corp. v Mapes, 181 AD3d 401, 403-404 [1st Dept 2020)).

Here, plaintiffs have sufficiently pleaded negligent and intentional
misrepresentation with sufficient particularity to survive the dismissal stage.
Plaintiffs' complaint alleges that defendant falsely represented to plaintiffs that its
conclusions in 2020 represented recent changes in law or changes in interpretation
by the NYSDTF. Further, plaintiffs' complaint also points to advisory opinions from
as early as 2003 as indication that defendant knew or should have known that it
was misrepresenting factual information. Because at the pleading stage actual
knowledge need only be pleaded to the extent that a plaintiff can produce
information at the pre-discovery stage, plaintiffs have sufficiently pleaded negligent
and intentional misrepresentation as to survive dismissal.

Defendant claims that because plaintiffs had in the Engagement letter
agreed that all managerial decisions were their own responsibility, acknowledged
that tax law was constantly changing, and stopped paying sales and use tax prior to
any purported advice from Grassi, plaintiffs cannot demonstrate causation for their
claims of accounting malpractice and misrepresentation (id. at 12-13). Defendant
further maintains that documentary evidence shows there was no negligence or
misrepresentation because one of plaintiffs received a refund for sales taxes paid in
2012 and 2014 and an approval of non-payment of sales tax for the period of 2014-
2016 (id. at 12).

Under New York law, "[a] claim of professional negligence requires proof that
there was a departure from the accepted standards of practice and that the
departure was a proximate cause of the injury" (Herbert H. Post & Co. v Sidney
Bitterman, Inc., 219 AD2d 214, 223 [1st Dept 1996)). '"A plaintiff must establish,
beyond the point of speculation and conjecture, a causal connection between its
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losses and the [accountant's] actions'," (id.). A mere recitation that damages are
proximately caused by misrepresentations and omissions will not be enough,
especially where a complaint is to be pleaded with sufficient particularity (see
Friedman v Anderson, 23 AD3d 163, 165 [1st Dept 2005] [finding that plaintiff
failed to adequately plead facts sufficient to make out a claim for fraud where the
complaint merely asserted that defendant knew his representations were false and
made without any knowledge or factual support]).

Here, defendant's evidence does not utterly refute the alleged factual
allegations in the complaint. Rather, these documents at most raise questions of
fact as to the proximate cause of plaintiffs' alleged injury and the reasonableness of
their reliance. Accepting plaintiffs' allegation as true that defendant gave incorrect
advice to plaintiffs while providing different advice to similar clients, the court must
further accept that had plaintiffs not followed the advice of defendant regarding
sales tax advice and filed tax returns directly corresponding to that advice, they
would not face monetary damages including the repayment of sales tax liabilities
together with interest and penalties on the repayment amounts. Furthermore,
defendant concedes that it defended the sales tax advice that they provided to
plaintiffs. Thus, the reasonable conclusion is that plaintiffs have adequately
pleaded professional negligence and misrepresentation claims so as to avoid
dismissal at this stage of litigation.

Gross Negligence

Defendant argues that because gross negligence is different from ordinary
negligence in that it is conduct that 'smacks of intentional wrongdoing', plaintiffs
have failed to plead any facts that would arise to the level of gross negligence as a
matter of law.

It is true that in the context of liability, "'gross negligence' differs in kind, not
only degree, from claims of ordinary negligence [and] evinces a reckless disregard
for the rights of others" (see Colnaghi, U.S.A. v Jewelers Protection Servs, 81 NY2d
821, 824 [1993]). Where a plaintiffs cause of action merely repeats the allegations
for a negligence cause of action and simply adds a claim that the defendant
recklessly disregarded facts, this allegation will be insufficient to meet any special
pleading standards that may be required (see Credit Alliance Corp. v Arthur
Andersen & Co, 65 NY2d 536, 554 [1985] [holding that where a cause of action for
fraud repeats the allegations for negligence and merely adds a claim that defendant
recklessly disregarded facts which would have apprised it that its reports were
misleading, this allegation was insufficient under the special pleading standards
required under CPLR 3016[b] and the case should have been dismissed]). Claims of
gross negligence and recklessness have been found to be sufficiently particularized
under CPLR 3016(b) where the complaint alleges that the defendant failed to
independently verify provided information, despite having notice of particular
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circumstances raising doubts as to the verity of such information (see Foothill
Capital Corp. v Grant Thornton LLP, 276 AD2d 437 [1st Dept 2000]).

Plaintiffs here have sufficiently pleaded their claim of gross negligence with
sufficient particularity so as to survive the motion to dismiss. In their complaint,
plaintiffs specifically allege that defendant acted with not just reckless disregard
but that defendant provided different and correct sales tax advice and guidance to
other similarly situated clients, while failing to notify plaintiffs of its error or take
any remedial steps to mitigate the damage. Plaintiffs further allege that defendant
took steps to intentionally conceal any such negligence by falsely representing to
plaintiffs in 2020 that their newfound conclusions were a result of a change in law.
Thus, plaintiffs have gone beyond merely adding a claim that defendant acted with
a reckless disregard for plaintiffs' right and have specifically enumerated factual
allegations, which if taken as true as the court must do at the pleading stage, could
reasonably be found by a fact-finder to evince an utter indifference to plaintiffs'
rights. Plaintiffs' claim for gross negligence withstands defendant's motion to
dismiss.

Misrepresentation Claims as Duplicative of Professional Malpractice Claim

Defendant argues that plaintiffs' negligence and intentional
misrepresentation claims should be dismissed as duplicative of professional
malpractice claim because a plaintiff should not be awarded a longer statute of
limitations simply by labeling a claim for accounting malpractice as fraud.

New York courts have held that fraud claims that originate from a source of
duty that is different from the contractual duty that a claim of breach arises from
are distinct and not duplicative (see IS Chrystie Mgt. LLC v ADP, LLC, 205 AD3d
418 [1st Dept 2022] [holding that where the fraud alleged was separate from the
allegation that defendants' did not perform its obligations under the parties
contract because of an additional misrepresentation, the claims were not
duplicative]). Courts have found that the fraud claim is not rendered redundant
when it is premised on defendant's intentional misrepresentations outside the scope
of its contractual duties to perform (see Wyle Inc. v ITT Corp., 130 AD3d 438, 441
[1st Dept 2015] [holding where a core of plaintiffs claim is that defendants
intentionally misrepresented material facts about various individual loans, the
claim was a separate claim for fraud notwithstanding the existence of a breach of
contract claim]).

Here, as alleged, plaintiffs' misrepresentation claims are sufficiently distinct
from their professional malpractice claims to withstand dismissal. Plaintiffs'
malpractice claims are based on defendant's professional duty of due care and
diligence, which was breached when defendant failed to exercise reasonable skill as
accountants prior to giving advice to plaintiffs on April 10, 2015, or anytime
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thereafter. By contrast, the misrepresentation claim goes beyond just professional
malpractice to allege that defendants intentionally or negligently attempted to
conceal their prior negligence and falsely represented to plaintiffs that their 2020
conclusions had changed due to a change in the law or its interpretation. It is this
alleged false representation that serves as the basis for the misrepresentation
claims, not merely the same malpractice alleged from the advice of the April 10,
2015 meeting.

Thus, there is sufficient basis at this juncture to conclude that plaintiffs'
malpractice and misrepresentation claims are based on two separate foundations
such as to avoid being duplicative (see Wyle Inc., 130 AD3d at 440; Johnson v
Proskauer Rose, LLP, 2014 WL 317839, *5 [Sup Ct, NY County, Jan. 23, 2014], affd
129 AD3d 59 [1st Dept 2015] ["it is proper to deny a motion to dismiss a fraud claim
as duplicative of a legal malpractice claim where 'the fraud cause of action was
based upon tortious conduct independent of the alleged malpractice, i.e., an alleged
misrepresentation as to the eligibility of the defendant [attorney] to practice law in
the State of Florida, and the plaintiffs alleged that damages flowed from this
conduct"']).

4. Damages

Defendant urges the court to dismiss categories of damages that the plaintiffs
had agreed were not recoverable in the Engagement Letters (id. *15). Defendant
avers that any allegations or claims of lost profits based upon bids on projects are
purely speculative and there are no factual allegations to suggest plaintiffs will yet
incur any damages from NYSDT's determination that plaintiffs were required to
pay use and sales taxes (id. at 16). Defendant further maintains that the parties
agreed to limit the damages recoverable to the lesser of actual damages incurred or
two times the amount of the fee paid for the specific service from which the claimed
damages arose so long as Grassi was not willfully or grossly negligent (id. at 16-17).
At any rate, defendant argues that damages are contractually limited regardless of
the claim being made by the plaintiffs because the Engagement Letters further
exclude punitive or consequential damages in any event without exception (id. at
17-18).

Defendant argues in the alternative that certain categories of damages
plaintiffs seeks should be dismissed because the Engagement Letters establish that
the parties have agreed to limit damages recoverable to a set amount and limit
liability regardless of the claim brought by plaintiffs.

A party may not pursue damages awards based on speculation or conjecture
(see Wathne Imports, Ltd. v PRL USA, Inc., 101 AD3d 83, 87 [1st Dept 2012]). In
addition, contract terms that specify a sole remedy and are sufficiently clear in
limiting liability are consistently approved and upheld by New York courts (see
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Matter of Part 60 Put-Back Litig., 36 NY3d 342 [2020]; see also U.S. Bank National
Assn v DLJ Mtge Capital, Inc., 38 NY3d 169 [2022]). Particularly where contracts
are entered into between two sophisticated parties and in the absence of
countervailing public policy concerns, freedom of contract principles typically govern
contractual limitations of liability and a contract is assumed to represent the
parties' agreement on the allocation of risk (see Part 60 Put-Back Litig., 36 NY3d
342).
That said, while contractual provisions limiting liability are generally
enforceable, "[h]owever, it is New York's public policy that a party cannot 'insulte
itself from damages caused by grossly negligent conduct"' (Abacus Federal Sau.
Bank v ADT Sec. Services, Inc., 18 NY3d 675, 682-683 [2012]); see also IS Chrystie
Mgt LLC, 205 AD3d 418).

Here, it is true that the Engagement Letters include a paragraph entitled
"LIMITATIONS OF LIABILITY" that reads as follows:

"Client agrees that any liability of Grassi & Co. arising out of the
services provided under this agreement is limited to the lesser of
actual damages incurred or two times the amount of the fee paid for
the specific service from which the claimed damages arose ... .In no
event shall Grassi & Co. or its personnel be liable to you for any
punitive, consequential, lost profits, or benefit-of-the bargain damages
in connection with the services provided under this agreement."

(see e.g. NYSCEF # 66 at 10). Because, as alleged, the limited liability provision
within the Engagement Letters leaves no room for plaintiffs to ever recover upon
consequential or punitive damages, this allows defendants to evade any additional
liability that may result from gross negligence or willful conduct, in direct violation
of standing New York law. Therefore, while damages should be limited as provided
within the limited liability provision, plaintiffs may maintain an action for punitive
and consequential damages if defendants' alleged conduct were found to constitute
gross negligence and willful misconduct. Thus, defendant's request to dismiss
plaintiffs request for punitive or consequential damages is denied at this juncture.

CONCLUSION

Based on the foregoing, it is

ORDERED that defendant Grassi & Co, Certified Public Accountants' motion
to dismiss plaintiff Island Consolidated's Amended Complaint is denied; it is further

ORDERED that within 30 days of thee-filing of this order, defendant shall
file an answer to the Complaint; and it is further

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ORDERED that a preliminary conference shall be held via Microsoft Teams
on February 18, 2025, at 11:30 AM or at such other time that the parties shall set
with the court's law clerk. Prior to the conference, the parties shall first meet and
confer to stipulate to a preliminary conference order, available at
https://www .nycourts.gov/LegacyPDFS/courts/comdiv/NY/PDFs/part49-PC-Order-
fillable.pdf, in lieu of a conference; and it is further

ORDERED that that counsel for plaintiff shall serve a copy of this decision,
along with notice of entry, on defendant within ten days of this filing.

1/7/2025
DATE MARGARET A. CHAN, J.S.C.

~
CHECK ONE: CASE DISPOSED NON-FINAL DISPOSITION

GRANTED 0 DENIED GRANTED IN PART □ OTHER
APPLICATION: SETTLE ORDER SUBMIT ORDER

CHECK IF APPROPRIATE: INCLUDES TRANSFER/REASSIGN FIDUCIARY APPOINTMENT □ REFERENCE

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10785321. Public record. Not legal advice.