In this civil appeal, the Arizona Court of Appeals addressed an issue of first impression in Arizona: When does a cause of action for accounting malpractice accrue? The court of appeals held that, “[c]onsistent with the discovery rule, . . . determining the accrual date is a fact-based inquiry that turns on when a party knew or reasonably should have known of facts establishing a basis for the claim.”
Consistent with the discovery rule, we hold that determining the accrual date [for an accounting malpractice claim] is a fact-based inquiry that turns on when a party knew or reasonably should have known of facts establishing a basis for the claim.
—Coulter v. Grant Thornton, LLP, No. 1 CA-CV 14-0625 (Ariz. Ct. App. Jan. 3, 2017)
In 2000, the three plaintiffs in this case (which include Arizona auto mogul Bill Coulter) hired the accounting and tax advisory firm Grant Thornton, LLP to implement strategies intended to reduce their income tax liability. Unfortunately for the plaintiffs, the IRS disapproved of the strategies recommended by Grant Thornton and issued notices of deficiency to the plaintiffs in 2006 and 2007 reflecting millions of dollars in tax deficiencies and penalties. At the recommendation of Grant Thornton, Coulter and another of the plaintiffs unsuccessfully challenged the deficiency determinations in the United States Tax Court. All three plaintiffs ultimately settled with the IRS and paid significant taxes as a result.
The plaintiffs sued Grant Thornton in November 2011 in Arizona state court for breach of fiduciary duty, professional negligence, negligent misrepresentation, common law fraud, aiding and abetting, racketeering, breach of contract, and contractual bad faith. The superior court granted Grant Thornton’s motion to dismiss all but the breach of contract and bad faith claims as time-barred. The superior court concluded the plaintiffs’ tort claims, each of which was subject to either a two- or three-year limitations period, accrued when the IRS issued notices of deficiency in 2006 and 2007. The plaintiffs then amended their complaint to assert a claim for fraudulent concealment. The superior court dismissed this claim as well, finding it was barred by the three-year statute of limitations for fraud claims.
The court of appeals reversed the dismissal of the plaintiffs’ tort claims because it determined there was a question of fact as to when the plaintiffs discovered or should have discovered they were injured by Grant Thornton’s actions. The court of appeals ruled the accrual of an accounting malpractice claim is governed by the “discovery rule.” Under the discovery rule, a cause of action does not accrue until a plaintiff discovers, or by the exercise of reasonable diligence should have discovered, that he or she has been injured by the defendant’s conduct. The court of appeals rejected the bright-line rules adopted by some other courts in situations where, as in this case, a taxpayer receives a notice of deficiency and then continues to rely on its accountant’s advice in challenging the IRS’s determination in the tax court. Courts applying these bright-line rules fix either the date of the IRS’s notice of deficiency, which was the approach adopted by the superior court in this case, or the date the taxpayer’s liability is ultimately resolved as the accrual date. Applying the same type of fact-based, case-by-case approach used in Arizona for determining the accrual date for attorney malpractice claims, the court of appeals concluded the superior court erred in finding the limitations period for the plaintiffs’ initial tort claims necessarily commenced in this case when the IRS issued its notices of deficiency to the plaintiffs. The court of appeals stated: “[T]here remains a fact question regarding whether [the plaintiffs] reasonably continued to rely on [their accountant’s] reassurances, and when they discovered (or should have discovered) that the accounting advice was improper and the IRS’s position would be upheld on appeal.”
Addressing, the fraudulent concealment claim added by the plaintiffs after their initial tort claims had been dismissed, the court of appeals held the determination of when that claim accrued was likewise a fact question that must be resolved by a jury. The court of appeals rejected Grant Thornton’s argument that the plaintiffs’ knowledge in June 2008 of a complaint filed by the Department of Justice (DOJ) against Blair Stover, the Grant Thornton accountant who gave them the bad tax advice, started the running of the limitations period for their fraudulent concealment claim. The court of appeals reasoned the filing of the DOJ’s complaint against Stover did not resolve whether he had in fact committed fraud. Given Stover’s continuing representations to the plaintiffs that they would prevail in their tax case and that the DOJ’s charges against him were not well founded, the court of appeals concluded the statute of limitations on the plaintiffs’ fraud claim did not necessarily commence when they received a copy of the government’s complaint against Stover; instead, the dispositive question on the accrual issue was when the plaintiffs discovered or should have discovered the government’s claims against Stover were meritorious.
To read the court of appeals’ full published opinion in this case, click here.