Judge: Daniel S. Murphy, Case: 22STCV355542, Date: 2023-03-27 Tentative Ruling

Case Number: 22STCV355542    Hearing Date: March 27, 2023    Dept: 32

BACKGROUND

            On November 8, 2022, Plaintiff Gary Korngold filed this accounting malpractice action against Defendant Stanley Ingel. The single cause of action alleges that between 2006 and 2019, Plaintiff retained Defendant to provide accounting services on behalf of the Korngold Family Trust. The complaint alleges that Defendant defectively prepared the Trust’s tax returns and provided faulty tax advice.

            On January 6, 2023, Defendant filed the instant demurrer, arguing that Plaintiff’s claim is barred by the statute of limitations.

LEGAL STANDARD

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Ibid.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, supra, 147 Cal.App.4th at 747.) A complaint will survive demurrer if it sufficiently apprises the defendant of the issues, and specificity is not required where discovery will clarify the ambiguities. (See Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 608.) All reasonable inferences are drawn in favor of the complaint. (Kruss v. Booth (2010) 185 Cal.App.4th 699, 713.)

MEET AND CONFER

Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer. (Code Civ. Proc., §§ 430.41, 435.5.) The Court notes that Defendant has complied with the meet and confer requirement. (Wright Decl. ¶ 2.)

DISCUSSION

            For “[a]n action upon a contract, obligation or liability not founded upon an instrument of writing,” the statute of limitations is two years. (Code Civ. Proc., § 339(1).) For accounting malpractice based on negligent tax preparation, the statute of limitations under Section 339 does not begin to run until the tax deficiency is assessed by the relevant tax authority, because that is when the harm accrues. (Int'l Engine Parts v. Feddersen & Co. (1995) 9 Cal.4th 606, 622; Moss v. Duncan (2019) 36 Cal.App.5th 569, 573-75.) Although in some cases the injury will be apparent and negative consequences may arise before a final assessment, courts rely on the bright line rule to maintain uniformity. (Id. at pp. 621-22; Van Dyke v. Dunker & Aced (1996) 46 Cal.App.4th 446, 454.) This avoids “the anomalies that would occur if claims were treated differently based on the taxpayer's suspicion of negligence.” (Moss, supra, 36 Cal.App.5th at p. 576.) Furthermore, actual injury is a requirement for the running of the statute of limitations regardless of a plaintiff’s knowledge of wrongdoing. (Feddersen, supra, 9 Cal.4th at p. 613.)    

            Defendant argues that the allegations reveal a statute of limitations defense because Plaintiff alleges that Defendant worked for the Trust until 2019. (See Compl. ¶ 8.) According to Defendant, this means the statute ran in 2021 at the latest. However, the statute of limitations for accounting malpractice does not necessarily begin running when the accounting services cease. Instead, the statute begins when actual injury occurs, when tax liability is imposed. (See Feddersen, supra, 9 Cal.4th at p. 622; Moss, supra, 36 Cal.App.5th at pp. 573-75.) Plaintiff’s alleged damages are based on Defendant’s purported failure “to abide by the terms of the Trust Agreement,” “to file the proper tax documents and by providing improper related tax advice,” which resulted in “significantly higher tax liability.” (Compl. ¶¶ 11-12.) Thus, the injury did not accrue until the tax liability was actually imposed. The complaint is silent on when Plaintiff’s tax liability was assessed and therefore does not reveal on its face that the claim is time-barred.

            Citing Adams v. Paul (1995) 11 Cal.4th 583, 588, Defendant argues that the Federsen rule is not applicable to all scenarios. While Adams acknowledged that “actionable harm may occur at any one of several points in time,” it also recognized that this “depend[s] upon the particulars . . . [and] is generally a question of fact.” (Ibid.) Additionally, Adams dealt with legal malpractice, which has a different statute of limitations and “is not subject to the bright-line rule established for accounting malpractice.” (Moss, supra, 36 Cal.App.5th at p. 578.) Defendant also relies on Van Dyke, which distinguished Feddersen. In Van Dyke, the “appellants suffered actual injury either in 1990 when they unconditionally conveyed their property to the Oakdale Fire District, or in 1991 when they paid taxes in excess of the amount they expected to pay after donating their property pursuant to the erroneous tax advice.” (Van Dyke, supra, 46 Cal.App.4th at p. 455.) Critically, these facts were established during summary judgment. However, evidence cannot be considered at the pleading stage, and there is no indication on the face of the complaint that Plaintiff suffered actual out-of-pocket losses like those in Van Dyke by 2019.

            Defendant requests judicial notice of court records and other documents as “substantial evidence” that Plaintiff knew of Defendant’s potential liability as early as 2016. (Dem. 6:27-28.) The Court cannot properly consider evidence on a demurrer, and the materials are not the proper subject of judicial notice. (See Evid. Code, §§ 450-453.) Defendant’s request is denied.

CONCLUSION

            Defendant’s demurrer is OVERRULED.