Judge: Monica Bachner, Case: 21STCV22955, Date: 2023-02-28 Tentative Ruling

Case Number: 21STCV22955    Hearing Date: February 28, 2023    Dept: 71

Superior Court of California

County of Los Angeles

DEPARTMENT 71

TENTATIVE RULING

Defendants Fred Maidenberg’s and Fred Maidenberg, CPA’s, motion for summary adjudication is denied as to the 2nd cause of action.

Defendants Fred Maidenberg and Fred Maidenberg, CPA (collectively, “Maidenberg”) (collectively, “Maidenberg Defendants”) move for summary adjudication against Plaintiffs Roni Efron (“Efron”) and 439 South Clark, LLC (“Clark LLC”) (collectively, “Plaintiffs”) on their complaint (“Complaint”) on the grounds that there is no triable issue of material fact as to any act or omission in breach of the standard of care applicable to accountants, not was there any detriment or damage incurred by plaintiffs as to the second cause of action for professional accounting malpractice.  (Notice of Motion, pg. 2; C.C.P. §437c.)

Procedural Background

On June 18, 2021, Plaintiffs filed their initial complaint alleging nine causes of action against Maidenberg Defendants and non-moving Defendants: (1) breach of oral partnership, (2) professional negligence, (3) breach of fiduciary duty, (4) accounting, (5) unjust enrichment, (6) quantum meruit, (7) quiet title, (8) dissolution and winding up of partnership, and (9) declaratory relief, arising from the alleged end of Maidenberg Defendants’ long-standing relationship with Plaintiff as Plaintiff’s CPA, wealth manager, business advisor, and partner in the acquisition, development, and sale of various residential and commercial properties.  (Complaint ¶1.)  On February 4, 2022, this Court sustained Maidenberg Defendants’ demurrer to the 7th cause of action in the Complaint for quiet title without leave to amend.  (2/4/22 Ruling.)  On December 14, 2022, Maidenberg Defendants filed the instant motion. Plaintiffs filed their opposition on February 14, 2023.  On February 23, 2023, Maidenberg Defendants filed their reply.

Summary of Allegations

Plaintiffs allege Plaintiff Efron’s longtime CPA, wealth manager and business advisor, Maidenberg Defendants, abandoned Plaintiff during tax season and also denied their long-standing partnership in the acquisition, development and sale of various residential and commercial properties, including real property at 12334 Gorham Avenue, Los Angeles, CA 90049 (“Gorham Property”) and real property at 439 South Clark, Beverly Hills (“South Clark Property”).  (Complaint ¶¶1, 26, 30.)  Plaintiffs allege by Defendants’ own admission, Plaintiff trusted and relied upon Maidenberg Defendants by giving Plaintiff Efron tax and business advice not only connection with Plaintiff Efron’s construction business but also in connection with “our mutual finances” reflected in the partnership business that Plaintiff Efron and Maidenberg Defendants formed to acquire and redevelop residential and multi-family real estate projects.  (Complaint ¶2.)  Plaintiffs allege throughout their partnership, Plaintiff Efron identified and located potential redevelopment projects and then did all of the redevelopment and construction work for the projects and was intimately involved in assisting Maidenberg Defendants in raising the capital by preparing budgets and further assisted in marketing and sale of the projects.  (Complaint ¶3.)  Plaintiffs allege Maidenberg Defendants provided the financial analysis of the projects and was responsible for all financial aspects, including raising of capital for those projects, negotiating the purchase and sale agreements, forming, when needed, the entity that would hold the project, and maintaining the books and records.  (Complaint ¶4.)  Plaintiffs allege Plaintiff Efron and Maidenberg Defendants agreed to acquire such projects in Maidenberg Defendants’ name or in an entity that Maidenberg Defendants formed. While Maidenberg Defendants would be responsible for all financial matters, Plaintiff Efron would find the projects and perform the redevelopment /construction /marketing work.  (Complaint ¶5.)  Plaintiffs allege this relationship went on for many years until Maidenberg Defendants repudiated and denied their partnership, locked Plaintiff Efron out of their jointly held offices that Plaintiff Efron had occupied and used for many years and where Plaintiff Efron worked side by side with Maidenberg Defendants in their development business.  (Complaint ¶6.)  Plaintiffs allege Maidenberg Defendants has now seized control of all the partnership assets and excluded Plaintiff Efron, have refused to acknowledge Plaintiff’s interests (which Maidenberg holds in trust either directly or through the entities that he formed for the purposes of holding partnership property).  (Complaint ¶7.)  Plaintiffs allege Maidenberg Defendants have also taken financial positions adverse to his client, Plaintiff Efron, and given tax and other advice in a manner that violated his professional and fiduciary duties of care and loyalty to Plaintiff’s detriment and substantial expense.  (Complaint ¶8.)  Plaintiffs allege Plaintiff Efron has been substantially damaged and are informed and believe, and based thereon allege, that Plaintiff Efron’s damages are in excess of $20,000,000.00.  (Complaint ¶9.)

Legal Standard

Under C.C.P. §437c, a grant of summary adjudication can only be made if it completely disposes of a cause of action, affirmative defense, a claim for damages, or an issue of duty.  (C.C.P. §437c(f)(1).) 

Professional Accounting Malpractice (2nd COA)

“The elements of a cause of action in tort for professional negligence are (1) the duty of the professional to use such skill, prudence, and diligence as other members of his profession commonly possess and exercise; (2) a breach of that duty; (3) a proximate causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional’s negligence.”  (Budd v. Nixen (1971) 6 Cal.3d 195, 200; CACI 600.)

“[I]f the allegedly negligent conduct does not cause damage, it generates no cause of action in tort.”  (Moua v. Pittullo, Howington, Barker, Abernathy, LLP (2014) 228 Cal.App.4th 107, 112-113; CACI 600.)

Plaintiffs allege Maidenberg Defendants were Plaintiff Efron’s Certified Public Accountant (“CPA”) and therefore owed a duty of loyalty and reasonable care in providing an accounting, tax, and financial advisory services to Plaintiff Efron.  (Complaint ¶53.)  Plaintiffs allege at all relevant times, Plaintiff Efron reasonably and completely relied on Maidenberg Defendants to perform their services, including Maidenberg Defendants’ collective skills and abilities as Certified Public Accountants and experienced tax preparation professionals in rendering financial and tax advice to Plaintiff Efron.  (Complaint ¶54.)  Plaintiffs allege at all relevant times, Maidenberg Defendants knew and recognized that Plaintiff Efron was relying exclusively and completely upon them with respect to his tax, investment and financial interests.  (Complaint ¶54.)  Plaintiffs allege on information and belief that in rendering their services to Plaintiff Efron, Maidenberg Defendants did each and all of the following: (a) negligently and improperly advised Plaintiff Efron concerning the acquisition of his interest in the South Clark Property and the financing related to that South Clark Property both before and after its acquisition; (b) made recommendations and gave tax and other business advice in a manner that was detrimental to Plaintiff Efron while being advantageous to the Maidenberg Defendants’ interests, particularly as it related to Plaintiff’s interests in the Partnership, the Acquisition Entities (Equity Sharing Investment Company LLC, Larchmont Investment Properties LLC, 1735 Taft LLC, 1120 North Van Ness LLC, 1243 Beachwood LLC, Wilton Chimney Smoke I LLC, 312 South La Peer Drive LLC) and the South Clark Property; (c) breached their duty of loyalty and duty of due care to Plaintiff Efron by virtue of taking adverse interests in the Partnership and the Acquisition Entities and with respect to the South Clark Property without fully informing and disclosing to Plaintiff Efron the nature of such adverse interests and his right to seek independent financial, tax and legal advice; (d) putting Maidenberg Defendants’ interests ahead of Plaintiff Efron’s interests by, among other things, abandoning Plaintiff Efron by refusing to perform accounting and financial services during tax season when Plaintiff began to question the Maidenberg Defendants’ actions with respect to the Acquisition Entities; (e) failing to keep Plaintiff Efron adequately informed concerning the financial and tax liabilities that the Maidenberg Defendants had recommended, created and/or implemented for Plaintiff Efron; (f) concealing the books and records of the Acquisition Entities from which Plaintiff Efron would have been able to ascertain the true nature of his position; and (g) refusing to pay Plaintiff Efron and/or third parties who had contracted through Plaintiff Efron’s construction company in order to put financial pressure on Plaintiff to accede to the Maidenberg Defendants’ wrongful demands (which included the Maidenberg Dissolution Terms).  (Complaint ¶55.)  Plaintiffs allege Maidenberg Defendants by their acts, omissions, misfeasance, malfeasance and non-feasance, breached their duties of care and loyalty by doing all of the foregoing things.  (Complaint ¶56.)  Plaintiffs allege such acts, omissions, misfeasance, malfeasance and nonfeasance were performed by Maidenberg Defendants as licensed certified public accountant which constitute fiscal dishonesty, breach of fiduciary responsibilities thus failing to meet reasonable standards of professional care to exercise ordinary skill and competence in this profession in violation of applicable law.  (Complaint ¶57.)  Plaintiffs allege the above-stated negligence has damaged Plaintiff Efron in an amount as yet unknown, but within the jurisdictional limit of this Court, subject to proof at trial, but which Plaintiff believes to be not less than $20,000,000 plus interest at the legal rate, and costs of suit herein, or in such other amounts as Plaintiff Efron may subsequently establish at trial.  (Complaint ¶58.)

Maidenberg Defendants argue Plaintiffs cannot establish a claim for malpractice because Plaintiff Efron did not suffer detriment or damage from the IRS §1031 exchange.  (Motion, pgs. 6-7; Reply, pgs. 3-4.)

Maidenberg Defendants submitted undisputed evidence suggesting Plaintiffs cannot establish damages.  Specifically, Maidenberg Defendants submitted evidence that from the date of filing Plaintiff Efron’s 2016 federal and state tax returns to the present, neither Maidenberg Defendants nor Plaintiff Efren have not received communications from the IRS or the Franchise Tax Board (“FTB”) concerning the IRS §1031 exchange transaction described on Form 8824 submitted as part of Plaintiff Efron’s tax return.  (Defendants’ Undisputed Separate Statement of Fact [“DUSSF”] 6, 7; Decl. of Maidenberg ¶2, D-COE Exh. 2 at 150:12-151:6, 260:21-261:4.)  Maidenberg Defendants met their burden on summary adjudication to demonstrate there is no merit to Plaintiffs’ claim for damages in its second cause of action for professional negligence.

However, Maidenberg Defendants fail to completely dispose of Plaintiffs’ second cause of action for professional negligence under C.C.P. §437c. Under C.C.P. §437c, a grant of summary adjudication can only be made if it completely disposes of a cause of action, affirmative defense, a claim for damages, or an issue of duty.  (C.C.P. §437c(f)(1).)  Maidenberg Defendants only challenge Plaintiffs’ cause of action for professional malpractice with regards to Maidenberg Defendants’ alleged tax advice to Plaintiff Efron regarding an IRS §1031 exchange.  (Motion, pg. 6; Complaint ¶55(a).) 

Maidenberg Defendants’ assertion that they do not need to argue Plaintiffs’ remaining allegations in the second cause of action because they do not pertain to Maidenberg Defendants’ professional accounting services, but rather Plaintiffs’ partnership claims is unavailing.  (Reply, pg. 2.)  Maidenberg Defendants fail to address the allegations of fiscal dishonesty and breach of duty of loyalty alleged in the pleading as required by C.C.P. §437c(f)(1).  (Complaint ¶¶54-55(b)-(g).)   Rather than addressing individual issues on summary adjudication, Maidenberg Defendants moved for summary adjudication as to the entire second cause of action but did not address all allegations. Therefore, Maidenberg Defendants failed to meet their burden on summary adjudication as to the second cause of action.

Assuming Maidenberg Defendants’ argument in reply that the only act of professional negligence alleged is the 1031 exchange is correct, Maidenberg Defendants argue summary adjudication as to two issues:  lack of damages and inability to prove malpractice because he refused to produce his expert for deposition. 

Maidenberg Defendants failed to meet their burden on summary adjudication regarding the IRS §1031 exchange of the Gorham property for the Clark property.  Maidenberg Defendants argue Plaintiffs’ evidence to support any claim of professional negligence as an accountant is “beyond skimpy and in fact nonexistent.”  (Motion, pg. 7.)  In Crouse v. Brobeck, Phleger & Harrison, the Court of Appeals rejected defendants’ arguments that the trial court’s grant of the motion was proper because (1) plaintiff had “no evidence” of malpractice and therefore shifted the burden to plaintiff to create a triable issue of fact that defendants had been negligent and (2) plaintiff’s failure to respond with expert testimony fell below the standard of care permitted entry of summary judgment for defendants.  (Crouse v. Brobeck, Phleger & Harrison (1998) 67 Cal.App.4th 1509, 1533.)  The Crouse Court determined the grant of summary judgment was improper because the motion did not contain “evidence affirmatively disproving or negating an element of [the plaintiff’s] cause of action” and “instead relied on the ‘no evidence” approach,’ asserting the plaintiff’s deposition answers showed she had no evidence of the defendants’ negligence when the plaintiff’s deposition answers did demonstrate evidence of negligent acts.  (Id. at pg. 1534.)  Further, the Crouse Court stated,

[T]he burden-shifting provisions of [C.C.P. §437c(o)(2)] do not operate until the moving party first produces affirmative evidence negating the duty’s existence, or evidence that [defendants] did not breach the duty of care. [Citation] . . . [Defendants] produced no expert testimony negating the duty of care or breach of duty elements of [plaintiff’s] cause of action, and the motion for summary judgment should have been denied even though [plaintiff] did not produce expert testimony. [Citation]

(Id. at pg. 1535.)  Like the defendants in Crouse, here, Maidenberg Defendants failed to produce affirmative evidence that Maidenberg Defendants’ advice to Plaintiff Efron to use an IRS §1031 Exchange was not a breach of the standard of care for an accountant.  Maidenberg Defendants have not met their burden on summary adjudication that Plaintiff Efron “has no evidence” with regards to a negligent act or omission related to the IRS §1031 Exchange.  (Defendants’ Disputed Statement of Material Facts [DSSF] 16; D-COE Exh. 2 at 141:19-145:10, 149:14-153:20.)

          Maidenberg Defendants’ argument with regards to Plaintiffs’ evidence to support damages resulting from the IRS §1031 Exchange is flawed for the same reasons stated above.  Maidenberg Defendants’ argument that Plaintiff was unable to produce evidence of damages is not sufficient to shift their burden on summary adjudication to Plaintiffs.  Maidenberg Defendants argument on the basis of International Engine Parts v. Feddersen & Co. is also inapposite because its narrow holding with regards to the triggering of the statute of limitations and accrual of damages applies to accounting malpractice claims for the negligent filing of tax returns, which is not at issue in the instant case.  (International Engine Parts v. Feddersen & Co. (1995) 9 Cal.4th 606, 608, 614; Apple Valley Unified School District v. Vavrinek, Trine, Day & Co., LLP (2002) 98 Cal.App.4th 934, 946 [citing Van Dyke v. Dunker & Aced (1996) 46 Cal.App.4th 446 in recognizing the Feddersen “bright-line” rule is expressly limited to a specific type of accounting malpractice, i.e., “the negligent preparation of tax returns”]; Adams v. Paul (1995) 11 Cal.4th 583, 588 [stating the California Supreme Court’s conclusion in Feddersen was made in “very narrowly drawn circumstances,” the decision in Feddersen was not a paradigm, “and did not articulate a ‘rule for all seasons’”]; see also Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 763 [“Feddersen presented specialized circumstances and did not articulate a rule of broad or general applicability.”].) 

While Maidenberg Defendants argue in reply that Plaintiff Efron concedes he has not incurred any loss or damages because of the alleged accountant malpractice because Plaintiff Efron admits neither the IRS nor the Franchise Tax Board has questioned or challenged his tax returns since he filed them in September 2017, Apple Valley Unified School District v. Vavrinek, Trine, Day & Co., LLP, recognized that “the alleged malpractice [in Apple Valley] was not negligent preparation of a tax return, but a representation which induced detrimental reliance.”  Apple Valley Unified School District, 98 Cal.App.4th at pg. 946.)  As such, the Apple Valley Court determined plaintiff school district sustained actual injury when it either acted on the defendant’s tax advice or after it suspected defendant’s tax advice was incorrect and suffered out-of-pocket losses by paying investigation and legal fees in an effort to determine the extent of the improper payments that resulted from following the defendant’s tax advice.  (Id. at pgs. 946-947.)  Here Defendant has not negated damages from following  Maidenberg Defendants’ tax advice regarding the alleged illegal IRS §1031 Exchange.

Maidenberg Defendants’ argument that Plaintiff’s failure to produce an expert’s testimony to prove malpractice is similarly misplaced. An expert is not necessary when “the conduct required by the particular circumstances is within the common knowledge of the layman.”  (Flowers v. Torrence Memorial Hospital Medical Center (1994) 8 Cal.4th 992, 1001.)  The instant case is similar to Ryan v. Real Estate of the Pacific, Inc., which involved the sale of a home and the alleged professional negligence of the broker defendant in not disclosing certain information to plaintiff clients about a neighbor’s planned renovations that would negatively affect the value of the plaintiffs’ property, the defendant moved for summary judgment and argued that “because the [plaintiffs] had not designated an expert, they could not establish the prevailing standard of care or that Defendants breached that standard of care.”  (Ryan v. Real Estate of the Pacific, Inc. (2019) 32 Cal.App.5th 637, 641.)  The Court of Appeal found that “Defendants must do more than merely assert that an expert witness is required to prove the [plaintiff’s] causes of action. They must explain why, under the facts as pled, the lack of an expert witness is fatal.”  (Id. at pg. 644.)  The Ryan Court determined the defendants had not shown “that an expert witness was necessary to establish the scope of the broker’s duty or a breach of that duty for a professional negligence claim,” and that “the conduct required by the circumstances presented here is within the common knowledge of a layman.”  (Id. at pg. 646.)  Here, as in Ryan, Plaintiffs’ allegations pertaining to fiduciary duties Maidenberg Defendants owed to Plaintiff Efron, including a duty to disclose conflicts of interest that violate the duty of loyalty, is within the common knowledge of a layman—a client hiring the services of an accountant expects the accountant to follow the law and to provide advice to a client that will not put the client in jeopardy of IRS penalties and sanctions.

Accordingly, Maidenberg Defendants’ summary adjudication as to the 2nd cause of action is denied.

Dated:  February _____, 2023

Hon. Monica Bachner

Judge of the Superior Court