Fraud Claims Not Duplicative of Malpractice Claims

On June 27, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Kislev Partners, LLP v. Sidley LLP, 2019 NY Slip Op. 31850(U), declining to dismiss fraud claims as duplicative of a malpractice claim, explaining:

Sidley argues that plaintiffs' claims all essentially sound in professional malpractice and, therefore, have a three-year statute of limitations, which passed long before this action was commenced. In their reply, Sidley elaborates: plaintiffs' claims must be treated as malpractice claims for timeliness purposes even if a potential malpractice claim might fail on the merits. The malpractice limitations period applies whenever the facts underlying a party's claims are of the sort properly pursued as malpractice, i.e., are based on an 'alleged failure to exercise due care or abide by general professional standards.

Plaintiffs argue in opposition that they have not pied a malpractice claim against Sidley, and that, instead, their claims are premised on intentional fraud, not simple professional negligence. Plaintiffs assert that their claims against Sidley cannot sound in malpractice because: 1) plaintiffs have never had an attorney client relationship with Sidley; (2) plaintiffs' claims for fraud and aiding and abetting fraud each allege facts that go beyond legal malpractice and seek damages distinct from what is available for malpractice; and (3) plaintiffs' unjust enrichment claim does not seek recovery of attorneys' fees and is based on facts unrelated to legal representation.

In separating a malpractice claim from a fraud claim, the First Department, in Johnson v Proskauer Rose LLP (129 AD3d 59, 68 [1st Dept 2015]), recognized that a plaintiff may try to circumvent the three-year statute of limitations for professional malpractice by characterizing the defendants' failure to meet professional standards as something else. In describing the distinction between a fraud claim and one for professional malpractice, the Court stated:

Thus, in Mitschele, the fraud claim was considered independent of the malpractice claim for statute of limitations purposes even though the harm arose out of the accountant's failure to properly protect its client. The situation here is no different. Plaintiffs allege not only that defendants failed to adequately advise them with respect to the tax strategy. They also claim that Proskauer pressured them into the scheme because, at the outset, Proskauer's paramount concern was preserving its lucrative arrangement with TDG, which presumably intended to continue to work with Proskauer to sell the scheme to other high net worth individuals and entities.

Like in Johnson v Proskauer Rose LLP, here plaintiffs' fraud-based claims rely upon facts that go beyond professional negligence and include allegations that Sidley and the other defendants purposefully created and/or aided Valdez in creating an illegal scheme, which included the Opinion Letter, to market the allegedly criminal tax shelter to unwitting investors. Because plaintiffs' fraud-based claims are not disguised claims for professional malpractice, the professional malpractice statute of limitations is inapplicable.

(Internal citations omitted).

We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of professionals such as lawyers, accountants and architects to their clients. Contact Schlam Stone & Dolan partner Erik Groothuis at egroothuis@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.