No Equitable Accounting When All Relevant Information Produced in Discovery

On September 30, 2023, Justice Andrea Masley of the New York County Commercial Division issued a decision in Fruhling v. Westreich, et al., Index No. 161487/2017, dismissing a plaintiff LLC member's claim for an accounting when plaintiff failed to show a need for additional documents not already produced in discovery, explaining:

As a preliminary matter, plaintiff's "accounting" claim is really a claim for books and records because plaintiff is ultimately seeking MG's records to determine "the correctness of allocations of income" to plaintiff and to answer to the then-pending tax audits. (NYSCEF 394, Amended Com pl. ,m 43-44, 70.) Specifically, plaintiff alleges that he is "entitled to an accounting of the finances of [MG] sufficient to determine the correctness of [MG's] allocation of income to [plaintiff] ... and the K-1s issued to [MG's] members." (Id. ,i 70; see also id. at 18 [requesting that the court order an accounting of MG's finances to determine the "allocations of income for tax years 2011 to the present and for specific performance of the obligation to properly account for MG's allocation of income to plaintiff"].) An equitable accounting "is designed to require a person in possession of financial records to produce them, demonstrate how money was expended and return pilfered funds in his or her possession." (Roslyn Union Free School Dist. v Barkan, 16 NY3d 643, 653 [2011] [citation omitted].) For the reasons below, summary judgment is granted on the first cause of action.

Defendants argue that they have complied with the Prior Order to produce documents necessary for plaintiff to answer to the New York State tax authorities, and thus, plaintiff's accounting claim is moot and should be dismissed. Further, defendants contend that that plaintiff has neither objected nor raised any issue regarding the sufficiency or responsiveness of defendants' production. Plaintiff, on the other hand, argues that discovery is not complete as defendants have failed or refused to provide documentation that could evidence the "book to tax differences" and that the note of issue has not been filed. Although plaintiff concedes that he has not demanded additional documentation since March 26, 2021, he asserts that it was only evident that more discovery was needed after receipt of defendants' expert David P. McKelvey's report.

First, plaintiff's contention that he needs more documentation to evidence the "book to tax differences" is not only vague but controverted by plaintiff's own expert, Ken DeMarinis.6 DeMarinis clarified in his deposition that the documents he required to determine whether there was a built-in gain are from 2002, the time plaintiff was Tax Matters Partner of MG.7 (NYSCEF 420, DeMarinis depo tr at 90:14-93:14.) While plaintiff was Tax Matters Partner, he had retained Anchin Block & Anchin (Anchin) to prepare MG's 2002 2004 tax returns. (NYSCEF 406, Plaintiff's Response to Defendants' Rule 19-a Statement ,i 15 [admitting that Hochfelder was Manager and Tax Matters Partner of MG from 2002 to 2004 and retained Anchin to prepare MG's tax returns and its members' Schedule K 1s].) However, neither McKelvey nor plaintiff were able to obtain the necessary documents from Anchin because Anchin had destroyed the records related to the preparation of the tax returns and Schedule K-1s pursuant to Anchin's document retention policies. (Id. ,m 54-55 [admitting that while Anchin produced documents pursuant to a March 5, 2020 so ordered stipulation, it provided a cover lettering stating "that any other records that had once been Anchin's possession relating to the preparation of Max Global's tax returns and the Members Schedule K-1s were destroyed in accordance with Anchin's document retention policies."].)

Thus, these documents no longer exist without fault on any party or non party and neither expert had access to them, including the original preparer of these tax documents. Plaintiff's purported need for this discovery is further belied by the fact that he has, to this day, failed to move to compel further discovery or set forth other discovery that is required to prosecute his claims in his action. Plaintiff's reliance on the fact that no note of issue was filed does not warrant a different conclusion.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning equitable accountings or demands for books and records.