Vigilant Insurance Co. v. LLP (2011)

MEMORANDUM OF DECISION

I

On May 21, 2007, the plaintiff, Vigilant Insurance Company, filed a four-count complaint against the defendant, PricewaterhouseCoopers, LLP, seeking to recover monies that the plaintiff paid to its insured, Conning & Company (Conning), based upon the alleged failure of the defendant to uncover embezzlement by one of Conning's employees.   The plaintiff alleges negligence under a theory of equitable subrogation (first count), breach of contract under equitable subrogation (second count), professional negligence under assignment (third count) and breach of contract under assignment (fourth count).   On June 9, 2009, both sides moved for summary judgment (# # 158, 163).¹  This court issued a memorandum of decision on October 27, 2009 (# 230) denying both motions for summary judgment except the defendant's motion for partial summary judgment was granted on the negligence counts as to the 2001 Conning audit.

On December 21, 2009, both parties filed motions to reconsider (# # 310, 311, 314) and, on March 19, 2010, both filed supplemental motions and memoranda (# # 322, 323, 332).   The parties filed memoranda in opposition to each other's motions (# # 333, 335) on April 9, 2010.   On April 21, 2010, both parties filed reply memoranda (# # 343, 348).   On July 6, 2010, this court granted the motions to reargue only as to two issues:  (1) whether the defendant waived the statute of limitation defense and (2) whether the defendant's engagement letters contained specific promises.   The court heard oral argument on November 22, 2010.   Also, on November 22, 2010, the plaintiff filed another memorandum in support of its arguments (# 359) to which the defendant responded in a memorandum (# 360) filed on November 24, 2010.   The plaintiff filed a reply (# 361) on December 10, 2010 and the defendant filed a surreply (# 362) on December 23, 2010.

II

A.

In the defendant's motion for summary judgment, it argued that the plaintiff's contract counts only allege violations of professional standards and thus are nothing more than tort claims.   While the defendant pleaded the three-year statute of limitations of General Statutes § 52–577 ² as a special defense to the tort claims of counts one and three in its July 30, 2007 answer, it did not plead it as to the contract claims of counts two and four.   Hence, the plaintiff argues that the defendant waived its right to assert this defense pursuant to Practice Book § 10–50 ³ and improperly raised the issue in its summary judgment motion.

In response, the defendant maintains that because § 52–577 applies only to tort actions, not to contract actions, it could not properly raise the statute as a special defense.   Instead, it asserted a failure to state a claim as a special defense.   Finally, the defendant argues that the six-year statute of limitations under General Statutes § 52–576,⁴ applicable to contract claims, could not be pleaded as the time had not expired and thus it would have been inappropriate to do so.

This case was consolidated with Vigilant Ins. Co. v. Deloitte & Touche, LLP, Superior Court, complex litigation docket at Hartford, Docket No. X07 CV 07 5012262.   That case was withdrawn on February 2, 2010, but the defendant, Deloitte & Touche, LLP, argued in its motion to strike that the plaintiff's alleged contract claims were merely tort claims.   This court denied the motion to strike in a memorandum of decision on June 12, 2008.

In the instant case, the defendant filed its motion for summary judgment one year later on June 9, 2009.⁵  The parties argued about whether the defendant was entitled to summary judgment on the plaintiff's contract claims because they were really tort claims and, as such, were precluded by the statute of limitations.  “The fundamental purpose of a special defense, like other pleadings, is to apprise the court and opposing counsel of the issues to be tried, so that basic issues are not concealed.”  (Internal quotation marks omitted.)  Martino v. Scalzo, 113 Conn.App. 240, 245, 966 A.2d 339, cert. denied, 293 Conn. 904, 976 A.2d 705 (2009).   There is no question, based upon the voluminous pleadings and memoranda in this case, that the plaintiff was apprised of the defendant's argument.   This argument has never been concealed.

The plaintiff argues that Mac's Car City, Inc. v. DeNigris, 18 Conn.App. 525, 528–29, 559 A.2d 712, cert. denied, 212 Conn. 807, 563 A.2d 1356 (1989), mandates a finding in the present case that the defendant waived the defense of the statute of limitations.   In Mac's Car City, the court found that it was error for the trial court to raise the statute of limitations defense because the defendants had not pleaded it.  Id., 529.   In the present case, the defendant has not pleaded the statute of limitations.⁶  “A trial court is required to follow the prior decisions of an appellate court to the extent that they are applicable to facts and issues in the case before it, and the trial court may not overturn or disregard binding precedent.”   Potvin v. Lincoln Service & Equipment Co., 298 Conn. 620, 650, 6 A.3d 60 (2010).

B.

The second issue that the court agreed to address on the parties' motions for reargument is whether the engagement letters contain specific promises.  “[A] claim that a defendant promised to work diligently or in accordance with professional standards is not made a contract claim simply because it is couched in the contract language of promise and breach.”  (Internal quotation marks omitted.)  Connecticut Education Assn., Inc. v. Milliman USA, Inc., 105 Conn.App. 446, 458, 938 A.2d 1249 (2008).  “[W]e look beyond the language used in the complaint to determine what the plaintiff really seeks.   Just as [p]utting a constitutional tag on a nonconstitutional claim will no more change its essential character than calling a bull a cow will change its gender ․ putting a contract tag on a tort claim will not change its essential character.   An action in contract is for the breach of a duty arising out of a contract;  action in tort is for a breach of duty imposed by law.”  (Citation omitted;  internal quotation mark omitted.)  Gazo v. Stamford, 255 Conn. 245, 263, 765 A.2d 505 (2001).   The Milliman court concluded that the allegations of the complaint “set forth a breach of contract claim, and are more than a malpractice claim couched in the language of promise and breach.   The plaintiff's allegations refer to specific actions required by the plaintiff ․” Connecticut Education Assn., Inc. v. Milliman USA, Inc., supra, 459.

In the present case, the question is whether the engagement letters require specific actions of the defendant within the context of the action complained of by the plaintiff.   See Weiner v. Clinton, 106 Conn.App. 379, 385, 942 A.2d 469 (2008).   The defendant entered into at least four engagement letters:  one dated January 4, 2002 covering the 2001 audit year;  one dated January 10, 2003 covering the 2002 audit year;  and two dated January 13, 2005 covering the 2004 audit year.⁷

The letters are substantially similar although the 2001 letter concerned the audit of Conning;  the 2002 letter pertained to the audit of Conning's subsidiary, Conning Asset Management Co. (CAM);  and the 2005 letters were regarding the audits of CAM and a second subsidiary, Conning Research & Consulting, Inc. (CRCI).⁸  The plaintiff does not dispute that the defendant completed the work and issued an unqualified opinion for the subject years.   The audits were to be performed in accordance with the professional industry standards—generally accepted accounting standards (GAAS).⁹ These standards, known as “AUs,” require the auditor to use “due professional care”;  AU §§ 150.02(3) and 230.02;  and recommend that the auditing standards be set forth in the engagement letter.   AU § 310.06.

The plaintiff's expert, James Kern, was asked at his deposition what provision of the 2002 and 2003 engagement letters the defendant breached and he testified that the defendant did not comply with GAAS. (Transcript of Kern's deposition on June 2, 2009 [Kern Tr.], p. 165.)   The plaintiff asserts that the defendant failed to obtain a sufficient understanding of internal controls.   The engagement letters stated that the defendant would “consider the Company's internal control over financial reporting solely for the purpose of determining the nature, timing and extent of auditing procedures necessary for expressing our opinion on the financial statements.   This consideration will not be sufficient to enable us to provide assurance on the effectiveness of internal control over financial reporting.”   The relevant GAAS standard, AU § 150.02(2) states, “[a] sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.”   Moreover, AU § 310.06 provides that “[a]n audit is not designed to provide assurance on internal control or to identify reportable conditions.”   Thus, the requirement is the same in both the GAAS standard and the engagement letter as the letter simply reiterates the standard.   In his deposition, Kern asserts that “the understanding that [the defendant] obtained with the respect to internal control was not sufficient to comply with GAAS standards.”   Kern Tr., pp. 165–66.

The engagement letters also stated that the defendant would “design [its] audit to obtain reasonable, but not absolute, assurance of detecting errors or fraud that would have a material effect on the financial statements as well as other illegal acts having a direct and material effect on financial statement amounts.   Our audit will not include a detailed audit of transactions, such as would be necessary to disclose errors or fraud that did not cause a material misstatement of the financial statements.”   The relevant GAAS provision, AU § 110.02, provides, “Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.”   Once again, Kern testified at his deposition that he believed the design of the audit did not comply with GAAS. (Kern Tr., p. 166).   Kern was unable to identify any other provisions of the engagement letters that the defendant may have breached.   Thus, the court finds that the engagement letters do not contain any specific promises outside of the GAAS requirements.

III

This court finds that the defendant did not plead the statute of limitations as a special defense as it was required to do and that the engagement letters contain no specific promises outside of the GAAS standards.   As a consequence of this decision, the court is mindful that other issues in the summary judgment motions will need to be re-examined.

Berger, J.

FOOTNOTES

FN1. The plaintiff sought partial summary judgment on the defendant's special defenses of contributory negligence and third-party fraud and its counterclaim of indemnification.   The plaintiff also moved, in the alternative, to preclude any evidence concerning the above issues.The defendant moved for summary judgment on the breach of contract counts (second and fourth counts) arguing that they were actually negligence claims and were barred by the three-year statute of limitations under General Statutes § 52–577.   Additionally, the defendant sought partial summary judgment on the negligence counts (first and third counts) as to its 2001 Conning audit and the 2002 audit of Conning's subsidiary, Conning Asset Management Co. (CAM), on the grounds that the claims were also barred by § 52–577.   Finally, the defendant sought summary judgment on all counts as to the 2004 audits of CAM and a second subsidiary, Conning Research & Consulting, Inc. (CRCI), arguing a lack of damages..  FN1. The plaintiff sought partial summary judgment on the defendant's special defenses of contributory negligence and third-party fraud and its counterclaim of indemnification.   The plaintiff also moved, in the alternative, to preclude any evidence concerning the above issues.The defendant moved for summary judgment on the breach of contract counts (second and fourth counts) arguing that they were actually negligence claims and were barred by the three-year statute of limitations under General Statutes § 52–577.   Additionally, the defendant sought partial summary judgment on the negligence counts (first and third counts) as to its 2001 Conning audit and the 2002 audit of Conning's subsidiary, Conning Asset Management Co. (CAM), on the grounds that the claims were also barred by § 52–577.   Finally, the defendant sought summary judgment on all counts as to the 2004 audits of CAM and a second subsidiary, Conning Research & Consulting, Inc. (CRCI), arguing a lack of damages.

FN2. Section 52–577 provides:  “No action founded upon a tort shall be brought but within three years from the date of the act or omission complained of.”.  FN2. Section 52–577 provides:  “No action founded upon a tort shall be brought but within three years from the date of the act or omission complained of.”

FN3. Section 10–50, in relevant part, provides:  “[T]he statute of limitations ․ must be specially pleaded ․.  FN3. Section 10–50, in relevant part, provides:  “[T]he statute of limitations ․ must be specially pleaded ․

FN4. Section 52–576(a), in relevant part, provides:  “No action for an account, or on any simple or implied contract, or on any contract in writing, shall be brought but within six years after the right of action accrues ․”.  FN4. Section 52–576(a), in relevant part, provides:  “No action for an account, or on any simple or implied contract, or on any contract in writing, shall be brought but within six years after the right of action accrues ․”

FN5. The trial was originally scheduled for November 24, 2009, but it was continued to January 3, 2012 for a variety of reasons..  FN5. The trial was originally scheduled for November 24, 2009, but it was continued to January 3, 2012 for a variety of reasons.

FN6. The defendant's argument is not without merit.   If it pleaded the tort statute of limitations as a defense to the contract counts, it would have likely had to defend against a motion to strike the special defense.   Perhaps this is why the defendant never sought to amend its special defenses.   Moreover, a defendant—in a case such as this where both professional negligence and breach of contract is alleged—arguably raises the statute of limitations impliedly in its special defenses by pleading that the contract counts fail to state claims when the argument is that the allegations do not, in fact, sound in contract, but really constitute professional negligence.Practice Book § 1–8 provides that “[t]he design of these rules being to facilitate business and advance justice, they will be interpreted liberally in any case where it shall be manifest that a strict adherence to them will work surprise or injustice.”   In the present case, after years of litigation, it seems unjust to find that the defendant waived a special defense that it has consistently espoused from the beginning of the case.   Furthermore, one might argue that it elevates form over substance.   See Lostritto v. Community Action Agency of New Haven, Inc., 269 Conn. 10, 34, 848 A.2d 418 (2004) (“[t]his court repeatedly has eschewed applying the law in such a hypertechnical manner so as to elevate form over substance” [internal quotation marks omitted] ).   Nevertheless, Mac's Car City is controlling and Practice Book § 10–50 specifically requires the defendant to plead the statute of limitations as a special defense.   Sec also Avon Meadow Condominium Assn., Inc. v. Bank of Boston Connecticut, 50 Conn.App. 688, 698, 719 A.2d 66, cert. denied, 247 Conn. 946, 723 A.2d 320 (1998) ( [b]y not specifically pleading the statute of limitations in its special defense, the defendant waived its right to have the statute of limitations considered by the trial court”)..  FN6. The defendant's argument is not without merit.   If it pleaded the tort statute of limitations as a defense to the contract counts, it would have likely had to defend against a motion to strike the special defense.   Perhaps this is why the defendant never sought to amend its special defenses.   Moreover, a defendant—in a case such as this where both professional negligence and breach of contract is alleged—arguably raises the statute of limitations impliedly in its special defenses by pleading that the contract counts fail to state claims when the argument is that the allegations do not, in fact, sound in contract, but really constitute professional negligence.Practice Book § 1–8 provides that “[t]he design of these rules being to facilitate business and advance justice, they will be interpreted liberally in any case where it shall be manifest that a strict adherence to them will work surprise or injustice.”   In the present case, after years of litigation, it seems unjust to find that the defendant waived a special defense that it has consistently espoused from the beginning of the case.   Furthermore, one might argue that it elevates form over substance.   See Lostritto v. Community Action Agency of New Haven, Inc., 269 Conn. 10, 34, 848 A.2d 418 (2004) (“[t]his court repeatedly has eschewed applying the law in such a hypertechnical manner so as to elevate form over substance” [internal quotation marks omitted] ).   Nevertheless, Mac's Car City is controlling and Practice Book § 10–50 specifically requires the defendant to plead the statute of limitations as a special defense.   Sec also Avon Meadow Condominium Assn., Inc. v. Bank of Boston Connecticut, 50 Conn.App. 688, 698, 719 A.2d 66, cert. denied, 247 Conn. 946, 723 A.2d 320 (1998) ( [b]y not specifically pleading the statute of limitations in its special defense, the defendant waived its right to have the statute of limitations considered by the trial court”).

FN7. The parties are unable to locate an engagement letter for the 2003 audit year..  FN7. The parties are unable to locate an engagement letter for the 2003 audit year.

FN8. The 2002 engagement letter with Conning and the 2005 letter with CRCI required the defendant to “provide a report on internal control as required by Rule 17a–5 of the Securities Exchanges Act of 1934.”   This requirement might be beyond what GAAS requires.   See Vigilant Ins. Co. v. Deloitte & Touche, LLP, Superior Court, complex litigation docket at Hartford, Docket No. X07 CV 07 5012262 (June 12, 2008, Berger, J.).   Nevertheless, this court previously precluded the plaintiff's expert from testifying about an alleged breach pertaining to SEC Rule 17a–5 in its memorandum of decision, dated July 2, 2010, because he did not identify any breach of SEC Rule 17a–5 in either his expert report, dated April 6, 2009, or at his deposition.   Therefore, any promise to provide a report on internal control required by SEC Rule 17a–5 is not considered by the court here..  FN8. The 2002 engagement letter with Conning and the 2005 letter with CRCI required the defendant to “provide a report on internal control as required by Rule 17a–5 of the Securities Exchanges Act of 1934.”   This requirement might be beyond what GAAS requires.   See Vigilant Ins. Co. v. Deloitte & Touche, LLP, Superior Court, complex litigation docket at Hartford, Docket No. X07 CV 07 5012262 (June 12, 2008, Berger, J.).   Nevertheless, this court previously precluded the plaintiff's expert from testifying about an alleged breach pertaining to SEC Rule 17a–5 in its memorandum of decision, dated July 2, 2010, because he did not identify any breach of SEC Rule 17a–5 in either his expert report, dated April 6, 2009, or at his deposition.   Therefore, any promise to provide a report on internal control required by SEC Rule 17a–5 is not considered by the court here.

FN9. “The standard of care for the accounting profession is GAAS, which is a product of the U.S. Auditing Standards Board and American Institute of Certified Public Accountants.”   Curtis Packaging Corp. v. KPMG, Superior Court, complex litigation docket at Waterbury, Docket No. X06 CV 99 0156558 (July 31, 2002, McWeeny, J.).  “GAAS and statements of auditing standards (SAS) delineated the standard of care for accountants performing audits.”  Id..  FN9. “The standard of care for the accounting profession is GAAS, which is a product of the U.S. Auditing Standards Board and American Institute of Certified Public Accountants.”   Curtis Packaging Corp. v. KPMG, Superior Court, complex litigation docket at Waterbury, Docket No. X06 CV 99 0156558 (July 31, 2002, McWeeny, J.).  “GAAS and statements of auditing standards (SAS) delineated the standard of care for accountants performing audits.”  Id.

Berger, Marshall K., J.