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“Make Sure To Get It In Writing”: An Idiomatic Anachronism In Today’s Complex Legal World

5/8/23

By: Nancy M. Reimer and Andrew M. Vandini

“Did you get it in writing?” has customarily and commonly been an inquiry used to determine whether a party can be held accountable for his, her, or its promises. The law, however, has never required a writing, and now, at least in Massachusetts, the answer to this idiomatic inquiry matters even more in the context of a professional accountant-client relationship.

In 2012, a renowned Boston philanthropist (the “Client”) retained Deloitte Tax LLP (“Deloitte”) to review the structure of a general partnership and to plan the most efficient way for the Client to transfer his ownership interest in the general partnership or its assets to his charitable foundation (the “Foundation”) without adverse tax consequences (the “Objective”). A tax partner at Deloitte in its Boston, Massachusetts office represented to the Client that he and his colleagues possessed the skill, knowledge, and resources to assist him in pursuing the Objective.

Between 2012 and 2014, the general partnership and Deloitte tax professionals exchanged communications related to the Objective. Deloitte agreed to provide the Client with a formal opinion letter, which would include, among other considerations, the tax consequences of various proposed transactions involving the Client and the general partnership (the “Opinion Letter”). Deloitte billed the Client for transactional planning services related to the Objective. In 2014, Deloitte proposed that the Client sign a formal engagement letter significantly limiting Deloitte’s potential liability for malpractice. The Client refused to sign the engagement letter. Deloitte then ceased all transactional-related services on behalf of the general partnership and refused to provide the Client with a signed Opinion Letter.

Relying on the advice Deloitte had provided, the Client purchased his children’s shares in the general partnership, and thereafter the general partnership made a $77 million distribution to the Client to reduce the basis of his shares (the “Buyout”). Unbeknownst to the Client, the Buyout resulted in significant unintended tax consequences antithetical to the Objective. The Client sued Deloitte for: (1) negligence; (2) negligent misrepresentation; and (3) violation of M.G.L. c. 93A[1].[2]

Judge Peter Krupp of the Massachusetts Superior Court (the “court”) first found that Deloitte’s work on behalf of the Client between 2012 and 2014 – in advance of Deloitte’s request for a formal client engagement letter – created an implied accountant-client relationship. Moreover, the court held the Client’s reliance on Deloitte’s advice was not unreasonable as a matter of law “merely because they refused to agree to a last-minute proposal of an engagement letter.” See Mem. and Order on Mot. to Dismiss, at 8. The court further held there was no statute of limitations issue because a factual determination related to the Client’s knowledge of appreciable harm in a complex factual case was best left to the factfinder. Finally, the court refused to dismiss the M.G.L. c. 93A claim on the grounds that Deloitte’s refusal to stand by their recommendations unless the Client forfeited their potential remedies could be viewed as “extortionate.” See id. at 11.

The practical implications of the court’s decision are apparent. First, accounting firms should, whenever possible, carefully craft and sign client engagement letters at the outset of representation before providing substantive advice to the client. Second, and perhaps most important, accounting firms should keep abreast of relevant tax law and, prior to providing substantive advice, ensure the advice is current, accurate, and aligned with the client’s objectives. By following these two practice pointers, accounting firms may very well prevent significant liability for an alleged malpractice claim.

For more information on this topic, contact Nancy M. Reimer ,Andrew M. Vandini or your local FMG Attorney.

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[1] M.G.L. c. 93A is Massachusetts’ Consumer Protection Act.

[2] Cummings v. Deloitte Tax LLP, Civil Action No.: 23-103-BLS1, Suffolk County Superior Court.