Tuesday, August 31, 2010

Accountants Did Not Breach Any Duty to Waiters for Allegedly Over-reporting Tip Income

Three waiters employed at a popular Los Angeles restaurant alleged that their income was negligently over-reported on W-2 forms prepared by the restaurant’s accountants. The waiters further alleged that the restaurant’s managers improperly allocated a percentage of the tips to themselves, and that the accountants included the tip money taken by the mangers as income received by the waiters. (Emanuele Giacometti, et al., v. Aulla, LLC et al. (2010) 2010 Cal.App. Lexis 1484).

The accountants were hired by the restaurant, not the waiters, to prepare year-end documents with respect to earnings and taxes. Hence, the waiters had no contract with the accountants; in legal terminology, the waiters were not in privity of contract with the waiters. As a general rule, privity of contract is required in order for a party-plaintiff to state a cause of action for professional negligence. Where a plaintiff is not in privity of contract, courts analyze professional negligence claims by considering a number of factors first articulated in the landmark case of Biakanja v. Irving (1958) 49 Cal.2d 647.

After taking the Biakanja factors into consideration, the Court of Appeal concluded the waiters had no case against the accountants because the accountants had not breached any duty to the waiters. In other words, the waiters were unsuccessful in convincing the Court of Appeal that the accountants owed a duty to accurately report the waiters’ income to the IRS.

The waiters’ case failed mainly because they did not allege, and apparently could not honestly allege, that the accountants knew about the alleged wrongdoing or had a duty to investigate the accuracy of the income reported by the restaurant. As pointed out by the Court of Appeal, “there is no allegation that the accountants were the sources of the inaccurate numbers or that they had an obligation to ascertain the accuracy of the income reported for each employee.” Reasoning from an analogous case concerning auditors, the Court of Appeal stated “an auditor is a watchdog, not a bloodhound.” Hence, the key to understanding the Court’s reasoning is fact that the record contained no evidence the accountants knew the restaurant managers were, allegedly, taking the waiter’s tips.

The Court’s holding in this case is important for clients of the Law Offices of James F. Lindsay for a number of reasons. (see www.jameslindsaylaw.com for more information). In any case potentially involving negligence it is absolutely necessary to show a duty owed by the defendants. A duty may arise from contract, or in the absence of a contract, from a special relationship between the plaintiff and the defendant, from a voluntary undertaking by the defendant, from the words of a statute, code or regulation, or from affirmative findings of the Biakanja factors. Under any of these legal theories of liability, proof of the defendant’s knowledge of, participation in, consent to, or aiding and abetting of the wrongdoing that caused harm to plaintiff will be crucial to holding the defendant liable for damages.

The opinion was filed on August 25, 2010. The accountants were ably represented by Randall Dean and Andrew Wright of Chapman, Glucksman, Dean, Roeb & Barger.

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