Accountants are professionals. They carry malpractice insurance. They are potential deep pockets. For these reasons, accountants sometimes find themselves defending against liability claims in business divorce lawsuits. The theories of accountant liability vary. Accountants owe their clients a duty of reasonable care, breach of which exposes the accountant to a claim of professional negligence / accounting malpractice. Alternatively, or in addition, accountants can face liability for “aiding and abetting” another person’s torts, like aiding and abetting another’s breach of fiduciary duty, fraud, or conversion, including failure to report fraud an accountant discovers while performing its services. Our blog about 1650 Broadway addressed these principles.
But, “[a]s a general rule, accountants are not fiduciaries as to their clients,” except where they are “directly involved in managing the client’s investments” (Caprer v Nussbaum, 36 AD3d 176 [2d Dept 2006] [citations omitted]).
What about bookkeepers? Unlike accountants, who generally have their own accounting firm or practice, bookkeepers often (though not always) work in-house, either as an employee or independent contractor. Is a bookkeeper a fiduciary to a business entity where an accountant is not?
A recent appeals court decision, Schiano v Harsanyi (230 AD3d 820 [2d Dept 2024]), considered this interesting question along with whether courts may hold bookkeepers liable for “aiding and abetting” a business owner’s fraud. The answer: bookkeepers beware.
The Vending Machine Business
In Schiano, James Schiano (“Schiano”) sued Peter Harsanyi (“Harsanyi”) alleging that the men had a de facto partnership to own and operate multiple corporations, including Systems Vend Management Corp. (“SVMC”), a vending machine business. Schiano alleged that although Harsanyi was sole owner “on paper,” Schiano loaned and invested several hundred thousand dollars to the business over more than a decade and should be deemed equal 50% owner. After a blow up, Harsanyi physically locked Schiano out of the business, resulting in a complaint by Schiano for declaratory judgment, accounting, compelled distributions, constructive trust, and breach of contract.
The Claims Against the Bookkeeper
Harsanyi brought a third-party complaint against Schiano and Jacqueline Castro (“Castro”), the entity’s bookkeeper. Harsanyi alleged claims against Schiano for a “fraudulent embezzlement scheme,” breach of fiduciary duty, and faithless servant, and against Castro for “aiding and abetting Schiano’s fraudulent embezzlement scheme” and breach of fiduciary duty.
The essence of the scheme, according to Harsanyi, was that SVMC dealt heavily in cash collections from its vending machines, and that Schiano made off with large sums of cash, treating the stolen funds as loans or capital contributions. According to Harsanyi, Castro was responsible for taking Schiano’s cash reports and recording the income in the company’s books. Instead, Castro “knowingly used Schiano’s false reports and deceptively accounted on her books and records that Schiano’s cash were loans or capital contributions made to Systems Vend,” and “then purposefully withheld her internal records from Harsanyi, and in due course, Systems Vend’s accountant, allowing Schiano’s fraudulent scheme to continue for years.”
Prior Case Law
If bookkeeper liability sounds like a stretch, it may come as a surprise that there is precedent. In Torrance Constr., Inc. v Jaques (127 AD3d 1261 [3d Dept 2015]), an Albany-based appeals court ruled that a construction business stated viable claims against a bookkeeper for conversion and breach of fiduciary – and against his bookkeeper’s wife for aiding and abetting – after the bookkeeper allegedly “stole” almost half a million dollars by “charging personal purchases” to the entity’s accounts, which the bookkeeper and his wife used for improvements on the family home. The Court ruled that the bookkeeper owed a “confidential and fiduciary relationship of trust” because he was the entity’s “sole” bookkeeper and “had authorization to write checks on at least one business account.”
But Harsanyi’s allegations against Castro were far less egregious. Among other things, there was no allegation in Schiano that Castro (as opposed to Schiano) profited from the scheme. Unsurprisingly, Castro moved to dismiss the third-party complaint, providing a short affidavit in support. She initially succeeded.
The Dismissal Decision
In a Decision and Order, Nassau County Supreme Court Justice Conrad D. Singer held that: (i) the allegations of aiding and abetting fraud “lack the particularity” required of such a claim; and (ii) the “conclusory allegations” in the third-party complaint were “insufficient to assert a claim for breach of fiduciary duty.”
The Appellate Decision
Harsanyi appealed. You can read the appeal briefs here, here, and here. The appellate decision was a total loss for Castro, and a total win for Harsanyi.
On the claim for aiding and abetting fraud, the Court ruled:
Contrary to Castro’s contention, the third-party complaint sufficiently alleged her knowledge of the underlying fraud and her substantial assistance by alleging . . . that Castro deceptively accounted on her books and records that cash obtained by Schiano from SVMC was in the nature of loans or capital contributions, that Castro purposefully withheld her internal records from Harsanyi, thereby enabling Schiano’s fraudulent scheme to continue for years, and that Castro acted with knowledge that Schiano was converting company money and that cash received by Schiano was not a loan to the business as represented.
(quotations omitted).
On the claim for breach of fiduciary duty, the Court ruled:
[C]ontrary to Castro’s contention, the third-party complaint sufficiently alleged the existence of a fiduciary duty between Castro and SVMC based upon allegations that Castro, as SVMC’s bookkeeper, had a duty to make truthful and complete disclosures to SVMC. Further, the third-party complaint sufficiently alleged that Castro breached her fiduciary duty to SVMC by . . . reporting cash received as loans made by Schiano to SVMC, deceptively accounting embezzled cash as loans and capital contributions made by Schiano, and withholding information from SVMC regarding the nature of the funds obtained by Schiano.
(citation, quotations, and brackets omitted).
Lessons from Schiano
For business owners, the lesson of Schiano is that if your bookkeeper double crosses you, there may be a remedy under the right set of facts. After Schiano and Torrance, it should not be too hard to plead a breach of fiduciary claim if the bookkeeper is an employee, because an “employee owes a duty of good faith and loyalty to an employer in the performance of the employee’s duties” (McKinnon Doxsee Agency, Inc. v Gallina, 187 AD3d 733 [2d Dept 2020]). The outcome may be different if the bookkeeper is an independent contractor, where it is more difficult, though not impossible, to allege a viable claim for breach of fiduciary duty (see e.g. Barber v Actknowledge, Inc., 24 Misc 3d 1211(A) [Sup Ct, Kings County 2009, Demarest, J.]).
For bookkeepers, the lesson is that if you are perceived to have taken sides or participated in the wrongdoing or misappropriation of a close business owner, there may be litigation and potential liability in your future.
[View source.]
