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Investment Advisors Are Not Professionals Subject To A Malpractice Claim

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  • Posted on: Jan 8 2018

What word that comes to mind when you hear the term “professional malpractice”? Medical? Legal? To be sure, doctors and lawyers are the more common professionals subject to malpractice claims. But, there are other professionals who can commit malpractice. These include accountants, architects, and engineers. Yet, not all professionals are subject to malpractice claims.

In Gutterman v. Stark, 2017 NY Slip Op. 32618(U) (Sup.Ct. N.Y. County, Dec. 18, 2017) (here), a financial advisor learned, to his benefit, that he was not a professional for purposes of a malpractice claim.

To put Gutterman in perspective, a brief summary of the law follows.

Who is a Professional?

Malpractice is the negligence of a professional toward a person for whom a service is rendered. Historically, a “professional” is a person engaged in an occupation generally associated with long-term educational requirements leading to an advanced degree, licensure evidencing qualifications met prior to engaging in the occupation, and control of the occupation by adherence to standards of conduct, ethics and malpractice liability. Santiago v. 1370 Broadway Assocs., LP, 264 A.D.2d 624, 625(1st Dept. 1999); see also Leather v. United States Trust Company of New York, 279 A.D.2d 311, 312 (1st Dept. Jan. 11, 2001); Matter of Rosenbloom v. State Tax Commn., 44 A.D.2d 69, 71 (3d Dept. 1974). As noted, the occupations that traditionally fall within the definition of “profession” have been limited to such “learned professions” as the law, accountancy, architecture, and engineering.

Gutterman v. Stark

Background

Gutterman arose out of an investment in an ambulatory care surgical facility. In early 2015, defendant Ilya Kogan (“Kogan”), a part-time employee of an asset management company (“Asset Manager”), referred plaintiffs Aharon Gutterman, MD and Aharon Gutterman MD PLLC (together, “Gutterman”) to an advisor (“Advisor”) at the Asset Manager about investing in surgical centers. In connection with the referral, Gutterman and the Advisor met at a Manhattan restaurant to discuss Gutterman’s interest in investing in an ambulatory surgery center (“ASC”). During their meeting, Gutterman claims that the Advisor falsely touted his experience and expertise in ASCs, and told Gutterman that he could “get it done” for him.

Months later, the Advosor informed Gutterman of an investment opportunity to convert the offices of Luis A. Vinas (“Vinas”), a Florida plastic surgeon, into a surgical center where Vinas and other surgeons could operate. The Advosor, Kogan and Nicholas Monroy (“Monroy” and, together with the Advisor, Kogan, and the Asset Manager, the “Asset Management Defendants”) introduced Gutterman to Vinas for the purpose of forming a partnership to establish the ASC.

In December 2015, Gutterman, Vinas, and the Asset Manager entered a Memorandum of Terms, which set forth the terms of their “efforts to expedite [the] creation of [a] new surgical facility in West Palm Beach.…”

The proposed facility faced numerous regulatory hurdles, among which was Kogan and the Advisor’s alleged lack of experience with ASC facilities. Gutterman claimed that if the Asset Management Defendants had the claimed experience or performed due diligence, circumstances upon which they relied, they would have known of the regulatory requirements that rendered the project unfeasible.

Gutterman commenced the action on October 13, 2016 by summons with notice and filed a complaint on November 22, 2016, asserting eight causes of action, one of which (the third claim) was against the Advisor for malpractice.

Service was made by overnight delivery and first-class mail, which the Court ruled failed to comply with the CPLR. The Asset Manager never appeared, and neither the Asset Manager nor the Advisor filed an answer.

Gutterman moved for a default judgment, which the Court denied for failure to specify the cause of action forming the basis for the requested default. Thereafter, Gutterman refiled the motion, seeking a default judgment against the Advisor and the Asset Manager on Plaintiffs’ third, fourth, fifth, sixth, and seventh causes of action.

The Court’s Ruling

The Court denied the motion. Regarding the malpractice cause of action, the Court dismissed the claim because the Advisor, against whom the claim was brought, was not a “professional” for purposes of the claim:

As to [the Advisor], the motion is denied as to the third cause of action for malpractice. The Complaint alleges that [the Advisor] became the financial and investment advisor for Gutterman, but failed to use reasonable and proper skill in providing financial and investment advice and to properly manage [his] account. Malpractice is professional misfeasance. Professional malpractice requires that a professional failed to perform services with due care and in accordance with the recognized and accepted practices of the profession. Professionals, in the context of professional malpractice, refers to the learned professions such as, architects, engineers, lawyers, and accountants. Financial advisors are not professionals.

Citations and internal quotation marks and insertions omitted.

Although the Court dismissed the malpractice claim, it found that Gutterman alleged sufficient facts that could give rise to a claim for breach of fiduciary duty. Consequently, the Court sua sponte granted leave to replead the claim accordingly:

If, as alleged, Gutterman reposed confidence in [the Advisor] and reasonably relied on [him for his] superior expertise or knowledge, [the Advisor] owed Gutterman fiduciary duties as his financial and investment advisor and as manager, through [the Asset Manager], of Gutterman’s invested funds. Allegations of [the Advisor’s] self-dealing, conflict of interest, and failure to prudently advise Gutterman may give rise to a breach of fiduciary duty.

Citations and internal quotation marks omitted.

Takeaway

Whether a person is a professional under the law matters. Among other reasons, it is relevant for statute of limitations purposes. Under CPLR 214(6), a claim for professional malpractice (other than medical malpractice) must be brought within three years of the wrongdoing.

In making the limitations period three years, the New York Legislature sought to correct attempts to circumvent the statute by “allowing actions that were technically malpractice actions to proceed under a six-year contract statute of limitations.” Matter of Arbitration Between Kliment & McKinsey & Co., 3 N.Y.3d 538, 541 (2004). Prior to the Legislature’s action, the courts “determined the appropriate statute of limitations in nonmedical malpractice actions based upon the proposed remedy instead of the theory of liability.” Id. (citations omitted). The courts reasoned that “liability would not have existed between the parties without the contractual relationship and that there was an implied agreement to perform professional services using due care.” Id. (citations omitted). With the amendment to the CPLR, the analysis changed. Thus, as the Court of Appeals observed, “[t]he pertinent inquiry is … whether the claim is essentially a malpractice claim.”

Although the statute of limitations was not at issue in Gutterman, the decision nevertheless highlights the importance of understanding whether a person is a professional. For Gutterman, it meant dismissal of the claim – though, with leave to replead the claim as one for breach of fiduciary duty.

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