* EPIC, a non-profit corporation v. CliftonLarsonAllen LLP

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FILED
JUNE 20, 2017
In the Office of the Clerk of Court
WA State Court of Appeals, Division III
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION THREE
EPIC, a non-profit corporation, 	)
) 	No. 34540-8-111
Appellant, 	)
)
v. 	)
)
CLIFTONLARSONALLEN LLP, a 	) 	PUBLISHED OPINION
limited liability partnership, and RALPH 	)
CONNER, an individual, 	)
)
Respondents. 	)
FEARING, C.J. - 	Is an auditor engagement agreement provision, which imposes a
deadline for filing suit, against the auditor, within two years from the date of the last audit
report, a reasonable and enforceable stipulation when the auditor's client had one year to
file suit after it should have discovered any breach of duty by the auditor and any
resulting damages? Plaintiff Enterprise and Progress in the Community (EPIC) appeals
from a summary judgment dismissal of its suit against its former auditing firm,
CliftonLarsonAllen LLP (CLA), for negligence and breach of contract. We hold the
contractual provision to be reasonable under the circumstances and affirm the trial court's
dismissal of the suit.
FACTS
Plaintiff EPIC, a nonprofit corporation, operates a Head Start program funded by
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the United States Department of Health and Human Services Administration for Children
and Families (HHS). Defendant CLA is the successor to EPIC's former auditing firms,
Lemaster & Daniels PLLC and LarsonAllen LLP. This statement of facts will refer to all
iterations of the auditing firm as CLA.
From 2006-2011, EPIC entered annual engagement agreements with CLA to audit
EPIC's financial statements and determine whether EPIC complied with federal grant
regulations. Each engagement agreement contained clauses that required EPIC to
commence any legal action arising from the audits within two years. 	The limitations
clause pertaining to the 2006-2009 audits stated:
It is agreed by Client [EPIC] and [Lemaster & Daniels PLLC]
[CLA] or any successors in interest that no claim arising out of services
rendered pursuant to this agreement by or on behalf of Client shall be
asserted more than two years after the date of the last audit report issued by
[Lemaster & Daniels PLLC].
Clerk's Papers (CP) at 38, 44, 52, 57 (emphasis added). The limitation clauses in the
2010-2011 audit agreements declared:
Time limitation
The nature of our services makes it difficult, with the passage of
time, to gather and present evidence that fully and fairly establishes the
facts underlying any Dispute. We both agree that, notwithstanding any
statute or law of limitations that might otherwise apply to a Dispute, any
action or legal proceeding by you against us must be commenced within
twenty-four (24) months ('Limitations Period') after the date when we
deliver our final audit report under this agreement, regardless of whether
we do other services for you relating to the audit report, or you shall be
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forever barred from commencing a lawsuit or obtaining any legal or
equitable relief or recovery.
The Limitation Period applies and begins to run even if you have not
suffered any damage or loss, or have not become aware of the existence or
possible existence of a Dispute.
CP at 70, 79 (emphasis added). All engagement agreements defined "dispute" as "[a]ny
disagreement, controversy, or claim that may arise out of any aspect of our services or
relationship with you." CP at 70, 79.
Pursuant to the agreements, CLA delivered the following audit reports to EPIC on
the following dates:
2006 audit report
2007 audit report
2008 audit report
2009 audit report
2010 audit report
2011 audit report
2012 audit report
May 22, 2007
March 17, 2008
June 29, 2009
May 18, 2010
March 28, 2011
September 19, 2012
June 25, 2013
CLA last prepared an audit for EPIC for the 2012 year. We do not know ifEPIC's
financial year was the same as the calendar year.
On January 17, 2012, HHS notified EPIC that EPIC violated federal regulations by
using 2011 grant money to pay expenses for another year. 	The disbursements reported to
HHS by EPIC for 2011 exceeded the disbursements reflected in EPIC's internal
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accounting records. 	Under federal regulations, a Head Start recipient must expend grant
money received on obligations incurred during the funding period to the award, rather
than accumulate the money for later payments. Among other untimely payment of bills,
EPIC, in January 2011, wrote a check to one vendor but did not deliver the check to the
vendor until June because of a cash flow problem. The notification directed EPIC to
correct its violation of the HHS regulation within ninety days or such additional time, up
to one year, as approved by an HHS official.
Shortly after receiving HHS's notice EPIC confirmed that Walter Abegglen,
EPIC's chief financial officer, used grant funds from one grant year to pay expenses
incurred in a different grant year. 	EPIC contends that Abegglen lacked knowledge that
the delayed expenditures breached HHS rules. 	Abegglen claimed that he moved "money
around just so accounts balanced." CP at 169. In February 2012, EPIC fired Abegglen
due to his inability to lawfully manage Head Start funds.
After terminating Walter Abegglen's employment, EPIC's Executive Director
Gary Hudson tasked EPIC's controller to investigate the rule violations alleged by HHS.
EPIC's controller learned that Abegglen charged expenses incurred in the last quarter of
one year to the first quarter of the next year.
Shortly after receiving the January 2012 notice EPIC began experiencing costs to
address the financial problems associated with the misuse of HHS grant funds and the
prospect of HHS demanding repayment of misused funds. 	In April 2012, EPIC borrowed
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$620,000 in anticipation of repayment.
On September 19, 2012, CLA delivered the 2011 audit report to EPIC. The 2011
report identified the misuse of grant funds alleged by HHS and warned that the misuse
started at least by the 2009 grant year. Note 12 in the 2011 audit report states:
Net assets at the beginning of 2011 have been adjusted to properly
reflect cash receipts on accounts receivable for prior years and to match
grant expenditures without reimbursements applicable to prior years. The
adjustment resulted in a decrease in net assets and an increase in accrued
expenses of$331,095. 	The effect of the restatement on the previously
reported change in net assets for the year ended December 31, 2010 has not
been determined.
CP at 111. The audit report also read:
As described in items 2011-01, 2011-02, and 2011-03 in the
accompanying schedule of findings and questioned costs, EPIC did not
comply with requirements regarding cash management and period of
availability of federal funds that are applicable to its Head Start Cluster.
Compliance with such requirements is necessary, in our opinion, for EPIC
to comply with the requirements applicable to that program.
CP at 115. CLA further described the misuse of grant funds in the audit's Finding 2011-
02 that stated:
Condition: EPIC drew down funds from current Head Start grants
for expenditures incurred in previous grant years.
Questioned Costs: 	·
$448,885 related to November 1, 2010 through October 31, 2011
grant year
$477,320 related to November 1, 2011 through October 31, 2012
grant year
Context: During the reconciliation process of accounts receivable
and grant draw downs, it was noted that the expenses incurred in the last
month of the previous grant year were claimed on the current year grant
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draw down. This occurred for at least two consecutive prior grant years.
The questioned costs noted above are the amounts dawn down on the
respective grants to pay expenses incurred in October 2010 and October
2011.
Recommendation: Management and the board of directors should
establish policies that prevent management override of internal controls and
procedures to ensure that expenditures incurred and reimbursed by Head
Start are matched in the appropriate period.
Views of Responsible Officials and Planned Corrective Actions:
Management acknowledges finding. 	During the reconciliation process of
accounts receivable, grant draw downs, and preparation of the second
quarter 2012 draw down report, management discovered a discrepancy in
the expense report from 2009. Management is currently working with the
office of Head Start to resolve this issue.
CP at 119.
EPIC contends that Chief Financial Officer Walter Abegglen also mismatched
expenses with grant funds in years 2007 to 2010. According to EPIC, if CLA had
identified these errors in earlier audits, EPIC would not have repeated the error in 2011,
and HHS would not have complained of any errors. HHS never detected any regulation
violations before the 2011 grant year. Because the earlier CLA audits exposed no
accounting errors, EPIC management concluded that EPIC complied with HHS
regulations.
EPIC attempted to cure the deficiencies identified by HHS, in its January 17, 2012
notification, by a department deadline of December 31, 2012. EPIC secured a loan for
$350,000 to cover the amount of expenses in dispute. 	We do not know the relationship
between the $350,000 loan and the April 2012 $620,000 loan. Unfortunately, the lender
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did not disburse the $350,000 loan until after January 2013. Accordingly, on February 8,
2013, HHS notified EPIC that it must repay $1,146,039 of the 2011 grant within thirty
days. In June 2013, EPIC relinquished its 2013 $7,514,963 grant and its 2014
$12,392,427 grant in order to remain eligible for grants after 2014. 	In August 2013, HHS
agreed to reduce EPIC's repayment amount to $303,287.
According to EPIC Executive Director Gary Hudson, when HHS reduced the
amount of repayment in August 2013, EPIC focused on learning how the mismatching
occurred, calculating the extent of the mismatching, and ascertaining whether CLA
should have uncovered errors earlier. In September 2013, EPIC retained Forensic
Accountant Tiffany Couch to investigate whether CLA should have unearthed and
warned of the misuse of grant funds in the audits for years 2007-2011. According to
Hudson, EPIC first suspected it might have a claim against CLA in September 2013.
After being hired by EPIC, Tiffany Couch contacted CLA on multiple occasions
to request accounting work papers pertaining to the audits. CLA refused Couch access
without a proper release. 	We do not know the nature of the release demanded.
Tiffany Couch delivered a preliminary report to EPIC on June 1, 2015. The report
found consistent error in EPIC's handling of HHS grant funds in years 2007-2011 that
CLA should have detected. 	Couch concluded that CLA likely violated an auditor's
standard of care when failing to unearth the HHS regulation violations beginning with
2007. Couch omitted a formal finding because she lacked access to CLA's working
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papers. EPIC then filed suit out of frustration from CLA refusing to disclose working
papers.
PROCEDURE
On December 17, 2015, EPIC sued CLA. EPIC asserted claims for breach of
contract, professional negligence, and negligent misrepresentation. EPIC alleged that
CLA's audit reports for 2007-2011 failed to uncover discrepancies involving HHS grant
funds and payment of expenses, thereby resulting in EPIC's epic loss of grant funding.
On January 22, 2016, EPIC filed an amended complaint that added more detail to EPIC's
alleged damages.
CLA filed a motion to dismiss under CR 12(b )(6) or, in the alternative, for
summary judgment under CR 56. In support of its motion, the accounting firm filed the
declaration of one of its lawyers, which declaration attached the pertinent engagement
agreements and audit reports. CLA contended that EPIC's amended complaint failed to
state a claim for the following reasons: (1) the two-year time limitation contained in each
of the engagement agreements bars EPIC's claims, (2) the in pari delicto doctrine bars
EPIC's claims, (3) the complaint fails to plausibly allege how any act or omission of the
firm caused EPIC to suffer recoverable damages, and (4) the complaint fails to allege that
CLA failed to perform its contractual undertaking and failed to identify a breached
contractual provision.
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When opposing CLA's motions to dismiss and summary judgment, EPIC filed
declarations from Executive Director Gary Hudson and Forensic Accountant Tiffany
Couch. Couch opined that the two-year limitation in the CLA engagement agreement is
unreasonably short because the auditor's principal will not know of many auditing errors
within that two-year period.
In response to CLA's summary judgment motion, EPIC argued that (1) CLA's
CR 12(b)(6) motion must be treated as a summary judgment motion since the auditing
firm relied on documentation outside the pleadings, (2) the in pari delicto defense does
not apply because EPIC's agents engaged in no misconduct, (3) the two-year suit
limitation deadline in the engagement letter is unreasonably short and unenforceable,
(4) CLA's failure to earlier uncover the mismatching of grant funds and expenses in the
years 2007-2010 caused EPIC damage by precluding EPIC from avoiding adverse action
by HHS, and (5) EPIC's malpractice claim against the accounting firm may be pursued as
a breach of contract claim and thus the longer contract statute of limitations applies.
In reply to EPIC's motion response, CLA filed a declaration of Ralph Conner, the
partner responsible for EPIC's audits, which declaration attached the January 17, 2012
notification letter from HHS to EPIC.
The trial court granted EPIC's summary judgment motion and the motion to
dismiss with prejudice. The court enforced the two-year contract limitation period and
ruled the period expired before December 2015.
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LAW AND ANALYSIS
Motion
EPIC contends the trial court erred when granting CLA's motion to dismiss
because the court considered evidence outside the complaint and answer to the complaint.
When ruling on a CR 12(b)(6) motion to dismiss, the trial court may generally consider
only the allegations contained in the complaint and may not go beyond the face of the
pleadings. Jackson v. Quality Loan Service Corp., 186 Wn. App. 838, 844, 347 P.3d
487, review denied, 184 Wn.2d 1011, 360 P .3d 817 (2015). 	When either party submits
affidavits, the submittals convert a motion to dismiss into a motion for summary
judgment. McAfee v. Select Portfolio Servicing, Inc., 193 Wn. App. 220,226, 370 P.3d
25 (2016).
In support of its motion to dismiss, CLA filed an affidavit of an audit partner. In
opposition to the motion, EPIC filed affidavits of its chief executive officer and its expert
accountant. Thus, the motion to dismiss metamorphosed into a summary judgment
motion. Nevertheless, the trial court committed no harmful error by granting the motion
to dismiss. CLA alternatively moved for summary judgment. The trial court considered
the submittals and granted summary judgment in addition to the motion to dismiss. On
appeal, we treat the dismissal as based solely on a summary judgment motion.
Appellate courts review a trial court's order granting a motion for summary
judgment de novo. Jackson v. Quality Loan Service Corp., 186 Wn. App. at 843 (2015);
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Briggs v. Nova Services, 166 Wn.2d 794, 801, 213 P.3d 910 (2009). 	Summary judgment
is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of law.
CR 56(c). A material fact is one on which the outcome of the litigation depends in whole
or in part. Ranger Insurance Co. v. Pierce County, 164 Wn.2d 545, 552, 192 P.3d 886
(2008); Morris v. McNicol, 83 Wn.2d 491,494,519 P.2d 7 (1974). In a summary
judgment motion, the burden is on the moving party to demonstrate that there is no
genuine issue as to a material fact and that, as a matter of law, summary judgment is
proper. Hartley v. State, 103 Wn.2d 768, 774, 698 P.2d 77 (1985). 	Under summ~
judgment principles, this court construes all facts and reasonable inferences in the light
most favorable to the nonmoving party. Barber v. Bankers Life & Casualty Co., 81
Wn.2d 140,142,500 P.2d 88 (1972); Wilson v. Steinbach, 98 Wn.2d 434,437,656 P.2d
1030 (1982). 	We conclude that, based on the undisputed facts, the engagement letter's
deadline for suit is enforceable and bars both the negligence and breach of contract
claims.
Reasonableness of Contract Limitation Period
EPIC employs a circuitous, but astute, argument on appeal. It focuses on CLA's
alleged failure to expose the HHS grant and expenditure mismatch in 2007. EPIC notes
that it received CLA's 2007 audit report on March 17, 2008, but it lacked knowledge of
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any negligence of CLA and damages resulting therefrom until, at the earliest, February
2013 when HHS notified EPIC of the need to return funds. 	According to EPIC, the two-
year limitation period expired for suit based on the 2007 auditing contract on March 17,
2010, two years after the receipt of the report. 	Since the law refuses to impose a
limitation period that expires before the claimant can assert the claim, this court,
according to EPIC, must strike the contract provision. 	In tum, the court must impose the
Washington three-year statute of limitations for the professional malpractice claim and
the six-year statute of limitations for a breach of contract claim and apply a discovery
rule for each cause of action. Under EPIC's contention, it filed suit within three years of
its knowledge of damages in February 2013. Presumably EPIC's same argument would
apply to CLA's purported negligence in failing to unearth the mismatch in the audits for
the 2008, 2009, and 2010 years.
EPIC emphasizes CLA's failure to identify, in the earlier audit years, EPIC's
accounting error. This emphasis prompts the argument that, had CLA caught the error in
the 2007, 2008, 2009, or 2010 audits, EPIC would not have repeated the mistake during
the 2011 grant year. HHS punished EPIC only for the 2011 error. To our knowledge,
HHS lacks notice of the earlier grant year mistakes. EPIC may also focus on earlier
years' audits because by the time it received CLA's 2011 audit, it lacked time to correct
the error before HHS discovered the regulation violation.
We observe that EPIC's argument assumes that a court should strike the entirety
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of an unreasonable contractual limitation period, rather than conform the contractual
limitation within reasonable constraints. For example, EPIC does not admit that this
court could enforce the contractual two-year time limit, but rule that the period
commenced when EPIC knew of CLA's violation of the standard of care rather than the
date of the receipt of the last audit.
We further note that EPIC's argument assumes that the contractual limitation
period for the 2007 to 2011 audits commences to run when it received each of the
respective audits. For example, CLA delivered the 2007 audit report on March 17, 2008.
EPIC's contention assumes that it needed to file suit for any negligence in preparing the
2007 audit by March 17, 2010. The engagement agreement reads otherwise. For the
2006-2009 audits, any suit needed to be brought within two years of the last audit report
issued by the auditing firm. 	CLA last delivered a report, the 2012 audit report, on
June 25, 2013. Therefore, under the audit agreement, EPIC had until June 25, 2015, to
file suit based on any audit between 2006 and 2009.
The limitation clauses in the 2010 and 2011 respective audit agreements require
suit be brought within two years of the final audit report under that agreement. CLA
delivered the 2010 audit report on March 28, 2011, and the 2011 audit report on
September 19, 2012. Therefore, as to the 2010 report, EPIC could timely sue by
March 28, 2013. EPIC could timely bring any suit based on any error in the 2011 report
by September 19, 2014. Note that the limitation period for the 2010 and 2011 audits
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expired earlier than the 2006-2009 audits, with the period for the 2010 audit expiring
first.
Since EPIC attacks the reasonableness of the engagement letter's two-year
deadline for filing suit and since EPIC advocates the application of the statute of
limitations discovery rule, we probe the date by which EPIC should have known of any
breach of duty by CLA. 	We then compare that date with the first possible date for a
deadline in filing suit. That first possible date is March 28, 2013, the contractual time
limit for filing suit based on the 2010 report. 	We then conclude that EPIC possessed a
reasonable amount of time to file suit after it should have discovered any breach by CLA.
Parties may agree to a shorter limitations period than provided in a general statute.
Syrett v. Reisner McEwin & Associates, 107 Wn. App. 524, 527-28, 24 P.3d 1070 (2001);
Yakima Asphalt Paving Co. v. Department of Transportation, 45 Wn. App. 663,665, 726
P.2d 1021 (1986). A stipulated limitation period prevails over the general statute of
limitations unless prohibited by statute or public policy, or unless the provision is
unreasonable. 	Wothers v. Farmers Insurance Co., 101 Wn. App. 75, 79, 5 P.3d 719
(2000). EPIC only argues the unreasonableness of the CLA engagement letter limitation
prov1s1on.
On the one hand, the stipulated limitation period is reasonable if the time allowed
affords the plaintiff sufficient opportunity to ascertain and investigate the claim and
prepare for the controversy. Syrett v. Reisner McEwin & Associates, 107 Wn. App. at
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529. Washington courts have found that contractual limitations clauses ranging from
three months to a year are reasonable. 	City of Seattle v. Kuney, 50 Wn.2d 299,302,311
P.2d 420 (1957); Absher Construction Co. v. Kent School District No. 415, 77 Wn. App.
137, 147-48, 890 P.2d 1071 (1995); Yakima Asphalt Paving Co. v. Department of
Transportation, 45 Wn. App. at 666 (1986); Ashburn v. Safeco Insurance Co., 42 Wn.
App. 692, 695, 713 P.2d 742 (1986). 	On the other hand, the court will not enforce the
contractual limitation period when the cause of action does not accrue before the
limitation period expires. Sheard v. United States Fidelity & Guaranty Co., 58 Wash. 29,
35-36, 107 P. 1024 (1910). The law will not require that a plaintiff commence action
before its pecuniary loss was capable of ascertainment. Sheard v. United States Fidelity
& Guaranty Co., 58 Wash. at 36; Syrett v. Reisner McEwin & Associates, 107 Wn. App.
at 529.
EPIC's challenge to the limitation period found in the auditor's engagement
agreement focuses on the date of the accrual of a claim rather than the length of the
limitation period. The date of accrual is the date of receipt of an audit report. 	Subject to
the same principles that apply to contractual modification of a statute of limitations,
parties may agree to set the time for accrual of causes of action arising under their
contracts. 	Washington State Major League Baseball Stadium Public Facilities District v.
Huber, Hunt & Nichols-Kiewit Construction Co., 176 Wn.2d 502,513,296 P.3d 821
(2013). The court will enforce such a provision unless it is contrary to statute, public
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policy, or it is unreasonable. 	Washington State Major League Baseball Stadium Public
Facilities District v. Huber, Hunt & Nichols-Kiewit Construction Co., 176 Wn.2d at 513.
The baseball stadium suit arose from a construction contract, but we see no reason not to
apply these principles to an auditing services contract.
CLA argues that, under the language of its auditing contract, its client EPIC's
ability to discover its claim is immaterial. CLA emphasizes the language in its later
agreements: "The Limitation Period applies and begins to run even if you have not
suffered any damage or loss, or have not become aware of the existence or possible
existence of a Dispute." CP at 79. 	We consider such an argument to conflict with
Sheard v. United States Fidelity & Guaranty Co. 	CLA cites Adler v. Fred Lind Manor,
153 Wn.2d 331,344, 103 P.3d 773 (2004) in support of its argument. Nevertheless,
Adler v. Fred Lind Manor merely states the general proposition that parties to a contract
shall be bound by its terms. Adler v. Fred Lind Manor, 153 Wn.2d at 344. Of course,
this general rule engenders many exceptions, and courts refuse to enforce many
contractual terms.
CLA may argue that its contractual deadline constitutes a period of repose not a
suit limitation period. 	CLA may further argue that a period of repose may be enforced
despite the claimant lacking any knowledge of the claim within the stated window of
time. Indeed, statutes of repose bar a suit if the claimant has not been damaged within a
time period. RCW 7.72.060(1)-(2). Nevertheless, the CLA engagement letter imposes a
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limitation period not a repose period.
Statutes of repose are of a different nature than statutes of limitation. Rice v. Dow
Chemical Co., 124 Wn.2d 205,211, 875 P.2d 1213 (1994). A statute of limitation bars
plaintiff from bringing an already accrued claim after a specific period of time. 	1000
Virginia Limited Partnership v. Vertecs Corp., 158 Wn.2d 566, 574, 146 P.3d 423
(2006). A statute of repose terminates a right of action after a specified time, even if the
injury has not yet occurred. 	1000 Virginia Limited Partnership v. Vertecs Corp., 158
Wn.2d at 574-75. Although the CLA auditing agreement reads that the deadline for suit
will apply even if the client does not discover the harm within the deadline, the
agreement contains no express provision that the client must be harmed within a set time
frame. 	Instead, the agreement imposes a deadline for bringing suit.
EPIC argues that it lacked a reasonable opportunity to ascertain that CLA's audits
were deficient until HHS issued its disallowance in August 2013. EPIC further argues
that, even ifwe move the date backward to February 2013 when EPIC received HHS'
preliminary notice, the two-year deadline for suit is inadequate based on the earliest
deadline of March 2013 for the 2010 report. EPIC would own only a month at most to
investigate, obtain an expert's opinion of whether EPIC possessed a claim against CLA,
consult with and retain counsel, and commence an action arising out of the 2010 audit.
Principles of law emanating from the discovery rule disagree.
Under statute, the limitation period begins to run when the plaintiffs cause of
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action accrues. RCW 4.16.005. A cause of action accrues when every element of an
action is susceptible to proof. 	Woods View JI, LLC v. Kitsap County, 188 Wn. App. 1,
20,352 P.3d 807, review denied, 184 Wn.2d 1015, 360 P.3d 318 (2015). In many
instances, an action accrues immediately when a wrongful act occurs, but, in some
circumstances, a plaintiff can be unaware of the harm until a later time. 	1000 Virginia
Limited Partnership v. Vertecs Corp., 158 Wn.2d at 575 (2006). Under the discovery
rule, a cause of action accrues when the plaintiff discovers, or in the reasonable exercise
of diligence should discover, the salient facts underlying the cause of action's elements.
1000 Virginia Limited Partnership v. Vertecs Corp., 158 Wn.2d at 576. The diligence
element of this test is generally a question of fact, but it is proper for the trial court to
resolve the issue as a matter of law if reasonable minds cannot differ as to the
interpretation of the relevant facts. 	Martin v. Dematic, 178 Wn. App. 646, 653, 315 P.3d
1126 (2013).
HHS notified EPIC of the misuse of Head Start funds on January 17, 2012. The
report warned of failing to timely expend grant money and spending one year's grant in
another year. EPIC had available then the 2010 audit report in addition to earlier reports.
A review of the 2010 report would have confirmed that CLA failed to warn EPIC of its
violation of the federal regulations. A review of EPIC's own accounting records would
have shown that EPIC violated the regulations in each year beginning in 2007. In
January 2012, EPIC still enjoyed fourteen months in which to file suit against CLA.
18
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No. 34540-8-111
EPIC v. CliftonLarsonAllen LLP
As a result of the January 2012 letter from HHS, EPIC took immediate action,
including terminating the employment of its chief financial officer, that confirms EPIC
had reason to question the completeness of CLA's audits. After terminating the financial
officer's employment, EPIC's Executive Director Gary Hudson tasked EPIC's new
controller to investigate the rule violations alleged by HHS. EPIC's controller learned
that her predecessor charged expenses from the last quarter of one year to the first quarter
of the next year. EPIC began incurring expenses by February 2012 to address the
financial problems associated with the misuse of funds and the prospect of having to
repay some portion of the misused funds. 	In April 2012, EPIC took a loan of $620,000 in
anticipation of repayment. Therefore, EPIC knew then that any failure to catch the
mistake by CLA was reaping damage. EPIC owned then eleven months, in which to sue
CLA. In the September 19, 2012 audit report, CLA disclosed such misuse dating back to
at least the end of 2009. 	Washington enforces a deadline as short as three months.
Based on the declaration of its expert, Tiffany Couch, EPIC promotes the
reasonableness of delaying suit until the expert conclusively determined that CLA
breached the auditor's standard of care. But EPIC's position conflicts with the facts of·
the case and Washington law. As to the facts, Couch has yet to conclusively determine
CLA breached its duty. This corrected fact does not support a ruling that the cause of
action has not accrued, but illustrates that even EPIC knows it need not wait until
irrefutable proof of any breach of duty.
19
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No. 34540-8-111
EPIC v. CliftonLarsonAllen LLP
As to the law, the court considers whether the plaintiff had knowledge of the
factual basis for the cause of action, not the legal basis. August v. United States Bancorp,
146 Wn. App. 328, 342, 190 P.3d 86 (2008); Germain v. Pullman Baptist Church, 96
Wn. App. 826, 832, 980 P.2d 809 (1999). Under the discovery rule, the running of the
statute of limitations does not toll until a plaintiff consults an expert or until an attorney
tells the plaintiff that a defendant breached the applicable standard of care. 	Gevaart v.
Metco Construction, Inc., 111 Wn.2d 499, 501-02, 760 P.2d 348 (1988). Moreover,
EPIC does not explain why it needed to wait for Couch to finish her work or why Couch
could not have issued her preliminary report much sooner than she did. EPIC does not
identify any material fact which it knew when it filed the lawsuit in December 2015 that
it did not know by February 2012.
EPIC contends that it did not know the full extent of its damages until after it
negotiated with HHS to lower the penalty. 	This argument helps none, since a cause of
action accrues when the plaintiff knows or should know of some damage. 	When a
plaintiff is placed on notice by some appreciable harm occasioned by another's wrongful
conduct, the plaintiff must make further diligent inquiry to ascertain the scope of the
actual harm. Green v. A.P.C., 136 Wn.2d 87, 96,960 P.2d 912 (1998). The statute of
limitations does not toll by the fact that further, more serious harm may flow from the
wrongful conduct. 	Green v. A.P. C., 136 Wn.2d at 96. The claimant need not be aware of
the full extent of the damages. 	Cashmere Valley Bank v. Brender, 128 Wn. App. 497,
20
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No. 34540-8-III
EPIC v. Cli.ftonLarsonAllen LLP
508, 116 P.3d 421 (2005), aff'd, 158 Wn.2d 655, 146 P.3d 928 (2006).
EPIC also argues that it needed to minimize its damages before hiring an expert to
determine if CLA breached an obligation. Nevertheless, no rule delays the accrual of an
action during a time that the plaintiff seeks to minimize damages. EPIC does not
illuminate why it cannot minimize damages and hire an expert at the same time.
CLA argues that, even if a contractual limitation period is unreasonable, the court
does not strike the entire provision, but strikes the offending portion and enforces the
remainder of the contract. CLA states that we could delay the accrual of the claim but
enforce the two-year period. 	Since we hold that the provision as a whole is reasonable
under the circumstances, we do not need to address this argument.
CONCLUSION
We affirm the trial court's dismissal on summary judgment ofEPIC's claims
against CLA and award CLA costs on appeal.
I CONCUR:
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No. 34540-8-111
SIDDOWAY, J. (concurrence in the result)-We lack information on the
magnitude and complexity of the work involved for CliftonLarsonAllen LLP (CLA) to
perform the annual Head Start program compliance it promised to perform for Enterprise
and Progress in the Community (EPIC). 1 Its base annual audit fee ranged from $23,600
to $29,500 between 2006 and 2011. Depending on the complexity of the compliance
work and the aptitudes ofEPIC's own employees, timely determining whether CLA
committed malpractice might have required EPIC's board of directors to hire an auditor
to audit the auditor. 	If so, I am unwilling to say as a general matter that the contractual
limitations period in CLA's engagement letters is reasonable.
1 The 2009 engagement letter, for instance, stated in relevant part:
In addition to our report on Client's financial statements, we will also issue
the following types of reports:
• 	Reports on compliance with laws, regulations, and the provisions
of contracts or grant agreements. We will report on any
noncompliance which could have a material effect on the
financial statements and any noncompliance which could have
a direct and material effect on each major program.
Clerk's Papers (CP) at 55. The agreement identified "Head Start 93.600" as the only
federal financial assistance program that EPIC participated in for purposes of the audit.
Id. 	It went on to provide that its report would address "material errors, fraud, abuse,
violations of compliance obligations, and other responsibilities imposed by state and
federal statutes and regulations." Id.
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No. 34540-8-111
EPIC v. CliftonLarsonAllen LLP (concurrence)
Nor do we need to. The undisputed evidence establishes that EPIC's causes of
action against CLA accrued in time for it to have asserted its claims within the
contractual limitations period. Where that is the case, there is no need to determine
whether the provision should be deemed waived.
Where a limitations provision might unreasonably bar a claim before it can be
asserted, the result, announced in our Supreme Court's 1910 decision in Sheard v. United
States Fidelity & Guaranty Co., is that the court will infer an intent to waive the
provision as to such claims. 58 Wash. 29, 34-35, 107 P. 1024 (1910). In other words, a
party cannot attack a contractual limitations period as "facially unreasonable"-instead,
the limitation provision is deemed waived in cases where it would be unreasonable as
applied. We glean this from Sheard's adoption, as ''the correct rule of construction," the
rule announced by the Iowa Supreme Court in Longhurst v. Star Ins. Co.:
"If, with reasonable diligence, the value [of the insured interest] cannot be
legally ascertained in time to bring an action on the policy within a year
from the date of the loss, then it follows (unless you wish to impute a
dishonest purpose on the part of the company), that in granting such policy
they intended to waive, in this class of insurable interest, the condition
which limits the right of action on the policy to twelve months. By putting
this construction upon the contract of insurance, you preserve the upright
intent of the company intact. Whereas, if you put the other construction
upon it, you ... judicially determine, that the company granted a policy for
a valuable consideration paid, which at the time they had reason to believe,
would be no risk to them and no protection to the insured, and thereby
obtained money for themselves under false pretenses. . . . It is the business
of the court in construing the contract, to give effect, if possible, to the real
intent and expectations of the parties. That can be done only in this case by
holding that the fifteenth condition of the policy under discussion, is not
2
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No. 34540-8-111
EPIC v. CliftonLarsonAllen LLP (concurrence)
applicable to this particular class of insurable interest, and that when the
defendant consented to take risks of this kind, it either intended to waive
the limitation, or have it to commence running from the date that the value
of the mechanic's lien should be judicially ascertained."
Sheard, 58 Wash. at 34-35 (quoting Longhurst, 19 Iowa 364, 371-72 (1865)) (emphasis
added).
"[A] claim [generally] accrues when a party has the right to apply to a court for
relief." Cambridge Townhomes LLC v. Pac. Star Roofing, Inc., 166 Wn.2d 475, 485, 209
P.3d 863 (2009). Generally, if the plaintiff is aware of some injury, beyond nominal
damage, the statute of limitation begins to run even ifhe does not know the full extent of
his injuries. Steele v. Organon, Inc., 43 Wn. App. 230,234, 716 P.2d 920 (1986).
As the majority illustrates, EPIC had the right to apply to a court for relief many
months before the contractual limitation provision barred its claim. Because the
provision did not unreasonably bar this claim before it could be asserted, there is no need
to examine its reasonableness further.
I concur in the result.
3
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