The Equitable Action of Accounting

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An action for an accounting is an equitable cause of action. As discussed below, for statute of limitations purposes, the cause of action for an accounting must sometimes be distinguished from the remedy of an accounting.  When, for instance, the gravamen of a Complaint is based on some other cause of action, such as conversion or breach of contract, an accounting will be available only if the claim has been brought within the limitations period for the cause of action on which the ancillary remedy of accounting depends. 

  1. Essential Elements of an Action for an Accounting

An action for an accounting is a suit in equity for a determination of the amount owed to the plaintiff when the amount to which the plaintiff is entitled is uncertain and cannot be calculated based on the information available to the plaintiff. The essential elements of a cause of action for an accounting are (1) a relationship between the plaintiff and the defendant or other circumstances that demonstrate that the plaintiff’s legal remedies are inadequate; and (2) a showing that the amount due the plaintiff is unknown and cannot be ascertained without an accounting, since the information necessary to determine that amount is within the exclusive knowledge of the defendant. Typically, the essential elements of a claim for an accounting can be met when there is a fiduciary relationship between the parties, or the accounts between the parties are so complicated that the plaintiff cannot assert a specific sum due, and there is no legal remedy available.  

  1. Availability of an Accounting in Cases of Fraud

A claim for damages for fraud, whether based on intentional or negligent misrepresentation, or suppression of concealment of material facts, is a legal claim for which an accounting is typically not available. For instance, if the damages resulting from the fraud are readily ascertainable, there is no right to an accounting.

However, if the plaintiff’s damages cannot be readily ascertained, and the facts necessary to determine the amount due the plaintiffs are solely within the knowledge of the defendant, the plaintiff assert a cause of action for an accounting. Nor, in such circumstance, will the plaintiff be required to show the existence of a fiduciary relationship between him and the defendant. 

  1. Trust

A trustee owes a fiduciary duty to the beneficiaries of the trust, and typically, to the settlor who created the trust as well.  Probate Code sections describe the instances in which a trustee must render an accounting to beneficiaries and the settlor of the trust. Typically, a trustee must render an accounting on an annual basis, when there is a change in trustees, and upon termination of the trust.

  If the trust is an inter vivos revocable trust which the trust settlor may revoke at any time, the trustee will have an obligation to account to the trust settlor, but will not be obligated to render an accounting to any of the beneficiaries, so long as the trust settlor is alive. Obviously, that results from the fact that the trust settlor can revoke the trust at any time, in which case, there will no longer be any beneficiaries.

However, once the trust settlor dies, the beneficiaries rights are irrevocable, insofar as the terms of the trust document provides, a trustee must render an accounting to the beneficiaries on an annual basis and as otherwise provided in various Probate Code sections.  Moreover, the remainder beneficiaries, who do not have a current right to distributions from the trust, will typically not have a right to receive the trustee’s annual accounting. 

  1. Partnerships and Joint Venture

A partner or joint venturer may maintain an action against the partnership or another partner or against his fellow joint venturers for an accounting to enforce the rights of the partner or joint venturer against his fellow partners or joint venturers pursuant to the terms of the partnership or joint venture agreement. A partner may have a right to seek dissolution and winding up of the partnership, and an accounting would be ancillary to such dissolution and winding up. 

  1. Rights of Spouses to an Accounting

Spouses are in the nature partners, and each spouse owes a fiduciary duty to the other spouse with respect to community property. That is because each of them has a financial interest in the community property. They each hold community property in trust for the benefit of the other spouse and the community. 

The remedy of an accounting in a suit between spouses is subject to a three-year limitations period.  The limitations period begins to run when the spouse learns, or in the exercise of reasonable diligence should have learned of the transaction plaintiff spouse contends was wrongful. However, no limitation period applies to an action by one spouse against the other in connection with an action for dissolution of the marriage, or against the estate of the other spouse when the other spouse dies.  However, since the action for an accounting is equitable in nature, the defendant may raise the defense of laches 

  1. Principal and Agent

An agent owes a fiduciary duty to his principal. To the extent the agent comes into possession of money or any other asset which belongs to the principal, or which the agent received on account for the principal, the agent must account to the principal for such money or other benefit. 

  1. Employer and Employee

. Although an employee who is not an agent of the employer does not owe a fiduciary duty to the employer, to the extent the employee is entrusted with money or other assets belonging to the employer, or receives money or other assets for the account of the employer, he must account to the employer for that money or those other assets. As an example, if an employee receives commissions which, under his agreement with the employer, he must share with the employer, he must account to the employer for those commissions. Similarly, if an employer receives commissions or other payments which, under his agreement with the employee, he must share with the employee, he must account to the employee for those payments.

  1. Statute of Limitations

There is no specific limitations period for an action for an accounting. Consequently, the four-year limitations period in the catch-all provision of Code of Civil Procedure section 343 applies. The statute begins to run upon the accrual of the cause of action, and the cause of action accrues upon the act or transaction giving rise to the right to an accounting, or when the plaintiff learned or in the exercise of reasonable diligence should have learned of the wrongful act or transaction.  However, in the case of a fiduciary relationship between the parties, the statute does not begin to run so long as the fiduciary relationship exists. 

As noted above, however, if the requested accounting is ancillary to a cause of action which is the primary purpose for the lawsuit, the relevant limitations period will be the limitations period for the cause of action for which an accounting is only an ancillary remedy.  For instance, if the primary basis for the complaint is breach of a contract, the two year or four-year limitations period will apply, depending on whether the contract is oral or written.  Similarly, if the cause of action is one for conversion, the three-year limitations period will apply.

The Law Office of William J. Tucker is familiar with contract and tort principles, including issues involving accountings, and provides free initial phone consultations to individuals and companies dealing with such issues.  Feel free to Schedule an Appointment.