| Overseas Shipholding Group, Inc. v Proskauer Rose,LLP |
| 2015 NY Slip Op 05772 [130 AD3d 415] |
| July 2, 2015 |
| Appellate Division, First Department |
[*1]
| Overseas Shipholding Group, Inc.,Respondent, v Proskauer Rose, LLP, et al.,Appellants. |
Davis Polk & Wardwell LLP, New York (Paul Spagnoletti of counsel), forappellants.
Mullin Hoard & Brown, LLP, Amarillo, TX (Steven L. Hoard of the bar of theStates of Texas and North Carolina, admitted pro hac vice, of counsel), forrespondent.
Orders, Supreme Court, New York County (Jeffrey K. Oing, J.), entered September16 and September 25, 2014, which, to the extent appealed from, denied defendants'motion to dismiss the first cause of action alleging legal malpractice, affirmed, withoutcosts.
The motion court correctly determined that the legal malpractice claim, based onallegedly deficient tax advice provided by defendants beginning in 2005 and continuingthroughout the course of its ongoing representation of plaintiff, is not time-barred(see Shumsky v Eisenstein, 96 NY2d 164, 168 [2001]; Ackerman v PriceWaterhouse, 252 AD2d 179, 205-206 [1st Dept 1998]; see also Zwecker vKulberg, 209 AD2d 514, 515 [2d Dept 1994]). Further, plaintiff sufficiently pleadedthat defendants' advice was the proximate cause of its alleged damages.
Defendants argue that because the 2006 credit facility agreement was drafted byanother law firm, it severed any causal chain between defendants' work in 2005 andplaintiff's increased tax liability. However, "[a]s a general rule, issues of proximatecause[, including superceding cause,] are for the trier of fact" (Hahn v Tops Mkts., LLC, 94AD3d 1546, 1548 [4th Dept 2012] [alterations in original] [internal quotation marksomitted]) and defendants' contention is unavailing at this procedural juncture (see Ableco Fin. LLC v Hilson,81 AD3d 416, 417 [1st Dept 2011]). Plaintiff alleges, inter alia, that it continuallyrelied on defendants' advice for the purpose of shielding income from its off-shoresubsidiary from federal income tax and that defendant improperly advised it to make the2005 "check-the-box" election, which greatly enlarged the prospective pool of income onwhich plaintiff could be taxed. Plaintiff further alleges that the error in advising it tomake the check-the-box election, which according to defendant could not be changed forthe next five years, was compounded by the error of changing the language in the creditfacility agreements from several liability to joint and several liability, effectivelytransferring the entire pool of off-shore subsidiaries' income to plaintiff.
The motion court correctly determined that the complaint adequately pleads a validclaim of legal malpractice arising out of a 2011 memorandum. The documents submittedby defendants do not conclusively refute plaintiff's claim (Amsterdam Hospitality Group,LLC v Marshall-Alan Assoc., Inc., 120 AD3d 431, 433 [1st Dept 2014]).
We have considered defendants' remaining arguments and find them unavailing.Concur—Acosta, J.P., Andrias and DeGrasse, JJ.
Saxe and Richter, JJ., concur in a separate memorandum by Richter, J., as follows:The majority concludes that plaintiff's legal malpractice claim based on defendants' taxadvice dating back to 2005 is not time-barred. Although I agree that the complaint shouldnot be dismissed at this stage of the proceedings, I disagree with the majority'sconclusion that the entire malpractice claim is timely as a matter of law. Instead, I believethat issues of fact exist with respect to the continuous representation doctrine and thatdiscovery is needed to resolve the statute of limitations question.
Plaintiff Overseas Shipholding Group, Inc. (OSG) is in the business of transportingbulk crude oil and refined petroleum products throughout the world.[FN1] OSG's operations in theUnited States are conducted by its wholly-owned subsidiary OSG Bulk Ships, Inc.(OBS), and its foreign business is conducted by OSG International, Inc. (OIN), anotherwholly-owned subsidiary. Defendant Proskauer Rose, LLP is a nationally-recognized lawfirm that has provided a variety of legal services to OSG since the company's inception in1969. Defendant Alan P. Parnes, a partner at Proskauer and the leader of its New Yorktax team, served as OSG's primary tax counsel. The remaining defendants are partners atProskauer.
Proskauer, through Parnes, was OSG's principal tax advisor on issues related to theU.S. taxation of foreign shipping income earned by foreign subsidiaries of U.S.corporations, such as OIN. The tax treatment of such income has changed significantlyover the years. As relevant here, since January 1, 2005, none of OIN's foreign shippingincome has been subject to U.S. taxation unless it was either actually distributed to OSGin the form of a dividend, or deemed distributed under section 956 of the InternalRevenue Code (26 USC § 956). Section 956 provides, inter alia, that theearnings of a foreign subsidiary will be deemed to have been distributed to its U.S. parentunder certain circumstances that are considered the functional equivalent of a dividend.These circumstances include when the assets of the foreign subsidiary are used to supportthe obligations of the U.S. parent, such as by way of a loan or guarantee.
As part of its representation of OSG, Proskauer negotiated and drafted a series ofunsecured credit agreements for OSG and its subsidiaries, OIN and OBS. In agreementsdated 1994 and 1997, OSG, OIN and OBS were "severally" liable only for the amountseach borrowed directly. In agreements dated 2000 and 2001, Proskauer changed thestructure to provide that OSG, OIN and OBS were each borrowing on a "joint andseveral" basis. OSG alleges that this change in language had potentially dire taxconsequences. According to OSG, the "joint and several" language was tantamount to aguarantee by OIN of OSG's borrowings under the credit agreements, rendering thoseborrowings a deemed dividend under section 956, and subjecting OSG to substantialU.S. income tax liability. OSG maintains that Proskauer never advised it that the new"joint and several" language could result in additional taxes for OSG, and that suchfailure fell below the standard of care owed by Proskauer to OSG.
OSG subsequently entered into a number of additional unsecured credit agreementsfrom 2003 to 2006. Although Proskauer did not represent OSG in connection with theseagreements, OSG alleges that it used the "joint and several" structure of the earlierProskauer-drafted agreements as templates for the 2003-2006 agreements. According toOSG, Proskauer was aware of these credit agreements because copies were attached tocertain filings with the Securities and Exchange Commission (SEC) for which Proskauerrendered legal advice. Further, during the time the agreements were negotiated,Proskauer continued to be OSG's principal tax advisor, including with respect to ongoingissues related to foreign shipping income taxation under section 956.
Liability under section 956 arises only to the extent the foreign subsidiary has currentor accumulated earnings that have not already been subject to U.S. taxation. Thus, thetaxable amount of an actual or deemed distribution of foreign income from OIN to OSGis limited by the amount of OIN's current or past accumulated untaxed earnings andprofits. Since 2000, OIN itself did not have significant earnings; rather, the vast majorityof OIN's earnings was generated by its lower-tier subsidiaries. Thus, any potential section956 tax liability for OSG due to OIN's[*2]"joint andseveral" liability under the credit agreements would have been limited to the untaxedearnings and profits at the OIN level. The substantial accumulated untaxed earnings andprofits of OIN's lower-tier subsidiaries would not have been included in calculatingOSG's section 956 tax liability.
According to OSG, that changed in early 2005, when Parnes advised OSG to makecertain elections under the Internal Revenue Code known as "check-the-box" elections.One of the effects of these elections was to disregard OIN's lower-tier subsidiaries asseparate entities for U.S. income tax purposes and to treat OIN and its subsidiaries as asingle taxpayer. Thus, the substantial accumulated untaxed earnings and profits of OIN'slower-tier subsidiaries would be considered, for tax purposes, as if they belonged to OIN.Because untaxed accumulated earnings and profits are the measure of the taxable amountof a section 956 deemed distribution, the result of the "check-the-box" elections was todramatically increase OSG's potential tax liability due to the "joint and several" structureof the credit agreements. OSG alleges that Parnes neither reviewed the existing creditagreements to ensure that no negative tax consequences flowed from the elections, noradvised OSG to perform any such review itself. OSG followed Parnes's advice and madethe recommended "check-the-box" elections. OSG alleges that this resulted in theaddition of at least $1 billion of untaxed future earnings that subsequently becamesubject to section 956 tax liability due to the "joint and several" structure of the creditagreements.
In late 2010, OSG began working on a new unsecured credit agreement to replacethe 2006 agreement, effective 2013. Proskauer represented OSG in negotiating anddrafting this agreement, which used the same "joint and several" liability repaymentstructure that had existed in the previous post-1999 agreements. In April 2011, afterreviewing a draft of the new agreement, Parnes told OSG that he was concerned that the"joint and several" language created a potential section 956 tax problem. OSG allegesthat after researching the matter, Parnes concluded that there was "no tax solution" to theproblem, but did not tell this to OSG. Several days later, however, a different Proskauerpartner told OSG that Proskauer had since determined that the language of the agreementwould not trigger section 956 tax liability.
In June 2011, Proskauer wrote a memorandum to OSG in which it concluded that the"joint and several" language in the various credit agreements did not obligate OIN torepay OSG's borrowings and thus would not give rise to a deemed dividend undersection 956. Proskauer advised OSG that it could continue to borrow under the existing2006 credit agreement, and enter into the new agreement, without any adverse taxconsequences. Proskauer's opinion rested on its conclusion that the language in theagreements was ambiguous, and that it was clear, from parol evidence, that the partiesnever intended OIN to guarantee OSG's borrowings. The memorandum, however, didnot disclose that Parnes had concluded there was "no tax solution" to the problem, oradvise OSG of any risk that the "joint and several" language would be determined to beunambiguous. In reliance on Proskauer's advice, OSG executed the new credit agreementwith the "joint and several" structure, and did not reexamine any of the draws it hadpreviously taken under the earlier credit agreements.
In July 2012, OSG was contemplating a large drawdown on the existing 2006 creditagreement. In light of concerns voiced by the lenders, OSG asked Proskauer if it couldstill rely on the advice given in the June 2011 memorandum, and, according to OSG,Proskauer unequivocally told OSG that it could. Based on that representation, OSGproceeded with a $343 million drawdown, assuming that it could do so without section956 tax exposure. OSG alleges that, subsequent to Proskauer's June 2011 memorandumand in reliance thereupon, OSG drew down a total of $659 million under the 2006 creditagreement.
In October 2012, OSG filed a form with the SEC withdrawing its financialstatements for the previous three years, effectively repudiating Proskauer's tax advice onthe section 956 matter. Several weeks later, OSG filed for chapter 11 bankruptcyprotection, and self-reported to the Internal Revenue Service (IRS) that some of itsprevious tax returns were incorrect. In February 2013, the IRS filed an amended claim inthe OSG bankruptcy proceeding in the amount of several hundred million dollars, largelybased on the section 956 issue.
In March 2014, OSG commenced this action asserting a cause of action for legalmalpractice against Proskauer, Parnes, and three other Proskauer partners (hereinafter,[*3]collectively Proskauer).[FN2] OSG's malpractice claim has twobranches. In the first branch, OSG maintains that Proskauer breached its duty of care byproviding negligent section 956 tax advice. OSG alleges, inter alia, that Proskauer failedto identify the issue with the "joint and several" language contained in OSG's creditagreements, improperly advised OSG to make the "check-the-box" elections, and failedto disclose to OSG the tax consequences stemming from the credit agreements and the"check-the-box" elections.[FN3] The second branch of the malpracticeclaim centers around Proskauer's June 2011 memorandum, reaffirmed in 2012, advisingOSG that there were no adverse section 956 tax issues with its credit agreements. OSGmaintains that Proskauer's advice that the "joint and several" language in the agreementsdid not create a taxable deemed dividend under section 956 was "dead wrong."
Proskauer sought dismissal of the legal malpractice claim, arguing that the firstbranch was barred by the statute of limitations, and that the second branch was barred bydocumentary evidence. Proskauer also argued that the claim as a whole does not state acause of action due to lack of causation.[FN4] The motion court denied Proskauer'smotion and this appeal followed.
On appeal, Proskauer contends that the branch of the malpractice claim related to the2005 "check-the-box" advice (the 2005 claim) is time-barred.[FN5] In addressing a statute of limitationsissue arising from a CPLR 3211 motion, the allegations of the complaint must be given aliberal construction and accepted as true (Simcuski v Saeli, 44 NY2d 442,446-447 [1978]; Johnson vProskauer Rose LLP, 129 AD3d 59, 67 [1st Dept 2015]). Further, a plaintiff must be accorded the benefit of everypossible favorable inference, and "[w]hether a plaintiff can ultimately establish itsallegations is not part of the calculus in determining a motion to dismiss"(Johnson, 129 AD3d at 67 [alteration in original] [internal quotation marks omitted]).
The statute of limitations for a legal malpractice claim is three years running from thedate the alleged malpractice was committed (CPLR 214 [6]; Waggoner v Caruso, 68 AD3d1, 6 [1st Dept 2009], affd 14 NY3d 874 [2010]). OSG concedes that thisaction was brought more than three years after the 2005 advice was rendered, but arguesthat the limitations period should be tolled due to Proskauer's continuing representationof OSG. Under the continuous representation doctrine, the statute of limitations for legalmalpractice is tolled while there is an "ongoing provision of professional services withrespect to the contested matter or transaction" (Matter of Lawrence, 24 NY3d 320, 341 [2014]). Theongoing representation must relate "specifically to the matter in which the attorneycommitted the alleged malpractice" (Shumsky v Eisenstein, 96 NY2d 164, 168[2001]). The doctrine, however, does not apply to a client's "continuing generalrelationship with a lawyer . . . involving only routine contact formiscellaneous legal representation . . . unrelated to the matter upon whichthe allegations of malpractice are predicated" (id.).
[*4] The continuous representation doctrine operates as atoll "only where there is a mutual understanding of the need for further representation onthe specific subject matter underlying the malpractice claim" (McCoy v Feinman,99 NY2d 295, 306 [2002]). The rationale underlying the doctrine is that a person seekinglegal advice "has a right to repose confidence in the professional's ability and good faith,and realistically cannot be expected to question and assess the techniques employed orthe manner in which the services are rendered" (Shumsky, 96 NY2d at 167[internal quotation marks omitted]). Relatedly, a client cannot be expected to jeopardizehis relationship with the attorney handling the matter while that same attorney continuesto represent the client (id.). For these reasons, the limitations period is tolled untilthe ongoing representation is complete (id. at 167-168).
Here, Proskauer has met its prima facie burden of showing that this action wasbrought more than three years after the 2005 claim accrued. Thus, the burden shifted toOSG to "demonstrat[e] that the continuous representation doctrine applied, or at leastthat there was an issue of fact with respect thereto" (CLP Leasing Co., LP v Nessen, 12 AD3d 226, 227 [1stDept 2004]). Although the majority would decide the limitations issue in OSG's favor asa matter of law, I believe that issues of fact exist and that a conclusive determinationcannot be made on this pre-answer pleading motion (see Weiss v Manfredi, 83NY2d 974, 977 [1994] [rejecting time-bar defense where there was a question of fact asto whether the defendants continued to represent the plaintiff in connection with thematter]).
Because the statute of limitations period is tolled only where the ongoing legalrepresentation is related to the "contested matter or transaction" (Matter ofLawrence, 24 NY3d at 341), it is essential to properly frame what that matter ortransaction is. Proskauer narrowly defines the transaction as discrete, one-time tax adviceconcerning the "check-the-box" elections. Proskauer points out that the complaint doesnot allege that Proskauer gave OSG any further "check-the-box" advice after 2005.According to Proskauer, it could not have advised OSG any further on this matterbecause governing regulations prevented OSG from changing its "check-the-box"elections for a period of five years. Thus, Proskauer argues, its advice on the"check-the-box" elections came to an end when OSG made the elections, and no furtherrepresentation continued on that matter.
In contrast to Proskauer's narrow framing of the matter, OSG more broadly defines itas section 956 tax advice provided to ensure that its foreign shipping income remainedexempt from U.S. taxation. OSG maintains that the "check-the-box" advice did notsimply flow from a one-time engagement, but was part and parcel of Proskauer'scontinuing representation on how OSG could legally avoid foreign income taxation. Insupport, OSG points to allegations in the complaint that Proskauer was OSG's principaltax advisor with respect to these issues spanning from at least 2005 until 2012, and thatOSG regularly consulted Proskauer for advice in this area.
I find that Proskauer's framing of the matter is too narrow. By defining the matter assimply "check-the-box" advice, Proskauer ignores the complaint's allegations thatProskauer negligently failed to advise OSG of the potential section 956 tax liability thatcould be triggered as a result of the "joint and several" structure of the credit agreementsif the "check-the-box" elections were made. In other words, the alleged malpracticerelates not simply to the discrete "check-the-box" advice, but more broadly to how thatadvice affected taxation of foreign income in light of the existing credit agreements.Indeed, in its June 2011 memorandum, Proskauer expressly states that it had advisedOSG "over the years" that OIN could not guarantee borrowings by OSG or any otherdomestic borrower.
On the other hand, I conclude that OSG's definition of the matter is too broad. Byframing the matter as all tax advice concerning section 956, regardless of whether it wasrelated to the "joint and several" structure of the credit agreements, OSG impermissiblyseeks to expand the continuous representation doctrine to cover its "continuing generalrelationship" with Proskauer involving "routine contact for miscellaneous legalrepresentation" (Shumsky, 96 NY2d at 168). OSG's sweeping analysis wouldmean that the statute of limitations was tolled as long as Proskauer continued to givethem any type of section 956 advice and would blur the line between representation on aspecific matter and serving as general tax counsel (see Williamson v PricewaterhouseCoopers LLP, 9 NY3d 1,11 [2007] [no continuous representation where [*5]allegations show "failures within a continuing professionalrelationship, not a course of representation as to the particular problems (conditions) thatgave rise to plaintiff's malpractice claims"]).
Although neither party's framing of the contested matter withstands scrutiny, theprecise scope of the matter within these two extremes cannot be determined in theabsence of further discovery. The complaint alleges that Proskauer continuously servedas OSG's tax counsel on section 956 matters, and sets forth an exhaustive list ofnumerous representations covered thereunder. Although some of these matters appear tohave no connection to the matter from which the malpractice claim in this action arose,the record does not establish how all of these post-2005 section 956 matters relate to theproblems that arose from Proskauer's alleged negligent advice concerning the"check-the-box" elections in the face of the "joint and several" structure of the creditagreements. Likewise, it cannot be determined whether all of these subsequent mattersinvolve entirely separate transactions unrelated to the 2005 matter upon which themalpractice claim is predicated. Furthermore, OSG alleges that the 2006 credit agreementthat continued the problematic "joint and several" liability language, although not draftedby Proskauer, was attached to SEC filings for which Proskauer rendered legaladvice.
In determining whether the continuous representation tolling applies, it is essential toknow whether "there is a mutual understanding of the need for further representation onthe specific subject matter underlying the malpractice claim" (McCoy v Feinman,99 NY2d at 306). In the absence of further discovery as to the parties' mutualunderstanding, any determination on the continuous representation toll would bepremature. Relatedly, there is insufficient evidence of the precise scope and parametersof OSG's engagement of Proskauer (see Williamson v PricewaterhouseCoopersLLP, 9 NY3d at 10 [nature and scope of the parties' engagement play a key role indetermining whether continuous representation was contemplated by the parties]).Although the complaint alleges that the parties had only one engagement letter coveringthe entire period relevant to this case, the record does not contain a copy of that letter orany other details about the engagement.
Given the early stage of these proceedings, and in light of the disputed issues of facton the continuous representation toll, I would affirm the decision of the motion court todeny Proskauer's motion to dismiss the 2005 claim as time-barred. Because adetermination of the statute of limitations issue has the potential to dispose of asubstantial part of OSG's complaint, a prudent option for the motion court would be toorder limited discovery on the continuous representation issue followed by furtherbriefing and, if necessary, an immediate trial on that issue (see CPLR 3212 [c];Deep v Boies, 53 AD3d948, 952 [3d Dept 2008]).
Footnote 1:The facts set forth hereare from OSG's complaint and are presumed to be true for purposes of this motion.
Footnote 2:The complaint alsoasserted a cause of action for breach of the duty of loyalty. That claim was dismissed asduplicative by the motion court and is not the subject of this appeal.
Footnote 3:Although OSG does notseek damages for Proskauer's alleged negligent advice concerning the 2000 and 2001credit agreements, OSG maintains that such negligence is relevant to Proskauer'ssubsequent malpractice.
Footnote 4:Proskauer makes noargument that the second branch, which relates to the June 2011 memorandum, istime-barred.
Footnote 5:Proskauer also arguesthat OSG cannot establish causation with respect to either branch of the malpracticeclaim, and that documentary evidence bars the second branch. I agree with the majority'srejection of these arguments.