Ambase Corp. v. Davis Polk & Wardwell

• Decision Date: 26 April 2007
• Docket Number: No. 51.,51.
• Citation: 8 N.Y.3d 428,866 N.E.2d 1033
• Court: New York Court of Appeals Court of Appeals
• Parties: AMBASE CORPORATION, Appellant, v. DAVIS POLK & WARDWELL et al., Respondents.

866 N.E.2d 1033

8 N.Y.3d 428

AMBASE CORPORATION, Appellant, v. DAVIS POLK & WARDWELL et al., Respondents.

No. 51.

Court of Appeals of New York.

April 26, 2007.

Greenberg & Massarelli, LLP, Purchase (William Greenberg and Crystal M. Massarelli of counsel), for appellant.

Simpson Thacher & Bartlett LLP, New York City (Roy L. Reardon of counsel), and Davis Polk & Wardwell (Guy Miller Struve, Mario J. Verdolini, Nancy B. Ludmerer, David B. Toscano and Elliot Moskowitz of counsel pro se) for Davis Polk & Wardwell and others, respondents.

OPINION OF THE COURT

CIPARICK, J.

In this appeal we are asked to determine whether a law firm that successfully litigated an Internal Revenue Service (IRS) tax dispute nonetheless committed legal malpractice when it failed to question whether an agreement entered into between the client and a related company may have relieved it of the tax liability in dispute. We are also asked to determine whether defendants were properly awarded a money judgment where defendants had not answered or asserted a counterclaim. We conclude that defendants did not commit legal malpractice, and a money judgment was properly awarded to defendants.

I.

In 1985, plaintiff AmBase Corporation became an independent entity when its parent City Investing Company elected to liquidate.¹ In order to ensure payment of its postliquidation liabilities, City Investing transferred substantial assets to City Investing Company Liquidating Trust (City Trust). At the same time, AmBase and its parent company entered into an Assignment and Assumption Agreement (the Agreement) that purportedly required AmBase to assume primary liability for City Investing's federal income taxes, and assume secondary liability as a "backstop" to City Trust for all other liabilities which it was unable to pay.

Shortly thereafter, the IRS determined that City Investing was liable for having failed to withhold 30% of interest payments to a related entity, City Investing Finance N.V. (N.V.), for a period of six years from 1979 through September 1985. In 1991, Lester Mantell, a senior vicepresident of AmBase and trustee of City Trust, advised AmBase and the IRS in a Tax Protest that AmBase was liable as N.V.'s agent for the withholding taxes in issue if such liability was ultimately determined to exist. Attempts to settle the tax matter failed and a year later, AmBase retained defendant Davis Polk & Wardwell to resolve this dispute with the IRS.²

In May 1995, the IRS issued a notice of deficiency for the tax years 1979 through 1985 for the withholding taxes in the sum of $20,986,609, and in June, Davis Polk filed a petition in United States Tax Court challenging the alleged deficiencies. The matter was litigated and in May 2001, the Tax Court rendered a decision in AmBase's favor, rejecting the IRS's claim for the subject withholding taxes (see AmBase Corp. v. Commissioner of Internal Revenue, TC Memo 2001-122 [2001]). Following this victory on behalf of its client, Davis Polk requested payment of $1,424,104 in outstanding legal fees pursuant to the terms of its retainer agreement.³ AmBase refused to pay and requested that Davis Polk return previously paid legal fees.

AmBase then commenced this action for legal malpractice alleging that, although it won the tax case, it suffered substantial damages as a result of defendants' failure to advise that it was only secondarily liable for payment of taxes as per the Agreement with its parent. Plaintiff further requested a declaration that it did not owe Davis Polk $1,424,104 in outstanding legal fees. Davis Polk moved to dismiss plaintiff's amended complaint and for a declaration that AmBase was obliged to pay all fees owed as per its retainer agreement plus interest and for "such other and further relief as this Court may deem just and proper." AmBase cross-moved for partial summary judgment on the issue of liability for legal malpractice.

Supreme Court rejected AmBase's assertions, granted Davis Polk's motion to dismiss the complaint and awarded the firm a money judgment of $1,424,104 representing outstanding legal fees plus statutory interest.⁴ The court found that Davis Polk was hired to resolve tax issues for liability that AmBase had assumed, and that even if Davis Polk had committed malpractice, AmBase's damages were "entirely speculative." Supreme Court then directed the parties to settle an order, and defendants submitted a proposed order directing the entry of a money judgment. AmBase did not submit a proposed counterorder, nor did it advise the court that the proposed money judgment was improper in the absence of a pleading seeking such a judgment, and it never requested an opportunity to litigate the matter.

The Appellate Division unanimously affirmed, holding that since "[d]efendants successfully represented plaintiff in a tax dispute with the [IRS]," the claim that the dispute could have been "resolved in a more expeditious fashion[] was properly dismissed as speculative" (30 A.D.3d 171, 172, 816 N.Y.S.2d 438 [2006]). The Court further held that "[d]efendants were entitled to a money judgment . . . in light of [plaintiff's] failure, throughout these proceedings, to contest the amount, which was based on calculations consistent with the retainer agreement" (id.). We granted leave to appeal, and now affirm.

II.

We need not answer the question whether a legal malpractice claim is precluded by virtue of a complete victory in an underlying action. What is before us is whether a cause of action for legal malpractice lies under the circumstances of this particular case. We hold it does not. In order to sustain a claim for legal malpractice, a plaintiff must establish both that the defendant attorney failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession which results in actual damages to a plaintiff (see McCoy v. Feinman, 99 N.Y.2d 295, 301-302, 755 N.Y.S.2d 693, 785 N.E.2d 714 [2002]), and that the plaintiff would have succeeded on the merits of the underlying action "but for" the attorney's negligence (see Davis v. Klein, 88 N.Y.2d 1008, 1009-1010, 648 N.Y.S.2d 871, 671 N.E.2d 1268 [1996]).

The gravamen of this legal malpractice claim is that defendants failed to advise plaintiff that the Agreement allegedly provided that AmBase was not primarily liable for the subject taxes in the underlying Tax Court proceeding — that primary liability rested with City Trust. Plaintiff claims that defendants were provided with a copy of the Agreement but never fully reviewed the document to determine what effect, if any, it had on the underlying dispute with the IRS, thereby failing to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession. AmBase further asserts that "but for" Davis Polk's negligence, it would not have had to maintain the multimillion dollar loss reserve on its books, creating the appearance that it had a negative net worth, which caused it to lose business opportunities and incur monetary damages.

Defendants dispute AmBase's claim that its liability for the taxes was only secondary. In addition, they assert that they were retained to litigate only whether taxes were due, not to determine who was responsible for such taxes. Defendants further argue that they had not advised AmBase to carry the loss reserve and that AmBase publicly acknowledged that it was responsible for the withholding taxes at issue since 1985, seven years before Davis Polk was retained.

The retainer agreement states that AmBase has "engaged [Davis Polk] to represent ...