Coe v. Proskauer Rose, LLP.

Decision Date07 September 2022
Docket NumberS21G1250
Citation314 Ga. 519,878 S.E.2d 235
Parties COE et al. v. PROSKAUER ROSE, LLP.
CourtGeorgia Supreme Court

Joshua Barrett Belinfante, Robbins Ross Alloy Belinfante Littlefield LLC, 500 14th St, NW, Atlanta, Georgia 30318, Jeven Robinson Sloan, Loewinsohn Deary Simon Ray LLP, 12377 Merit Drive Suite 900, Dallas, Texas 75251, Harry W. MacDougald, Caldwell, Carlson, Elliott & Deloach, LLP, Two Ravinia Drive Suite 1600, Atlanta, Georgia 30346, for Appellant.

Harold David Melton, Troutman Pepper Hamilton Sanders LLP, 600 Peachtree Street NE Suite 3000, Atlanta, Georgia 30308, Mark G. Trigg, Dentons US LLP, 303 Peachtree Street, NE Suite 5300, Atlanta, Georgia 30308, Shari Lynn Klevens, Dentons US LLP, 1900 K Street, N.W., Washington, DC 20006-1108, David M. Lederkramer, Proskauer Rose, 11 Times Square, New York, New York 10036-8299, Lisa S. Blatt, Williams & Connolly LLP, 680 Maine Avenue SW, Washington, DC 20024, for Appellee.

Johannes S. Kingma, Jeffrey Charles Hoffmeyer, Stites & Harbison, PLLC, 303 Peachtree Street, N.E. Suite 2800, Atlanta, Georgia 30308, Laurie Webb Daniel, Webb Daniel Friedlander LLP, Matthew D. Friedlander, 1201 West Peachtree Street, NW Suite 2625, Atlanta, Georgia 30309-3400, for Amicus Appellee.

McMillian, Justice.

In 2002, Douglas Coe, Jacqueline Coe, and GFLIRB, LLC (collectively the "Coes") were involved in the sale of a company in which they held a substantial interest, and their accountants, BDO Seidman, LLP ("BDO"),1 advised them of a proposed tax strategy in which the Coes could invest in distressed debt from a foreign company in order to offset their tax obligations. In connection with the proposed tax strategy, BDO advised the Coes to obtain a legal opinion from an independent law firm, Proskauer Rose LLP ("Proskauer"). The Coes followed BDO's advice, obtained a legal opinion from Proskauer, and claimed losses on their tax returns as a result. But in 2005, the Internal Revenue Service ("IRS") initiated an audit, which ultimately led to a settlement in 2012.

After settling with the IRS, the Coes filed suit against Proskauer in December 2015, asserting legal malpractice, breach of fiduciary duty, fraud, negligent misrepresentation, and other claims. After limited discovery on whether the statute of limitation barred the Coes’ claims, the trial court concluded that it did and granted summary judgment in favor of Proskauer, and the Court of Appeals affirmed. See Coe v. Proskauer Rose LLP , 360 Ga. App. 68, 860 S.E.2d 630 (2021). We granted the Coes’ petition for certiorari to address whether that holding was correct and conclude that it was not.2 For the reasons set forth below, we reverse the judgment of the Court of Appeals and remand the case with instructions to reverse the trial court's order and remand the case for further proceedings consistent with this opinion.

1. Background and Procedural History.

Construed in the light most favorable to the Coes as the nonmoving party on summary judgment,3 the record shows that in October 2001, the Coes were approached by BDO regarding a proposed tax strategy in connection with the sale of a company in which the Coes held a substantial interest. BDO had been Douglas Coe's accounting firm since 1985, and the Coes "placed a tremendous amount of trust and faith in [it]."

BDO advised the Coes that adopting a distressed-debt strategy (the "Strategy") would result in a higher-than-average return on their investment while providing the Coes with legal tax benefits that they could use to offset the capital gains tax from the sale of the company. The Strategy involved investments in distressed debt with Gramercy,4 an experienced investment advisory company. BDO assured the Coes that the Strategy was legal and would be supported by a legal opinion letter (the "Opinion") from Proskauer, an independent law firm, and that the Opinion would satisfy the IRS that the Strategy complied with all applicable tax laws. BDO and Gramercy emphasized that the Opinion would allow the Coes to prevail in the event of an IRS audit and would provide protection from IRS penalties against the Coes.5 Following BDO's and Gramercy's assurances about the Opinion and Proskauer's expertise in tax law and the Strategy, the Coes agreed to engage Proskauer to issue the Opinion.

In its March 22, 2002 engagement letter, Proskauer stated that it was "asked to represent [the Coes] in connection with rendering tax advice in connection with certain investment transactions that [the Coes] conducted in 2001" and that, in connection with the investment transactions, Proskauer would charge $30,000, payable upon execution of the engagement letter. Also, the letter provided:

We have advised you that we also represent BDO Seidman, LLP and Gramercy Advisors and their affiliated entities in connection with various matters. You acknowledged and expressly agreed that we would be free to continue to represent BDO Seidman, LLP and Gramercy Advisors and you waived any conflict resulting from or attributable to such representation.[6 ]

On April 15, 2002, Proskauer issued the Opinion to the Coes. In the Opinion, Proskauer first outlined the various entities involved in the Strategy, the representations made by those entities, and the agreements documenting the various transactions. Proskauer then rendered a number of opinions on discrete issues regarding the Strategy, ultimately concluding that there was a "greater than fifty percent likelihood that the tax treatment of the [Strategy] would be upheld if challenged by the [IRS]" and that the investor "should not be subject to a penalty" under multiple code sections.7 The Opinion also provided a substantial, over-70-page legal analysis supporting the various opinions provided therein. Relying on the Opinion, the Coes then included the losses generated by the Strategy on their tax return for the 2001 tax year.

The IRS initiated an audit of the Coes’ 2001 tax return on January 11, 2005, and the Coes retained the law firm of Chamberlain Hrdlicka ("Chamberlain")8 to represent them during the audit. Eventually, the Coes entered into a settlement agreement with the IRS in January 2012. During that time period, a number of news reports publicized the IRS's investigations of similar tax strategies. In 2005, a United States Senate subcommittee report concluded that tax avoidance transactions like the Strategy "required close collaboration between accounting firms, law firms, investment advisory firms, and banks," and in 2008, an IRS notice identified similar distressed-debt transactions as improper tax avoidance strategies subject to penalties. Also, beginning in 2009, several BDO partners entered guilty pleas to counts of conspiracy to defraud the United States and to tax evasion in connection with tax shelters similar to the Strategy that they promoted to other clients. In June 2012, BDO entered into a deferred-prosecution agreement with the United States Department of Justice relating to the fraudulent marketing and selling of illegal tax shelters.9

After their settlement with the IRS, the Coes retained separate counsel, Loewinsohn Flegle Deary Simon LLP ("Deary"), to pursue their claims against Proskauer. In December 2015, the Coes filed suit against Proskauer, asserting legal malpractice, breach of fiduciary duty, negligent misrepresentation, fraud, and other claims. In support of their claims, the Coes alleged that Proskauer and BDO were not independent, and instead Proskauer, BDO, and Gramercy jointly designed, promoted, and implemented the Strategy as part of a conspiracy.10 Specifically, they alleged that Proskauer had an illegal business arrangement with BDO and Gramercy, whereby BDO recommended that Proskauer provide opinion letters to BDO's clients in connection with the Strategy, and that Proskauer knowingly allowed BDO to use its legal opinion letters to market the Strategy to its clients. According to the Coes, the Opinion was not tailored to their circumstances, but rather was a boilerplate opinion letter that was part of this pre-planned scheme. And although Proskauer represented and advised the Coes that the Strategy was a legal investment strategy, Proskauer had knowledge that federal authorities were investigating the legality of similar tax shelters and that the IRS was auditing and disallowing similar tax strategies.

Furthermore, the Coes alleged that there was an undisclosed fee-splitting arrangement between Proskauer, BDO, and Gramercy wherein they would split substantial fees based on the size of the distressed debt rather than an hourly rate. Proskauer never informed the Coes that Proskauer represented and advised BDO on the Strategy specifically. However, in the spring of 2002, as BDO's counsel, Proskauer advised BDO that any taxpayer claiming Strategy losses on a tax return would face a 100% chance of an IRS audit. But Proskauer never informed the Coes that it represented BDO on the Strategy, that it gave BDO materially different advice regarding the Coes’ chance of an IRS audit, or that the IRS considered the Strategy an illegal tax shelter. Despite this knowledge, Proskauer maintained in its Opinion that the Coes "should not" incur IRS penalties.

The Coes have asserted that they had no knowledge that Proskauer was not independent from BDO; that Proskauer was participating in any improper conduct; that certain BDO partners were convicted in 2009; of news coverage of the same or similar tax strategies as the Strategy; or of the litigation against accounting and law firms regarding the same or similar transactions as the Strategy.

Proskauer filed a motion to dismiss the complaint on several grounds, including that the Coes’ claims were barred by the applicable statute of limitation because they were on notice of their claims no later than February 13, 2009, when the first of four BDO partners pleaded guilty to crimes associated with similar tax avoidance strategies and that tolling based on alleged fraudulent concealment did...

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