Dempsey v. Chaves & Perlowitz LLP
| Decision Date | 27 September 2018 |
| Docket Number | Index 15-601938 |
| Court | New York Supreme Court |
| Parties | RICHARD DEMPSEY, Plaintiff, v. CHAVES & PERLOWITZ LLP and ANDREW LUFTIG, Defendants. |
Unpublished Opinion
ROBIBNSON BROG LEINWAND GREENE GENOVESE & GLUCK, P.C. Attorney for Plaintiff
FURMAN KORNFELD & BRENNAN LLP Attorney for Defendants
Upon the following papers numbered 1 to 58 read on this motion and cross motion for summary judgment; Notice of Motion/ Order to Show Cause and supporting papers 1 - 14; Notice of Cross Motion and supporting papers 16 - 55; Answering Affidavits and supporting papers_; Replying Affidavits and supporting papers_; Other memoranda of law 15, 56, 57 - 58; (and after hearing counsel in support and opposed to the motion) it is ORDERED that the motion by the defendants Chaves & Perlowitz LLP and Andrew Luftig for an order pursuant to CPLR 3212 granting summary judgment dismissing the plaintiffs complaint is denied; and it is further
ORDERED that the cross motion by the plaintiff for an order pursuant to CPLR 3212 granting summary judgment in his favor as to the liability of the defendants and awarding damages in the amount of $770, 000 is denied.
This action was commenced to recover damages allegedly sustained by the plaintiff as the result of the failure of the defendants to properly structure and complete a tax-deferred sale of the plaintiffs real property in accordance with 26 U.S.C. § 1031. It is undisputed that the plaintiff was the previous owner of a commercial cooperative located at 49 West 24th Street, 8th Floor, New York, New York (49 West or the loft), that he and his wife, nonparty Mary Dinaberg (Dinaberg) decided to sell 49 West in the Spring of 2013, and that they found a willing purchaser in June 2013. On July 10, 2013, the plaintiff retained the defendant Chaves & Perlowitz LLP (the law firm) and the defendant Andrew Luftig (Luftig) (collectively, the defendants) to represent him in the sale of 49 West. In an email dated July 18, 2013, the plaintiffs accountant provided the plaintiff with an estimate of the capital gains taxes due on the sale of 49 West and suggested that the plaintiff request that his attorneys insert "an option to execute the sale as a 'Section 1031 Exchange/" The accountant also indicated that if the plaintiff was able to buy another property it might save him from having to pay a significant amount of taxes in 2013.
It is further undisputed that Dinaberg, who acted as the "point of contact" between the plaintiff and the defendants, sent an email to Luftig on the morning of July 18, 2013 asking him to insert an option in the contract regarding a Section 1031 Exchange, that Luftig immediately responded, "yes, of course," and that said option or clause for structuring the transaction as a Section 1031 tax-deferred exchange was inserted as paragraph 52 of the contract rider to the contract of sale regarding 49 West. To qualify for the tax deferral provided under 26 U.S.C. § 1031 (Section 1031), the taxpayer must meet several requirements, including the identification of a replacement property within 45 days after the closing of sale of the existing property together with the actual purchase of such property within 180 days of the transfer of the relinquished property, and that the taxpayer may not have actual or constructive receipt of the proceeds from the sale of the relinquished property. "Safe-harbor" provisions under regulations promulgated under Section 1031 do, however provide that a taxpayer may use a "qualified intermediary" to facilitate a "like-kind" exchange and avoid impairment of the exchange including issues regarding the taxpayer/seller's actual or constructive receipt of the proceeds of the sale. A successful "like-kind exchange" under Section 1031 and the regulations promulgated thereunder results in the deferment of capital gains taxes otherwise payable on the sale of the first property until the sale of the replacement property.
On July 23, 2013, the contract of sale was executed by the plaintiff and the purchaser. In an email dated July 30, 2013, Dinaberg inquired of Luftig as to the closing date to enable her and the plaintiff to contact their real estate broker and view "new places" the same day. The closing of title to 49 West took place on August 6, 2013 and was handled by an associate at the law firm, Ami Wellman (Wellman). The total consideration paid by the purchaser was $2, 713, 028.99 and such consideration was credited on the closing statement as being paid to the plaintiff rather to any qualified intermediary as required by Section 1031.
On August 14, 2013, the defendants advised the plaintiff, after inquiry from Dinaberg, that the intended tax-deferred sale of 49 West pursuant to Section 1031 was lost due to the failure to pay the proceeds over to a qualified intermediary rather than to the plaintiff himself. According to the plaintiff, although the defendants suggested that the sale be re-done, the purchasers would do so only if a payment of $75, 000 was made to them. The plaintiff refused to re-do the sale because the defendants asked him to pay $50, 000 of the $75, 000 payment and because he thought it would be a sham sale unacceptable to the IRS on fraud grounds. On January 15, 2014, the plaintiff paid $520, 000 in federal income taxes and $250, 000 in state income taxes, which amounts are allegedly attributable to the defendants' failure to properly place the proceeds of the sale in the hands of a qualified intermediary.
The plaintiff commenced this action by the filing of a summons and complaint on February 26, 2015. In his complaint, the plaintiff sets forth causes of action for legal malpractice and breach of contract. The defendants filed an answer with affirmative defenses on September 21, 2015. The defendants now move for summary judgment dismissing the complaint on the grounds, among other things, that neither the plaintiff nor Dinaberg ever indicated an intention to pursue a Section 1031 transaction, that they were not retained to provide advice regarding a Section 1031 transaction, that the plaintiff has not suffered actual and ascertainable damages, and that the cause of action for breach of contract should be dismissed as duplicative of the cause of action for legal malpractice.
In support of their motion, the defendants submit the pleadings, the transcripts of the deposition testimony of the plaintiff and Dinaberg, the subject retainer agreement, the contract of sale dated July 23, 2013, certain emails sent or received by the parties, and a copy of a revenue ruling issued by the United States Internal Revenue Service (IRS). At his deposition, the plaintiff testified that he purchased 49 West in 1979 or 1980, that the loft had been rented to a yoga studio for four years as of 2013, and that his real estate broker referred him to the defendants to handle the sale of 49 West. He stated that he spoke with Luftig by telephone, that he signed the retainer agreement, and that he learned from his accountant about the availability of deferring taxes through use of Section 1031. He indicated that he had not heard about Section 1031 prior to July 2013, that his accountant did not explain how Section 1031 works, and that he did not discuss Section 1031 with Luftig or anyone at the law firm prior to the July 18, 2013 email from his wife to Luftig asking him to insert a option to structure the sale of 49 West as a like-kind exchange (the option email).
The plaintiff further testified that, between July 18, 2013 when the option email was sent, and July 30, 2013 when the email indicating that he and Dinaberg were hoping to view "new places" with their broker on the day of the closing of title to 49 West was sent (the new places email), he never expressed to the defendants that he intended to structure the sale of 49 West as a Section 1031 like-kind exchange. He indicated that between July 30, 2013 and the closing of title on August 6, 2013, he did not remember having any conversation with the defendants, that Section 1031 was not discussed at the closing of title, and that prior to the closing of title he did not know how Section 1031 worked. He stated that he did not hear the term "qualified intermediary" before the closing of title, that his broker and his accountant did not mention that a qualified intermediary was needed in the sale of 49 West, and that the option email was his indication to the defendants that he wished the sale to be structured as a Section 1031 like-kind exchange.
The plaintiff further testified that he viewed a number of potential replacement properties on the day of the closing of title, that a few days later an associate of his broker informed him that the sale of 49 West was not structured as a like-kind exchange, and that he and Dinaberg had not asked about the possibility of structuring the sale as a like-kind exchange at the closing of title. He stated that the defendants never asked him for an additional legal fee to structure the deal as a like-kind exchange, and that the defendants realized their mistake and suggested that the closing be rescinded and re-done as a like-kind exchange. He indicated that the purchasers refused to agree to rescind the closing of title and re-do the transaction as a like-kind exchange without a payment of $75, 000, that the law firm suggested that it would pay $25, 000 of that amount to the purchasers if the plaintiff paid the balance, and that he rejected the idea of rescinding the closing because of the additional fee requested by the purchasers and the advice of a number of people, including his accountant and a "1031 consultant," that the IRS might consider the re-do of the sale to be fraudulent.
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