Denenberg v. Rosen

• Decision Date: 07 January 2010
• Citation: 71 A.D.3d 187,897 N.Y.S.2d 391
• Parties: Robert A. DENENBERG, etc., Plaintiff-Respondent, v. Warren ROSEN, et al., Defendants, Bankers Life of New York, etc., et al., Defendants-Appellants.
• Court: New York Supreme Court — Appellate Division

897 N.Y.S.2d 391

71 A.D.3d 187

Robert A. DENENBERG, etc., Plaintiff-Respondent,

v. Warren ROSEN, et al., Defendants,Bankers Life of New York, etc., et al., Defendants-Appellants.

Supreme Court, Appellate Division, First Department, New York.

Jan. 7, 2010.

K & L Gates LLP, New York (Catherine R. Keenan of counsel), for Bankers Life of New York, appellant.

Calinoff & Katz, LLP, New York (Robert A. Calinoff of counsel), for Kenneth R. Hartstein, ECI Pension Services, LLC, and Economic Concepts, Inc., appellants.

Robert P. Levine, P.C., Yorktown Heights, (Robert P. Levine of counsel), for Gary L. Thornhill and The Private Consulting Group, appellants.

McDermott Will & Emery, LLP, Chicago, IL (Joshua G. Herman and Douglas E. Whitney of the Bar of the State of Illinois, admitted pro hac vice, of counsel), and McDermott Will & Emery LLP, New York (Daniel N. Jocelyn of counsel), for Richard C. Smith and Bryan Cave, LLP, appellants.

Harrington, Ocko & Monk, LLP, White Plains (Michael W. Freudenberg and Kevin J. Harrington of counsel), for John Repetti and Graf Repetti & Co., LLP, appellants.

Schrier Fiscella & Sussman, LLC, Garden City (James B. Fiscella and Richard E. Schrier of counsel), for respondent.

LUIS A. GONZALEZ, P.J., DAVID FRIEDMAN, KARLA MOSKOWITZ, DIANNE T. RENWICK, HELEN E. FREEDMAN, JJ.

MOSKOWITZ, J.

Plaintiff, a commodities trader, claims that all the defendants induced him to establish a pension plan that guaranteed tax benefits that the IRS later disallowed. The motion court dismissed claims against the moving defendants sounding in breach of contract, fraud and negligent misrepresentation. Plaintiff is not appealing the dismissal of these claims. Rather, the moving defendants appeal from the motion court's denial of their motions to dismiss the remaining claims against them in the 69-page complaint. We reverse the order of the motion court to the extent appealed from and dismiss the remaining causes of action against them, except for the accountant defendants, Repetti and Graf Repetti, who have abandoned that portion oftheir appeal challenging denial of their motion to dismiss plaintiff's claims for unjust enrichment and accounting malpractice.

Background

I. The Parties:

Plaintiff commodities trader operated as a sole proprietorship. On December 26, 2002, he adopted a pension plan and became its administrator (the Plan). The Plan was effective October 1, 2001 and involved the purchase of life insurance policies for plaintiff and for his wife from Bankers Life of New York (Bankers).

Defendants Rosen and his company, Warren Rosen & Co., sell insurance and financial products. These defendants did not participate in the motions underlying this appeal.

Defendant Bankers advises and provides retirement services, employee benefits, life insurance and disability benefits.

Defendant Hartstein is an officer and controlling person of defendants ECI Pension Services LLC (ECI) and Economic Concepts Inc. (Concepts) that design and administer pension plans and sell insurance. One or both own the trademark to the "Pendulum Plan."

Defendant Thornhill controls defendant The Private Consulting Group (TPCG), a pension, insurance, consulting and brokerage firm.

Defendant Repetti is an accountant with defendant accounting firm Graf Repetti.

Defendant Bryan Cave LLP is a law firm (Bryan Cave or the firm).

Defendant Smith is a partner with Bryan Cave.

II. The Allegations

Plaintiff alleges that defendants ECI, Concepts, Bankers and Bryan Cave promoted a tax shelter scheme they dubbed the Pendulum Plan. The strategy behind the Pendulum Plan was to fund a pension plan with life insurance policies. Plaintiff claims defendants benefitted from the sale of these life insurance policies. Some would receive commissions while others would receive indirect benefits, such as free trips and volume bonuses that they concealed from their customers.

Plaintiff claims that Repetti allegedly introduced Thornhill and Hartstein to Rosen to obtain introductions to Rosen's clients and that Repetti, Rosen, Hartstein, Thornhill andConcepts agreed to share fees on commissions Bankers paid on the sale of its insurance to Rosen's clients, including plaintiff.

Plaintiff alleges that Thornhill, Hartstein and Rosen induced him to adopt the Plan by making false promises of its tax benefits and by preparing misleading illustrations showing an 8% return on policy investments. Plaintiff claims he reasonably relied on the advice of Rosen, Hartstein, Thornhill and Repetti in deciding to implement the Plan.

The Pendulum Plan was exclusively available through ECI that marketed the plan through a brochure and other materials. The Pendulum Plan claimed the "highest tax deductible contributions" and a high rate of return. ECI targeted it at business owners. Plaintiff claims the marketing materials he received emphasized large tax deductions, but downplayed or omitted that the deductions did not increase plan benefits and failed to disclose the "enormous" level of commissions, fees and profits that defendants received.

The marketing materials included an opinion letter that Smith and Bryan Cave had issued, on September 10, 1999, to Hartstein/ECI expressing that the Pendulum Plan was legal. The opinion letter contained the caveat that it was solely for ECI:

"This opinion is solely for the information of ECI Pension Services, LLC and its professional advisors. We have not considered whether adoption of the Plan would be appropriate for any particular employer ... The deductibility of all, a portion, or none of each employer's contribution made to the Plan will depend upon facts and circumstances surrounding each such employer's participation in a Plan. Thus, while we believe that our opinions are likely to be applicable to the majority of the employers that consider participating in the Plan, such opinions may not apply to every employer that actually participates or considers participating in the Plan. Therefore, we recommend that all employers and covered employees consult with their own tax advisors with respect to obtaining appropriate advice relating to federal, state and local income, estate and gifttax planning with respect to the benefits under the Plan."

Plaintiff claims that in 2001, he "retained the services of defendant, Bryan Cave to represent me before the Internal RevenueService" particularly with respect to "IRS Form 5307." However, the "Power of Attorney" that plaintiff claims appointed Bryan Cave as his attorney is unsigned and undated. In April 2002, the IRS advised Bryan Cave that the form of the Pendulum Plan was acceptable for tax purposes.

Plaintiff claims that all defendants (except Bankers) gave the Pendulum Plan an air of credibility when they informed plaintiff that the reputable law firm Bryan Cave would represent plaintiff in connection with the design and drafting of his own Plan and would aid in the submission of his Plan to the IRS for approval.

On or about May 29, 2002, plaintiff signed a "Disclosure and Acknowledgment" in connection with his adoption of the Plan. He acknowledged his responsibility to seek the advice of his own tax or legal advisor regarding the application of the tax laws to the transaction and disclaimed reliance on any tax information received from ECI or its employees, agents or representatives in adopting the Plan.

On December 26, 2002, plaintiff adopted the Plan and became its administrator. The Plan was effective as of October 1, 2001 and involved the purchase of life insurance policies from defendant Bankers.

Unfortunately, the operation of plaintiff's specific plan was not acceptable to the IRS because it utilized excessive amounts of whole life insurance. Plaintiff claims that defendants knew their representation that 100% of contributions to the Plan would be deductible was false, because they knew or should have known that 100% funding of the Plan with life insurance would disqualify the Plan for tax purposes and result in the loss of deductions and the imposition of excise taxes. Plaintiff also claims that defendants' action caused him to incur fees to defend an IRS audit.

III. The Motion Court Ruling

The motion court dismissed the contract cause of action as against all defendants because none had an obligation to guarantee that the premiums would be deductible. The court also dismissed the fraudulent concealment claims against Bryan Cave and Repetti because the allegations that they knew or should have known of the 2004 IRS revenue ruling, but concealed it, sounded in malpractice rather than fraud. The court also dismissed the "professional negligence" claims. As against Bryan Cave and Repetti, the court dismissed this claim asduplicative of the malpractice claims and untimely under the 3 year statute of limitations (CPLR 214[6] ) because the claim accrued when plaintiff adopted the Plan on December 26, 2002.

With respect to the legal malpractice claim against Bryan Cave and Smith, the court noted that plaintiff did not allege that he had consulted with the attorneys prior to retaining them in 2004, and that the 2001 or 2002 power of attorney was for a limited purpose and therefore, did not, standing alone, support an attorney-client relationship. The court found that the 1999 opinion letter, addressed to Hartstein and for the sole benefit of ECI, did not make Bryan Cave plaintiff's attorneys.

Nevertheless, the court denied dismissal of the legal malpractice claim. The court found it unclear whether "[p]laintiff's statement that he 'retained' Bryan Cave in 2001 is merely a conclusory statement or whether [p]laintiff paid a fee for his legalrepresentation." Then, the court reasoned that, if plaintiff could prove an attorney-client relationship existed with Bryan Cave as of 2002, the allegation that the firm failed to advise him concerning the propriety of the funding of his pension plan was sufficient to state a malpractice claim.

The court also denied appellants' motion to dismiss the General Business...