Johnson v. Proskauer Rose LLP

• Decision Date: 30 April 2015
• Docket Number: 652075/11, 14349
• Citation: 129 A.D.3d 59,2015 N.Y. Slip Op. 03626,9 N.Y.S.3d 201
• Parties: John Seward JOHNSON, Jr., etc., et al., Plaintiffs–Respondents–Appellants, v. PROSKAUER ROSE LLP, et al., Defendants–Appellants–Respondents, Ira Akselrad, Defendant.
• Court: New York Supreme Court — Appellate Division

129 A.D.3d 59

9 N.Y.S.3d 201

2015 N.Y. Slip Op. 03626

John Seward JOHNSON, Jr., etc., et al., Plaintiffs–Respondents–Appellants

v. PROSKAUER ROSE LLP, et al., Defendants–Appellants–RespondentsIra Akselrad, Defendant.

652075/11, 14349

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

April 30, 2015.

Proskauer Rose LLP, New York (David M. Lederkramer, Elise A. Yablonski and Andrew S. Wellin of counsel), for appellants.

Pashman Stein, P.C., Hackensack, N.J. (Gary S. Stein of the bar of the State of New Jersey, admitted pro hac vice, of counsel), Pashman Stein, P.C., New York (Sean Mack of counsel), and Baratta, Baratta & Aidala, LLP, New York (Ottavio V. Mannarino, Joseph P. Baratta and Louis R. Aidala of counsel), for respondents-appellants.

LUIS A. GONZALEZ, P.J., ANGELA M. MAZZARELLI, ROLANDO T. ACOSTA, KARLA MOSKOWITZ, LELAND G. DeGRASSE, JJ.

Opinion

MAZZARELLI, J.

On this appeal and cross appeal from the disposition of a motion addressed to the allegations in plaintiffs' first amended complaint, the following recitation of facts is based strictly on the allegations set forth in that pleading. As this is a motion to dismiss the complaint, the allegations must be assumed to be true. Plaintiffs are individual heirs to the Johnson & Johnson (J & J) fortune, trusts established for the benefit of those individuals, and trustees of the plaintiff trusts. They own many shares of J & J stock, much of it obtained at a low cost basis. One of the trustee-plaintiffs, Robert Matthews, is also a certified public accountant who prepared the tax returns that were challenged by the IRS and give rise to this dispute. Defendant Proskauer Rose LLP (Proskauer) is a law firm that, prior to the events at issue, had represented plaintiffs on a variety of matters, including tax matters. Defendant Jay Waxenberg is a member of Proskauer.

Although plaintiffs had not expressed to anyone at Proskauer that they desired to sell J & J stock, Waxenberg telephoned Matthews several times in September 2000 to discuss a method which, he told Matthews, would permit plaintiffs to sell J & J stock without being subject to a large tax liability. Plaintiffs agreed to hear more about the proposal, and on October 2, 2000, plaintiff John Seward Johnson, Jr. and Matthews met Waxenberg and his partner, defendant Ira Akselrad, at Proskauer's offices. At the meeting, Waxenberg and Akselrad introduced Johnson and Matthews to James Haber, who was identified as a principal of The Diversified Group, Inc. (TDG). Haber explained to Johnson and Matthews that TDG was in the business of developing tax minimization strategies for individuals and families with high net worths.

Haber, Waxenberg and Akselrad then described to Johnson and Matthews the specific scheme they believed would benefit plaintiffs, and instructed them how to execute it. They represented to Johnson and Matthews that the plan would obviate plaintiffs' need to pay tax on the gains realized by the sale of J & J stock and would withstand IRS scrutiny since it had “a legitimate and bona fide business and economic purpose.” Waxenberg and Akselrad stated that, at a later date, Proskauer would prepare and issue to plaintiffs an opinion letter explaining the legal rationale supporting the scheme, and which would protect plaintiffs from the imposition of any penalties in the “unlikely” event the IRS disagreed with defendants' opinion that the strategy was a legitimate one. They also told Johnson and Matthews that after the plan was implemented, they would continue to represent plaintiffs in connection with it. In the meantime, however, even though Johnson and Matthews told them that they were in no rush to sell J & J stock, Waxenberg and Akselrad told Johnson and Matthews that they should execute the strategy in the very near future, and would be “ foolish” not to. This, Waxenberg and Akselrad said, was because plaintiffs' opportunity to do so may not be open-ended, because it was being offered to them as favored clients of Proskauer, and because other similarly-situated clients, including members of the Johnson family, had already done so. Finally, Akselrad and Waxenberg told Johnson and Matthews not to discuss the tax avoidance plan with anybody else.

Also on October 2, 2000, Johnson and Matthews executed a retainer letter that provided, inter alia, that Proskauer would render tax advice to plaintiffs regarding the discussed sale of J & J stock, that Proskauer had represented TDG in the past on “unrelated matters,” that plaintiffs had agreed that Proskauer would “continue to represent TDG fully in unrelated matters notwithstanding [its] ongoing representation of [plaintiffs],” and that plaintiffs had waived “any conflict of interest” arising in connection with Proskauer's representation of TDG “in unrelated matters notwithstanding [its] ongoing representation of [plaintiffs].”

Between October 13, 2000 and November 30, 2000, plaintiffs took the complex series of steps recommended by TDG and Proskauer to effectuate the tax strategy. They paid TDG a total of $1,379,650 in fees and costs, of which they allege that $425,000 was paid by TDG to Proskauer to cover its legal fee.

In June 2001, Proskauer sent plaintiffs a 63–page opinion letter, dated December 29, 2000, which concluded that “it was more likely than not” that the scheme, already executed, would not generate any gain or loss, or accrue any penalties if it was disallowed by the IRS.

In January 2002, the IRS announced a tax amnesty program which allegedly would have been applicable to plaintiffs' situation. However, Proskauer did not notify plaintiffs of that program. In April 2006, the IRS sent plaintiffs a letter requesting documents and detailed information about the tax avoidance strategy they had implemented over five years earlier. Plaintiffs sought counsel from Waxenberg, but he informed them that Proskauer was conflicted by its representation of TDG. Concerned that the agency would ultimately challenge the scheme and assess penalties against them, plaintiffs secured a tolling agreement from Proskauer which, after a later extension, tolled the statute of limitations for any claims against Proskauer up to and including July 31, 2011. Ultimately, the IRS ruled the shelter transaction was not entitled to favorable capital gains tax treatment and assessed plaintiffs back taxes, penalties and interest amounting to millions of dollars.

In December 2010, plaintiffs became aware of a decision in a federal case in Massachusetts District Court (Fidelity Intl. Currency Advisor A Fund, LLC v. United States, 747 F.Supp.2d 49 [D.Ma.2010] ). That case was brought by a former Proskauer client who had executed a tax avoidance plan similar to that recommended to plaintiffs by Proskauer and Akselrad. The District Court, after a 44–day trial, issued findings of fact and conclusions of law which stated that the attorneys “agreed in advance to provide favorable legal opinions in order to induce taxpayer-investor” to get involved in the shelter opportunity, and that Proskauer and another law firm had “derived substantial profit from the promotion and sale of the tax shelter strategy, and therefore had a financial interest in upholding the strategy” (747 F.Supp.2d at 212, 213 ).

In July 2011, plaintiffs commenced this action against defendants. Plaintiffs asserted causes of action against defendants sounding in fraud, legal malpractice and unjust enrichment; they also sought a declaratory judgment in their favor and recovery of legal fees, which they claimed were grossly excessive. The fraud claim was supported by the allegations that, at the October 2000 meeting, Waxenberg and Akselrad made affirmative statements touting a tax avoidance plan that they had no genuine basis to represent would be an effective one, as well as their failure to apprise plaintiffs of the fact that Proskauer was effectively in a business partnership with TDG and had a direct financial interest in plaintiffs' purchasing the services being offered by TDG. Plaintiffs claim that the fraud was widespread, since, they allege, Proskauer issued 380 opinion letters to other clients, similar to the one they received, discussing TDG tax avoidance strategies. In connection with the fraud cause of action, plaintiffs sought, inter alia, the taxes, penalties and interest to be assessed by the IRS, and dividend income and appreciation sacrificed by their decision to sell J & J stock at the urging of defendants. Plaintiffs also sought punitive damages based on defendants' alleged “conscious, willful and wanton disregard of the rights” of plaintiffs, which was “directed at members of the public, to generate unwarranted and excessive fees.”

Proskauer and Waxenberg jointly moved to dismiss plaintiffs' first amended verified complaint, arguing, as is relevant here, that the legal malpractice claim was time-barred before the tolling agreement was executed and that the other substantive claims must be similarly barred based on the duplicative claims doctrine codified in CPLR 214(6). They further posited that, on the merits, the fraud claim must fail because plaintiffs could not have justifiably relied on any of the representations or omissions attributed to defendants, given plaintiffs' relative sophistication and the fact that the opinion letter advised that it was merely “more likely than not” that the scheme would pass IRS muster. Finally, defendants asserted that, even were the fraud claim to survive, it did not give rise to a claim for punitive damages.

Plaintiffs argued in opposition to the motion that the continuing representation doctrine tolled the accrual of their malpractice claim until at least April 2006, which was when Proskauer affirmatively informed them that it could not represent them with respect to the tax avoidance plan. They further argued that the fraud and malpractice claims were not duplicative because they rested on different allegations and sought different damages.

The court denied defendants'...