Marshall v. PricewaterhouseCoopers, LLP

• Decision Date: 29 December 2021
• Docket Number: A172477
• Citation: 316 Or.App. 610,504 P.3d 1236
• Parties: John M. MARSHALL and Karen M. Marshall, individuals; Patsy L. Marshall, an individual; Patsy L. Marshall, as Personal Representative of the Estate of Richard L. Marshall, Deceased; and Marshall Associated, LLC, an Oregon limited liability corporation, Plaintiffs-Appellants, v. PRICEWATERHOUSECOOPERS, LLP, a limited liability partnership, Defendant-Respondent, and Schwabe, Williamson & Wyatt, P.C., an Oregon professional corporation, Defendant.
• Court: Oregon Court of Appeals

316 Or.App. 610

504 P.3d 1236

John M. MARSHALL and Karen M. Marshall, individuals; Patsy L. Marshall, an individual; Patsy L. Marshall, as Personal Representative of the Estate of Richard L. Marshall, Deceased; and Marshall Associated, LLC, an Oregon limited liability corporation, Plaintiffs-Appellants,

v. PRICEWATERHOUSECOOPERS, LLP, a limited liability partnership, Defendant-Respondent,andSchwabe, Williamson & Wyatt, P.C., an Oregon professional corporation, Defendant.

A172477

Court of Appeals of Oregon.

Argued and submitted September 27, 2021.

December 29, 2021

Scott F. Hessell,

Illinois, argued the cause for appellants.

On the opening brief were John J. Dunbar and Dunbar Law LLC. Also on the reply brief were Sperling & Slater, P.C., John J. Dunbar, and Dunbar Law LLC.

Jameson R. Jones, Colorado, argued the cause for respondent. Also on the brief were Milo Petranovich, Thomas W. Sondag, Peter D. Hawkes, Lane Powell PC, Christopher D. Landgraff, Illinois, and Bartlit Beck LLP.

Before Ortega, Presiding Judge, and Shorr, Judge, and Powers, Judge.

SHORR, J.

Plaintiffs, the former shareholders of Marshall Associated Contractor, Inc. (MAC), alleged claims against their former accountants at PricewaterhouseCoopers, LLP (PwC) and former attorneys at Schwabe Williamson & Wyatt P.C. (Schwabe) relating to professional advice those advisors provided regarding a stock-sale transaction.¹ The trial court dismissed plaintiffs' claims against Schwabe on Schwabe's motion to dismiss. Plaintiffs appealed from that decision, and we reversed in part in Marshall v. PricewaterhouseCoopers, LLP , 316 Or. App. 416, 505 P.3d 40 (2021). We now address plaintiffs' claims against PwC, which are the subject of this separate appeal.

In the trial court, PwC moved to dismiss plaintiffs' negligence and breach of contract claims, contending, among other things, that the claims were barred by issue preclusion. The trial court granted that motion, and plaintiffs first assign error to that ruling. With the court's permission, plaintiffs amended their complaint to replead allegations of negligence against PwC that were consistent with the court's issue preclusion ruling. However, PwC moved for summary judgment against the amended complaint, and the court granted that motion on the grounds that the repleaded negligence claim was time-barred by the statute of limitations in ORS 12.110(1). Plaintiffs' second assignment of error asserts that the court's grant of summary judgment was erroneous. Although we find no error in the court's application of issue preclusion, the court's later grant of summary judgment was erroneous, because plaintiffs raised a genuine issue of material fact as to when a reasonable person should have discovered that PwC's alleged negligence had caused them damages. As a result, we reverse in part and remand for further proceedings.

I. FIRST ASSIGNMENT OF ERROR: ISSUE PRECLUSION

We begin by considering plaintiffs' first assignment of error, in which they contend that the trial court erred by granting PwC's motion to dismiss their negligence and breach of contract claims on issue preclusion grounds. We first relay the facts relevant to that ruling, and analyze that issue, before considering plaintiffs' second assignment of error.

A. The Relevant Facts Giving Rise to This Litigation

In reviewing a trial court's grant of a motion to dismiss, we assume the truth of all well-pleaded allegations in the operative complaint and give plaintiffs the benefit of all favorable inferences that may fairly be drawn from their allegations. Kelly v. Lessner , 224 Or. App. 31, 33, 197 P.3d 52 (2008).

The facts relevant to this litigation began in 2002 when plaintiffs' heavy construction company MAC was awarded approximately $40 million in a litigation award. Interested in minimizing the tax consequences of that award, plaintiffs began negotiating with a company called Fortrend that proposed to purchase all of MAC's stock and assume all of its liabilities, including the expected federal and state taxes associated with the $40 million award.² Plaintiffs' complaint explains:

"Fortrend claimed, among other things, that MAC's remaining assets would facilitate Fortrend's ‘debt-collection' business, and that Fortrend would employ MAC's tax liabilities to legitimately offset tax deductions associated with its debt-collection business. As a result, Fortrend said, Plaintiffs would realize a greater net return on its investment in MAC than would otherwise be the case if MAC simply distributed its assets to the shareholders."

Plaintiffs engaged their usual attorneys, Schwabe, in spearheading an evaluation of the proposed deal. Plaintiffs' long-time accountants at PwC also participated in that evaluation. Specifically, plaintiffs engaged Schwabe and PwC to examine all legal and tax implications of the proposed transaction, advise plaintiffs on whether the transaction complied with applicable laws, and advise plaintiffs as to whether the transaction created a risk of greater tax liabilities beyond what would be expected from a simple stock sale. Schwabe and PwC also communicated and negotiated with Fortrend on plaintiffs' behalf and were tasked with handling all aspects of consummating the deal, if approved. Plaintiffs assert that they "wanted to avoid any potential controversy or litigation," advised Schwabe and PwC of that position, and would not have entered the transaction had they been advised or believed that the transaction did not comply with the law.

Schwabe and PwC proceeded to investigate the proposed transaction. Plaintiffs assert that PwC learned that "Fortrend would borrow a substantial sum" to finance the transaction and "intended to employ MAC's tax liability to offset gains and deductions associated with high basis/low value assets." Plaintiffs also assert that PwC was aware that plaintiffs were "relying on Fortrend to satisfy MAC's tax obligations." Plaintiffs essentially contend that those facts either should have or did raise red flags for PwC regarding the tax consequences of the proposed transaction, but that PwC did not communicate any concerns to plaintiffs. Ultimately, plaintiffs claim that PwC advised them "that the proposed transaction was legitimate for tax purposes, and that [plaintiffs] would have no ongoing exposure once the transaction with Fortrend was completed." Plaintiffs assert that PwC and Schwabe "both recommended that [plaintiffs] go forward with the proposed transaction."

In January 2003, plaintiffs decided to go through with the Fortrend transaction. Schwabe and PwC handled all aspects of negotiating and consummating the transaction. Plaintiffs assert that, in the weeks before closing, PwC became concerned about the tax implications of the transaction but did not share those concerns with plaintiffs or Schwabe or investigate further.

Following the close of the transaction in March 2003, plaintiffs contend that both advisors continued to bill for work related to the transaction, its tax and accounting implications, and communications with the IRS. Plaintiffs allege that, during that period, PwC never counseled plaintiffs that they were at risk for additional tax liability or corrected any of its past advice. Plaintiffs contend that PwC did advise them, post-closing and for the first time, that they "had to submit a ‘protective disclosure’ with their tax returns, which according to PwC would protect plaintiffs from potential penalty exposure."

Plaintiffs assert that they later discovered that the Fortrend transaction was an "improper tax-avoidance" mechanism known as a "Midco" transaction. See Salus Mundi Foundation v. C.I.R. , 776 F.3d 1010, 1013 (9th Cir. 2014) (explaining the mechanics of a "Midco" transaction tax-avoidance scheme). Since the IRS's issuance of Notice 2001-16 in 2001, certain Midco transactions have been considered "listed transactions" subject to IRS challenge and penalties. Intermediary Transactions Tax Shelter, Notice 2001-16, 2001-1 CB 730 (2001). Plaintiffs contend that PwC never advised them of Notice 2001-16 or the IRS's position on similar transactions.

As a result of the Fortrend transaction, plaintiffs were subject to an IRS investigation. After determining that plaintiffs' former company had a substantial unpaid tax liability and no assets from which to collect, the IRS concluded in August 2011 that plaintiffs were liable as transferees for over $20 million in back taxes, penalties, and interest. In June 2016, the United States Tax Court ruled in favor of the government's determination and against plaintiffs.

Estate of Marshall v. C.I.R. , 111 T.C.M. (CCH) 1579, 2016 WL 3460226 (2016), aff'd sub nom Marshall v. C.I.R. , 782 F. Appx. 565 (9th Cir. 2019), cert. den. , ––– U.S. ––––, 140 S. Ct. 1270, 206 L.Ed.2d 257 (2020).

B. The 2016 United States Tax Court Decision

We briefly summarize the 2016 tax court decision, which is relevant to our consideration of plaintiffs' arguments on appeal. In Estate of Marshall , the tax court was tasked with determining whether plaintiffs were liable as transferees for MAC's unpaid federal income tax liability, plus accompanying penalties and interest. 2016 WL 3460226 at *1. That determination required the court to consider whether the various separate transfers that made up the Fortrend transaction should be "collapsed." Id. at *11-12. The court applied the legal standard used in "jurisdictions with fraudulent transfer provisions similar to Oregon's" and asked whether plaintiffs "had constructive knowledge that the debtor's debts would not be paid." Id. at *11. The court explained the standard:

"Finding that a person had constructive knowledge does not require finding that he had actual knowledge of the plan's minute details. It is sufficient if, under the totality of the surrounding circumstances, he ‘should have known’ about the tax-avoidance scheme. HBE Leasing Corp. v. Frank , 48 F.3d 623, 636 (2d Cir. 1995).

"Constructive knowledge also includes ‘inquiry

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