Roy E. Hahn, Larry J. Austin, Chenery Assocs., Inc. v. Dewey & Leboeuf Liquidation Trust, Proskauer Rose, LLP, Index No. 650817/2014

• Decision Date: 03 August 2015
• Docket Number: Index No. 650817/2014
• Citation: Hahn v. Dewey & LeBoeuf Liquidation Trust, 2015 NY Slip Op 31481(U), Index No. 650817/2014 (N.Y. Sup. Ct. Aug 03, 2015)
• Parties: ROY E. HAHN, LARRY J. AUSTIN, CHENERY ASSOCIATES, INCORPORATED, and SUSSEX FINANCIAL ENTERPRISES, INC., f/k/a CHENERY MANAGEMENT, INCORPORATED, Plaintiffs, v. THE DEWEY & LEBOEUF LIQUIDATION TRUST, PROSKAUER ROSE, LLP, and SIDLEY AUSTIN, LLP, Defendants.
• Court: New York Supreme Court

2015 NY Slip Op 31481(U)

ROY E. HAHN, LARRY J. AUSTIN, CHENERY ASSOCIATES, INCORPORATED,and SUSSEX FINANCIAL ENTERPRISES, INC.,f/k/a CHENERY MANAGEMENT, INCORPORATED, Plaintiffs, v. THE DEWEY & LEBOEUF LIQUIDATION TRUST,PROSKAUER ROSE, LLP, and SIDLEY AUSTIN, LLP, Defendants.

Index No. 650817/2014

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK : IAS PART 3

August 3, 2015

Motion Seq. No: 010, 011 & 012

Motion Date: 4/22/2015

BRANSTEN, J.

In this action, plaintiffs assert legal malpractice, fraud, and negligent representation claims against their former legal counsel, defendants Dewey & LeBoeuf Liquidation Trust¹ ("Liquidation Trust"), Sidley Austin LLP ("Sidley"), and Proskauer Rose LLP ("Proskauer"). All defendants now seek dismissal of plaintiffs' Corrected Amended Complaint ("Complaint") in its entirety, pursuant to CPLR 3211(a)(5) and (a)(7). In addition, defendants Liquidation Trust and Sidley also contend that the fraud claim asserted against them fails under CPLR 3016(b), Plaintiffs oppose and request leave to file a second amended complaint, omitting the negligent representation claim and adding a Judiciary Law § 487 attorney misconduct claim, based upon newly discoveredevidence. For the reasons that follow, defendants' motions are granted, plaintiffs' cross-motion is denied, and plaintiffs' action is dismissed.

I. Background²

A. The NPL Program

In late 2000, plaintiffs Roy E. Hahn and Larry J. Austin, tax-advantaged investment strategists working in the United States and Asian financial markets, created and developed an investment strategy involving Asian distressed debt that became known as the "Non-Performing Loan Investment Program" ("NPL Program"). The NPL Program involved the purchase of the distressed debt of fundamentally sound companies from the Federal Deposit Insurance Corporation and the Resolution Trust Corporation that could be used to offset tax liabilities. Hahn and Austin sold the debt to investors through plaintiff Chenery Associates, Incorporated ("Chenery").

Plaintiffs retained Graham R. Taylor, a LeBoeuf tax attorney, to render tax advice to them regarding the NPL Program. Taylor advised plaintiffs that he believed that plaintiffs' investment strategy was legally viable and "worked" from a tax perspective. Plaintiffs engaged LeBoeuf as their legal advisor with regard to the NPL Program.

Plaintiffs also contacted Sidley, which was their then-general legal counsel. Sidley advised plaintiffs that it also believed the NPL Program would work and agreed to render United States federal income tax benefit opinions to plaintiffs' investors, if the NPL Program were appropriately structured.

Both LeBoeuf and Sidley became involved in structuring the NPL Program to ensure that Chenery would be in compliance with the laws and regulations of the United States and foreign countries. One legal issue that they specifically addressed was whether the NPL Program would be classified as a tax shelter by the Internal Revenue Service ("IRS") and whether Chenery would be considered a tax shelter organizer, such that it would be required by sections 6111 and 6112 of the Internal Revenue Code ("IRC") to file a disclosure statement with the IRS and to maintain a list of actual investors.

Plaintiffs introduced the NPL Program to non-party myCFO LLC ("myCFO"), a company in the business of providing financial services to high net worth individuals. During the summer of 2001, a group including myCFO, LeBoeuf, and Sidley discussed Asian distressed asset portfolios that might be available for purchase, and LeBoeuf and Sidley made trips to Asia to meet with potential sellers. In August 2001, Chenery, myCFO, LeBoeuf and Sidley arranged the initial distressed debt portfolio acquisition by clients of myCFO. "In September 2001, [Sidley] advised Chenery that it was not able to render tax benefit opinions to third party investors in respect of China-based distressedassets arranged by Chenery" because "it was unable to determine how the IRS would determine the basis of the China-based distressed assets." (Complaint ¶¶ 52-53.)

B. Opinion Letters

On December 31, 2000, Sidley issued a tax opinion letter, at plaintiffs' request, regarding a transaction known as the "Whitechapel transaction," which was unrelated to the NPL Program ("Whitechapel transaction opinion letter").

Later, in October 2001, plaintiffs retained Proskauer to write letters to NPL Program investors, advising them of the tax issues presented by the program. Between October and December 2001, plaintiffs regularly consulted Proskauer regarding structuring issues relating to the China assets, and Proskauer repeatedly advised that it did not believe that registration of the NPL Program with the IRS as a tax shelter was required. In late December 2001, Proskauer advised plaintiffs that it was prepared to write opinion letters to investors in the NPL Program based on oral representations by myCFO and Chenery regarding the final acquisition structure.

On December 3, 2001, LeBoeuf issued a formal opinion ("LeBoeuf opinion letter"), written by Taylor, confirming that Chenery was not required to register the NPL Program as a tax shelter. That same month, plaintiffs consummated a series of investments as part of the NPL Program.

Meanwhile, in 2001, Hahn and Austin each individually retained Proskauer to advise them regarding the tax issues presented by their own personal investments in the NPL Program involving an entity known as Peking Investment Fund LLC ("Peking transaction"). By letters dated November 21, 2002 ("Proskauer 2002 Peking opinion letters"), Proskauer confirmed its earlier verbal advice to Hahn and Austin and advised each of them again that, in the event that the IRS disallowed the tax position that they adopted in their personal investments in the NPL Program, they probably would be able to avoid the tax penalties imposed by IRC § 6707(a) because their reliance on Proskauer's tax advice would be considered reasonable by the IRS.

On September 18, 2003, Proskauer issued an opinion letter ("Proskauer 2003 opinion letter"), advising NPL Program investors that Chenery was not required to register the NPL Program as a tax shelter. In that letter, Proskauer warned, "as you know, the IRS or a court may disagree with the conclusions reached herein." (Proskauer 2003 opinion letter at 1.)

Allegedly in reliance on legal advice received from LeBoeuf, Sidley, and Proskauer, plaintiffs did not register the NPL Program as a tax shelter with the IRS.

C. IRS Investigation and Penalties

Between 2003 and 2010, plaintiffs were sued in four separate actions by investors in the NPL Program. See Compl. ¶ 123. On October 21, 2003, the IRS conducted a Promoter Penalty Interview with Hahn, as part of an IRS investigation into the NPL Program. The IRS interviewed Hahn a second time in September 2008, as part of the same investigation.

On December 30, 2008, the IRS advised that it would impose tax penalties of approximately $1 million against both Hahn and Austin individually, in connection with the Peking transaction. Plaintiffs are contesting the imposition of such tax penalties.

On January 19, 2012, the IRS assessed $7,719,594 in penalties against plaintiffs, pursuant to IRC § 6707(a), for failure to register the NPL Program as a tax shelter. The IRS found that plaintiffs' reliance on the advice of LeBoeuf and Proskauer was unreasonable, since they did not accurately state the facts of the transaction in their respective opinion letters and had a financial interest in providing opinions approving of the transaction. See Compl. Ex. D at 26 (IRS Jan. 19, 2012 Report, Form 886A).

D. The Instant Action

On March 13, 2014, plaintiffs commenced this action, asserting that they reasonably relied on the verbal and written opinions issued by LeBoeuf, Proskauer, andSidley in deciding not to register the NPL Program as a tax shelter. Moreover, if those firms had advised plaintiffs to register, plaintiffs assert that they would have registered the program. Plaintiffs further contend that, had Chenery registered by late 2003, the IRS would not have assessed any promoter penalties. Plaintiffs maintain that they incurred substantial financial losses, as a result of their reasonable reliance on the legal advice rendered by LeBoeuf, Proskauer, and Sidley. Plaintiffs also assert that Sidley committed legal malpractice in rendering the advice in the Whitechapel transaction opinion letter.

In response to these alleged causes of action, plaintiffs seek to recover $50 million in damages on the legal malpractice claim, and $1 million each on the fraud and negligent misrepresentation claims.

II. Discussion

A. Motion to Dismiss Standard

On a motion to dismiss a complaint for failure to state a cause of action, all factual allegations must be accepted as truthful, the complaint must be construed in a light most favorable to the plaintiffs, and the plaintiffs must be given the benefit of all reasonable inferences. Allianz Underwriters Ins, Co. v. Landmark Ins. Co., 13 A.D.3d 172, 174 (1st Dep't 2004). "We . . . determine only whether the facts as alleged fit within any cognizable legal theory." Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994). This Courtmust deny a motion to dismiss, "if from the pleadings' four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law." 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 (2002) (internal quotation marks and citations omitted).

CPLR 3211(a)(5) provides for dismissal where the cause of action may not be maintained because of, inter alia, statute of limitations. CPLR 3211(a)(5).

B. Legal Malpractice Claims

LeBoeuf, Sidley, and Proskauer each contend that the first cause of action for legal malpractice, which pertains to the NPL Program, is time-barred. Sidley also argues that the second cause of action for legal malpractice in connection with the Whitechapel transaction is similarly...