Williams v. Ely

• Decision Date: 08 August 1996
• Citation: 423 Mass. 467,668 N.E.2d 799
• Parties: Margaret C. WILLIAMS, executrix, 1 & others 2 v. Richard ELY & others. 3
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 799

668 N.E.2d 799

423 Mass. 467

Margaret C. WILLIAMS, executrix, ¹ & others² v. Richard ELY & others. ³

Supreme Judicial Court of Massachusetts Norfolk.

Argued April 3, 1996.

Decided August 8, 1996.

Samuel Adams, Boston (Laurie C. Buck, with him) for Richard Ely & others.

Michael B. Keating & Richard M. Brunell, Boston, for Ralph B. Williams & others.

Allan van Gestel, Boston, for Lynne B. Barr & others.

Thomas J. Sartory, Boston, for Jordan P. Krasnow & others.

John O. Mirick, Worcester, for John W. Belash & others.

Stephen Wald, Boston, for Joseph Bartlett.

Robert D. Canty, Boston, pro se, was present but did not argue.

Before LIACOS, C.J., and WILKINS, LYNCH and O'CONNOR, JJ.

WILKINS, Justice.

We deal with claims of legal malpractice asserted against certain former partners in the defunct Boston law firm of Gaston Snow & Ely Bartlett (Gaston Snow). A Superior Court judge ruled that some former Gaston Snow partners were liable to the plaintiffs, but that, for various reasons, others were not. The defendants assert that (1) this action was barred by the statute of limitations; (2) neither the plaintiff Thomas B. Williams nor the plaintiff Frances W. Perkins were shown to have been Gaston Snow clients; and (3) the evidence warranted neither a finding of negligence nor a finding that the plaintiffs sustained harm as a result of the alleged negligence. We shall reject each of these enumerated arguments. After presenting the procedural background, we shall set forth the facts that bear on the enumerated issues, decide those issues, and then turn to the several questions bearing on which former partners are liable for the negligently caused harm.

This action was commenced on February 4, 1988, against Gaston Snow and all its then present and former (since 1975) partners. The issue of liability was separated for trial, and, in June, 1991, the Superior Court judge made findings and rulings and ordered judgment for the plaintiffs. In October, 1991, bankruptcy proceedings concerning Gaston Snow were commenced. In May, 1992, a bankruptcy judge allowed the plaintiffs to proceed to liquidate their claims. The trustee in bankruptcy and the plaintiffs settled the plaintiffs' claims against those partners who elected to participate in the bankruptcy reorganization plan. Those former Gaston Snow partners who are involved in this appeal, either as appellants or appellees, chose not to participate in the plan. The defendant former partners against whom judgment was entered have appealed. The plaintiffs have appealed from that portion of the final judgment that excluded certain former Gaston Snow partners from liability. We transferred the cross appeals here on our own motion.

In 1975, each plaintiff had contingent remainder interests in two testamentary trusts (family trusts), one created in 1926 and the other in 1948. In October, 1975, the plaintiff Ralph B. Williams, a vice president of The Fiduciary Trust Company until his retirement in 1982, consulted his cousin Charles Jackson, Jr., a partner in Gaston Snow, as to whether he could effectively disclaim his contingent interests under the family trusts and, if he did, whether he would be liable for any Federal estate or gift tax. Jackson referred the matter to a partner who dealt with estate planning matters. That partner circulated a memorandum among the firm's tax and estate planning partners, who approved it. In November, 1975, Jackson orally advised Ralph that disclaimers of his interests in the trusts would not give rise to Federal estate or gift tax liability. That advice was confirmed by letters that the firm sent Ralph in January, 1976, concerning each family trust, stating unequivocally that "[t]he disclaimer gives rise to no Federal gift tax liability."

In December, 1975, Ralph executed two disclaimers, prepared and filed by Gaston Snow in the appropriate registries of probate, renouncing his remainder interests in the family trusts. In November and December, 1976, respectively, Ralph's siblings, the other plaintiffs Thomas B. Williams and Frances W. Perkins, executed similar disclaimers of their contingent interests in the family trusts, relying, according to the judge's findings, on Gaston Snow's advice. The firm filed those disclaimers, which Ralph had prepared, in the appropriate registries of probate in 1977. ⁴ Late in December, 1976, the firm sent each plaintiff a bill for its services concerning the disclaimers. Gaston Snow did not advise the plaintiffs to file Federal gift tax returns so as to initiate the three-year statute of limitations for gift tax liability. Nor did the firm advise Thomas or Frances that, if their disclaimers were recorded in 1976 rather than in 1977 (as was the case), the applicable rate of taxation on any taxable gift would be lower. ⁵

The judge found that a competent estate planning attorney would have advised a client in 1975 that the law was unsettled, in that there was a risk of Federal gift tax consequences for a person disclaiming a remainder interest in a trust as each plaintiff did. The unsettled point was whether, in order to avoid adverse gift tax consequences, such a disclaimer had to be made (a) within a reasonable time after a contingent taker learned of the existence of his or her potential interest or (b) within a reasonable time after the remainder interest vested. In 1961, the Tax Court had taken the former position--a disclaimer may be made without adverse gift tax consequences only if made within a reasonable time after learning of the existence of the future interest. Fuller v. Commissioner 37 T.C. 147 (1961). The Tax Court reaffirmed that position in 1972 in Keinath v. Commissioner, 58 T.C. 352, 1972 WL 2461 (1972), but, on appeal from that decision, the United States Court of Appeals for the Eighth Circuit reversed. Keinath v. Commissioner, 480 F.2d 57 (8th Cir.1973). That court said that a disclaimer made within a reasonable time after the remainder interest vested produced no adverse Federal gift tax consequences. Id. at 63, 64, 66. The ruling in the Keinath case was controlling only within the jurisdiction of the Eighth Circuit, and, as of 1975 and 1976, the Internal Revenue Service had not indicated that it acquiesced in the holding in the Keinath case. A consequence of these circumstances was that the Internal Revenue Service might take a position in another Federal circuit contrary to that stated in the Keinath opinion. Moreover, if the Internal Revenue Service were successful in another circuit, a conflict between circuit courts might prompt the Supreme Court to grant certiorari and, if it did, it might overrule the Keinath case. It is this risk of which Gaston Snow gave the plaintiffs no hint.

The possibility became a reality when, on February 23, 1982, the Supreme Court, in a six-to-three decision, in review of an opinion of the United States Court of Appeals for the Ninth Circuit (see Jewett v. Commissioner, 638 F.2d 93 [9th Cir.1980] [rejecting the result in the Keinath case] ), held that a gift tax was payable if a disclaimer had not been made within a reasonable time after the contingent taker learned of the existence of the interest. Jewett v. Commissioner, 455 U.S. 305, 102 S.Ct. 1082, 71 L.Ed.2d 170 (1982). The plaintiffs, of course, had learned of their contingent remainder interests in the family trusts long before 1975.

In late December, 1984, Gaston Snow advised Ralph that the Jewett case applied to him and his siblings and that they had a Federal gift tax liability because of their disclaimers. This was, the judge found, the first notice that any plaintiff had of possible gift tax liability. In 1986, each plaintiff filed gift tax returns for the periods during which their respective disclaimers were filed, and paid all gift tax liabilities, including interest. These liabilities, the judge found, were incurred because the plaintiffs had relied on the advice of Gaston Snow that their disclaimers would not generate Federal gift tax liability and because Gaston Snow had failed to advise them, either in 1975 or shortly thereafter, to file gift tax returns and thereby start the running of the statute of limitations on any gift tax liability arguably flowing from the disclaimers.

In October, 1986, the plaintiffs and Gaston Snow entered into an agreement (tolling agreement) that purportedly tolled the running of the statute of limitations in this matter as of September 18, 1986, for a period of approximately six and one-half months. Later in this opinion we shall discuss which partners of Gaston Snow were bound by that agreement. As we have said, this action was commenced on February 4, 1988.

The judge ruled that there was an attorney-client relationship between the law firm and each plaintiff, although only Ralph had received gift tax advice directly from the firm. The firm was negligent, she ruled, in failing to advise the plaintiffs of the unsettled state of the law and was also negligent in failing to advise Thomas and Frances of the adverse tax consequences of not recording their disclaimers before January 1, 1977. ⁶ The judge also ruled that, because the plaintiffs first became aware of their claims against Gaston Snow in December, 1984, when the firm advised them of their tax liability, the three-year statute of limitations (G.L. c. 260, § 4 [1994 ed.] ) had not run on September 18, 1986, the date as of which, by agreement, the running of the statute of limitations had been tolled. She concluded that the statute of limitations did not bar the action, ordered judgment for the plaintiffs on liability, and directed that the matter proceed to the determination of damages.

1. Statute of limitations. The defendants assert that this action was not commenced within the period required by the statute of limitations, that is, within three years of the date on which cause of action accrued. G.L. c. 260, § 4. As to those defendants governed by the tolling...