Williams v. Sidley Austin Brown & Wood, L.L.P., 2006 NY Slip Op 50381(U) (NY 3/13/2006)
| Decision Date | 13 March 2006 |
| Docket Number | 600808/05. |
| Citation | 2006 NY Slip Op 50381(U) |
| Court | New York Court of Appeals Court of Appeals |
| Parties | E. ROGER WILLIAMS, NORMANDY TRADING, INC. and NORMANDY INVESTMENT TRUST, Plaintiffs, v. SIDLEY AUSTIN BROWN & WOOD, L.L.P; RAYMOND J. RUBLE; MULTINATIONAL STRATEGIES, LLC; KEVIN M. KOPS; MICHAEL N. SCHWARTZ; COASTAL TRADING, LLC; ENTERPRISE FINANCIAL SERVICES INC., F/K/A ENTERPRISE BANK; DEERHURST MANAGEMENT COMPANY, N.C.; BRAXTON MANAGEMENT, INC; BRADONTON MANAGEMENT, INC.; NORTHBRIDGE CAPITAL MANAGEMENT, INC. BECKENHAM TRADING COMPANY, INC.; PETER MOLYNEUX; ANDREW KRIEGER; REFCO CAPITAL MARKETS, LTD.; HVB US FINANCE INC.; and DAVID A. SCHWARTZ, Defendants. |
Kane Kessler, P.C. New York, New York, (Jeffrey H. Daichman, Esq.) Attorneys for Plaintiffs.
Whatley Drake LLC, Birmingham AL, (Joe R. Whatley, Jr., Esq.) Attorneys for Defendants.
Attorneys for defendant Sidley Austin Brown & Wood LLP. Covington & Burlington, New York, NY, (Aaron R. Marcu, Esq. Andrew Ruffino, Esq., Phillip A. Irwin Esq., Jason P. Criss, Esq.)
Of Counsel: Munger Tolles & Olson LLP, Los Angeles, California, (Richard E. Drooyan, Esq.). Attorneys for Raymond J. Ruble, William J. Brady, III, Esq., Frankel & Abrams, New York, New York, (Stuart E. Abrams, Esq. William J. Brady, III, Esq.).
Attorneys for Defendant HVB US Finance Inc. f/k/a HVB Structured Finance Inc.: Fulbright & Jaworski, LLP, Los Angeles, California, (Helen L. Duncan, Esq., Dinh Ha, Esq.) and New York, New York, (Sarah E. O'Connell, Esq.).
Motion sequence numbers 007, 008 and 009 are consolidated for determination.
In this action, plaintiffs, E. Roger Williams and his affiliated entities, assert thirteen causes of action against the defendants, who are alleged to have acted in concert to structure and facilitate a series of transactions leading to plaintiffs' investment in the Coastal Common Trust Fund Series III Fund (the Coastal III Fund). Plaintiffs allege that defendants made fraudulent or negligent misrepresentations, concealed the nature of their relationships, breached their fiduciary duty, and committed professional malpractice to induce plaintiffs to enter into these transactions, and to claim $8,033.250.77 in ordinary losses generated by the Fund as a deduction against income on their 2001 U.S. federal and state income tax returns. Plaintiffs seek both declaratory relief and damages, including the interest, penalties and late fees paid when, subsequently, the deductions were disallowed by the Internal Revenue Service (IRS).
Under motion sequence 007 and 008, the law firm defendants, Sidley Austin Brown & Wood LLP (Sidley) and attorney Raymond J. Ruble (together the Sidley defendants) move to dismiss plaintiffs' amended complaint pursuant to CPLR 3211 (a) (1) & (7) and CPLR 3016 (b), part upon alleged "documentary evidence" to demonstrate that Sidley made no representations to plaintiffs prior to their investment in the Coastal III Fund. Under motion sequence 009 defendant HVB US Finance Inc.(HVB) moves to dismiss plaintiffs' complaint, pursuant to CPLR 3211 (a) (7) for failure to state a cause of action, and allege that plaintiffs have no standing to seek a declaratory judgment.1
For purposes of these CPLR 3211 motions, the following facts, as alleged in plaintiffs' complaint, are accepted as true, and given the benefit of every possible favorable inference (EBC I, Inc. V Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]; Sokoloff v. Harriman Estates Development Corp., 96 NY2d 409, 414 [2001]; P.T. Bank Central Asia v. ABN AMRO Bank N.V., 301 AD2d 373, 375-6 [1st Dept 2003]).
Plaintiff E. Roger Williams was introduced to defendant Multi National Strategies, LLC, and its principals, Michael N. Schwartz, Kevin M. Kops and David Schwartz (collectively, the Multi National defendants) in October 2001 for the purpose of obtaining tax advice in connection with a substantial amount of "phantom equity" imputed to Williams as a result of the sale of one of his businesses. Defendants Schwartz and Kops, both certified public accountants, represented that they were experts in the field with substantial experience in creating, marketing and selling tax advantaged products to corporations and high net worth individuals. They advised Williams to invest in a "common trust fund" (CTF), which Schwartz and Kops represented was a lawful tax strategy with tremendous tax benefits. Schwartz and Kops explained that a CTF transaction was materially different from other tax strategies previously challenged by the IRS, and that the transaction would be accompanied by an opinion letter from defendant Sidley, which the Multi National defendants represented was an independent, international and highly reputable tax law firm. The Multi-National defendants represented to Mr. Williams that because Sidley was an independent, international and reputable law firm, the opinion letter would shield plaintiffs from accuracy penalties in the event of an adverse determination by the IRS, and that an adverse determination was unlikely because the CTF involved fewer investors than other tax strategies, making it unlikely to attract IRS attention. The Multi National defendants represented that the CTF transaction they were marketing met the "economic substance" and "clear business purpose" tests used by the IRS to measure the legitimacy of a transaction, and assured Williams that Sidley would provide him with an opinion letter stating that it was "more likely than not" that the transaction would be acceptable to the IRS. The Multi National defendants also advised Williams that it was absolutely essential that Williams obtain a Sidley opinion letter before making use of the CTF transaction losses when filing U.S. federal income tax returns for 2001.
As further assurance of the legitimacy and safety of a CTF investment, Multi National highlighted the participation of Deerhurst Management Company, Inc., which Multi National asserted was one of the premier experts in the field of options and foreign currency trading, and HVB, a subsidiary of Germany's second largest bank, Bayerische Hypo-und Vereinsbank AG. Multi National represented that HVB understood the nature of CTF investments, and would work closely with Multi National and the other defendants named in the amended complaint to implement the strategy.
The Multi National defendants advised Williams that under the Tax Code, the only way a tax sheltered investment in a CTF could be made was through the use of a trust. Thus, in order to facilitate Williams' investment in the Coastal III Fund, the Multi National defendants assisted Williams in setting up plaintiff Normandy Trading, Inc. (Normandy Trading), a subchapter S corporation wholly owned by Williams in order to limit Williams' personal liability exposure, and plaintiff Normandy Investment Trust ( the Normandy Trust). One of the individual Multi National defendants was named as Secretary of Normandy Trading, and defendant Enterprise Financial Services, Inc. was named as Trustee of Normandy Trust. According to the Sidley Opinion Letter, which is annexed to Sidley's moving papers as Exhibit 3 (the Opinion Letter), the use of these investment entities was in accordance with the prospectus issued for the Coastal III Fund.2
The next step in making this investment was for Williams to establish an account with defendant Deerhurst. Williams opened the account with Deerhurst on November 21, 2001 with an initial investment of $1.2 million. Deerhurst used those funds to purchase two put options on Japanese Yen for $8,040,426, and $8,000,000 respectively, with both puts maturing in November 22, 2002. Defendant Refco Capital Markets acted as the counter-party on the option transactions. Williams' portfolio was then transferred to Normandy Trading. To cover the options defendant Braxton Management, Inc. (Braxton), a Deerhurst affiliate, borrowed $8 million from Hypo Vereinsbank Structured Finance, of which defendant HVB is the United States counterpart. Braxton loaned the $8 million to Williams, who in turn loaned the $8 Million to Normandy Trading. Normandy Trading then contributed $1.2 million in cash and loaned $8 million to Normandy Trust, which in turn purchased a $9,200,000.00 position in the Coastal III Fund, giving Normandy Trust a 6.6% position in the fund.
The Coastal III Fund then used the $8 million to acquire a foreign currency linked variable rate of return structured note from defendant Bradonton, Inc., another Deerhurst affiliate. According to the Sidley Opinion Letter, Brandonton, in turn "lent" the money to Hypo Vereinsbank Structured Finance. Plaintiffs' amended complaint alleges that Bradonton's loan to HVB was in repayment of the $8 million borrowed by Williams through Braxton, and seeks a declaratory judgment that plaintiffs are not obligated to repay those funds. Plaintiffs' amended complaint also alleges that in addition to lending the $8 million, HVB facilitated the movement of the funds between the various entities, and that all of these transaction were an anticipated and integral part of the overall Coastal III Fund transaction.
In moving to dismiss plaintiffs' amended complaint, the Sidley defendants rely on an unsigned copy of a Letter of Engagement (the "Engagement Letter") dated December 12, 2001, which purportedly was forwarded to Williams after the CTF transactions were completed. Pursuant to the Engagement Letter, Sidley was to act as "Special U.S. Federal Income Tax Counsel," and would provide Williams with income tax advice, including the Opinion Letter, in relation to the CTF transactions. The Engagement Letter advised Williams that changes in the law could occur after completion of Sidley's engagement which could impact his future rights and liabilities, and that Sidley would have no further obligation unless specifically retained for that purpose. Under the terms of the Engagement Letter, Sidley's fee for...
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