Strong Suspicion But No Legal Malpractice

Wo Yee Hing Realty, Corp. v Stern  2012 NY Slip Op 05792   Decided on July 31, 2012
Appellate Division, First Department   is an example of just how minutely the AD will examine an "underlying case" when deciding a case of legal malpractice.  Here, plaintiffs hired an attorney to do the closing on a commercial property, and a deep split of testimony takes place.  Plaintiff and Defendant agree that Defendant attorney did not have the requisite knowledge to handle a 1031 exchange, yet he held the closing.  There was no 1031 exchange, there could be no 1031 exchange after the checks were made out to plaintiffs yet there is no legal malpractice.  Plaintiffs paid capital gains tax of $ 5 Million +
 

"The parties' claims as to the understanding that was reached regarding the corporation's retention of defendant are diametrically opposed. According to plaintiff's principals, defendant assured them that the anticipated sale could be structured as a "like-kind exchange" under Internal Revenue Code (26 USC) § 1031, which permits taxes on gains from the sale of real property to be deferred if the seller purchases another property of like kind, within certain parameters (see 26 USC § 1031[a]). Plaintiff asserts that defendant "held himself out as knowledgeable in [1031 exchanges] and able to effectuate the sale and transfer of real property" to enable it to take advantage of the capital gains tax deferral.

Defendant, however, asserts that he informed plaintiff's principals that he "had no expertise or experience with structuring Section 1031 like-kind exchanges" and that responsibility for taking advantage of Section 1031 would fall to them, and that they assured him that they were familiar with 1031 exchanges and would take care of that aspect of the transaction. "

"Strong evidence that defendant acted negligently is presented by his admission that he told the Yungs that he was not qualified to handle a 1031 exchange, but nevertheless undertook the preparation of the contract of sale. "[A]n attorney is obligated to know the law relating to the matter for which he/she is representing a client and it is the attorney's duty, if he has not knowledge of the statutes, to inform himself, for, like any artisan, by undertaking the work, he represents that he is capable of performing it in a skillful manner" (Fielding v Kupferman, 65 AD3d 437, 440 [2009] [internal quotations marks omitted]). Defendant's failure to have the checks made payable to a qualified intermediary similarly constitutes evidence of his negligence, since that failure would preclude plaintiff from taking advantage of the like-kind exchange option (see 26 CFR 1.1031[k]-1[f]).

In seeking summary judgment dismissing the case, defendant contends that plaintiff cannot show that his negligence, if any, caused plaintiff's alleged losses. He relies on the absence of evidence of a pending deal that plaintiff could have used to consummate a 1031 exchange. Plaintiff argues, citing Suppiah v Kalish (76 AD3d 829, 832 [2010]) that defendant was required to submit an expert affidavit establishing that even if he did commit malpractice, his actions were not the proximate cause of its losses. However, Suppiah concerned an allegation of attorney malpractice in an immigration matter that involved issues so "byzantine" that the issue of proximate cause could not be resolved without expert testimony (id. at 833). Here, by contrast, the mechanics of the governing legal framework are undisputed, and the issue of proximate cause turns on the discrete factual question of whether plaintiff took the requisite actions to identify and purchase a suitable replacement property in the required time frame. There is no need for expert testimony on the point.

The question is therefore whether plaintiff raised an issue of fact as to whether negligence on defendant's part proximately caused its claimed losses. "

"Unlike the dissent, we do not think that defendant's failure to have the checks made out to a qualified intermediary eliminates plaintiff's burden to offer evidence showing that but for defendant's negligence, it would have been able to complete a valid like-kind exchange. Although it is now clear that, as the dissent puts it, "the opportunity for a like-kind exchange was irretrievably lost once plaintiff received the proceeds of the sale," it is also clear that plaintiff had failed to satisfy all the other elements required for the successful completion of other such an exchange, and that the failure to meet those requirements is not attributable to defendant's alleged negligence."