It's the Client, Not its Shareholders in Legal Malpractice

Client is faced with a buy-out situation in which it must move a store.  Client hires attorneys to negotiate the buy-out and calculate how costs and taxes will affect the buy-out price.  The attorneys do not calculate all taxes, and the buy-out price does not cover the taxes.  Is this legal malpractice?

Leggiadro, Ltd. v Winston & Strawn, LLP   2013 NY Slip Op 50345(U)   Decided on March 1, 2013
Supreme Court, New York County   Kornreich, J. holds:  "In 2010, the Landlord notified Leggiadro that it wished to negotiate an early termination and buy-out of the Lease because it sought to convert [*2]the Building into residential and commercial cooperative units. ¶ 12. Leggiadro retained W & S to negotiate a buy-out with the Landlord whereby Leggiadro would obtain a "net settlement sum" that would provide an adequate amount of post-tax money to cover the costs of relocating its flagship store. ¶ 15. Brooks specifically requested that W & S advise plaintiffs of any and all tax liabilities arising from the buy-out. ¶ 16.

Leggiadro and the Landlord eventually executed a buy-out agreement, the terms of which were not disclosed to the court pursuant to a Confidentially and Nondisclosure Agreement. ¶ 24. Plaintiffs subsequently became aware that they incurred unexpected New York State and New York City tax liabilities by virtue of differences in how the State, the City, and the IRS treat S-Corporations for tax purposes. ¶ 25. Plaintiffs contend that W & S failed to inform them of these tax issues and, if they had, they would have negotiated a higher buy-out settlement amount with the Landlord that would have been sufficient to cover Leggiadro's moving costs. ¶ 31.

The allegations in the AC and the documentary evidence establish that the scope of W & S's representation was to negotiate a settlement sum that would cover Leggiadro's moving costs. Such costs were not limited to increases in operational costs such as rent. Rather, the Calculation also considers (though it does not ascribe a dollar amount to) goodwill loss from the company leaving its Madison Avenue location. The Calculation does not account for out-of-pocket costs to the shareholders. While the Calculation does consider the federal long term capital gains tax, which all of the involved parties knew would be paid by the shareholders by virtue of Leggiadro's S-Corporation status, this alone is not enough to expand the scope of W & S's representation of the company to include the representation of its shareholders. If consideration of pass-through tax liability was sufficient to constitute the representation of shareholders, by this logic, a lawyer who represents a company necessarily also must represent its shareholders because all financial liabilities of a company ultimately impact the finances of the shareholders. This is not the law.

Nevertheless, the Rosses argue that the special circumstances of the representation created a near-privity relationship under the doctrine set forth in Good Old Days Tavern, supra, which arises from the principle that a provider of professional services is liable for negligent misrepresentations to third-parties where the "relationship is so close as to approach that of privity." Prudential Ins. Co. of America v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 NY2d 377 (1992). Critically, it is important to remember that reasonable reliance is an essential element of a claim based on a negligent misrepresentation or omission. See J.A.O. Acquisition Corp. v Stavitsky, 8 NY3d 144, 148 (2007). Thus, even assuming W & S had a duty to consider the tax liabilities of the Rosses, the Rosses cannot claim to have reasonably relied on any representation or omission made by W & S as to the existence of their individual pass-through tax liability because they knew that such liability existed by virtue of their long history of paying these taxes as stockholders of an S-Corporation. Therefore, the Rosses' claims against W & S are dismissed.

However, Leggiadro may maintain its claim against W & S related to the New York City general corporation tax. See AC ¶ 26. The scope of W & S's representation included obtaining a settlement sum from the Landlord that accounted for the company's tax liabilities. Assuming, for the purposes of this motion to dismiss, that W & S failed to account for city taxes and that such failure led to a lower settlement amount with the Landlord, W & S might be liable to Leggiadro for the difference between the settlement amount that Leggiadro obtained and the [*4]amount it would have received if the amount accounted for city taxes. Contrary to W & S's contentions, this damages calculation is not speculative. "
 

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