This case, in which DP represented AmBase Corp. involved litigation in a tax matter. AmBase sued DP on the theory that it never owed taxes, and DP failed to represent it carefully. Supreme Court, New York County dismissed the case, the AD 1 affirmed, the Court of Appeals granted leave to appeal, and then affirmed, Joel Stashenko of Law Com writes:
"Davis Polk was retained in 1992 to represent AmBase in a dispute over about $20 million in federal withholding taxes the Internal Revenue Service sought from the company for 1979 through 1985. In May 2001, the U.S. Tax Court ruled that AmBase owed none of the money sought by the IRS.
Though it won the tax case, AmBase balked when Davis Polk submitted a bill for a $1,424,104 "success fee" that was provided for in the retainer agreement between the company and the firm. The fee was calculated at 150 percent of Davis Polk’s billed time, subject to a $2 million cap. AmBase filed a legal malpractice claim and sought to have Davis Polk return previously paid legal fees.
It contended that Davis Polk should have informed the company sooner that it did not appear AmBase would be liable for any of the taxes sought by the IRS. AmBase argued that its financial condition was weakened, and its economic opportunities were limited, because it had to carry a large loss reserve for years on the possibility that it could lose the tax case.
Both Manhattan Supreme Court Justice Louis B. York and the Appellate Division, 1st Department, in AmBase Corporation v. Davis Polk & Wardwell, 30 A.D. 3d 171, 172 (2006), dismissed the complaint. Both lower courts, like the Court of Appeals on Thursday, found AmBase’s contention that it suffered from the lack of earlier notice it was probably off the hook for the tax bill "purely speculative" and an insufficient basis for a legal malpractice claim.
In AmBase Corp. v. Davis Polk & Wardwell, 51, Judge Carmen Beauchamp Ciparick wrote Thursday that Davis Polk "exercised the ordinary reasonable skill and knowledge commonly possessed by a member of a legal profession" as established under McCoy v. Feinman, 99 N.Y. 2d 295, 301-302 (2002). "