Chang Yi Chen v Zhen Huang   2014 NY Slip Op 50517(U)   Decided on March 31, 2014  Supreme Court, Kings County  Schmidt, J. is ostensibly about a single real estate deal, but it discusses two very significant issues.  One is the very nature of legal malpractice damages and the other is when interest paid by plaintiff is a recoverable damage.  We’ll cover one today and one tomorrow.

"Plaintiff Chang Yi Chen alleges that defendant Zhen Huang, Esq., failed properly effectuate a real estate transaction intended to be structured as a "like-kind exchange" under Internal Revenue Code (26 USC) § 1031 in order to defer payment of capital gains taxes on the transaction.[FN1] Plaintiff alleges that he approached defendant, who held herself out as an attorney who specialized in real estate transactions, for advice regarding the tax consequences of selling property he owned in order to purchase another property. Defendant allegedly informed plaintiff that he could avoid paying capital gains taxes on the sale and purchase of a new property by way of a section 1031 transfer. Plaintiff thereafter retained defendant to represent him in the sale and purchase of properties through a section 1031 exchange.

On May 28, 2009 plaintiff entered into an agreement to purchase a property (Purchase Property) and on June 15, 2009, reached an agreement to sell the property he owned (Sale Property). Plaintiff alleges that these properties qualified as "like kind property" for purposes of a section 1031 exchange. The closing for the Sale Property occurred on September 1, 2009, and defendant held the proceeds of this sale in escrow until September 2, 2009, when she transferred these proceeds back to plaintiff. At a closing held on November 1, 2009, plaintiff used these sale proceeds to purchase the Purchase Property. Although plaintiff believed that these actions were sufficient to qualify for section 1031 tax treatment, the United States and New York State tax authorities thereafter issued tax warrants notifying plaintiff of deficiencies and penalties because the property transfers did not qualify for section 1031 treatment. According to plaintiff, the transfer did not qualify for such treatment because the proceeds from the sale of the Sale Property were held by defendant in escrow and then released directly to plaintiff in contravention of section 1031’s requirement that such proceeds be held by a "qualified intermediary."

Plaintiff has since commenced this action, alleging causes of action for breach of contract, breach of fiduciary duty and legal malpractice based on defendant’s alleged failure to insure that the transactions qualified for section 1031 treatment. Defendant now moves for summary judgment dismissing the complaint on the ground that, regardless of whether defendant committed malpractice in failing to effectuate a section 1031 exchange, plaintiff has not alleged any compensable damages. In this respect, defendant, pointing to the complaint, asserts that "plaintiff only seeks to recover the tax liabilities he incurred from the sale of the 57th Street property" (Memorandum of Law at 6). According to defendant, such damages are not recoverable because a section 1031 exchange only defers the payment of capital gains tax until the replacement property is sold, and that as such, plaintiff may not recover the capital gains tax he was required to pay since such a recovery would constitute [*3]a windfall. In addition, as plaintiff has not sold the Purchase Property,[FN2] a determination of the capital gains taxes he will owe with respect to the sale of the property would be unduly speculative. "

The Court eventually rules against Plaintiff on damages from the taxes paid.  

"In conjunction, these principles preclude plaintiff from recovering as damages the amount he paid to the IRS as capital gains taxes, at least on the facts here, where plaintiff has not sold the replacement property. In this regard, in a properly completed section 1031 exchange, the basis from the property sold becomes the basis for the replacement property, and the recognition of any gain or loss is deferred until the replacement property is sold in a sale that does not involve a section 1031 exchange (see Ocmulgee Fields, Inc. v C.I.R., 613 F3d 1360, 1364-1365 [11th Cir 2011]). The tax consequences of such a deferral depend on many factors, including any change in the capital gains tax rate, IRS rules for determining capital gains, market forces affecting the value of the property, and plaintiff’s ability to offset the gain against the losses (see generally Internal Revenue Code [USC] § 1001; Internal Revenue Code [USC] subtitle A, Chapter 1, subchapter P; IRS, Topic 409 – Capital Gains & Losses, [last reviewed or updated Feb. 27, 2014, accessed March 28, 2014]). As plaintiff has not sold the Purchase Property, any determination at this time that his capital gains liability would be less at the time of a future sale of the Purchase Property than he was actually required to pay involves future changeable events, and is thus inherently speculative (see Farrar, 73 NY2d at 804; Solin, 501 Fed Appx at 22; see also Ashland Mgt. Inc, 82 NY2d at 403; see also Menard M. Gertler, M.D., P.C., 40 AD3d at283; Alpert, 160 AD2d at 71-72).[FN4] 

On the other hand, plaintiff may be entitled to recover the amounts paid to the IRS as interest and penalties. Interest imposed by the IRS based on a failure to pay a tax generally may not be recovered as damages because the interest represents a payment to the IRS for the taxpayer’s use of the money while the taxpayer was not entitled to the use of the money (see Shalam v KPMG LLP, 43 AD3d 752, 754 [1st Dept 2007]; Alpert, 160 AD2d at 72). Here, however, plaintiff, but for defendant’s alleged malpractice, would have been entitled to the use of this money during the time for which IRS imposed interest. As such, plaintiff suffered a loss as the result of the IRS’s imposition of interest and plaintiff’s recovery of damages for such a loss would not constitute a windfall (see Jamie Towers Hous. Co. v William B. Lucas, Inc.,, 296 AD2d 359, 359-360 [1st Dept 2002]; Ronson v Talesnick, 33 F Supp2d 347, 355 [DNJ 1999]; see also Liebowitz v Kolodny, 24 AD3d 733, 733 [2d Dept [*5]2005]; Apple Bank for Sav., 2009 NY Slip Op 50948 * 6-7). For the essentially the same reasons, any penalty imposed by the IRS may be recovered as damages.[FN5]

Accordingly, defendant has failed to demonstrate her initial summary judgment burden of demonstrating, as a matter of law, that plaintiff cannot recover damages. As such, this portion of defendant’s motion must be denied regardless of the sufficiency of plaintiff’s opposition papers (see Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]). The court further notes that the motion turns almost entirely on the pleadings and that the only evidentiary fact before the court is plaintiff’s admission that he has not sold the Purchase Property. Thus, to the extent that this motion, couched as a motion for summary judgment, should more appropriately be addressed as a motion to dismiss for failing to state a cause of action pursuant to CPLR 3211 (a) (7) (see Light v Light, 64 AD3d 633, 634 [2d Dept 2009]), the motion is denied because plaintiff has adequately pleaded that he suffered some cognizable damage as the result of the alleged malpractice (see Kocak v Egert, 280 AD2d 335, 336 [1st Dept 2001]). "




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Andrew Lavoott Bluestone

Andrew Lavoott Bluestone has been an attorney for 40 years, with a career that spans criminal prosecution, civil litigation and appellate litigation. Mr. Bluestone became an Assistant District Attorney in Kings County in 1978, entered private practice in 1984 and in 1989 opened…

Andrew Lavoott Bluestone has been an attorney for 40 years, with a career that spans criminal prosecution, civil litigation and appellate litigation. Mr. Bluestone became an Assistant District Attorney in Kings County in 1978, entered private practice in 1984 and in 1989 opened his private law office and took his first legal malpractice case.

Since 1989, Bluestone has become a leader in the New York Plaintiff’s Legal Malpractice bar, handling a wide array of plaintiff’s legal malpractice cases arising from catastrophic personal injury, contracts, patents, commercial litigation, securities, matrimonial and custody issues, medical malpractice, insurance, product liability, real estate, landlord-tenant, foreclosures and has defended attorneys in a limited number of legal malpractice cases.

Bluestone also took an academic role in field, publishing the New York Attorney Malpractice Report from 2002-2004.  He started the “New York Attorney Malpractice Blog” in 2004, where he has published more than 4500 entries.

Mr. Bluestone has written 38 scholarly peer-reviewed articles concerning legal malpractice, many in the Outside Counsel column of the New York Law Journal. He has appeared as an Expert witness in multiple legal malpractice litigations.

Mr. Bluestone is an adjunct professor of law at St. John’s University College of Law, teaching Legal Malpractice.  Mr. Bluestone has argued legal malpractice cases in the Second Circuit, in the New York State Court of Appeals, each of the four New York Appellate Divisions, in all four of  the U.S. District Courts of New York and in Supreme Courts all over the state.  He has also been admitted pro haec vice in the states of Connecticut, New Jersey and Florida and was formally admitted to the US District Court of Connecticut and to its Bankruptcy Court all for legal malpractice matters. He has been retained by U.S. Trustees in legal malpractice cases from Bankruptcy Courts, and has represented municipalities, insurance companies, hedge funds, communications companies and international manufacturing firms. Mr. Bluestone regularly lectures in CLEs on legal malpractice.

Based upon his professional experience Bluestone was named a Diplomate and was Board Certified by the American Board of Professional Liability Attorneys in 2008 in Legal Malpractice. He remains Board Certified.  He was admitted to The Best Lawyers in America from 2012-2019.  He has been featured in Who’s Who in Law since 1993.

In the last years, Mr. Bluestone has been featured for two particularly noteworthy legal malpractice cases.  The first was a settlement of an $11.9 million dollar default legal malpractice case of Yeo v. Kasowitz, Benson, Torres & Friedman which was reported in the NYLJ on August 15, 2016. Most recently, Mr. Bluestone obtained a rare plaintiff’s verdict in a legal malpractice case on behalf of the City of White Plains v. Joseph Maria, reported in the NYLJ on February 14, 2017. It was the sole legal malpractice jury verdict in the State of New York for 2017.

Bluestone has been at the forefront of the development of legal malpractice principles and has contributed case law decisions, writing and lecturing which have been recognized by his peers.  He is regularly mentioned in academic writing, and his past cases are often cited in current legal malpractice decisions. He is recognized for his ample writings on Judiciary Law § 487, a 850 year old statute deriving from England which relates to attorney deceit.