Big law firm gets hired to guide an unusual real estate tax deduction which goes wrong.  How do the timelines for legal malpractice, IRS tax determinations, tax years, and the filing of deeds interact?

BLDG Christopher LLC v Herrick Feinstein LLP  2016 NY Slip Op 32237(U)  October 31, 2016  Supreme Court, New York County  Docket Number: 651795/12  Judge: Barry Ostrager gives both the history and the analysis of how the statute is applied, including a discussion of the only exception to the onset of the statute of limitations.

“Pursuant to CPLR § 214(6), the statute of limitations for legal malpractice is three years, “regardless of whether the underlying theory is based in contract or tort.” Similarly, the statute of limitations for the breach of fiduciary duty claim is three years, as it is based on some of the same facts as the malpractice claim and, like the malpractice claim, seeks monetary damages rather than equitable relief. See Nichols v Curtis, 104 AD3d 526, 527 (1st Dep’t 2013). According to Herrick, the law firm’s representation of plaintiffs in connection with the matters at issue ended in May of 2005 when it issued Opinion Letters regarding the tax status of the Easement donations, and the commencement of this action seven years later in May of 2012 is untimely. Plaintiffs first argue in opposition that the action is timely because the malpractice cause of action did not accrue until in or about 2011 at the earliest, when the IRS determined to disallow the tax deductions plaintiffs had claimed on their 2004 returns and plaintiffs discovered Herrick’s alleged malpractice for the first time. As recently as this month, in Hahn v The Dewey & LeBoeuf Liquidation Trust, 2016 WL 6078932, a case directly on point, the Appellate Division, First Department, rejected such a “discovery” argument, stating that: “Although plaintiffs claim not to have discovered that this advice was incorrect until years later, ‘[w]hat is important is when the malpractice was committed, not when the client discovered it’.” Hahn, citing McCoy v Feinman, 99 NY2d 295, 301 (2002), quoting Ackerman v Price Waterhouse, 84 NY NY2d 535, 541 (1994). The Appellate Division affirmed the trial court’s dismissal of the legal malpractice claim in connection with the defendant law firm’s erroneous tax advice rendered more than three years earlier, even though plaintiffs had not discovered the error until the IRS raised it two years before the action was commenced.

Plaintiffs latch on to certain language by the Court of Appeals in McCoy and Ackerman, supra, also quoted in Hahn, that a legal malpractice claim accrues “when all the facts necessary to the cause of action have occurred and an injured party can obtain relief in court.” They argue that since they could not prove Herrick’s error until the IRS disallowed the Easement tax deduction in or about 2011, they could not prove injury and obtain relief in court. Such a reading is inconsistent with the facts and holding in Hahn discussed above. It is also contrary to other clarifying language in McCoy, where the Court of Appeals expressly found that: “Because the [defendant lawyer] was negligent in failing to assert plaintiff’s claim to preretirement death benefits in the settlement stipulation or judgment, we conclude that plaintiff suffered actionable injury on the day of the stipulation … , or at the latest, on the day the judgment incorporating the stipulation was filed in the county clerk’s office” even though plaintiff did not discover the negligence until she sought to access the death benefits years later. 99 NY2d at 301 (emphasis added). Similarly, the Court of Appeals in Ackerman found that the cause of action for accountant malpractice accrued upon the accountant’s issuance of an erroneous tax return and not years later when the IRS assessed the deficiency. 84 NY2d at 541-42. In so holding, the court explained that “the claim accrues upon the client’s receipt of the accountant’s work product since this is the point that a client reasonably relies on the accountant’s skill and advice and, as a consequence of such reliance, can become liable for tax deficiencies …. This is the time when all the facts necessary to the cause of action have occurred and an injured party can obtain relief in court …. ” Id. at 541 (citations omitted); see also, Landow v Snow Becker Krauss, P. C., 111 AD3d 795 (2d Dep’t 2013) (cause of action for legal malpractice accrued when attorney issued erroneous tax opinion letter and not when the error was raised by the IRS and discovered by client years later). As defendants have demonstrated, prima facie, that plaintiffs’ claims are timebarred based on the 2005 accrual date, the burden shifts to plaintiffs to raise a question of fact as to whether the statute of limitations was tolled. Landow, supra, 111 AD3d at 796-97. In a further attempt to shield their claims from Herrick’s statute of limitations defense, plaintiffs seek to rely on the toll available under the “continuous representation” doctrine. Specifically, plaintiffs assert that the Herrick firm continuously represented them in connection with the original engagement inasmuch as Herrick was asked for assistance with regard to the IRS audit and rendered statements for services rendered through August of 2009. Plaintiffs argue that because of the continuous representation by Herrick, the statute of limitations did not expire until three years later, after this action was commenced in May 2012. The Court of Appeals explained the continuous representation doctrine in detail in Shumsky v Eisenstein, 96 NY2d 164, 167-68 (2001) (internal quotation marks and citations omitted): The continuous representation doctrine, like the continuous treatment rule, its counterpart with respect to medical malpractice claims, recognizes that a person seeking professional assistance has a right to repose .confidence in the professional’s ability and good faith, and realistically cannot be expected to question and assess the techniques employed or the manner in which the services are rendered. ”

“As summarized more recently by the First Department, a finding of continuous representation must be based on “clear indicia of an ongoing, continuous, developing and dependent relationship between the client and the attorney” or of “a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim.” Hadda v Lissner & Lissner LLP, 99 AD3d 476, 477 (1st Dep’t 2012), quoting Matter of Merker, 18 AD3d 332, 332-33 (1st Dep’t 2005). ”

“While the dismissal of all the claims asserted by four of the five plaintiffs may .I appear harsh at the pleading stage in light of the significant value of the claims, plaintiffs are all sophisticated, long-term real estate owners and investors in the City of New York. Had plafntiffs acted in 2007 or 2008 to enter into a tolling agreement or commenced suit against Herrick when the IRS first notified plaintiffs of questions relating to the tax deductions, plaintiffs’ suit would have been timely. But plaintiffs did not act then, and this Court cannot correct that omission. “While courts have discretion to waive other time limits for good cause (see CPLR 2004), the Legislature has specifically enjoined that ‘[n]o court shall extend the time limited by law for the commencement of an action’ … ” McCoy, supra, 99 NY2d at 300 (citations omitted). And the law discussed above does not permit a toll of the statute of limitations; even assuming an ongoing relationship between Herrick and the four plaintiffs, the allegations and evidence fail to demonstrate the required “mutual understanding of the need for further representation on the specific subject matter underlying the malpractice ‘ claim” so as to entitle plaintiffs to the continuing representation toll. Id. at 306. “