Thursday, November 9, 2017

Malpractice Claim Resurrected In West Virginia

Tax advice given in connection with the sale of the Kay Company led to a lawsuit against McGuireWoods by the double-taxed sellers.

The law firm was granted summary judgment below

As grounds for its motion, MW argued that the petitioners’ settlement with the IRS stood as a bar to any final adjudication concerning the legality of the IRS assessment and the related issue of whether its tax advice to the petitioners constituted legal malpractice. Through its ruling issued on May 27, 2015, the circuit court granted MW’s renewed motion for summary judgment. Concluding that the IRS settlement prevented the petitioners “from establishing the requisite causal connection between the alleged wrongful acts or omissions of McGuireWoods . . . and any damages,” the circuit court dismissed the complaint with prejudice. The circuit court similarly dismissed the claim of Mrs. Graham based on its finding that she “has not suffered damages because of any alleged malpractice by” MW.

Not so fast, says the West Virginia Supreme Court of Appeals in this opinion remanding the malpractice claims

At the center of the challenged rulings is the postulate that the absence of a tax court ruling validating the IRS assessment automatically precludes any claim by the petitioners against McGuireWoods arising from its legal advice. Because the shareholders elected to settle after incurring substantial legal fees in challenging the tax assessments, the circuit court ruled that certain issues bearing on the petitioners’ claims against MW can never be adjudicated. While both the circuit court and MW view this Court’s decision in Calvert as compelling this conclusion, a judicious reading of that opinion demonstrates otherwise. See 217 W.Va. 684, 619 S.E.2d 197.

The issue presented in Calvert was whether the intended beneficiaries of a will had standing to bring a malpractice claim where a settlement precluded a determination of whether the will had properly effectuated the testator’s intent...

Despite this favorable ruling on standing, we further determined that the Calvert beneficiaries could not pursue a malpractice claim “under the particular facts of this case” given their inability to demonstrate “they had suffered damages that were proximately caused by attorney malpractice.” 

Notably

By insisting that the IRS settlement precludes any subsequent determination of negligence on its part, MW demonstrates a flawed understanding of Calvert. Moreover, MW goes further astray in claiming that the petitioners’ proof of damages is dependent on a judicial upholding of the IRS tax assessment. Critically, the petitioners have not limited the recovery they seek from MW to the amounts they paid to settle the IRS tax assessment. The nature of their malpractice-based claims is decidedly broader than that...

In specifying the damages they are seeking, the Petitioners aver the following: “Plaintiffs have been required to pay additional taxes, penalties and interest and incur legal fees, costs and expenses, . . . and have been embarrassed, humiliated, suffered emotional distress, lost income and opportunity in their business and personal finances and business, have suffered annoyance and inconvenience and have otherwise been damaged.” Without a doubt, the IRS settlement is a component of the damages that the Petitioners seek.

Critically, however, the damage averments and the ad damnun clause are not confined to or limited by the amount of the IRS settlement.

While MW faults the petitioners for settling with the IRS rather than litigating until the issuance of a Tax Court ruling, the law does not penalize the petitioners for their decision. In fact, as we made clear in syllabus point four of Morris, the law encourages the mitigation of damages...

Enough to remand on some claims

we reverse the findings that the petitioners’ claims of legal malpractice, negligent misrepresentation, and fraud fail as a matter of law due to their settlement with the IRS; accordingly, this matter is remanded to the circuit court to permit the petitioners to proceed on their claims of legal malpractice, negligent misrepresentation, and fraud.

(Mike Frisch)

http://lawprofessors.typepad.com/legal_profession/2017/11/tax-advice-given-in-connection-with-the-sale-of-the-kay-company-led-to-a-lawsuit-against-mcguirewoods-by-the-double-taxed-sel.html

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