Corp.Orex Companies LLC v. Rose

713 F.Supp.2d 678

CORPOREX COMPANIES, LLC., et al., Plaintiffsv.PROSKAUER ROSE, LLP., Defendant.

Civil Action No. 2009-08.

United States District Court,

E.D. Kentucky,

Northern Division,

at Covington.

May 19, 2010.

Richard S. Wayne, Thomas P. Glass, Strauss & Troy, LPA, Cincinnati, OH, for Plaintiffs.

Michael E. Nitardy, William T. Robinson, III, Frost, Brown, Todd, LLC, Florence, KY, Stephen M. Gracey, Frost Brown Todd LLC, Cincinnati, OH, for Defendant.

OPINION

BERTELSMAN, District Judge.

This is a legal malpractice action in which federal jurisdiction is based on diversity. The matter is before the court on defendant's motion to dismiss, pursuant to Rule 12(b)(2) and 12(b)(6).

FACTUAL AND PROCEDURAL BACKGROUND

This case arises out of an allegedly spurious tax shelter which was entered into by plaintiffs, Corporex Companies, LLC, Corporex Realty & Investments, LLC, and Corporex Investments, LLC, based on the legal opinion of defendant Proskauer Rose, LLP. The opinion stated the tax shelter was permissible and advantageous under Internal Revenue Service regulations and other provisions of tax law. The particular tax shelter was marketed and sold to Corporex by Diversified Investments.¹ Much to Corporex's chagrin, the tax shelter and its associated tax deductions were not approved of by the IRS. The IRS sought an adjustment of Corporex's tax returns, claiming an underpayment of approximately $9,000,000.00 in taxes. Corporex Companies, Corporex Realty & Investments, and Corporex Investments now bring their claim of legal malpractice against Proskauer Rose.

The Parties

Corporex Companies is a privately-held Kentucky limited liability corporation with its principal place of business in Covington, Kentucky. Corporex Companies is a holding company for various other companies which engage in real estate, development, and investment activities.

Corporex Realty & Investments (Corporex R & I) is also a privately-held Kentucky limited liability corporation with its principal place of business in Covington, Kentucky. Corporex R & I is a subsidiary of Corporex Companies.

Corporex Investments is a Delaware limited liability company with its principal place of business in Covington, Kentucky. Corporex Investments was formed in 2001 to conduct activities, including, but not limited to, investing in foreign currency. Corporex R & I is a major shareholder in Corporex Investments.

Corporex Companies, Corporex R & I and Corporex Investments are all plaintiffs to this action and will be referred to collectively as “Corporex.”

Proskauer Rose LLP (Proskauer) is a law firm with its principal place of business in New York. According to the plaintiffs, Proskauer is a law firm that deals with complex financial transactions and attendant tax issues.

Chronology of Events

Sometime in the Fall of 2001, Corporex entered into a tax shelter investment that was marketed and sold to them by Diversified Investments (Diversified). Corporex paid Diversified a fee of over $800,000.00 for this investment. As part of Diversified's marketing of this particular tax shelter, Corporex was provided with a copy of a thirty-page opinion letter.

In essence, the letter stated that the tax shelter investment was legitimate and that, if any of the tax deductions that stemmed from it were challenged by the IRS, “there is a greater than 50 percent likelihood that the tax treatment of the Transactions would be upheld....” (Doc. # 15-1). The opinion letter also contained other reassurances as to the legitimacy of the tax shelter with statements such as: “[I]t is more likely than not that the conclusions set forth herein would be upheld by a court if the conclusions are challenged by the IRS.” Id.

Curiously, there was no date on this letter (only the year 2001 appears at the top) nor was there any identifying information as to whom might have drafted the letter. The letter was not addressed to any particular party.

On April 5, 2002, Corporex received another thirty-page opinion letter, this time from Proskauer. The April 5, 2002 letter was issued on Proskauer letterhead and is similar in form and content to the aforementioned 2001 letter. However, this second opinion letter also contains detailed descriptions of multiple transactions conducted by Corporex as a part of the tax shelter. All of the transactions took place during the 2001 tax year. The April 5, 2002 letter also contains assurances of legitimacy of the tax shelter investment, similar to those found in the 2001 opinion letter, such as: “Based upon the foregoing, there is a greater than 50% likelihood that the tax treatment of the Transactions would be upheld if challenged by the IRS.” (Doc. # 15-5). Proskauer does not deny drafting and issuing this letter to Corporex. In exchange for this opinion letter, Proskauer collected a substantial fee.

On April 15, 2005, the IRS sent Corporex a Notice of Final Partnership Administrative Adjustment (FPAA) for the tax year ending in 2001. The letter was essentially a deficiency notice in which the IRS disallowed the tax deductions claimed by Corporex as a result of their transactions in the tax shelter sold to them by Diversified. The IRS adjusted Corporex's tax liability for 2001, which resulted in an underpayment of approximately $9,000,000.00 in taxes. Corporex made a “good faith deposit” with the Secretary of the Treasury for this amount on September 8, 2005. Then, Corporex went on the offensive.

On September 9, 2005, Corporex filed suit against the IRS and the United States, seeking to overturn the IRS tax adjustments assessed in the April 15, 2005 deficiency notice.² In the course of this litigation between Corporex and the IRS, a settlement was reached by the parties. The U.S. Department of Justice, Tax Division, sent a letter to Corporex memorializing the settlement agreement, dated February 11, 2008. Corporex and the IRS entered into a joint stipulation of dismissal, and the case was dismissed on March 12, 2008.

Now we turn to the case at bar. Corporex brought their current suit against Proskauer by filing a complaint on January 16, 2009. (Doc. # 1).

Corporex opted to seek a waiver of service from Proskauer, in accordance with Fed. R. Civ. P. 4(d). Corporex mailed the waiver of service form to Proskauer on January 20, 2009. (Doc. # 10-1, # 24). The waiver of service form appears to have been signed by Proskauer on February 19, 2009. (Doc. # 10-1).

On March 9, 2009, Proskauer asked Corporex for an extension of time to respond to the complaint. (Doc. # 24). Corporex agreed to allow Proskauer additional time to respond, and an agreed order for an extension of time was entered on March 17, 2009. (Doc. # 5).

It is unclear from the record exactly when the executed waiver of service form was returned to Corporex. However, the executed waiver of service form was not filed with the court until April 22, 2009. (Doc. # 10). One day earlier, Proskauer moved to dismiss the complaint, arguing that the statute of limitations had run. (Doc. # 9).

Corporex subsequently filed an amended complaint on June 1, 2009. (Doc. # 15).

The matter is now before the court on Proskauer's motion to dismiss on the basis of the statute of limitations (Doc. # 21), Corporex's response in opposition (Doc. # 24), and Proskauer's reply (Doc. # 28).

The court heard oral arguments on the matter on April 6, 2010. (Docs. # 37, # 38). The parties have also filed supplemental memoranda in support of their respective positions (Docs. # 39, # 40), which the court has also taken into consideration.

ANALYSIS

The facts of this case are complex. Equally complex is the statute of limitations issue.

There have been several cases, at both the state and federal levels, concerning when a claim of legal malpractice accrues under Kentucky law. As briefed by the parties, this issue requires the court to consider the following:

Under Kentucky law,

1. When did the cause of action for legal malpractice accrue?

2. On what date was this action “commenced”? ³

Under the Erie Doctrine, issues concerning the commencement of the running of the statute of limitations are controlled by state law. Ragan v. Merchants Transfer & Warehouse Co., 337 U.S. 530, 533, 69 S.Ct. 1233, 93 L.Ed. 1520 (1949); Walker v. Armco Steel Corp., 446 U.S. 740, 752, 100 S.Ct. 1978, 64 L.Ed.2d 659 (1980); Bowden v. City of Franklin, Kentucky, 13 Fed.Appx. 266, 274 (6th Cir.2001).

The Kentucky statute of limitations for professional malpractice provides:

[A] civil action, whether brought in tort or contract, arising out of any act or omission in rendering, or failing to render, professional services for others shall be brought within one (1) year from the date of the occurrence or from the date when the cause of action was, or reasonably should have been, discovered by the party injured.

Ky.Rev.Stat. Ann. § 413.245 (2009). Under this statute, how is the date of the “occurrence” determined? ⁴

In Northwestern Nat'l Ins. Co. v. Osborne, 573 F.Supp. 1045 (E.D.Ky.1983) [hereinafter Osborne I ],⁵ an attorney was hired by Northwestern National Insurance Company to defend an action in state court brought by a homeowner who sued for wrongful denial of her claim under her homeowner's policy.

In the course of the litigation, a default was entered against the insurance company by the state court because of misconduct by the insurance company's attorney. The insurance company ultimately settled with the homeowner and obtained an assignment of claims against the attorney who had been representing it. The insurance company then filed a malpractice suit against its former attorney in this court.

The attorney defended by arguing that the statute of limitations had run on the insurance company's claim of malpractice. After a thorough examination of the controlling case law at the time, this court denied the attorney's motion to dismiss on the statute of limitations grounds.

The attorney had argued that the statute of limitations began to run when the default order...