Thies v Bryan Cave LLP
Annotate this CaseDecided on March 14, 2006
Supreme Court, New York County
Dennis W. Thies, WILLIAM F. THIES, JR., THOMAS J. THIES, JAMES H. THIES, WILLIAM F. THIES, SR., and WILLIAM F. THIES, SR., WILLIAM F. THIES, JR., and BRUCE MILLS as CO-TRUSTEES for the IRREVOCABLE TRUST OF CHRISTOPHER J. THIES and the IRREVOCABLE TRUST OF DENNIS P. THIES, Plaintiffs,
against
Bryan Cave LLP, PROSKAUER ROSE LLP, Defendants.
601036/05
Charles E. Ramos, J.
In motion sequence 001, defendant Bryan Cave LLP (Bryan Cave) moves to stay this action pending arbitration. In motion sequence 002, defendant Proskauer Rose LLP (Proskauer) moves to dismiss plaintiffs' fifth and sixth causes of action; to strike plaintiffs' claims for back taxes, interest, and punitive damages; and to dismiss the claims by plaintiffs James H. Thies, Thomas J. Thies, William F. Thies, Jr., and William F. Thies, Sr., in their individual capacities, due to lack of standing. Proskauer also seeks an order, pursuant to CPLR 2201, staying the above-captioned proceedings pending arbitration, should the Court grant Bryan Cave's motion.
Background
This action arises out of legal advice that the defendants Bryan Cave and Proskauer provided to the plaintiffs with respect to certain investment partnerships and their tax consequences. Plaintiffs allege that, in 2001 and 2002, their accountants, McGladrey & Pullen LLP ("McGladrey"), recommended certain investment partnerships as a way of reducing taxes owed on capital gains that plaintiffs realized on the restructuring of their beverage distribution business. Plaintiffs decided to participate in these investment partnerships, and as part of the "package," plaintiffs received legal opinions from Bryan Cave and Proskauer. See October 17, 2005 Transcript, p 15.
In February 2002, Bryan Cave sent each plaintiff a separate letter of engagement ("Engagement Letter"), setting forth the scope of representation. Each letter provided, in bold capitalized type, that, "THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES." See Letters of Engagement, Affidavit of Ann Schofield, Exhibits A - G. Each plaintiff signed their individual letter directly under this provision. In addition, a Statement of Engagement Terms and Billing Practices ("Statement") was attached to each Engagement Letter. The Statement affirmed that disputes would be settled by arbitration, and provided that,
"[T]he arbitration shall be held in the City of New York
by a panel of three arbitrators, all of whom must be
practicing attorneys in that city, with one arbitrator
to be selected by each party and the third to be chosen
by the two arbitrators selected by the parties. The [*2]
arbitrators may establish such rules for the conduct
of the arbitration as they may choose, except that
there shall be no discovery and any proceedings
conducted shall be private and confidential and
shall not be disclosed to the public by either the
arbitrators or the parties to the arbitration. The
award of the arbitrators must be by a majority vote
and shall be final and binding, not subject to challenge
by either party in any court of law. Each party shall
bear its own costs of the arbitration and shall pay
one-half of the costs of the proceeding."
See Letters of Engagement, Affidavit of Ann Schofield, Exhibits A - G.
In March 2002, Bryan Cave sent the plaintiffs its written legal opinion on the partnership investments.
On March 27, 2003, plaintiffs Dennis W. Thies and Bruce Mills, as trustee for the irrevocable trusts of Christopher J. Thies and Dennis P. Thies, entered into a representation agreement ("Representation Agreement") with Proskauer, to render tax opinions in connection with certain partnership investment transactions conducted in 2002. See Proskauer Representation Agreement, Affirmation of David M. Lederkramer, Exhibit B. In April 2003, Proskauer sent the final draft of its legal opinion regarding the tax consequences of these partnership investments.
According to the plaintiffs, the Internal Revenue Service ("IRS") contacted them, and questioned the validity of the partnership investments. Plaintiffs allege that Bryan Cave and Proskauer did not assist them after the IRS began investigating the partnerships. On May 5, 2004, plaintiffs further allege that the IRS announced that taxpayers who invested in "Son of Boss" transactions, like the partnerships, had until June 21, 2004 to accept a settlement with the IRS. Plaintiffs did not challenge the IRS, and settled with them, paying back taxes, interest, and penalties.
Plaintiffs' amended complaint, dated April 29, 2005, asserts separate claims for legal malpractice, breach of fiduciary duty, and breach of contract against Bryan Cave and Proskauer.
Analysis
Motion Sequence 001
In motion sequence 001, Bryan Cave moves to stay this action pending arbitration. Plaintiffs argue that a stay is not warranted, because the arbitration clause contained in the Engagement Letters cannot be enforced. Plaintiffs assert that Bryan Cave's failure to disclose the consequences of the agreement to arbitrate, and plaintiffs lack of informed consent, in conjunction with Bryan Cave's superior knowledge, render the arbitration clause unenforceable. The Court finds plaintiffs' arguments without merit.
Plaintiffs rely on the well settled law that an attorney owes a duty to his client to fully disclose any implications of a contract entered into between the attorney and client. See Greene v Greene, 56 NY2d 86 (1982). However, the case law that plaintiffs cite involves situations where the attorneys entered into contracts outside the scope of representation, or contracts involving fee arrangements. See also Greene, supra; Mar Oil, S.A. v Morrissey, 982 F2d 830 (2nd Cir 1993); Sun Forest Corp. v Shvili, 152 F Supp2d (SDNY 2001). Nevertheless, although New York courts have yet to address the issue of disclosure in regard to arbitration agreements, this Court finds that the duty of disclosure would be applicable to such agreements.
Applying this law, plaintiffs argue that Bryan Cave never explained the meaning or consequences of the arbitration clauses, and thus, violated its duty to disclose. This Court disagrees. The Engagement Letters, themselves, clearly disclosed the existence, scope, and implications of the arbitration provisions. The arbitration provisions plainly informed the [*3]plaintiffs that arbitration was binding; the method in which the panel of arbitrators would be selected; and the basic rules, including that there would be no discovery and the proceedings would be confidential. The provision also explained how an award would be achieved, that any award would be final, and the cost sharing for the proceedings. This clearly informed the plaintiffs of the consequences of arbitration. Further, plaintiffs have failed to show that Bryan Cave was required to verbally explain the provisions of the Engagement Letter to them. Plaintiffs also could have asked Bryan Cave to further explain any provision they did not understand before signing the letters.
Plaintiffs also rely on the New York County Lawyers' Association Ethics Opinion No. 723 (NYCLA Opinion 723), which addresses whether an attorney may agree with a client, in a retainer agreement, to arbitrate all disputes. NYCLA Opinion 723 concluded that such agreements were enforceable if the client is fully informed of the consequences of the arbitration clause. However, as discussed above, the provision itself fully informed the plaintiffs as to the scope and effect of arbitration.
The Court also finds that the arbitration provision is not unconscionable, as plaintiffs argue. In New York, arbitration is strongly favored as a matter of public policy [Matter of Smith Barney Shearson, Inc. v Sacharow, 91 NY2d 39 (1997)], and thus, it would be difficult to find an arbitration clause unconscionable.
Further, "a determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made i.e., some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party." Gillman v Chase Manhattan Bank, N. A., 73 NY2d 1, 10 (1988) (internal quotation marks and citations omitted). An unconscionable contract is one that "is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforceable according to its literal terms." Id. Applying this standard, the arbitration provision contained in the Engagement Letters is not unreasonable, because it is not grossly unreasonable for a large law firm, with many clients, to require that the client agree to arbitration if a dispute arises. cf. Sablosky v Edward S. Gordon Co., 73 NY2d 133 (1989)(in relation to an employment agreement).
This Court does not accept plaintiffs' claim that the Engagement Letters are contracts of adhesion. This Court sees no evidence of high pressure tactics, or deceptive language in the agreements. Plaintiffs also rely on the fact that Bryan Cave did not "explain" the arbitration provision to them. However, this Court has concluded that Bryan Cave did not need to explain the provision in any further detail, as the provision was adequately self-explanatory.
Therefore, in light of the fact that arbitration is strongly favored as a matter of public policy, that Bryan Cave met its duty to disclose, and that the arbitration provisions are not unconscionable, the Court stays this action as to defendant Bryan Cave. Plaintiffs and Bryan Cave shall proceed to arbitration.
Motion Sequence 002
In motion sequence 002, Proskauer moves to dismiss plaintiffs' fifth and sixth causes of action; to strike plaintiffs' claims for back taxes, interest, and punitive damages; and to dismiss the claims by plaintiffs James H. Thies, Thomas J. Thies, William F. Thies, Jr., and William F. Thies, Sr., in their individual capacities due to lack of standing. Proskauer also seeks an order, pursuant to CPLR 2201, staying the above-captioned proceedings pending arbitration, should the Court grant Bryan Cave's motion.
Proskauer argues that plaintiffs' claims for breach of contract and breach of fiduciary duty are duplicative of their legal malpractice claim. In order to maintain its claim for breach of fiduciary duty, the allegations cannot "track[s] the allegations of the malpractice claim," and plaintiffs must have alleged an intentional tort independent from the malpractice claim. See CVC Capital Corp. v Weil, Gotshal, Manges, 192 AD2d 324, 325 (1st Dept 1993). Here, the allegations of plaintiffs' breach of fiduciary duty claim mirror those for legal malpractice. [*4]Plaintiffs have alleged the same wrongful conduct for both claims. Plaintiffs have not alleged an intentional tort independent from the alleged legal malpractice. Although plaintiffs allege that Proskauer placed its own financial and other interests before the plaintiffs' interests, these allegations still arise out of Proskauer's alleged legal malpractice. Therefore, the breach of fiduciary duty claim is duplicative.
A cause of action for breach of contract against an attorney will be "dismissed since the cause of action, as pleaded, does not rest upon a promise of a particular or assured result and only claims a breach of general professional standards which is viewed as a redundant pleading of a malpractice claim." Senise v Mackasek, 227 AD2d 184, 185 (1st 1996) (internal quotation marks and citations omitted). Here, plaintiffs allege that Proskauer breached its "contract by failing to render tax advice with the ordinary reasonable skill and knowledge commonly possessed by members of the legal profession." See Amended Complaint, ¶ 42. This claim is also duplicative of plaintiffs' legal malpractice claim, because it merely alleges Proskauer's malpractice in failing to render tax advice, upon which the plaintiffs could reasonably rely. Therefore, the causes of action for breach of fiduciary duty and breach of contract are dismissed, without prejudice, as duplicative. As this Court stated at oral argument, if discovery uncovers something that would not fall under the legal "malpractice umbrella," either cause of action can always be restored. See October 17, 2005 Transcript, p 38-39.
Proskauer also moves to strike plaintiffs' claims for back taxes, interest, and punitive damages. Plaintiffs state they are not seeking back taxes. Thus, this part of Proskauer's motion is moot, and need not be addressed.
The next issue is whether plaintiffs are entitled to claim interest. Proskauer argues that New York law does not permit such a recovery. Proskauer cites Alpert v Shea Gould Climenko & Casey, [160 AD2d 67 (1st Dept 1990)], which held that a defrauded investor in a tax shelter was not entitled to recover interest paid to the IRS upon disallowance of tax deductions, because such interest was not damages suffered by the investor. Rather, the interest was a payment to the IRS for the investor's use of the money during the period of time when he was not entitled to it. Thus, as this Court held at oral argument, the plaintiff are not entitled to interest, in light of the First Department's holding. See October 17, 2005 Transcript, p 44.
Although plaintiffs argue that the more recent holding in Jamie Towers Hous. Co. v William B. Lucas, Inc., [296 AD2d 359 (1st Dept 2002)], is applicable, the Court disagrees. Jamie Towers involved a residential cooperative whose managing agent failed to timely pay the cooperative's taxes for the 1991/1992 tax year. The First Department held that the recovery of interest "would not constitute an impermissible windfall or put plaintiff in a better position' than it was prior to the managing agent's alleged misfeasance." Jamie Towers Hous. Co., supra, at 359-60. In the case at bar, plaintiffs made a decision not to pay the taxes in question, and plaintiffs had use of the money during the period that their taxes remained unpaid. Thus, plaintiffs' recovery of interest would put them in a better position, like the plaintiffs in Alpert.
Proskauer also argues that plaintiffs are not entitled to punitive damages, because they failed to meet the high pleading standard for such. This Court agrees. Plaintiffs must allege that Proskauer engaged in "egregious and willful conduct" that was "morally culpable, or is actuated by evil and reprehensible motives." Munoz v Puretz, 301 AD2d 382, 384 (1st Dept 2003). As this Court noted at oral argument, the plaintiffs have not met the high burden to sustain punitive damages at this time. See October 17, 2005 Transcript, p 53. However, the plaintiffs argue that discovery may reveal that Proskauer profited in some way from some undisclosed relationship it had with plaintiffs' accountants. Therefore, this Court is striking plaintiffs' claim for punitive damages without prejudice.
Proskauer also moves to dismiss plaintiffs James H. Thies, Thomas J. Thies, William F. Thies, Jr., and William F. Thies, Sr., in their individual capacities, for lack of standing. This motion is granted in part. Plaintiffs concede that James H. Thies, Thomas J. Thies, and William F. Thies, Jr. did not enter into engagement agreements with Proskauer, and thus, are not clients of [*5]Proskauer. Therefore, these plaintiffs are dismissed for lack of standing.
Plaintiffs do argue, however, that William F. Thies, Sr. was a client, because he received an Engagement Letter, a March 2003 draft opinion, and the final April 2003 opinion [FN1]. Plaintiffs also presented a letter dated March 28, 2003, which seems to evidence that Proskauer was giving him advice. Proskauer argues that William F. Thies, Sr. was not a client, because he never signed the Engagement Letter, and there is no evidence that he received the final April 2003 opinion. As this Court stated at oral argument, the arguments based on this type of factual context are more suited for a summary judgment motion, and not one to dismiss. See October 17, 2005 Transcript, p 35. Thus, the motion to dismiss William F. Thies, Sr. is denied.
Finally, Proskauer moves for a stay, pending the arbitration involving Bryan Cave and plaintiffs. At oral argument, this Court stayed this action, pending determination of Bryan Cave's motion, decided above. This Court stated that if the motion was granted, then the entire action will continue to be stayed pending a reasonable period of time. See October 17, 2005 Transcript, p 57. After careful review of the papers, this Court is removing that stay, as it no longer reasonable.
Plaintiffs have the right to a full and fair opportunity to litigate their claims against Proskauer, and the lack of discovery in the arbitration, as well as a stay of discovery in the litigation, raises concerns for this Court. Plaintiffs would not have a full and fair opportunity to litigate their claims against Proskauer, because, if this action was stayed and discovery did not proceed, Proskauer would have an unfair advantage, in that it might move for summary judgment, at the conclusion of the arbitration. At that point, plaintiffs would have no discovery, which they are entitled to, to defend such a motion. This Court understands that by permitting full discovery, plaintiffs may be at an advantage during the arbitration. Thus, plaintiffs are not permitted any discovery from Bryan Cave and/or from any third parties in regard to Bryan Cave.
The Court also finds that Proskauer would not be prejudiced by removing the stay. Proskauer argues that there is an identity of issues in the arbitration and litigation, particularly the issue of whether proximate cause is lacking by reason of plaintiffs' decision to settle with the IRS. However, the litigation involves a different firm, different tax opinions, and different agreements.
Proskauer is still going to have to litigate in this Court, no matter what the result of the arbitration. For example, if the stay remains in place until arbitration is completed, and the issue of proximate cause is decided in favor of Bryan Cave, Proskauer will have to successfully argue collateral estoppel in regard to that issue. Also, if the issue of proximate cause is decided in plaintiffs' favor, Proskauer will most likely seek to litigate their defenses to such before this Court. Therefore, the stay is removed as to the litigation between Proskauer and plaintiffs.
Accordingly, it is
ORDERED that defendant Bryan Cave's motion to stay this action pending arbitration is granted only as to Bryan Cave and plaintiffs; and it is further
ORDERED that the part of defendant Proskauer's motion to dismiss plaintiffs' fifth and sixth causes of action is granted without prejudice; and it is further
ORDERED that the part of defendant Proskauer's motion to strike plaintiffs' claim for back taxes is denied as moot, as plaintiffs contend that they raise no such claim; and it is further
ORDERED that the part of defendant Proskauer's motion to strike plaintiffs' claims for interest is granted; and it is further
ORDERED that the part of defendant Proskauer's motion to strike plaintiffs' claims for punitive damages is granted without prejudice; and it is further
ORDERED that the part of defendant Proskauer's motion to dismiss plaintiffs James H. [*6]Thies, Thomas J. Thies, William F. Thies, Jr. and William F. Thies, Sr., is granted in part, and denied in part. Plaintiffs James H. Thies, Thomas J. Thies, and William F. Thies, Jr. are dismissed due to lack of standing. However, William F. Thies, Sr. remains a plaintiff; and it is further
ORDERED that the part of Proskauer's motion to stay the above-captioned proceedings, pending the Bryan Cave arbitration, is denied. Plaintiffs William F. Thies, Sr., and Dennis W. Thies and Bruce Mills, as trustee for the irrevocable trusts of Christopher J. Thies and Dennis P. Thies, and defendant Proskauer shall proceed with this action. However, plaintiffs are not permitted any discovery from Proskauer and/or any third parties in regard to Bryan Cave, while arbitration is pending.
Dated: March 14, 2006
_________________________
J.S.C.
Counsel are hereby directed to obtain an accurate copy of this Court's opinion from the record room and not to rely on decisions obtained from the internet which have been altered in the scanning process.
Footnotes
Footnote 1:William F. Thies, Sr. has not presented the court with his copy of the final April 2003 opinion.
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