Opinion
No. 06-4215-BLS2.
December 21, 2007.
MEMORANDUM OF DECISION AND ORDER ON SIDLEY AUSTIN LLP'S MOTION TO DISMISS AND TO STRIKE
INTRODUCTION
This action arises from the plaintiff's ultimately unsuccessful use of a tax shelter device on advice of the defendants. Presently before the Court are the defendant Sidley Austin LLP's Motion to Dismiss and to Strike. For the reasons that will be explained, the motion will be denied.
BACKGROUND
The background of this case appears in this Court's memorandum of decision dated August 7, 2007, on defendant Ernst Young's motion to dismiss and related motions. The following additional background not set forth there bears on the present motion.
The complaint alleges that Ernst Young and Sidley Austin "acted in concert" to promote ECS, that Ernst Young represented that "it would procure 'opinion letters' attesting to the legitimacy of the ECS strategy from the international law firm, Sidley Austin," and that "these Defendants reaped millions of dollars in fees" from executives "enticed into this scheme, which Defendants knew or should have known to be an illegitimate tax sham." The complaint further alleges that "Defendants" knew or should have known "at the time they sold ECS to Vassalluzzo" that federal authorities were investigating "abusive tax shelters" and that "if the ECS tax strategy were ever scrutinized . . . it would be disallowed." It goes on, "as part of the package sold by Defendants, Vassalluzzo was provided with lengthy tax opinions from Sidley Austin that confirmed the 'propriety' of the ECS strategy" and "supported by sales pitch that ECS was 'more likely than not' to survive a challenge by IRS."
The complaint proceeds to allege a series of events in connection with the IRS investigation of tax shelters that "Defendants knew or should have known of" and "failed to bring . . . to Vassaluzzo's attention." Ernst Young, the complaint alleges, "went to 'great lengths' to line up law firms in advance as part of the promoted package to issue an opinion on their tax products." Vassalluzzo, the complaint alleges, "never signed an engagement letter with Sidley Austin, and his entire relationship with the law firm was orchestrated by and through Ernst Young." On information and belief, the complaint alleges, "Ernst Young and Sidley Austin in fact worked together jointly to promote the tax shelters sold by Ernst Young." It goes on, "The availability of the tax opinion from a respected law firm, such as Sidley Austin, was a material part of the marketing of ECS. . . . Plaintiff was promised at the outset that a respected law firm would issue a favorable tax opinion on the ECS strategy." The overall strategy, the complaint alleges, was "fully planned by Defendants, acting in concert, in order to defer plaintiff's tax liability and earn large fees for Defendants."
The complaint goes on to describe Ernst Young's promotion of ECS to Staples and to Vassalluzzo in 2000. "As part of the marketing materials given to Vassalluzzo," it alleges, "Ernst Young represented that Sidley Austin would prepare and provide a tax opinion on the legitimacy of the ECS strategy. . . . Ernst Young further indicated to Vassalluzzo that a separate opinion from Sidley Austin was necessary each time Vasssalluzzo entered into an ECS strategy to protect him from penalties." "On information and belief," the complaint alleges, "Sidley Austin was aware of and approved the use of its name to market ECS, and was thereby complicit in the representations made to Vassaluuzzo by Ernst Young." Based on the representations he received, Vassalluzzo believed that ECS "was a legitimate strategy to defer the recognition of taxable income." Accordingly, "during 2000 and 2001, in reliance on Ernst Young's advice and the promise of an opinion from Sidley Austin," Vassalluzzo participated in ECS transactions.
Vassalluzzo engaged in three sets of transactions, two in May, 2000, and one in December, 2001. Sidley Austin issued a separate opinion letter to Vassalluzzo with respect to each set of transactions, two dated June 22, 2000, regarding the May, 2000, transactions, and the third dated February 19, 2002, regarding the December, 2001, transactions. Each letter opined that "it was 'more likely than not' that the ECS strategy as implemented for Vassalluzzo would survive a challenge by the IRS."
Each step in implementation of the transactions, the complaint alleges, "was designed, proposed and undertaken by Ernst Young and Sidley Austin." The Sidley Austin letters to Vassalluzzo and other ECS clients "included largely identical language and were predetermined as to the conclusion that would be reached. . . . Large portions of the opinion letters were prepared well in advance of their issue dates . . . The three opinions issued were boilerplate templates that are almost identical except for the dates and particular details of the mechanics of the May 2000 and December 2001 transactions." The complaint identifies specific statements in the letters that "Sidley Austin knew or should have known were false at the time they were made," particularly statements relating to the treatment that various aspects of the transactions would receive for tax purposes. Sidley Austin's opinions, the complaint alleges, "were pre-ordained conclusions, based on a strained and overly literal construal of various Code sections, pronouncements and cases." Neither Sidley Austin nor Ernst Young disclosed to Vassalluzzo the relationship between them.
Based on these allegations, as well as those summarized in the Court's earlier memorandum, Vassalluzzo asserts seven claims against Sidley Austin. Count II claims fraudulent misrepresentation, based on a list of alleged false statements and failures to disclose. Among the falsehoods listed are that the opinion letters were independent and based on the unique circumstances of the particular client. Among the failures to disclose listed are Sidley Austin's relationship with Ernst Young and the background of IRS investigation of tax shelters. Count II goes on to allege that in reliance on Sidley Austin's misrepresentations and failures to disclose, Vassalluzzo "unnecessarily gifted and sold millions of dollars worth of Staples stock and stock options, filed federal and state tax returns in 2000 and 2001 that did not reflect income from the sale of said stock and stock options, and did not avail himself of legitimate tax saving opportunities." Count IV claims negligent misrepresentation by Sidley Austin, based on the same facts; count V claims violation of G.L. c.-93A by both defendants, again based on the same facts. Count VII claims professional malpractice by Sidley Austin, alleging that the firm "failed to meet applicable standards of care, which proximately caused damage to the Plaintiff," Count VIII claims breach of fiduciary duty by both defendants, based on the same underlying facts. The fiduciary duty, the complaint alleges, arises from the defendants' status as "Plaintiffs federally registered tax practitioners, accountants and attorneys."
Count IX claims breach of contract by both defendants. It alleges that the plaintiff "entered into oral and written contracts" with both defendants "to provide him with professionally competent tax advice, legal services, accounting services, to exercise the applicable standard of care, loyalty and honesty, and to comply with all applicable rules of professional conduct," and that both defendants "ignored their obligations and instead provided Plaintiff with advice that said Defendants knew or should have known to be wrong." Count X claims breach by both defendants of the implied covenant of good faith and fair dealing, based on the same factual allegations. Finally, Count XI of the complaint claims unjust enrichment against Sidley Austin, based on fees plaintiff paid for its services.
The prayers for relief include single and multiple damages. The plaintiff's damages, as identified in various parts of the complaint, are alleged to include "fees paid to Defendants to effectuate the ECS strategy; penalties and interest imposed by federal and state tax authorities; losses incurred as the result of the unnecessary gift and transfer of millions of dollars worth of Staples stock and stock options; lost investment income; fees paid to new tax and legal advisors; and the cost of foregoing of legitimate tax saving opportunities."
Sidley Austin moves to dismiss the claims for misrepresentation, breach of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and fair dealing, all on the theory that the complaint fails to state a claim. It moves further to dismiss all claims arising from one of the two May 2000 transactions, except the c. 93A claim, as time barred. It moves also to strike certain aspects of the allegations regarding damages.
With respect to its statute of limitations argument, Sidley has submitted a copy of a tolling agreement it entered into with the plaintiff, dated November 11, 2004. The agreement recites that Sidley provided "an opinion dated June 22, 2000," and "an opinion dated February 19, 2002," referred to collectively as "the Opinion," and that the IRS "is currently examining Vassalluzzo's tax returns with regard to matters that are the subject of the Opinion." The agreement tolls the limitations period on actions with respect to "any claim" Vassalluzzo may have "arising from or related in any way to the Opinion."
DISCUSSION
I. The Motion to Dismiss.
In reviewing a motion to dismiss for failure to state a claim, the Court accepts as true "all factual allegations in the complaint" and draws "all reasonable inferences in favor of the plaintiffs. The complaint should not be dismissed unless it appears beyond a doubt that the plaintiffs can prove no set of facts which entitle them to relief." The Gen. Convention of the New Jerusalem in the United States of America, Inc. v. MacKenzie, 449 Mass. 832, 835 (2007) (internal citations omitted); see General Motors Acceptance Corp. v. Abington Casualty Ins. Co., 413 Mass. 583, 584 (1992), quoting Nader v. Citron, 372 Mass. 96, 98 (1977), quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Here, although the Court is inclined to agree with the defendant that the claims asserted in the plaintiff's complaint include several that are likely to fall by the wayside before or during trial, and that serve only to complicate the litigation process, the Court nevertheless concludes that application of this standard compels denial of the motion.
A. Misrepresentation
To state a claim of misrepresentation, either intentional or negligent, the plaintiff must allege that the defendant made a false statement of material fact, on which he reasonably relied to his detriment. See Masingill v. EMC Corporation, 449 Mass. 532, 540-541 (2007); Maffei v. Roman Catholic Archbishop of Boston, 449 Mass. 235, 255 (2007), and authorities cited. Sidley Austin argues that Vassluzzo's claims of misrepresentation must fail as a matter of law because he could not have relied on the firm's opinion letters in deciding to enter into the transactions, since he received them, in each instance, after the transaction.
The argument, in the Court's view, rests on a reading of the complaint that does not comport with the standard governing a motion to dismiss. Read in the manner required on a motion to dismiss, with all reasonable inferences drawn in favor of the plaintiff, the complaint adequately alleges that ECS was the product of a scheme undertaken by Sidley Austin and Ernst Young jointly, and that each of them performed those aspects of the scheme assigned to it on behalf of both. Thus, the complaint can fairly be read to allege that Ernst Young acted as authorized agent of Sidley Austin, and with its knowledge and consent, when it represented to the plaintiff that Sidley Austin would issue to the plaintiff independent opinion letters, providing him with professional advice based on its analysis of his particular circumstances. That representation occurred before the plaintiff engaged in the transactions. The complaint adequately alleges the plaintiffs reliance on that representation.
The complaint also alleges that the plaintiff relied on the opinion letters in filing his tax returns for each year. Sidley Austin argues that the contents of the tax returns flowed automatically from the transactions themselves, which had already occurred by the time the plaintiff received the opinion letters. That may turn out to be the case, but the Court cannot so determine based on the complaint alone. Indeed, the allegations of the complaint seem to indicate the opposite. Had the plaintiff known, prior to filing his tax returns in each of the relevant years, that the IRS would disregard the transactions, he could have filed tax returns reflecting such treatment, and thereby avoided penalties and other consequences. The complaint also alleges that the plaintiff relied on the opinion letters in declining to undertake efforts to undo the ECS transactions. Whether he could have done so is a question the Court cannot resolve at this stage, but the allegation is enough to support reliance for purposes of a motion to dismiss. The facts alleged state claims of fraudulent and negligent misrepresentation.
B. Breach of Fiduciary Duty
Sidley Austin's challenge to Count VIII, alleging breach of fiduciary duty, is not that it fails to state a claim, but merely that it duplicates Count IV, alleging legal malpractice. The Court agrees that the claims are duplicative, but that conclusion does not warrant dismissal at this stage, where each claim adequately states a claim on which relief may be granted. Obviously the plaintiff cannot recover twice. That does not mean he cannot allege multiple claims based on the same set of facts, where those facts, if proven, would support relief on alternative legal theories.
C. Contract Claims
Sidley Austin moves to dismiss the claims against it of breach of contract and breach of the implied covenant, Counts IX and X, on the ground that the complaint fails to allege the existence of any contract between it and Vassalluzzo. Vassalluzzo responds that "the attorney client relationship is essentially contractual in nature," Brown v. Gerstein, 17 Mass. App. Ct. 558, 572 (1984). He points also to the allegation of the complaint that he "entered into oral and written contracts with Ernst Young and Sidley Austin to provide him with professionally competent tax advice, legal services, accounting services, to exercise the applicable standard of care, loyalty and honesty, and to comply with all applicable rules of professional conduct."
As discussed supra, the allegations of the complaint, read favorably to the plaintiff as is required at this stage, adequately allege that ECS was the product of a joint venture between Ernst Young and Sidley Austin, and that Ernst Young acted as Sidley Austin's agent in promoting ECS based on the promise of independent opinion letters from Sidley Austin. The promotional activity alleged, in substance, amounts to an offer, made by Ernst Young on behalf of itself and Sidley Austin, to provide professional services in connection with the ECS transactions, in return for fees. The facts alleged indicate that the plaintiff accepted that offer and paid fees, but did not receive the promised independent professional opinions. Those allegations are sufficient to support the claims asserted in these counts.
D. Statute of Limitations
Sidley Austin argues that all of the claims against it, except the c. 93A claim, based on one of the two sets of ECS transactions that occurred in May, 2000, are time-barred. It reaches this conclusion by relying on the singular phrasing of "an opinion dated June 22, 2000" in the tolling agreement. With that phrasing, it contends, the tolling agreement applies only to claims based on one of the two June 22, 2000, opinion letters. As to claims based on the other — it does not indicate which is which — it argues that the claims accrued in the spring of 2003, when the plaintiff first learned that the IRS was investigating.
The tolling agreement between these parties stands in sharp contrast to the one between the plaintiff and Ernst Young, which this Court has ruled is clearly and unambiguously limited to claims arising from the 2001 transactions. This tolling agreement seems on its face intended to encompass all potential claims between the parties, with "the Opinion" intended to describe all opinions rendered to Vassalluzzo regarding ECS. On the face of the document, without evidence of surrounding circumstances, the most sensible inference would appear to be that the drafters were unaware that two opinion letters had been issued on June 22, 2000. At the very least, the singular phrasing presents an ambiguity that cannot be resolved at this stage.
Sidley Austin offers no suggestion as to how the Court would determine which of the two letters the tolling agreement referred to.
In any event, even without the tolling agreement, the Court is not persuaded that the allegations of the complaint alone establish that the claims accrued more than three years before the filing of this action. Sidley Austin's argument on this point is the same as that advanced by Ernst Young in its earlier motion, which the Court rejected, for reasons fully explained in its earlier decision. Nothing now presented persuades the Court to reconsider this issue.
II. Motion to Strike
Sidley Austin moves under Mass. R. Civ. P. 12(f) to strike those portions of Vassaluzzo's complaint that allege damages based on interest paid to state and federal tax authorities and penalties paid to state tax authorities. Rule 12(f) authorizes the Court to "order stricken from any pleading any insufficient defense, or any redundant, immaterial, impertinent, or scandalous matter." Application of this rule to strike portions of a complaint is generally disfavored, and reserved for components of a complaint that have no conceivable basis. See Seippel v. Jenkens Gilchrist, P.C., 341 F. Supp. 2d 363, 383 (S.D.N.Y. 2004) ("Motions to strike are generally disfavored and will be denied unless it is clear that under no circumstances could the demand succeed. 'Moreover, even when the facts are not disputed, several courts have noted that a motion to strike for insufficiency was never intended to furnish an opportunity for the determination of disputed and substantial questions of law'"), quoting Salcer v. Envicon Equities Corp., 744 F.2d 935, 939 (2d Cir. 1984); see Goldwyn, Inc. v. United Artists Corp., 35 F. Supp. 633, 637 (1940) ("A motion to strike should be granted only when the allegations have no possible relation to the controversy. When the court is in doubt as to whether under any contingency the matter may raise an issue, the motion should be denied").
Here, what Sidley is seeking, in substance, is an advance ruling on a matter that would ordinarily be addressed in jury instructions at trial, after full factual development. Such a ruling might be warranted if the pertinent facts and applicable law were clear. The Court is not convinced that that is the case here, with respect to either of the issues Sidley raises.
A. Interest on Back Taxes
Sidley argues that the plaintiff cannot recover damages for interest paid to tax authorities ("interest-based damages"), because he had the use of the money during the period covered by such interest. Although it appears that no Massachusetts case has addressed the issue, a number of courts in other jurisdictions have, with mixed results. The second and sixth circuits, as well as appellate courts in Alaska, Washington, and New York, have adopted the rule Sidley advocates. See Stone v. Kirk, 8 F.3d 1079, 1093 (6th Cir. 1993) (interest-based damages not recoverable "at least insofar as the IRS charged a market rate of interest" because plaintiffs "had the use of the tax money . . . until the money was belatedly turned over to the IRS"); Freschi v. Grand Coal Venture, 767 F.2d 1041, 1051 (2d Cir. 1985) ("interest and penalties were not . . . really a damage . . . at all, but a return by [the plaintiff] of what would otherwise be a windfall resulting from his opportunity to use money to which he was not entitled"), vacated on other grounds, 478 U.S. 1015 (1986); Leendertsen v. Price Waterhouse, 916 P.2d 449, 452 (Wash. Ct. App. 1996) (interest-based damages not recoverable because the plaintiffs "had the value of the use of the money . . . and would be unjustly enriched to recover that interest from another source"); Alpert v. Shea Gould Climenko Casey, 160 A.D.2d 67, 72 (N.Y. App. Div. 1990) (interest paid to IRS "was not damages to the plaintiff but rather was a payment to the IRS for use of his money during the period of time when he was not entitled to it"); Orsini v. Bratten, 713 P.2d 791, 794 (Alaska 1986) (interest-based damages not recoverable because plaintiffs "had the use of . . . these monies and, presumably, were able to earn interest while they held it"). A decision of the federal district court for Massachusetts has followed suit, based on its prediction of Massachusetts law. See Sorenson v. HR Block, Inc., 2002 WL 31194868 *15 (D. Mass. 2002) (recognizing that while Massachusetts has not yet addressed the issue, "the weight of authority in other jurisdictions is arrayed against" awarding interest-based damages). See also Eckert Cold Storage, Inc. v. Behl, 943 F. Supp. 1230, 1235 (E.D. Cal. 1996) ("interest paid to the IRS represents a payment for the plaintiffs' use of the tax money during the period after the taxes came due and before they were paid; as such, to the extent that the IRS charges the market rate, interest is not a proper element of damages"); Loftin v. KPMG, LLP, 2003 WL 22225621 *7 n. 4 (S.D. Fla. 2003) (claim based solely on back taxes and interest does not constitute injury sufficient to confer standing under Article III).
Other cases in both state and federal courts, however, have reached a different conclusion. See O 'Bryan v. Ashland, 717 N.W.2d 632, 636-639 (S.D. 2006) (leaving to factfinder to decide whether interest constituted damages, with burden on plaintiff to show that recovery would not constitute a windfall); Seippel, supra, 341 F. Supp. 2d at 384 (declining to strike claim for interest-based damages, observing that Virginia law would permit recovery of such damages subject to defendant's right under "benefits rule" to show that plaintiff benefitted from having access to money owed to IRS); Ronson v. Talesnick, 33 F. Supp. 2d 347, 353 (D.N.J. 1999) (allowing recovery of interest based on the "collateral source rule" under New Jersey law); Jobe v. International Ins. Co., 933 F. Supp. 844, 860 (D.Ariz. 1995) (holding that evidence of economic benefit conferred on the plaintiff in a tax malpractice action is irrelevant and that interest on back taxes is recoverable), order withdrawn by stipulation 1 F. Supp. 2d 1403 (D. Ariz. 1997); McCulloch v. Price Waterhouse, LLP, 971 P.2d 414, 417-419 (Or. App. 1998) (declining to impose absolute bar on recovery of interest-based damages); Dail v. Adamson, 212 Ill. App. 3d 66, 68 (Ill. App. 1991) (holding that courts can award interest-based damages to the extent such damages are necessary to restore plaintiff to an unharmed condition); Wynn v. Estate of Holmes, 815 P.2d 1231, 1233 (Okla. App. 1991) (construing the collateral source rule to allow recovery of interest-based damages unmitigated by any benefit conferred on plaintiff by having access to money otherwise owed to the IRS), overruled on other grounds by Stroud v. Arthur Andersen Co., 37 P.3d 783, 795 n. 58 (Okla. 2001).
Although it did not acknowledge the case in its memorandum in support of its motion, Sidley is certainly well aware of Seippel, in which the Court denied Sidley's motion to strike a claim for interest-based damages under circumstances similar to those involved here.
Here, the record presently before the Court provides no basis for even the most preliminary determination of whether, as a factual matter, the plaintiff suffered harm as a result of interest charges. The Court does not know what rate the tax authorities charged, or what rates the market would have offered for any type of investment during the relevant period. If the IRS and state rates conformed to a standard market rate for widely available investments, it may be easy to determine, as a factual matter, that no harm occurred. If, on the other hand, the IRS and state rates far exceeded market rates, interest may have been, in effect, a penalty. In the absence of clearly established governing authority on the point, the Court will not rule on this issue, at this stage, on such a limited record.
See e.g., G.L. c. 231, §§ 6B, 6C, providing for interest on most Massachusetts judgments at twelve percent, a rate significantly exceeding earnings available to most investors in recent years.
B. State Taxes
Sidley Austin also urges the Court to strike Vassaluzzo's claims of damages based on penalties paid to state taxing authorities. It relies on language in its opinion letters that limited its advice to "the federal income tax laws of the United States" and expressly excluded "the laws of any state" from the scope of its opinions. Vassalluzzo responds that he is entitled to recover for all harms flowing from Sidley Austin's tortious conduct, see VMark Software, Inc. v. EMC Corp., 37 Mass. App. Ct. 610, 619 (1994) (plaintiff was "entitled to all damages it had suffered as a proximate result of [defendant's] misleading representations").
Here again, the Court simply cannot decide this issue based on the limited record now before it. The Court is aware that, in many instances, state tax laws follow federal law on corresponding matters, so that a federal tax filing based on an opinion as to federal law would have automatic consequences under state law. More broadly, if the plaintiff is able to prove, as he contends, that he was induced to participate in the ECS transactions based in substantial part on the promise of independent opinions from Sidley Austin, and that Ernst Young made that promise as Sidley Austin's agent, a factfinder could conclude that Sidley Austin's conduct was a proximate cause of all harms arising from the transactions, including state tax penalties. The motion to strike must be denied.
CONCLUSION AND ORDER
For the reasons stated, Sidley Austin's Motion to Dismiss and to Strike is DENIED .