A New York state appellate court has allowed a case alleging fraud against Proskauer Rose LLP, arising from a 15-year-old tax shelter, to go forward. The litigation involves the heirs to the Johnson & Johnson fortune as well as two of their trusts and trustees.
The suit includes claims that two Proskauer partners advised the plaintiffs to shield some of their assets in a tax shelter and, in 2000, introduced them to a representative of promoter, the Diversified Group, or TDG, a firm in “the business of developing tax minimization strategies for individuals and families with high net worths,’' according to the court’s opinion.
The plaintiffs allege that Proskauer partners Jay Waxenberg and Ira Akselrad initially said that it was unlikely that the Internal Revenue Service would disallow the tax shelter. Subsequently, in the opinion letter for the investment, the attorneys rephrased that assurance slightly, stating that it was “more likely than not’’ that the tax shelter would be permitted, the plaintiffs allege. In 2006, the IRS rejected the shelter.
As a result of the disallowance, the IRS assessed back taxes and penalties “amounting to millions of dollars,’' the court said in its opinion.
The plaintiffs then sued for malpractice, fraud and excessive legal fees, alleging in part that Proskauer “was jointly marketing’’ the tax shelters with TDG, making them “effectively partners.’' A lower court threw out the malpractice claims, agreeing with Proskauer that they were time-barred.
But the trial court – and the appellate court on review – refused to dismiss the claims that Proskauer had defrauded the plaintiffs because it hadn’t disclosed its relationship with TDG. The fraud claim “alleged independent, intentionally tortious conduct, particularly concerning Proskauer’s failure to disclose its true relationship with TDG,’' the appeals court said.
Because the rulings came from a motion to dismiss, neither the appellate court nor the lower court ruled on the merits of the case.
Still, the appellate court had some pointed language about using the wealth and sophistication of the plaintiffs as a defense.
“The mere facts that plaintiffs were wealthy and could afford high-priced counsel are insufficient for us to draw the conclusion that, as a matter of law, they should have known that there was almost a 50 percent possibility that the tax strategy would not succeed,’' the court said.
The case can now proceed to the so-called discovery phase, where the plaintiffs will be able to review documents and take depositions.
For its part, Proskauer says it will ultimately prevail.
David Lederkramer, the Proskauer partner who has been handling the litigation for the firm, said in an e-mailed statement that Proskauer is “pleased that the appellate division has affirmed the dismissal of the malpractice claim against the firm. We will continue to seek dismissal of the remaining claims.’' Lederkramer wasn’t involved in the initial advice given to the plaintiffs.
Waxenberg didn’t respond to an e-mail seeking comment. Akselrad is now the general counsel of the Johnson Co., the private investment company of the Johnson family. He didn’t immediately return a call seeking comment.
Sean Mack, a partner with New Jersey-based Pashman Stein PC, co-counsel for the plaintiffs, said his clients wouldn’t appeal the statute of limitations ruling. He was pleased with the ruling, he said, adding that the fraud charges are “the essence of the complaint.’'
The case is Johnson v. Proskauer Rose LLP, 652075-11, New York State Supreme Court, Appellate Division, First Department (Manhattan).