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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK
OVERSEAS SHIPHOLDING GROUP, INC.,
Plaintiff,
- against -
PROSKAUER ROSE, LLP, ALAN P. PARNES, RICHARD H. ROWE, PETER G. SAMUELS, and STEVEN O. WEISE,
Defendants.
Index No. 650765/2014
DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS
Dated: April 11, 2014 Paul Spagnoletti Heather M. Ward Andrew S. Gehring Matthew Jacobs DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 Phone: 212-450-4577Facsimile: 212-701-5577
Counsel for Defendants Proskauer Rose LLP, Alan P. Parnes, Richard H. Rowe, Peter G. Samuels, and Steven O. Weise
FILED: NEW YORK COUNTY CLERK 04/11/2014 INDEX NO. 650765/2014
NYSCEF DOC. NO. 7 RECEIVED NYSCEF: 04/11/2014
TABLE OF CONTENTS
PAGE
TABLE OF AUTHORITIES .......................................................................................................... ii
PRELIMINARY STATEMENT .....................................................................................................1
SUMMARY OF FACTS AND ALLEGATIONS ...........................................................................5
I. OSG’s Credit Agreements .......................................................................................6
II. OSG Retains Proskauer to Advise on Independent Matters ....................................8
III. The 2011 Memorandum and OSG’s Hidden Documents ......................................10
IV. OSG’s Collapse and Continued Drawdowns .........................................................15
LEGAL STANDARDS .................................................................................................................18
ARGUMENT .................................................................................................................................19
POINT I. THE 2011 MEMORANDUM DID NOT CAUSE ANY OF OSG’S ALLEGED DAMAGES ..............................................21
A. OSG Knew It Had Documents Relevant to the Conclusion of the 2011 Memorandum ............................................22
B. OSG Knew the Parties to the Credit Agreements Had Intended That OIN Guarantee OSG’s Obligations ............................24
POINT II. OSG’S CHECK-THE-BOX CLAIM IS FATALLY DEFICIENT .......................28
A. Proskauer Did Not Continuously Advise OSG on Its Check-the-Box Elections ............................................28
B. Proskauer’s Check-the-Box Advice Did Not Cause Any of OSG’s Alleged Damages ......................................32
POINT III. OSG’S CAUSES OF ACTION ARE DUPLICATIVE .........................................35
POINT IV. THE COMPLAINT SHOULD BE DISMISSED WITH PREJUDICE ................36
CONCLUSION ..............................................................................................................................37
ii
TABLE OF AUTHORITIES
PAGE
CASES
A&R Kalimian, LLC v. Breger, Gorin & Leuzzi, LLP,307 A.D.2d 813 (1st Dep’t 2003) ................................................................................24, 27
Ableco Fin. LLC v. Hilson, 109 A.D.3d 438 (1st Dep’t 2013) .....................................................24
Al Fayed v. Barak, No. 601354/06, 2006 N.Y. Misc. LEXIS 3250(Sup. Ct., N.Y. Cnty. Oct. 23, 2006), aff’d 39 A.D.3d 371 (1st Dep’t 2007) ....................... 22
Atlas v. Metro. Life Ins. Co., 181 N.Y.S. 363 (App. Term, 1st Dep’t 1920) .................................... 22
Biondi v. Beekman Hill House Apartment Corp., 257 A.D.2d 76 (1st Dep’t 1999),aff’d, 94 N.Y.2d 659 (2000) ........................................................................................19, 26
Byron Chem. Co. v. Groman, 61 A.D.3d 909 (2d Dep’t 2009) ........................................................ 31
Campaign for Fiscal Equity v. State, 86 N.Y.2d 307 (1995) .........................................................18
Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 N.Y.3d 269 (2011) ........................................................................................................27
Cliffstar Corp. v. Alpine Foods, LLC, No. 09-CV-00690(A)(M), 2012 U.S. Dist. LEXIS 187360 (W.D.N.Y. July 18, 2012) .................................................. 22
CLP Leasing Co. v. Nessen, 12 A.D.3d 226 (1st Dep’t 2004) .......................................................... 28
Cosmetics Plus Grp., Ltd. v. Traub, 105 A.D.3d 134 (1st Dep’t), leave to appeal denied, 22 N.Y.3d 855 (2013) ...................................................................... 35
Delcor Labs., Inc. v. Cosmair, Inc., 169 A.D.2d 639 (1st Dep’t 1991) .........................................19
Dignelli v. Berman, 293 A.D.2d 565 (2d Dep’t 2002) ...................................................................... 32
Dombrowski v. Bulson, 19 N.Y.3d 347 (2012) .............................................................................21
Duane Morris LLP v. Astor Holdings Inc., 61 A.D.3d 418 (1st Dep’t 2009) ...............................28
E*Trade Fin. Corp. v. Deutsche Bank, AG, No. 05 Civ. 902 (RWS), 2006 U.S. Dist. LEXIS 82428 (S.D.N.Y. Nov. 13, 2006) .................................................... 23
Elardo v. Town of Oyster Bay, 176 A.D.2d 912 (2d Dep’t 1991).................................................34
Estate of Nevelson v. Carro, Spanbock, Kaster & Cuiffo,290 A.D.2d 399 (1st Dep’t 2002) ................................................................................ 35-36
iii
European Am. Bank v. Cain, 79 A.D.2d 158 (2d Dep’t 1981) ......................................................35
Finova Capital Corp. v. Berger, 18 A.D.3d 256 (1st Dep’t 2005) .................................................24
Fishberger v. Voss, 51 A.D.3d 627 (2d Dep’t 2008) .....................................................................26
Fortress Credit Corp. v. Dechert LLP, 89 A.D.3d 615 (1st Dep’t 2011), leave to appeal denied, 19 N.Y.3d 805 (2012) ..................................................................21
Green v. Conciatori, 26 A.D.3d 410 (2d Dep’t 2006) ...................................................................21
Johnson v. Societe Generale S.A., 94 A.D.3d 663 (1st Dep’t 2012) ................................................. 36
Krichmar v. Scher, 82 A.D.3d 1164 (2d Dep’t 2011) ........................................................................ 28
Kush v. City of Buffalo, 59 N.Y.2d 26 (1983) ..............................................................................34
LaBrake v. Enzien, 167 A.D.2d 709 (3d Dep’t 1990) ....................................................................... 35
Maurice W. Pomfrey & Assoc., Ltd. v. Hancock & Estabrook, LLP, 50 A.D.3d 1531 (4th Dep’t 2008) .......................................................................................... 32
MIG, Inc. v. Paul, Weiss, Rifkind, Wharton & Garrison, L.L.P., 701 F. Supp. 2d 518 (S.D.N.Y. 2010),aff’d, 410 F. App’x 408 (2d Cir. 2011) ............................................................................ 31, 35
Miller v. Liberty Mut. Fire Ins. Co., 48 Misc.2d 102 (N.Y. Sup. Ct., Kings Cnty. 1965) ............... 22
Ming v. Hoi, 163 A.D.2d 268 (1st Dep’t 1990) ................................................................................. 36
Mitschele v. Schultz, 36 A.D.3d 249 (1st Dep’t 2006)..................................................................29
Nuzum v. Field, 106 A.D.3d 541 (1st Dep’t 2013) ............................................................................ 31
Reichenbaum v. Cilmi, 64 A.D.3d 693 (2d Dep’t 2009) ...............................................................35
Rite Aid Corp. v. Grass, 48 A.D.3d 363 (1st Dep’t 2008) ................................................................. 23
Rosenbaum v. Sheresky Aronson Mayefsky & Sloan, LLP, 100 A.D.3d 731 (2d Dep’t 2012) .......................................................................................34
Rovello v. Orofino Realty Co., 40 N.Y.2d 633 (1976) ..................................................................19
Rudolf v. Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d 438 (2007) ............................21, 33
Serino v. Lipper, 47 A.D.3d 70 (1st Dep’t 2007) ............................................................................... 30
Shalam v. KPMG LLP, 89 A.D.3d 155 (1st Dep’t 2011) ............................................................ 23, 27
iv
Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879 (S.D.N.Y. 1999) ................................... 23
Shumsky v. Eisenstein, 96 N.Y.2d 164 (2001) ..............................................................................30
Siwiec v. Rawlins, 103 A.D.3d 703 (2d Dep’t 2013) ....................................................................33
Sobel v. Ansanelli, 98 A.D.3d 1020 (2d Dep’t 2012) ....................................................................19
Somma v. Dansker & Aspromonte Assocs., 44 A.D.3d 376 (1st Dep’t 2007) .............................34
Spinale v. Tag’s Pride Produce Corp., 44 A.D.3d 570 (1st Dep’t 2007) .......................................... 23
State v. Rock, 147 Misc.2d 231 (N.Y. Sup. Ct., Saratoga Cnty. 1990) ............................................. 22
Stolmeier v. Fields, 280 A.D.2d 342 (1st Dep’t),leave to appeal denied, 96 N.Y.2d 714 (2001) ......................................................23, 24, 27
Sun Graphics Corp. v. Levy, Davis & Maher, LLP, 94 A.D.3d 669 (1st Dep’t 2012) .................28
Tigulla v. Porzio, 255 A.D.2d 504 (2d Dep’t 1998) ......................................................................34
Transp. Workers Union of Am. Local 100 AFL-CIO v. Schwartz, 32 A.D.3d 710 (1st Dep’t 2006) ............................................................................................. 31
Williamson v. PricewaterhouseCoopers LLP, 9 N.Y.3d 1 (2007) .............................................. 28, 30
STATUTES AND RULES
26 C.F.R. § 301.7701-3 ....................................................................................................................... 29
26 U.S.C. § 956(d) ................................................................................................................. passim
N.Y. C.P.L.R. 214 ............................................................................................................................... 28
N.Y. C.P.L.R. 3013 ..................................................................................................................20, 32
N.Y. C.P.L.R. 3211 ..................................................................................................................18, 26
OTHER AUTHORITIES
David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., C.P.L.R. § 3211:9 (2014) ............................................19
Defendants Proskauer Rose LLP (“Proskauer”), Alan P. Parnes, Richard H. Rowe, Peter
G. Samuels, and Steven O. Weise (together, “Defendants”), respectfully submit this
memorandum of law in support of their motion to dismiss the complaint (the “Complaint”) of
Overseas Shipholding Group, Inc. (“OSG” or the “Company”) in its entirety.
PRELIMINARY STATEMENT
This case involves time-barred and baseless claims of legal malpractice against Proskauer
by a now-bankrupt entity—OSG—for tax liabilities it concedes arise entirely from a 2006 loan
agreement that was structured, negotiated, and documented by a different law firm and in which
Proskauer played no role. As set forth below, this Court should dismiss OSG’s unfounded
claims with prejudice because OSG cannot establish the necessary element of causation or the
timeliness of its claims.
In 2006, OSG entered into a massive $1.8 billion revolving credit facility. That facility
contained language that made one of OSG’s foreign subsidiaries, OSG International, Inc.
(“OIN”), “jointly and severally” liable with OSG. One potential interpretation of the “joint and
several” language was that it operated as a guarantee by OIN of the debt of its domestic parent
OSG. If the “joint and several” obligation was in fact a guarantee, then Section 956(d) of the
Internal Revenue Code would deem the amount of OSG’s borrowings under the 2006 facility to
be a dividend from OIN to OSG, to the extent that OIN had previously untaxed earnings and
profits. If OIN were deemed to have paid such a dividend to OSG, the amount would be subject
to taxation in the United States as income.
In connection with its bankruptcy proceedings, OSG decided to concede the tax liability
that arose under the 2006 agreement and negotiated a settlement with the Internal Revenue
Service (the “IRS”) in which OSG would pay $225 million in taxes for its borrowings,
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substantially all of which related to calendar year 2010. In this action, OSG seeks to recover the
taxes it agreed to pay the IRS. OSG alleges that the liability should be borne by Proskauer, on
claims of malpractice and breach of fiduciary duty.
But Proskauer had no involvement in the structuring, negotiation, or documentation of the
2006 revolving credit agreement. OSG retained Clifford Chance LLP (“Clifford Chance”) to
structure, negotiate, and document that loan. OSG also had its General Counsel, James Edelson,
work on the loan documents, together with a team of OSG executives who were seasoned and
knowlegeable on matters of law, taxation, accounting, and shipping finance. Proskauer was not
retained to work on the loan, and, indeed, Proskauer played no part at all in connection with the
agreement. In sum, OSG omits and ignores the parties that actually do bear responsibility for the
supposed error that OSG complains of, and instead tries to shift blame to Proskauer even though
the firm played no role in connection with the 2006 agreement.
OSG latches on to events in 2011—five years after the seminal events of 2006 when the
loan agreement was made—in the hope of pinning the blame on Proskauer. But OSG’s own
allegations and the documentary record plainly and conclusively establish that none of
Proskauer’s 2011 work could have been the cause of any of OSG’s alleged harm. In 2011, OSG
engaged Proskauer to document a new credit facility for the first time in nearly a decade. Upon
review of an initial draft from creditors’ counsel that was based on the 2006 agreement,
Proskauer immediately identified the potential Section 956(d) problem: The 2006 credit
agreement that Clifford Chance and OSG’s executive team had structured contained “joint and
several” language. Proskauer raised the alarm with the Company, and OSG then asked
Proskauer to develop arguments that could eliminate or mitigate OSG’s tax problem.
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The principal argument Proskauer developed was based on an extensive body of legal
doctrine that would have mitigated OSG’s risk of liability if, in fact, the parties to the 2006 loan
agreement did not intend that OIN be a guarantor of OSG’s repayment obligations. OSG
repeatedly (and, we now know, falsely) represented to Proskauer that OSG never intended that
OIN would be responsible for the obligations of OSG. OSG also repeatedly (and, we now know,
falsely) represented to Proskauer that OSG had no documents that would be relevant to
Proskauer’s analysis. OSG knew that these representations formed the critical foundation for the
argument Proskauer had crafted in mid-2011 (the “2011 Memorandum”).
Perhaps the most stunning example of the Complaint’s many distortions is the statement
that, in late October 2012, OSG found documents that it “had previously been unable to locate”
but which “shed no light” on Proskauer’s 2011 analysis. What the Complaint fails to say is that
both the existence and the content of the documents provided to Proskauer for the first time in
late 2012 directly contradicted the critical representations that OSG made to Proskauer at the
time Proskauer was analyzing the relevant issues. It is clear that the content of this trove of
documents completely undermines the facts on which Proskauer’s advice was expressly
predicated. Even more striking, although these files were located in a central and readily
accessible place at OSG, the Company falsely represented to Proskauer for nearly 15 months that
they simply did not exist.
OSG also dredges up advice provided by Proskauer nearly a decade ago in 2005
regarding a restructuring of certain of the Company’s subsidiaries (through so-called “check-the-
box” elections), in an attempt to blame Proskauer for tax liability OSG incurred in subsequent
years. Glossing over the critical import of the intervening 2006 credit agreement, the Complaint
blithely asserts that Proskauer’s earlier advice somehow caused the Company liability. Yet that
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assertion is completely undermined by OSG’s admission that the tax liability arose entirely from
drawdowns on the 2006 credit facility—a transaction entered into after the check-the-box
elections were made and with which Proskauer had absolutely no involvement.
The Complaint should be dismissed, with prejudice, for each of the following reasons:
1. The arguments Proskauer crafted for the 2011 Memorandum are not actionable.
A necessary element of a malpractice claim is causation, and the Complaint and associated
documentary evidence negate causation as a matter of law. OSG made two critical factual
representations to Proskauer in providing the necessary foundation for the 2011 Memorandum:
(i) that there were no documents that shed light on whether the parties intended that OIN should
be a guarantor, and (ii) that OSG never intended that OIN be responsible for OSG’s loan
repayment obligations. Because both of those representations made by OSG were indisputably
false and OSG is charged with knowledge of that falsity, OSG could not, as a matter of law, have
relied on the 2011 Memorandum. Proskauer’s memorandum, therefore, could not have been the
cause of any of OSG’s alleged damages. (Point I, infra.)
2. OSG’s claim with regard to tax advice Proskauer gave in 2005 should be
dismissed as untimely. New York’s three-year statute of limitations for professional negligence
ran in 2008, and the 2005 tax claims have been barred since then. OSG utterly fails to establish
any basis for a continuing representation toll because the 2005 tax advice ended when it was
acted upon by OSG’s making a check-the-box election whereby certain of OSG’s foreign
subsidiaries became treated as a single taxpayer in 2005. (Point II.A, infra.)
3. OSG’s “check-the-box” claim also must be dismissed on causation grounds. As
the Complaint admits, there was no adverse tax consequence, and hence no injury, that arose
merely by reason of the 2005 check-the-box elections. Rather, all of OSG’s alleged damages
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flow exclusively from the subsequent 2006 credit agreement on which Proskauer did not work.
Proskauer cannot be held accountable for the “joint and several” structure that Clifford Chance
and OSG’s team of executives put in place, and the 2005 tax claim should thus be dismissed.
(Point II.B, infra.)
4. Finally, OSG’s second cause of action for breach of the duty of loyalty should be
dismissed as duplicative of the first cause of action for breach of the duty of care. Under New
York’s duplicative claims doctrine, claims that rest on the same facts and seek the same damages
are duplicative and cannot be simultaneously maintained. Here, the second cause of action is
founded squarely on the facts alleged, and the damages sought, in the first and should be
dismissed. (Point III, infra.)
Having already had the benefit of briefing these precise issues before another court and
revising the Complaint—albeit futilely—to attempt to remedy its deficiencies, OSG should not
be permitted to repeatedly reassert meritless claims against Defendants. Any dismissal should be
made with prejudice.
SUMMARY OF FACTS AND ALLEGATIONS
OSG is a multi-national company with, among others, two wholly owned subsidiaries—
OSG Bulk Ships, Inc. (“OBS” or “OSG Bulk”) and OSG International, Inc. (“OIN”), the latter of
which is a foreign corporation that conducts OSG’s foreign operations. (Compl. ¶ 22.)
Proskauer has represented OSG from time to time on a variety of discrete legal matters,
providing OSG with advice in connection with mergers and acquisitions, certain commercial
finance issues, certain regulatory matters, and certain specific tax-planning questions. (Id. ¶ 27.)
OSG regularly uses other counsel and professional advisors.
6
The Complaint’s central allegations are focused on a series of events beginning in 2011,
when, for the first time in nearly a decade, OSG hired Proskauer to negotiate and document a
new credit agreement, and Proskauer identified problematic language in OSG’s operative credit
agreement from 2006. According to the Complaint, after raising the issue with the Company,
Proskauer negligently advised OSG regarding the interpretation and tax implications of the
identified “joint and several” language (the “Section 956(d) Claim”). The Complaint also
reaches back nearly ten years to assert that Proskauer was negligent when advising the Company
on the effect of certain tax elections—the check-the-box elections—made during subsidiary
restructurings in 2005 (the “Check-the-Box Claim”).
I. OSG’s Credit Agreements
In the 1990s, Proskauer represented OSG in connection with negotiating and
documenting certain agreements to obtain unsecured revolving credit facilities for OSG, OBS,
and OIN. (Id. ¶ 36.) Each of the credit agreements contains a provision pertaining to repayment
of the amount each company borrows through the facility. For instance, the credit agreement
entered into in 1997 states that “[e]ach Borrower severally, and not jointly, agrees to repay to the
Banks the principal of each [advance] made to such Borrower.”
OSG also retained Proskauer to assist with securing an additional $350 million credit
facility, documented in an agreement entered into on April 18, 2000 (the “2000 Credit
Agreement”). (See id.) The language of the repayment clause in that agreement was different
than in prior agreements, providing that “[e]ach Borrower jointly and severally agrees to repay to
the Banks the principal of each Advance made to the Borrowers.” (Aff. of Peter G. Samuels in
Supp. of Defs.’ Mot. to Dismiss (“Samuels Aff.”), Ex. A § 4.1.) The following year, Proskauer
was also engaged by OSG to obtain another, $300 million credit facility. (Compl. ¶ 37.) The
7
resulting agreement, dated December 12, 2001 (the “2001 Credit Agreement”), contains a “joint
and several” repayment provision identical to the one in the 2000 Credit Agreement.1
Against a shifting backdrop of tax and other regulations in the years that followed (id.
¶ 33), OSG’s operations continued to expand and the Company continued to require additional
financing. It did not, however, retain Proskauer in connection with those later credit
transactions, and Proskauer provided no advice on them. Rather, from 2002 through 2005, the
negotiation and documentation of OSG’s credit agreements were handled by its in-house counsel
and its in-house tax and accounting professionals. (Id. ¶ 41.) These agreements contain “joint
and several” repayment provisions. (Id.)
In early 2006, OSG, OBS, and OIN retained finance and tax lawyers at Clifford Chance
for the purpose of structuring and documenting a $1.8 billion unsecured revolving credit
agreement (Samuels Aff., Ex. B (the “2006 Credit Agreement”)), later reduced to $1.5 billion
(Compl. ¶ 42; Samuels Aff. ¶ 3). In connection with that transaction, OSG “terminated all of its
unsecured revolving credit facilities . . . that existed prior thereto.” (Samuels Aff., Ex. C at 63.)
While the terms of the massive 2006 Credit Agreement—including the repayment provisions—
differed substantially from OSG’s prior credit agreements, the agreement continued to provide
that the loans would be made “to the Borrowers on a joint and several basis.” (Id., Ex. B
§ 1.01(a), (b).)
As described further infra, the “joint and several” structure would—at OSG’s
insistence—be used again in a 2011 agreement intended to replace the 2006 Credit Agreement
1 OSG is not asserting any claims stemming from the 2000 or 2001 Credit Agreements, notwithstanding its gratuitous and baseless assertions about Proskauer’s supposedly negligent advice in connection with these agreements. (Compl. ¶ 40.)
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upon its expiration (the “Forward Start Agreement”).2 Until retained in 2011 to advise on the
Forward Start Agreement, Proskauer had not handled OSG’s loan work for nearly ten years.
II. OSG Retains Proskauer to Advise on Independent Matters
Proskauer did not represent OSG in connection with any credit agreements from 2002
through 2010. OSG did, however, engage Proskauer in connection with other discrete matters
during that period. Each engagement was specifically requested by OSG, independent of the
others, and limited in scope to an OSG-defined subject. (See, e.g., Compl. ¶ 51.)
For instance, in 2004, OSG retained Proskauer to review the structure of the Company’s
foreign subsidiaries in light of a newly enacted law with tax implications for U.S. corporations
with foreign operations. (See Samuels Aff., Ex. D at 2.) As the culmination of that engagement,
Proskauer partner Alan Parnes drafted a memorandum dated March 3, 2005 entitled
“Restructuring of Certain Foreign Subsidiaries” in which he addressed making “check-the-box”
elections for certain subsidiaries of OIN in light of the new law and OSG’s organizational
structure at that time.3 (Compl. ¶ 46.) Those elections permit multiple corporations to be treated
as a single taxpayer—i.e., their separateness is “disregarded”—for purposes of U.S. income
taxation. The check-the-box elections, which OSG made in 2005, thus enabled greater free-flow
of cash between certain specifically enumerated foreign subsidiaries of OSG. (Id.)
Making the check-the-box elections neither triggered a tax nor raised any issue under
Section 956. While the elections did increase the profits attributable to OIN—which OSG
2 The Forward Start Agreement was never drawn upon, and Proskauer’s work in connection with that agreement is not at issue here. 3 An eligible foreign corporation with only one owner can elect to be disregarded as a separate entity for U.S. tax purposes. This election is made quite easily by checking a box on a simple three-page form that is then filed with the IRS. Hence, these elections are commonly referred to as “check-the-box” elections.
9
acknowledged in writing would be a result of the elections before Proskauer advised on them4—
they did not actually create any tax liability for OSG. Absent an OIN guarantee of the
obligations of OSG, the profits were simply not subject to taxation under Section 956(d).
However, when OSG and Clifford Chance later decided to use the “joint and several” language
in the 2006 Credit Agreement, they utilized a structure that the IRS determined triggered liability
under Section 956(d). (See Compl. ¶¶ 47 (OSG’s liability “could have been avoided entirely
either by not making the check-the-box elections . . . or by not entering into a loan agreement
that had the joint and several structure” (emphasis added)), 48 (“the check-the-box elections
resulted in the addition of . . . untaxed future earnings and profits in OIN that subsequently
became subject to U.S. income tax liability under Section 956 because of OIN’s joint and several
liability” (emphasis added)), 95(m) (the elections created the “potential for Section 956 tax
liability”).)
Proskauer has also advised OSG on a variety of other tax issues throughout the years.
(Id. ¶ 51.) As a multinational shipping corporation, OSG frequently encounters questions
pertaining to taxation in wide-ranging circumstances and arising under numerous Internal
Revenue Code provisions. After providing OSG with the check-the-box memorandum in 2005,
however, Proskauer did not provide further advice to OSG with respect to these elections. Some
of the questions Proskauer did address involved Subpart F of the Internal Revenue Code, and a
subset of those questions pertained to various issues that involved Section 956. But none of
those questions in any way concerned the “joint and several” structure of OSG’s credit
agreements, and none is alleged to have given rise to any improper tax liability. (See id.)
4 See Samuels Aff., Ex. D at 2 (November 1, 2004 e-mail from OSG Controller Jerry Miller noting that, “[f]or US tax purposes,” check-the-box elections by OIN’s subsidiaries “will be treated as liquidating all such subsidiaries into OIN”).
10
III. The 2011 Memorandum and OSG’s Hidden Documents
Having secured significant financing for itself and its subsidiaries for years to come
through the 2006 Credit Agreement handled by Clifford Chance, OSG did not seek a new credit
facility until nearly five years later. In early 2011, the Company began work on the “Forward Start
Facility,” which was intended to replace the facility under the 2006 Credit Agreement when it
expired in 2013. (Id. ¶ 53.) Although it had been almost a decade since Proskauer last advised
OSG on a credit agreement, OSG engaged Proskauer to document the Forward Start Facility. (Id.)
In connection with this engagement, Parnes reviewed a draft of the Forward Start
Agreement prepared by the lenders and immediately identified a potential problem with the
draft’s provision that the revolving loans would be made “to the Borrowers on a joint and several
basis.” (Id. ¶ 54.) The issue applied equally to the 2006 Credit Agreement, which had been in
effect during the preceding five years and in which Clifford Chance had included the same “joint
and several” language. Proskauer immediately brought the issue to the attention of James
Edelson, OSG’s Senior Vice President and General Counsel. (Id. ¶ 55.)
Proskauer told Edelson that the “joint and several” language was problematic for OSG
under the rules governing the income tax treatment of earnings by controlled foreign
subsidiaries. Specifically, Proskauer advised that if “joint and several” were interpreted to be a
guarantee by OIN (OSG’s foreign subsidiary) of OSG’s obligations under its credit agreement,
income tax liability would already have been triggered under Section 956(d) of the Internal
Revenue Code, 26 U.S.C. § 956(d). (See id.) After internal discussions at OSG, the Company
asked Proskauer to develop potential arguments that would eliminate or reduce any tax liability
arising from the “joint and several” language in the 2006 Credit Agreement, and Proskauer
began drafting a memorandum that evaluated such arguments. (See id. ¶¶ 56-57.)
11
Proskauer provided OSG with three drafts of the 2011 Memorandum—an initial draft on
May 9, a second draft on May 23, and a draft dated June 1, 2011 deemed final by OSG on June
22—that stated that OSG ought to prevail in litigation against the IRS on the Section 956(d)
issue because: (1) based on leading treatises and a wealth of case law—together with the specific
factors discussed in the memorandum—the “joint and several” language in the credit
agreements, as drafted, was reasonably susceptible of multiple readings and therefore
ambiguous;5 and (2) based on the representations made to Proskauer by OSG, the Company did
not intend “joint and several” to mean that OIN would be a guarantor or co-obligor of OSG’s
debt. (Compl., Ex. A at 3, 13.) Critically, the second premise of each draft of the memorandum
was based on two vital—yet false—OSG representations that OSG’s management repeatedly
made to Proskauer about its intent.6
Indeed, the Complaint admits that, before the memorandum was finalized, OSG “critically
vetted Proskauer’s draft opinion” and had “numerous discussions [with Proskauer] about its
analyses of the issues.” (Compl. ¶ 63.) As the 2011 Memorandum itself reflects—in the initial,
second, and final drafts—during these and other discussions OSG represented to Proskauer that
“OSG would not have entered into the [2000 to 2006 Credit Agreements] . . . had senior
management believed that OIN was responsible for the obligations of OSG and OSG Bulk.”
(Compl., Ex. A at 3; Samuels Aff., Ex. F at 3; Samuels Aff., Ex. G at 3.) Similarly, OSG’s senior
5 The conclusion that the “joint and several” language was ambiguous was based on a variety of factors, including the presence of specific language suggesting that “separate,” not “co-obligor,” liability was intended; the unlikelihood that the parties would have intended to make OIN a guarantor of OSG because of the tremendous increase in tax liability that could result; and the lack of waivers of guarantor defenses, which are routine in contracts creating guarantor obligations. (Compl., Ex. A at 11-12.) That conclusion, however, is not at issue on this motion. 6 The Complaint repeatedly alleges that Parnes decided that there was “no tax solution” to the “joint and several” issue but that this conclusion was never conveyed to OSG. (Compl. ¶¶ 56, 57, 62, 65, 68, 77, 95(c), 100(d).) This assertion is immaterial to the instant motion but, in all events, is both patently false and facially implausible: Had Proskauer never told OSG of its analysis, there would have been no reason for OSG and Proskauer to pursue the detailed contract interpretation analysis set forth in the 2011 Memorandum, which itself notes that a tax solution is, at best, “difficult.” (Compl., Ex. A at 6.) Should it be necessary in the course of further proceedings, Proskauer will establish that it acted prudently and disclosed all material information to OSG.
12
management “strongly state[d] that they never intended that OIN would be responsible for the
obligations of OSG or OSG Bulk under the [2000 to 2006 Credit Agreements].” (Compl., Ex. A at
12-13; Samuels Aff., Ex. F at 12; Samuels Aff., Ex. G at 12-13.)
This representation was critical to Proskauer’s analysis because, as far as Proskauer knew,
there was no documentary evidence that would shed light on the intent of the parties to the credit
agreements—which was “the pivotal issue” in the 2011 Memorandum’s analysis. (Compl., Ex. A
at 6.) Before drafting the memorandum, Proskauer had searched its own files (from nearly a
decade earlier) for insight into the issue but found none.7 Proskauer had also asked OSG to search
its files for anything it might have that could aid the analysis in the 2011 Memorandum. (Compl.
¶ 58.) In response, OSG (through Edelson, Senior Vice President and General Counsel of OSG)
reported to Proskauer that “it could not find anything” of relevance to the memorandum. (Id.)
These two representations—Edelson’s representation that OSG had no documents that
would shed light on the parties’ intent in connection with the “joint and several” language and
senior management’s representation that the Company never intended OSG’s debts to be
guaranteed by OIN—are essential to every step of the 2011 Memorandum. Had Proskauer been
provided with the relevant documents in OSG’s files, or told of OSG’s actual intent, it plainly
would not have arrived at the conclusions it did. But Proskauer had no reason to suspect it was
being misled by OSG and, relying squarely on those critical representations, ultimately reasoned
that “section 956 should not apply so as to cause OSG to include OIN’s deferred earnings in
7 The 2011 Memorandum includes a footnote about the only contemporaneous parol evidence Proskauer had at the time of drafting, Proskauer’s billing records: “It seems clear from our time records that the issue of the tax implications of the joint and several language of the credit agreement was identified during the 2000 loan negotiations and discussed not only internally at Proskauer and with OSG, but also with counsel to the lenders.” (Compl., Ex. A at 13 n.57.) OSG makes the false assertion that Proskauer “specifically represented” in the 2011 Memorandum that “the time entries showed that evidence from Proskauer’s own files supported the conclusion that the parties had not intended joint and several liability for OIN under the 2000 agreement.” (Compl. ¶ 64.) As is plain from its face, the memorandum did not draw conclusions from the existence of the time entries as to the parties’ intent with respect to the “joint and several” language.
13
OSG’s income” because, based on those representations, “a court should not enforce ‘joint and
several’ liability against OIN in the event OSG or OSG Bulk could not repay its borrowings.”
(Compl., Ex. A at 13.)
As described more fully below, it was not until nearly 15 months after Proskauer had
written the 2011 Memorandum that Proskauer was asked to turn it into a tax opinion. (Compl.
¶ 86.) At that time, OSG finally informed Proskauer that it had a trove of documents easily
accessible in its offices that were relevant to the parties’ intent in connection with the “joint and
several” language in the credit agreements.8 (See id. ¶ 89.)
This late-breaking revelation directly contradicted OSG’s critical representation to
Proskauer that OSG had no documents of relevance. Moreover, these documents were not
merely relevant to the “joint and several” issue but, on their face, conclusively demonstrated both
that the inclusion of those words in the credit agreements was intentional and that the intended
meaning was “guarantor or co-obligor.” Had Proskauer known about these documents, it never
would have reached the conclusion in the 2011 Memorandum that OSG ought to prevail in
convincing a court that the credit agreements should not create Section 956(d) liability. Indeed,
upon learning of the existence of these previously undisclosed documents, Proskauer refused to
issue the tax opinion that OSG requested (see id. ¶ 87)—a request OSG made despite its
knowledge that the contradictory documents sat in its files. Cumulatively, the documents in
OSG’s files left no room for doubt that OSG, OBS, and OIN were fully intended to be co-
obligors. Most importantly, OSG knew that the documents eviscerated crucial premises
underlying the memorandum—(1) that the Company had no documents of relevance to the
8 OSG disingenuously refers to these documents as “relevant to the negotiation and drafting of the 2000 credit agreement” (Compl. ¶ 89), but they pertain broadly to the Company’s credit agreements from 2000 to 2006 (Samuels Aff. ¶ 9).
14
memorandum, and (2) that, as “strongly state[d]” by OSG senior management to Proskauer for
inclusion in the 2011 Memorandum, OSG never intended that OIN be a guarantor.
By way of example, OSG’s files contained a mark-up of a draft term sheet for the 2006
Credit Agreement that plainly demonstrates—contrary to OSG’s representations to Proskauer—
that both OSG and its counsel Clifford Chance understood and intended that OIN be a guarantor of
OSG’s debts through the “joint and several” structure. Specifically, counsel to the lenders sought
to “[d]iscuss tax implications of guarantees from non US subsidiaries.” (Samuels Aff., Ex. H at 1.)
Clifford Chance responded that “[n]o subsidiary guarantees should be required [because] OSG
Bulk and [OIN] . . . will be joint and several borrowers under the Credit Facility.” (Id. at 1 n.1
(emphasis added).) Thus, Clifford Chance asserted on behalf of its client OSG that the banks did
not need OIN’s subsidiaries to guarantee OSG’s debts precisely because it believed that OIN’s
joint and several liability amounted to a guarantee. That clear assertion directly contradicted OSG
senior management’s assertions to Proskauer that the parties never could have intended “jointly
and severally” to mean that OIN would guarantee OSG’s repayment obligations.
Also in OSG’s files was a March 29, 2000 draft of the 2000 Credit Agreement with a
handwritten question from OSG’s in-house counsel: “different accounting/tax treatment – joint
& several –/ OSG guarantee?” (Samuels Aff., Ex. I at 1.) Questioning whether the “joint and
several” structure would result in different tax treatment from the OSG guarantee of OIN that
had been used in prior agreements, OSG clearly understood the import of avoiding an OIN
guarantee of OSG. A subsequent April 4, 2000 draft of the agreement in OSG’s files bore a
comment from that same in-house counsel indicating that OSG was rejecting the “joint &
several” language and “offer[ing]” to replace it instead “with OSG guarantee of OIN”—
evidencing the plain understanding that “joint and several” would make OIN a guarantor of
15
OSG. (Samuels Aff., Ex. J at 28.) In accord with that understanding, OSG’s in-house counsel
had struck or written “NO” next to the “joint and several” language where it appeared in the draft
agreement. (Id. at 1, 28, 29.) Yet, in a later e-mail exchange among the bank lenders regarding
the 2000 Credit Agreement, the lenders had asked whether “the Borrowers [are] jointly and
severally liable for all obligations?” (Samuels Aff., Ex. K at 2.) OSG wrote next to that question
“OK,” acquiescing in the “joint and several” structure used in the final agreement and agreeing
that OSG and OIN should, in fact, each be responsible for the obligations of the other. (Id.)
These documents and numerous others, which were readily available in OSG’s own files
before Proskauer delivered the 2011 Memorandum, wholly undermine the foundation of the 2011
Memorandum. Unknown to Proskauer, OSG had asked Proskauer to draft a memorandum—by
OSG’s own admission, vetted by and thoroughly discussed with OSG—that hinged on crucial
misinformation supplied by OSG to Proskauer and belied by documents within OSG’s possession.
IV. OSG’s Collapse and Continued Drawdowns
On May 26, 2011, prior to the completion of the 2011 Memorandum, OSG finalized the
Forward Start Agreement. (Compl. ¶ 66.) Despite being fully aware of the potential Section
956(d) issue and attendant risks, “OSG determined that it was not necessary or commercially
reasonable to renegotiate the Forward Start Facility or the 2006 credit agreement to address the
joint and several/Section 956 issue” (id. (emphasis added)), and executed a final Forward Start
Agreement with the very same “joint and several” language as the 2006 Credit Agreement.
Thus, when confronted in 2011 with a business decision between protecting against a tax risk or
protecting the terms of a financing, OSG elected to protect its financing terms.
In late 2011, OSG reopened negotiations with the bank lending group under the Forward
Start Agreement in an attempt to secure additional financing. (Id. ¶ 73.) During those
16
negotiations, the lenders insisted that certain of OIN’s assets be pledged as collateral for any
further financing, given OSG’s deteriorating financial state. (Id.) The ensuing discussions about
avoiding liability under Section 956(d) drew attention to the “joint and several” language in the
existing 2006 credit facility—straining negotiations with the lenders, who had begun expressing
concern about OSG’s potential tax liability. (Id. ¶¶ 73-75.)
OSG, worried that it did not have sufficient financing to continue its operations, began
considering drawing down the funds remaining in the 2006 credit facility.9 (Id. ¶ 75.) The
Complaint alleges that, prior to that drawdown, Proskauer reaffirmed for OSG the validity of the
2011 Memorandum’s conclusions—specifically, that there was an ambiguity about the meaning
of “joint and several” in the credit agreements and that, absent any contradictory evidence and in
continued reliance on OSG’s representations about its intent with respect to the language, a court
ought to determine that OIN had not guaranteed OSG’s debt. (Id. ¶¶ 76-77.) Spurred by its need
for liquidity and the perceived threat that the lenders under the 2006 Credit Agreement might
refuse to honor additional drawdowns on that facility, on July 16, 2012 OSG drew down the
remainder of the capacity of the 2006 facility, $343 million. (Id. ¶¶ 75, 78.)
Following the additional drawdown, negotiations with the bank lending group broke
down. (See id. ¶¶ 79-80.) In a subsequent September 2012 meeting of OSG’s board of directors,
the board directed Proskauer to meet with OSG’s outside auditors PricewaterhouseCoopers
(“PwC”) to discuss the conclusions of the 2011 Memorandum. (Id. ¶ 84.) After meeting with
Proskauer in October 2012, PwC asked Proskauer to provide it with a tax opinion on the “joint
and several” issue. (Id. ¶¶ 86.)
9 In the five years that had passed since the 2006 Credit Agreement’s execution, OSG had—without any possibility of having relied on Proskauer’s 2011 advice—already borrowed more than $830 million under that facility. (Cf. Compl. ¶ 78.)
17
While Proskauer was in the process of considering whether it could provide the requested
tax opinion, OSG advised Proskauer—for the first time—that, contrary to OSG’s earlier
representations, the Company in fact had a cache of documents pertaining to the negotiation and
documentation of the 2000 through 2006 Credit Agreements. (See id. ¶ 89.) As described
above, these documents undermined critical premises of the 2011 Memorandum—i.e., that OSG
had no other documents relevant to the parties’ intent and that the Company did not intend for
OSG and OIN to be co-obligors. Proskauer, now realizing that it had been misled by OSG and
that the arguments in the 2011 Memorandum were factually unfounded, refused to issue the
requested tax opinion. (See id. ¶ 87.)
Meanwhile, OSG issued guidance that its financial statements for the previous three years
could not be relied upon, and, on November 14, 2012, it filed for Chapter 11 relief. (Id. ¶¶ 88,
91.) OSG thereafter self-reported to the IRS that it owed additional income taxes due to the
“joint and several” language in its credit agreements. (Id. ¶ 92.) On December 19, 2013, OSG
filed a Current Report on Form 8-K with the U.S. Securities and Exchange Commission (the
“SEC”) stating that OSG had agreed with a notice of proposed adjustment issued by the IRS,
which provides that OSG will include additional taxable income under Section 956 in respect of
calendar years 2010 and 2011. (Samuels Aff., Ex. N at 2.) Of the $225 million of liability
pursuant to that adjustment, more than $211 million relates to calendar year 2010—the year
prior to the issuance of the 2011 Memorandum.10
On November 18, 2013, OSG initiated an action against Defendants in the United States
Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), alleging claims of
malpractice and breach of fiduciary duty extending back more than a decade to the year 2000.
10 The $463,013,177.63 referenced in the Complaint (Compl. ¶ 92) was taken from an old, outdated IRS proof of claim. The IRS’s January 21, 2014 third amended proof of claim seeks an aggregate amount of only $255,760,439.22, of which $225 million relates to additional taxable income under Section 956(d). (See Samuels Aff., Ex. L.)
18
(Samuels Aff., Ex. M.) On January 17, 2014, Defendants simultaneously moved to dismiss that
complaint and for the Bankruptcy Court to abstain from the action. After both motions were
fully briefed, Defendants’ abstention motion was granted on February 21, 2014.
Defendants subsequently initiated an action before this Court against two of OSG’s
officers, alleging, inter alia, fraud and negligent misrepresentation with respect to the false
representations that OSG had no relevant documents and that the Company did not intend that
OIN guarantee its debt. See Proskauer Rose LLP v. Edelson, No. 650596/2014 (Feb. 23, 2014).
Approximately three weeks later, on March 11, OSG filed a substantially revised complaint in
this Court.
Defendants now move to dismiss the Complaint with prejudice because, despite having
had the opportunity to replead in light of Proskauer’s motion to dismiss filed in the Bankruptcy
Court, OSG cannot establish the element of causation of either its Section 956(d) Claim or its
Check-the-Box Claim, nor can it establish that tolling of its time-barred 2005 claim is warranted.
LEGAL STANDARDS
Under CPLR 3211(a)(1), (5), and (7), a party may move for judgment dismissing a claim
asserted against it on the ground that a meritorious defense “is founded upon documentary
evidence,” the claim is barred by the applicable statute of limitations, or the claim fails to state a
cause of action.
In assessing a motion to dismiss for failure to state a cause of action, a court must
determine whether the “plaintiff can succeed upon any reasonable view of the facts stated.”
Campaign for Fiscal Equity v. State, 86 N.Y.2d 307, 318 (1995) (emphasis added and internal
quotation marks omitted). Allegations that “consist[] of bare legal conclusions” or are
“inherently incredible or flatly contradicted by documentary evidence” are neither “presumed to
19
be true [nor] accorded every favorable inference.” Biondi v. Beekman Hill House Apartment
Corp., 257 A.D.2d 76, 81 (1st Dep’t 1999) (internal quotation marks omitted), aff’d, 94 N.Y.2d
659 (2000). Courts may—and do—grant motions to dismiss where defendants submit
evidentiary material that “establish[es] conclusively that plaintiff has no cause of action.”
Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 635-36 (1976).
If “any part of a single cause of action is subject to separate and severable address by a
CPLR 3211(a) ground,” then so much of the claim that is legally insufficient should be
dismissed. David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., C.P.L.R.
§ 3211:9 (2014). Accordingly, on a motion to dismiss, any aspect of a cause of action for which
an essential element cannot be established should be dismissed, see Delcor Labs., Inc. v.
Cosmair, Inc., 169 A.D.2d 639, 640 (1st Dep’t 1991) (affirming a partial dismissal of claims for
fraud), and a court should dismiss as much of the claim as is untimely, see Sobel v. Ansanelli, 98
A.D.3d 1020, 1023 (2d Dep’t 2012) (affirming dismissal “of so much of that cause of action as
was predicated upon alleged acts or omissions occurring” outside the statute of limitations).
ARGUMENT
At its core, this action is about the 2011 Memorandum and related advice that Proskauer
provided to the Company regarding the interpretation of the “joint and several” language in
OSG’s prior credit agreements. That advice, however, was premised on false information
provided to Proskauer by OSG itself. As a matter of both logic and law, the Company could not
have relied on advice that it knew was grounded in misinformation. Accordingly, OSG simply
cannot establish the requisite element of causation for its Section 956(d) Claim, and that
malpractice claim should be dismissed.
20
As a fallback position, OSG has attempted to predicate a claim on events that are nearly a
decade old involving advice Proskauer rendered in 2005 regarding the restructuring of OIN’s
subsidiaries through check-the-box elections. The Check-the-Box Claim, however, is barred by
the statute of limitations, which expired in 2008—six years ago, or twice as long ago as the
underlying statute of limitations itself. Despite multiple paragraphs of the Complaint dedicated
solely to this fatal issue, OSG has not met its substantial burden to establish tolling. The Check-
the-Box Claim must be dismissed as time-barred.
The Check-the-Box Claim should also be dismissed for lack of causation because, as is
acknowledged in the Complaint, the check-the-box elections in themselves resulted in no injury.
Rather, all of the Company’s alleged damages arose after the elections were made, as a direct
result of borrowings made under the 2006 Credit Agreement, which was structured, negotiated,
and documented by Clifford Chance and the OSG executive team. That intervening agreement
and related advice necessarily severs any link between Proskauer’s 2005 work and OSG’s
claimed injury. Proskauer cannot be held responsible for the tax consequences of a later credit
agreement from which it was entirely excluded. OSG’s attempt to hold Proskauer responsible is
facially absurd and wholly at odds with New York law.
As discussed more fully below, OSG’s claims should be dismissed with prejudice.11
11 To the extent OSG is trying to assert a claim of malpractice based on Proskauer’s purported failure to advise the Company of the “joint and several” issue between 2005 and 2011, OSG’s pleading is wholly inadequate. While identifying a host of discrete engagements during that period (see Compl. ¶ 51), the Complaint does not explain the scope of any of those engagements, how they relate to OSG’s credit agreements or Section 956(d), any drawdowns made (and thus damages incurred) in reliance on that advice, or indeed any details that could put Proskauer on notice of what OSG is attempting to allege. See N.Y. C.P.L.R. 3013 (“Statements in a pleading shall be sufficiently particular to give the court and parties notice of the transactions . . . intended to be proved . . . .”). Moreover, if OSG is trying to claim that Proskauer is liable for not discovering the “joint and several” issue in its role as disclosure counsel, that assertion is preposterous. The suggestion that disclosure counsel would be responsible for determining the legal implications of every exhibit to an SEC filing—which, in the case of OSG’s Form 10-Ks, routinely number in the dozens—has no basis in law or practice.
21
POINT I. THE 2011 MEMORANDUM DID NOT CAUSE ANY OF OSG’S ALLEGED DAMAGES
The allegations of the Complaint and the documentary evidence negate any claim that
OSG could have relied on the 2011 Memorandum or Proskauer’s related advice. As is evident
from the 2011 Memorandum and OSG’s allegations, the memorandum’s conclusion was based
on, inter alia, the following fundamental premises: (1) the Company had no documentary
evidence bearing on the parties’ intended meaning of “joint and several”; and (2) OSG senior
management “never intended that OIN would be responsible for the obligations of OSG or
OSG Bulk under the [2000 through 2006 Credit Agreements].” Critically, both of these
premises were false.
Significantly, the allegations of the Complaint and the documentary record conclusively
establish that both of these premises were supplied to Proskauer by OSG itself (Compl. ¶ 58;
Compl., Ex. A at 3, 12-13),12 and that they were subsequently “critically vetted” over the course
of “numerous discussions” with OSG senior management (Compl. ¶ 63). As a matter of law,
OSG is charged with knowledge of the content of the Company’s files, and, as a matter of logic,
a client simply cannot rely on advice it knows is based on false information. The 2011
Memorandum and related advice therefore could have been neither the “but for” nor the
proximate cause of any of OSG’s damages, both of which OSG is required to establish. See
Dombrowski v. Bulson, 19 N.Y.3d 347, 350 (2012); Rudolf v. Shayne, Dachs, Stanisci, Corker
& Sauer, 8 N.Y.3d 438, 442 (2007).
12 New York courts have found the provision of misinformation by a client sufficient in itself to absolve an attorney of any malpractice liability. See, e.g., Green v. Conciatori, 26 A.D.3d 410, 411 (2d Dep’t 2006) (on a motion to dismiss, holding that defendants had not committed malpractice because “an attorney should not be held liable for ignorance of facts which the client neglected to tell him or her”); cf. Fortress Credit Corp. v. Dechert LLP, 89 A.D.3d 615, 617 (1st Dep’t 2011) (on a motion to dismiss, holding that defendant law firm had not breached a duty of care with respect to its advice in an opinion letter to a third party because the firm “had no reason to suspect” that its client had misled it), leave to appeal denied, 19 N.Y.3d 805 (2012).
22
A. OSG Knew It Had Documents Relevant to the Conclusion of the 2011 Memorandum
Contrary to its representations to Proskauer, OSG had a trove of documents “relevant to
the negotiation and drafting of the 2000 credit agreement.”13 (Compl. ¶ 89.) A fundamental
premise of the 2011 Memorandum—that OSG had no relevant documents—was therefore false.
Accordingly, as a matter of law, OSG could not have relied on the advice contained in the 2011
Memorandum.
OSG has admitted that a crucial first step in the analysis underlying the 2011
Memorandum was for Proskauer to determine whether any documents pertaining to the parties’
intent existed. (Id. ¶ 58 (prior to drafting the 2011 Memorandum, Proskauer asked OSG to
search the Company’s files for relevant documents).) Such documents were so important to
Proskauer’s analysis that the 2011 Memorandum cites to and discusses the only relevant
documents of which Proskauer was aware, even though they were only billing records that shed
no light on the parties’ intent. (See Compl., Ex. A at 13 n.57; see also Compl. ¶¶ 58, 64.)
OSG has also admitted that it had documents that were relevant to Proskauer’s analysis.
(Compl. ¶ 89.) These critical sources of key information were within OSG’s possession and
knowledge when the 2011 Memorandum was drafted and remained within OSG’s possession and
knowledge during the entire period OSG claims to have relied on that memorandum.14 OSG
13 Again, notwithstanding OSG’s insincere and incomplete characterization, the documents in OSG’s possession show, on their face, that they pertained to the drafting and negotiation of all of the Company’s credit agreements between 2000 and 2006. (Samuels Aff. ¶ 9.) 14 It is indisputable that a company is chargeable with knowledge of documents in its possession. Indeed, this principle is so fundamental that a company is charged not only with knowing that it possesses documents but also with knowledge of their contents. See Al Fayed v. Barak, No. 601354/06, 2006 N.Y. Misc. LEXIS 3250, at *11-12 (Sup. Ct., N.Y. Cnty. Oct. 23, 2006) (finding that an individual’s receipt of a document warranted charging him with knowledge of its contents (citing State v. Rock, 147 Misc.2d 231, 235 (N.Y. Sup. Ct., Saratoga Cnty. 1990))), aff’d 39 A.D.3d 371 (1st Dep’t 2007); Cliffstar Corp. v. Alpine Foods, LLC, No. 09-CV-00690(A)(M), 2012 U.S. Dist. LEXIS 187360, at *23 (W.D.N.Y. July 18, 2012) (similar); Atlas v. Metro. Life Ins. Co., 181 N.Y.S. 363, 364 (App. Term, 1st Dep’t 1920) (a “company must be charged with knowledge of the facts shown by its own records”); Miller v. Liberty Mut. Fire Ins. Co., 48 Misc.2d 102, 105 (N.Y. Sup. Ct., Kings Cnty. 1965) (a plaintiff who had possession of an
23
nevertheless chose not merely to withhold them but also to affirmatively represent that the
documents did not exist. Taken together, these undisputed facts unequivocally preclude OSG
from establishing that Proskauer caused its damages.
OSG’s dubious assertion that it had been “unable to locate” these documents until
October 2012 despite their central location in the Company’s office (Compl. ¶ 89) is irrelevant
and cannot salvage OSG’s claims. Under New York law, OSG is responsible for knowing the
contents of its files and is charged with constructive knowledge of their contents. Thus, because
OSG’s own files contradicted the factual premises of Proskauer’s 2011 Memorandum, as a
matter of law, OSG could not have relied on the memorandum’s conclusion or any related
advice. The 2011 Memorandum therefore could not have been the “but for” or the proximate
cause of any of OSG’s alleged damages.
Stolmeier v. Fields, 280 A.D.2d 342 (1st Dep’t), leave to appeal denied, 96 N.Y.2d 714
(2001), is instructive. In that case, a third party entered into a contract with home improvement
contractors for their services, and the contract was later held unenforceable because the
contractors did not have the appropriate license. The contractors sued their attorneys for
malpractice on the grounds that the attorneys had never made known the license requirement.
Having found that the plaintiffs “must be deemed to have been aware” of the requirement
insurance policy was “chargeable with knowledge of its contents”); see also Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879, 894 (S.D.N.Y. 1999) (“a party is charged with knowledge of what its agents know and the contents of its available records” and “cannot plead ignorance to information that is from sources within its control” (internal quotation marks omitted)); E*Trade Fin. Corp. v. Deutsche Bank, AG, No. 05 Civ. 902 (RWS), 2006 U.S. Dist. LEXIS 82428, at *4-5 (S.D.N.Y. Nov. 13, 2006).
Regardless, OSG was put on inquiry notice before delivery of even the first draft of the 2011 Memorandum when Proskauer asked it to search for relevant documents, thereby charging OSG with knowledge of any information it possessed or could have accessed with reasonable diligence. Cf. Shalam v. KPMG LLP, 89 A.D.3d 155, 157-58 (1st Dep’t 2011) (in the fraud context, holding that information possessed by plaintiff, and “contained in documents in his possession, conclusively establish that he knew or should have known” the reality and risks of defendants’ advice); Rite Aid Corp. v. Grass, 48 A.D.3d 363, 364 (1st Dep’t 2008) (in the fraud context, holding that “plaintiffs were on inquiry notice [of the fraud] based on their own financial records and communications”); Spinale v. Tag’s Pride Produce Corp., 44 A.D.3d 570, 571 (1st Dep’t 2007) (in the fraud context, holding that plaintiff was “put . . . on inquiry notice of the financial facts he claim[ed] were fraudulently concealed” because “any documents that might have been necessary for plaintiff to discover the fraud . . . were in his possession”).
24
independently of the defendants, the court held that defendants’ advice to enter into the contract
without discussing the need for a license therefore could not have been the proximate cause of
plaintiff’s losses. Id. at 343; see also A&R Kalimian, LLC v. Breger, Gorin & Leuzzi, LLP, 307
A.D.2d 813, 813 (1st Dep’t 2003) (holding that failure to advise a client about a lease did not
constitute legal malpractice because “a partner in plaintiff [the client] knew about the lease . . . ,
and any ultimate reliance that plaintiff may have placed on any misrepresentations . . . cannot be
attributed to defendants”); Ableco Fin. LLC v. Hilson, 109 A.D.3d 438, 439 (1st Dep’t 2013)
(holding that there could be no malpractice claim against counsel for negligently failing to advise
about a fact where the documentary record showed that plaintiff knew that fact from another
source); Finova Capital Corp. v. Berger, 18 A.D.3d 256, 258 (1st Dep’t 2005) (holding that,
where a plaintiff did not “rel[y] on defendant’s alleged negligently rendered opinion,” the
plaintiff had failed to establish proximate causation).
Here, OSG’s claimed losses could not have been caused—proximately or in fact—by
Proskauer’s advice because OSG knew that documents existed that were relevant to the analysis
and that an essential premise of the 2011 Memorandum was therefore false. As mandated by
both common sense and law, a client cannot rely on legal advice it knows is without basis in fact.
Accordingly, OSG’s Section 956(d) Claim should be dismissed with prejudice.
B. OSG Knew the Parties to the Credit Agreements Had Intended That OIN Guarantee OSG’s Obligations
OSG’s 2011 claims also should be dismissed because the substance of the documents it
“discovered” in 2012 directly contradicts the critical and unequivocal representation OSG made
to Proskauer in connection with the 2011 Memorandum—i.e., that OSG did not intend for OIN
to guarantee the debts of OSG in connection with the 2006 Credit Agreement.
25
The 2011 Memorandum could not be more clear that its conclusion was based on “the
statements of senior management of OSG that OSG would not have entered into the [2000 to
2006 Credit Agreements] . . . had senior management believed that OIN was responsible for the
obligations of OSG and OSG Bulk under these agreements.” (Compl., Ex. A at 3.) This premise
is so important to the analysis that it is repeated at the end of the memorandum:
Senior management of OSG, whom we have advised over the years that OIN can not guarantee borrowings by OSG or any other domestic borrower, strongly state that they never intended that OIN would be responsible for the obligations of OSG or OSG Bulk under the [2000 to 2006 Credit Agreements].
(Id. at 12-13.)15 Indeed, OSG’s intent as to OIN’s status as a guarantor was “the pivotal issue” to
the memorandum’s analysis. (Id. at 6.)
Yet, as demonstrated by the documents OSG disclosed to Proskauer for the first time in
October 2012, OSG’s “strong” representation to Proskauer about the Company’s intent was
patently false. Simply put, the documents OSG “discovered” in 2012 plainly show that OSG had
in fact intended “joint and several” to make OIN a guarantor of OSG’s obligations.
As discussed above, among the hoard of documents that OSG “discovered” in 2012 was a
draft term sheet for the 2006 Credit Agreement in which Clifford Chance noted that OIN’s
subsidiaries need not otherwise guarantee OSG’s debts specifically because OIN “will be [a]
15 These statements in the 2011 Memorandum—which was “critically vetted” by OSG’s senior management (Compl. ¶ 63)—unequivocally demonstrate the falsity of OSG’s assertion that “[t]he only representation OSG management made to Proskauer in connection with Proskauer’s analysis was that OSG never understood and never intended that the joint and several structure of its credit agreements would trigger Section 956 tax liability” (id. ¶ 61). OSG’s representations to Proskauer went much further than that: The Company affirmatively represented that it had not intended that OIN guarantee OSG’s obligations. It is telling that OSG—confronted by the unmistakable meaning of the documents in its files—is now forced to deny that it made representations that are clear from the face of the 2011 Memorandum.
Similarly belied by documentary evidence is the Complaint’s assertion that “Proskauer did not seek any representations of fact from OSG management, nor did OSG management provide Proskauer with any representations of fact, prior to OSG’s receipt of the May 9 Draft” (id.); that draft contains identical language regarding management’s intentions (Samuels Aff., Ex. F at 3, 12), and OSG has alleged that the Company represented that it had no documents of relevance prior to that draft’s completion (Compl. ¶ 58). No matter where the 2011 Memorandum’s premises came from, however, OSG cannot pretend that it did not know what the memorandum was based on or that the premises were false.
26
joint and several borrower[] under the Credit Facility” (Samuels Aff., Ex. H at 1)—in other
words, OIN was already responsible for OSG’s obligations, so its subsidiaries did not need to
make the same guarantee.16 Likewise, a draft of the 2000 Credit Agreement questions whether a
“joint & several” structure would affect the tax treatment of borrowings under that agreement
(id., Ex. I at 1), while a later draft bears a comment from OSG’s in-house counsel indicating that
OSG was rejecting the “joint & several” language and “offer[ing]” instead an “OSG guarantee of
OIN” (id., Ex. J at 28). OSG was proposing, in effect, to avoid Section 956(d) liability by only
having OSG guarantee OIN’s borrowings and not the other way around—a position from which
OSG later retreated by agreeing to the “joint and several” structure.17 Individually and together,
these documents show far more than that the “inclusion of the joint and several language in the
2000 credit agreement was not inadvertent” (Compl. ¶ 89); they demonstrate that OSG
understood and intended that the “joint and several” structure would operate as a guarantee
between the entities.
Even assuming arguendo that there is any doubt about the precise meaning of these
critical documents, there can be no doubt that the documents, at the very least, raise serious
questions about what OSG intended by the “joint and several” language when negotiating its
2006 Credit Agreement. A fortiori, OSG’s unequivocal representation to Proskauer in 2011 that
“[s]enior management of OSG . . . never intended that OIN would be responsible for the
16 The Court is expressly permitted to consider documents external to the pleadings on a motion to dismiss. See N.Y. C.P.L.R. 3211(a)(1). Where such evidence negates the facts upon which the complaint is predicated, the motion should be granted. Biondi, 257 A.D.2d at 81; see also Fishberger v. Voss, 51 A.D.3d 627, 628 (2d Dep’t 2008) (affirming dismissal of a claim based on allegations that a condition was not “reasonably discoverable” because “evidentiary material submitted on the motion to dismiss demonstrated . . . that the condition could, in fact, have been discovered by the plaintiffs”). 17 Moreover, in an e-mail exchange among the bank lenders regarding the 2000 Credit Agreement, the lenders had asked whether “the Borrowers [are] jointly and severally liable for all obligations?” (Samuels Aff., Ex. K at 2.) OSG wrote next to that question “OK,” evidencing a clear intent that OSG and OIN should, in fact, be responsible for the obligations of the other, thus undermining any contention that the meaning of “jointly and severally” was ambiguous in these circumstances. (Id.)
27
obligations of OSG” (Compl., Ex. A at 12-13) could not and should not have been made. The
2011 Memorandum was predicated on OSG’s clear statements about its intent, but the
documents in OSG’s own files directly contradicted those statements. Once again, because the
Company is charged with knowledge of its files, see supra note 14, OSG could not, as a matter of
law, have relied on Proskauer’s 2011 Memorandum, which was predicated on OSG’s false
statements. Accordingly, OSG cannot establish the requisite element of causation. See
Stolmeier, 280 A.D.2d at 343; A&R Kalimian, 307 A.D.2d at 813; see also Centro Empresarial
Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 N.Y.3d 269, 278-79 (2011) (holding that,
if a plaintiff “has the means available to him of knowing, by the exercise of ordinary intelligence,
the truth or the real quality of the subject of the [defendant’s] representation, he must make use
of those means, or he will not be heard to complain that he was induced to enter into the
transaction by misrepresentations” (internal quotation marks omitted)); Shalam, 89 A.D.3d at
158 (in the fraud context, because “plaintiff was in possession of sufficient information to
preclude him from accepting without question [defendants’] representations,” he could not have
reasonably relied on those representations).
In sum, the documents OSG had in its possession, and which were unknown to Proskauer
until October 2012, conclusively demonstrate that OSG’s categorical representations to
Proskauer about its intentions in entering into the credit agreements were false—and that OSG
knew Proskauer’s advice was based on the Company’s false information. OSG’s knowledge of
its own documents precludes any claim that the Company relied on the 2011 Memorandum and
related advice, and establishes, as a matter of law, that Proskauer was neither the “but for” nor
the proximate cause of OSG’s alleged damages. OSG’s Section 956(d) Claim should be
dismissed with prejudice.
28
POINT II. OSG’S CHECK-THE-BOX CLAIM IS FATALLY DEFICIENT
OSG’s claim as to Proskauer’s 2005 advice—provided almost nine years ago—
concerning OSG’s check-the-box elections fails because it is time-barred and because no
damages resulted from the check-the-box elections themselves. Either ground is sufficient for
dismissal, and the Check-the-Box Claim should, accordingly, be dismissed with prejudice.
A. Proskauer Did Not Continuously Advise OSG on Its Check-the-Box Elections
As addressed when the timeliness of OSG’s claims was first briefed before the
Bankruptcy Court, the check-the-box advice was rendered in 2005, and New York’s three-year
malpractice statute of limitations expired in 2008.18 The Check-the-Box Claim is therefore
untimely unless the statute of limitations is subject to a toll through at least November 14, 2012,
the date the Company filed its bankruptcy petition. It is OSG’s burden to demonstrate that
tolling is warranted. See Krichmar v. Scher, 82 A.D.3d 1164, 1165 (2d Dep’t 2011) (after a
showing that plaintiff’s time to sue has expired, “the burden shifts to the [plaintiff] to establish
that the statute of limitations has been tolled”); CLP Leasing Co. v. Nessen, 12 A.D.3d 226, 227
(1st Dep’t 2004). Despite the substantial revisions made to its Complaint, OSG has utterly failed
to meet its burden.
Tolling on grounds of continuous representation requires plaintiffs to allege not simply
that “defendants continued to represent them during the three years preceding the
commencement of the action,” but that the “representation pertained to the specific matters at
issue” in the malpractice claim for which tolling is sought. Sun Graphics Corp. v. Levy, Davis &
Maher, LLP, 94 A.D.3d 669, 669 (1st Dep’t 2012); see also, e.g., Duane Morris LLP v. Astor
Holdings Inc., 61 A.D.3d 418, 420 (1st Dep’t 2009) (subsequent representation must “pertain[]
18 Malpractice claims are governed by a three-year limitations period, see N.Y. C.P.L.R. 214(6), and accrue “when the malpractice is committed, not when the client discovers it.” Williamson v. PricewaterhouseCoopers LLP, 9 N.Y.3d 1, 7-8 (2007).
29
specifically to the matter in which the attorney committed the alleged malpractice” (internal
quotation marks omitted)); Mitschele v. Schultz, 36 A.D.3d 249, 253 (1st Dep’t 2006)
(subsequent representation must have been “in connection with the particular transaction which
is the subject of the action”). Proskauer’s advice on making the check-the-box elections ended in
2005 when OSG was provided with a memorandum on the subject and OSG then made the
elections. No one anticipated that Proskauer would continue advising on the elections and,
indeed, Proskauer never did provide subsequent advice on making those elections. Those facts
are fully supported by the allegations of the Complaint and alone are fatal to the Company’s
claim of continuous representation.
The Check-the-Box Claim pertains specifically to the alleged failure of Proskauer’s 2005
check-the-box memorandum to adequately address the “tax consequences resulting from the
check-the-box elections.” (Compl. ¶¶ 48, 49; see also id. ¶ 95(i) (alleging that Proskauer was
negligent in “advising OSG to make the check-the-box elections”).) Yet nowhere does the
Complaint even suggest that Proskauer advised OSG on those elections after March 3, 2005.
(See, e.g., id. ¶¶ 5 (Proskauer advised OSG to make the elections “[i]n 2005”), 12 (Proskauer
provided “negligent advice to OSG in 2005 regarding the check-the-box elections”), 100(e)
(alleging increased exposure to tax liability “in connection with [Proskauer’s] 2005 tax
advice”).)
Once the check-the-box elections had been made, the governing regulations themselves
closed the door on any possible continuing representation for at least five years. After making a
check-the-box election, except for certain narrow exceptions not applicable here, “the entity cannot
change its classification by election again during the sixty months succeeding the effective date of
the election.” 26 C.F.R. § 301.7701-3(c)(1)(iv). With the check-the-box elections being
30
unchangeable for at least five years, the advice leading up to them necessarily came to an end and
the need for any further advice disappeared. Thus, simply as a matter of the applicable law, the
representation could not have been continuous: It had reached its legal terminus.
In fact, the Company has actually admitted that it never anticipated needing further
advice on the check-the-box elections, categorically precluding tolling: It is firmly established
that, when a plaintiff is “unaware of any need for further legal services” on the matter at issue, it
may not avail itself of the continuous representation doctrine. Shumsky v. Eisenstein, 96 N.Y.2d
164, 169 (2001); see also Williamson, 9 N.Y.3d at 10 (holding that the continuous representation
doctrine applies only where the parties “were acutely aware of the need for further
representation”). Here, OSG’s allegation that “[n]o one at OSG had any knowledge of the tax
liability resulting from Proskauer’s advice on the check-the-box elections” (Compl. ¶ 48) is an
express admission that the Company could not have believed that additional representation on
the elections was necessary.
In an attempt to bolster its continuous representation position, the Complaint alleges that
Proskauer continuously advised the Company “to ensure that OIN’s foreign income was not
subjected to tax in the U.S.” (Id. ¶ 50.) Yet the laundry list of discrete engagements alleged by
OSG only serves to demonstrate that the continuous representation doctrine does not apply:
According to OSG, Proskauer’s advice pertained to “a wide range of issues” that were independent
of each other and were plainly not the same transaction as the 2005 check-the-box elections. (Id.
¶ 51.) OSG’s interactions with Proskauer were no more than a “‘continuing general relationship
with a lawyer . . . involving only routine contact for miscellaneous representation.’” Serino v.
Lipper, 47 A.D.3d 70, 76 (1st Dep’t 2007) (not tolling the statute of limitations as to audit work
because subsequent audit services were merely “the continuation of the professional relationship”).
31
Most strikingly, not a single one of those engagements even purports to have anything to do with
the making of the check-the-box elections by OIN’s subsidiaries in 2005.19
MIG, Inc. v. Paul, Weiss, Rifkind, Wharton & Garrison, L.L.P., 701 F. Supp. 2d 518
(S.D.N.Y. 2010), aff’d, 410 F. App’x 408 (2d Cir. 2011), illustrates the point. In that case, plaintiff
brought a malpractice claim years after the allegedly negligent drafting of a document governing
the conversion rights associated with plaintiff’s preferred stock. The plaintiff asserted application
of the continuous representation doctrine because the defendant firm had written and reviewed
subsequent SEC filings concerning the preferred stock, gave “targeted legal advice with regard to
the Preferred Stock,” and issued two memoranda pertaining to errors related to the preferred stock.
Id. at 521. The court, however, found tolling unwarranted: The SEC filings, although discussing
the preferred stock, “did not . . . address the Preferred Holders’ conversion rights under section 8—
the provision containing the alleged malpractice,” and the subsequent advice was part of the firm’s
“routine representations” where it “acted as [plaintiff’s] outside corporate counsel.” Id. at 526-28.
Likewise here, any tax advice Proskauer gave to OSG following the check-the-box elections was
routine for a multinational company and not specifically concerned with the subject matter of the
2005 check-the-box advice. See also, e.g., Nuzum v. Field, 106 A.D.3d 541, 541 (1st Dep’t 2013)
(finding tolling inappropriate because the preparation of promissory notes and the later drafting of
documents pertaining to the proceeds of those notes were “insufficiently related”); Byron Chem.
Co. v. Groman, 61 A.D.3d 909, 910-11 (2d Dep’t 2009) (finding tolling inappropriate despite
“defendants’ subsequent representation in matters unrelated to the specific matter that gave rise to
19 In fact, the only mention of advice regarding any check-the-box elections after 2005 is the factually bereft assertion that Proskauer provided OSG with “[a]dvice to file the check-the-box elections for . . . the Floating, Storage and Offloading (‘FSO’) joint venture (2008).” (Compl. ¶ 51.) That advice does not bear at all on the propriety of, or have any factual relationship to, the 2005 advice—the FSO joint venture did not even exist in 2005. (See Samuels Aff., Ex. E at 7.) However, even had the later advice pertained to the “particular transaction” at issue in 2005, Transp. Workers Union of Am. Local 100 AFL-CIO v. Schwartz, 32 A.D.3d 710, 713 (1st Dep’t 2006), it would still not save the Check-the-Box Claim because there are no allegations that Proskauer rendered any related advice after the applicable bar date.
32
the alleged malpractice”); Maurice W. Pomfrey & Assoc., Ltd. v. Hancock & Estabrook, LLP, 50
A.D.3d 1531, 1533 (4th Dep’t 2008) (tolling inappropriate even though defendant “continued to
provide legal services” to plaintiff because those services were not “in connection with the
employment agreement” underlying the malpractice action); Dignelli v. Berman, 293 A.D.2d 565,
565-66 (2d Dep’t 2002) (not tolling a claim related to the purchase of a farm despite defendants’
representation of plaintiffs “in their various general business dealings,” including those which were
“incidentally connected to the day-to-day business of the . . . farm”).
OSG has failed to meet its burden of pleading that the 2005 check-the-box advice
continued for years after 2005. There is no basis for tolling the statute of limitations, and the
Company’s Check-the-Box Claim should be dismissed with prejudice.
B. Proskauer’s Check-the-Box Advice Did Not Cause Any of OSG’s Alleged Damages
The Check-the-Box Claim should be dismissed for the additional and independent reason
that OSG cannot establish that Proskauer’s advice proximately caused any damages. On
February 9, 2006, OSG replaced all of its existing credit facilities with the 2006 Credit
Agreement (Samuels Aff., Ex. C at 63)—which was structured, negotiated, and documented by
OSG’s in-house lawyers and outside counsel at Clifford Chance (see Compl. ¶ 42). Proskauer
played no role in creating the 2006 Credit Agreement. Because all of OSG’s alleged damages
flow from borrowings under that agreement, any pre-2006 advice provided by Proskauer could
not have been the proximate cause of those damages.20 Accordingly, OSG cannot show that
20 While OSG broadly alleges that “every time [it] borrowed money under one of [its] credit agreements, the amount borrowed was deemed to be a distribution by OIN to OSG” and therefore subject to taxation (Compl. ¶ 10), in fact its damages arise only from drawdowns under the 2006 Credit Agreement. As confirmed by a recent SEC Form 8-K filed by OSG, no Section 956(d) tax liability resulted from drawdowns under pre-2006 credit facilities. (Samuels Aff., Ex. N at 2 (noting that “OSG will include additional taxable income under Section 956 of the Internal Revenue Code in respect of 2010 and 2011” (emphasis added)).)
Regardless, the only drawdowns the Complaint actually mentions occurred after May 2011 (e.g., Compl. ¶¶ 72, 78). OSG has thus inadequately pleaded any damages arising prior to 2011. See N.Y. C.P.L.R. 3013 (a pleading
33
Proskauer’s check-the-box advice—rendered in 2005—was the cause of any of its damages, and
OSG’s Check-the-Box Claim should be dismissed. See Rudolf, 9 N.Y.3d at 442 (requiring a
malpractice plaintiff to demonstrate that the defendant “proximately caused plaintiff to sustain
actual and ascertainable damages”).
The intervention of Clifford Chance utilizing the “joint and several” structure in the 2006
Credit Agreement completely severs any causal relationship between Proskauer’s pre-2006 advice
and OSG’s alleged damages. The Complaint proves this very point, affirmatively alleging that
“the check-the-box elections resulted” only “in the addition of . . . untaxed future earnings and
profits in OIN” and not in the tax liability of which OSG complains. (Compl. ¶ 48.) Those future
earnings and profits created no liability in and of themselves; they only “subsequently became
subject to U.S. income tax liability under Section 956 because of OIN’s joint and several liability
under the credit agreements.” (Id. (emphasis added); see also id. ¶ 95(m) (the check-the-box
elections “caused OIN’s U.S. property to increase dramatically thus creating potential for Section
956 tax liability” (emphasis added)).) Because OSG’s liability arises only from drawdowns under
the 2006 Credit Agreement on which Proskauer did not work (id. ¶ 42), Proskauer’s 2005 check-
the-box advice was not the proximate cause of OSG’s liability.
The Complaint goes even further in establishing that it was Clifford Chance’s use of the
“joint and several” structure in the 2006 Credit Agreement that directly caused OSG’s tax
liabilities. As OSG admits, the liability OSG attributes to the check-the-box elections “could
have been avoided entirely either by not making the check-the-box elections . . . or by not
entering into a loan agreement that had the joint and several structure.” (Id. ¶ 47 (emphasis
added).) Proskauer, whose work on the check-the-box elections ended nearly a year prior to the
must “be sufficiently particular to give the court and parties notice of the transactions . . . intended to be proved and the material elements of each cause of action”); Siwiec v. Rawlins, 103 A.D.3d 703, 704 (2d Dep’t 2013) (“Conclusory allegations of damages or injuries . . . are insufficient.”).
34
execution of the 2006 Credit Agreement, simply does not occupy a place in the causal chain.
See, e.g., Rosenbaum v. Sheresky Aronson Mayefsky & Sloan, LLP, 100 A.D.3d 731, 732-33
(2d Dep’t 2012) (where predecessor law firm ended its representation of plaintiff a year prior to
the relevant transaction, that firm “could not have been a proximate cause” of plaintiff’s
damages); Tigulla v. Porzio, 255 A.D.2d 504, 505 (2d Dep’t 1998) (holding that, as a matter of
law, although defendant’s breach “may have determined the gravity of the consequences
resulting from the [injury],” it nevertheless did not cause the “independent intervening act[]
which operate[d] upon but [did] not flow from the original negligence” (internal alterations
omitted)); Elardo v. Town of Oyster Bay, 176 A.D.2d 912, 913 (2d Dep’t 1991) (holding that, as
a matter of law, “an intervening act will be deemed a superseding cause and will serve to relieve
the defendant of liability when the act . . . so attenuates the defendant’s [alleged] negligence
from the ultimate injury that responsibility for the injury may not be reasonably attributed to the
defendant” (quoting Kush v. City of Buffalo, 59 N.Y.2d 26, 33 (1983))).
OSG acknowledges that both its in-house lawyers and Clifford Chance had ample
opportunity after the check-the-box elections were made to avoid any Section 956(d) liability by
structuring the 2006 Credit Agreement differently.21 Indeed, as OSG has put it, “a reasonably
competent lawyer would have advised the client of the adverse tax consequences flowing from
the joint and several language.” (Compl. ¶ 59.) That admission forecloses any possible
causative role of Proskauer’s 2005 check-the-box advice. See, e.g., Somma v. Dansker &
Aspromonte Assocs., 44 A.D.3d 376, 377 (1st Dep’t 2007) (affirming dismissal of malpractice
claim when “plaintiff’s successor counsel had sufficient time and opportunity to adequately
protect plaintiff’s rights”). The proximate cause of OSG’s damages was not the advice rendered
21 OSG was well aware that, (i) for US tax purposes, the elections would increase the profits attributable to OIN by treating its subsidiaries as liquidated into OIN and (ii) borrowings by domestic companies guaranteed by foreign subsidiaries would “be treated as deemed distribution[s]” for purposes of Section 956(d). (Samuels Aff., Ex. D at 1, 2.)
35
by Proskauer in 2005 but rather the intervening and superseding decision of OSG—after the
check-the-box elections had been made—to implement an agreement with a “joint and several”
structure that created significant tax liability for the Company.
POINT III. OSG’S CAUSES OF ACTION ARE DUPLICATIVE
In attempting to remedy the problems it faced on Proskauer’s motion to dismiss before
the Bankruptcy Court, OSG has restyled its former breach of fiduciary duty claim as a legal
malpractice claim. But—regardless of what the Company chooses to name its claim—it is
duplicative of the first cause of action and should be dismissed.
A party cannot simultaneously maintain two claims that “ar[i]se out of the same facts” and
do “not involve any damages that [are] separate and distinct.” Cosmetics Plus Grp., Ltd. v. Traub,
105 A.D.3d 134, 143 (1st Dep’t), leave to appeal denied, 22 N.Y.3d 855 (2013).22 OSG apparently
believes that, because the causes of action allege breaches of different duties, it has successfully
differentiated them. But this precise line of reasoning has previously been rejected.23 See MIG,
701 F. Supp. 2d at 532 (dismissing breach of fiduciary duty claim as duplicative of malpractice
claim despite plaintiff’s argument that the claim derived not from a breach of the duty of care, but
from “breach of other duties . . . viz. the duties of loyalty and honesty”).
This result is mandated by the principle that “it is not the theory behind a claim that
determines whether it is duplicative,” but the facts supporting it. Estate of Nevelson v. Carro,
22 Although the cases cited herein pertain to the dismissal of other causes of action as duplicative of a malpractice claim, the analysis applies with even more force here, where OSG has attempted to assert two malpractice claims to address the same conduct. See European Am. Bank v. Cain, 79 A.D.2d 158, 162 (2d Dep’t 1981) (holding that “a plaintiff can have but one recovery for one wrong” and therefore “has but a single cause of action” to address the alleged wrongdoing (internal quotation marks omitted)). 23 To the extent the second cause of action is attempting to allege failure to disclose or concealment of malpractice, those allegations are insufficient to differentiate it from the first. See Reichenbaum v. Cilmi, 64 A.D.3d 693, 694-95 (2d Dep’t 2009) (dismissing breach of duty claim as duplicative of malpractice claim and noting that “mere failure to disclose malpractice” does not give rise to a distinct claim (internal quotation marks omitted)); LaBrake v. Enzien, 167 A.D.2d 709, 711 (3d Dep’t 1990) (in a legal malpractice action, “a defendant’s concealment or failure to disclose his own malpractice without more does not give rise to a cause of action for fraud or deceit separate and distinct from the customary malpractice action”).
36
Spanbock, Kaster & Cuiffo, 290 A.D.2d 399, 400 (1st Dep’t 2002) (dismissing breach of
fiduciary duty claim as duplicative of malpractice claim). Here, OSG’s two claims are based on
precisely the same facts regarding Proskauer’s allegedly improper advice on the check-the-box
elections and the import of the “joint and several language.” (Compare. e.g., Compl. ¶ 95 (c),
(m), with id. ¶ 100 (d), (e).) Indeed, many of the allegations underlying each claim are virtually
identical. (Compare, e.g., id. ¶ 95(b), (d), (e), (f), (g), (h), (o), with id. ¶ 100(g), (h), (i), (j), (k),
(l), (m).) Likewise, the Complaint’s wholly inadequate damages allegations do not even attempt
to identify what damages are to be allocated to which claim (id. ¶¶ 98, 103), while the prayer for
relief affirmatively conflates the damages ostensibly arising from the two claims (id. at 46).
OSG has given its claims different names, but the reality is that they address the same
conduct and seek to recover the same damages. In these circumstances, the second cause of
action should be dismissed.
POINT IV. THE COMPLAINT SHOULD BE DISMISSED WITH PREJUDICE
It is a basic principle of law that a plaintiff should not be permitted to repeatedly bring the
same meritless claims against a defendant. See, e.g., Johnson v. Societe Generale S.A., 94 A.D.3d
663, 663 (1st Dep’t 2012) (affirming dismissal with prejudice of an amended complaint served in
response to a motion to dismiss); Ming v. Hoi, 163 A.D.2d 268, 269 (1st Dep’t 1990) (dismissing
with prejudice where amended complaint was “still deficient”). The issues presently before the
Court were also briefed in full before the Bankruptcy Court in Delaware, and—prior to refiling its
Complaint in New York—OSG made substantial revisions in a vain attempt to circumvent
Proskauer’s arguments. (Compare, e.g., Compl. ¶¶ 50-52, 89-90, with Samuels Aff., Ex. M.) But
the Complaint remains rife with fatal weaknesses. Having had a fair chance to correct those
deficiencies, OSG should not be accorded another. Dismissal should be with prejudice.
37
CONCLUSION
For the foregoing reasons, Defendants respectfully request that the Court dismiss the
Complaint with prejudice.
Dated: New York, New York April 11, 2014
DAVIS POLK & WARDWELL LLP
By: s/ Paul Spagnoletti Paul Spagnoletti
Paul SpagnolettiHeather M. Ward Andrew S. GehringMatthew JacobsDAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000
Counsel for Defendants Proskauer Rose LLP, Alan P. Parnes, Richard H. Rowe, Peter G. Samuels, and Steven O. Weise