Cohen, et a l . v . Shaines CV-00-396-M 04/25/01 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Abraham B . Cohen and David Stafford, Individually and as Partners/Members of Abraham B . Cohen, CPA, P.C., and Cohen and Stafford, CPA, P.C., Plaintiffs

v. Civil N o . 00-396-M Opinion N o .

Robert A . Shaines, Esq., Defendant

O R D E R

In 1998, Irene Levy (not a party to this litigation) filed a

malpractice action against her accountants - plaintiffs in this

proceeding - Abraham Cohen and David Stafford, individually and

as partners/members of Abraham B . Cohen, CPA, P.C. and Cohen and

Stafford, CPA, P.C. She brought that suit after the Internal

Revenue Service audited tax returns prepared by plaintiffs and

determined that Levy was liable for approximately $135,000 in

unpaid taxes and interest. Eventually, plaintiffs settled Levy’s

malpractice suit against them and, in this case, now seek

contribution from Defendant Attorney Robert A . Shaines, pursuant

to N.H. Rev. Stat. Ann. (“RSA”) 507-7:f. Shaines moves to dismiss the complaint, saying it fails to

set forth a viable cause of action. See Fed. R. Civ. P.

12(b)(6). Plaintiffs object and note that because Shaines’

motion references materials beyond the complaint, it should be

viewed as one for summary judgment. See Fed. R. Civ. P. 12(b).

Accordingly, plaintiffs have treated Shaines’ motion as one for

summary judgment and have, in their objection, also referenced

materials beyond the complaint. They have not requested

additional time to respond to Shaines’ motion under either Rule

12(b) or Rule 56(f). It would probably be reasonable to assume,

then, that plaintiffs have had a “reasonable opportunity to

present all material pertinent to such a motion,” Fed. R. Civ. P.

12(b), and that the parties wish the motion to be treated as one

for summary judgment.

The motion to dismiss necessarily fails, as a motion to

dismiss, because accepting the allegations set forth in the

complaint as true (as the court must), it plainly alleges each of

the essential elements of a viable contribution claim against

Shaines. And, even if Shaines’ motion is considered as one for

summary judgment, the record is insufficiently developed at this

2 point to support a finding that Shaines is entitled to judgment

as a matter of law.

Standard of Review

Treating the motion as one for summary judgment, the court

must “view the entire record in the light most hospitable to the

party opposing summary judgment, indulging all reasonable

inferences in that party’s favor.” Griggs-Ryan v . Smith,

(1st Cir. 1990). Summary judgment is appropriate

when the record reveals “no genuine issue as to any material fact

and . . . the moving party is entitled to a judgment as a matter

of law.” Fed. R. Civ. P. 56(c). In this context, “a fact is

‘material’ if it potentially affects the outcome of the suit and

a dispute over it is ‘genuine’ if the parties’ positions on the

issue are supported by conflicting evidence.” Intern’l Ass’n of

Machinists and Aerospace Workers v . Winship Green Nursing Center,

(1st Cir. 1996) (citations omitted).

Background

Viewing the current record in the light most favorable to

plaintiffs, the undisputed material facts appear as follows.

3 Shaines is an attorney who practices law in Portsmouth, New

Hampshire. Although he does not hold an advanced degree in tax

law, he is knowledgeable and experienced in legal matters related

to personal and corporate taxation. Irene Levy is a long-

standing client of Shaines. At all times material to this case,

she was a majority shareholder of a closely held corporation that

Shaines also represented.

During the course of his professional relationship with Mrs.

Levy, Shaines provided her with advice and legal services related

to estate planning, as well as various legal issues confronting

the corporation. Mrs. Levy also retained plaintiffs, certified

public accountants and tax counselors, who provided general

accounting services to the corporation and to Mrs. Levy

individually. In the late 1980’s, following the death of Mrs.

Levy’s husband, Shaines became more involved in her estate

planning decisions, which included transferring stock in the

corporation to Mrs. Levy’s son. With those stock transfers, Mrs.

Levy apparently exhausted all (or nearly all) of her unified

estate and gift tax credit (a fact that became critical later).

4 Over the course of many years, Mrs. Levy elected not to

withdraw funds due to her from the corporation as either salary

or stock dividends and, instead, allowed those sums to be carried

on the corporation’s books as loans from shareholders. By 1993,

the loans from Mrs. Levy to the corporation had grown to

approximately $900,000. In July of 1993, Mrs. Levy, Shaines, and

plaintiffs attended a meeting at Shaines’ office, at which the

parties discussed a proposal to capitalize the loans from Mrs.

Levy to the corporation as an estate planning device. According

to plaintiffs, Shaines acquiesced in that proposal. Eventually,

plaintiffs prepared tax returns for the corporation and Mrs.

Levy, consistent with her decision to capitalize those loans.

Plaintiffs allege that, at the time of the 1993 meeting and

based on his prior estate planning work for Mrs. Levy, Shaines

knew that she had actually exhausted (or nearly exhausted) her

unified estate and gift tax credit. Thus, say plaintiffs,

Shaines realized or should have realized that, because their

proposal depended upon the availability of unified tax credits,

at least a substantial portion of the loan capitalizations would

be treated by the IRS as a taxable gift. Accordingly, plaintiffs

5 assert that Shaines had a duty to advise Mrs. Levy against

plaintiffs’ own proposal to capitalize her corporate loans,

because he knew from his own past legal work for her that she had

already exhausted the credits necessary for the proposal to work.

Nevertheless, Shaines remained silent, thereby, plaintiffs say,

breaching a duty to speak that he owed to Levy.

Several years later, in 1996, plaintiffs apparently asked

Shaines to furnish them with a formal legal opinion as to whether

Mrs. Levy’s capitalization of her shareholder loans would be

treated by the IRS as a taxable event. After researching the

issue, Shaines opined that the capitalization of those loans

would be taxable. Perhaps not coincidentally, shortly thereafter

the IRS formally audited Levy’s 1993 tax returns and, as

predicted by Shaines, determined that the loan capitalizations

constituted taxable gifts from Mrs. Levy. She paid a substantial

gift tax on the capitalized loans and then filed the referenced

malpractice suit against her accountants, who, having settled

with Levy, now seek contribution from Shaines.

6 Discussion

Based upon Shaines’ long-standing attorney-client

relationship with Mrs. Levy, and because Shaines had previously

provided her with tax-related advice (including estate planning

services that exhausted at least a substantial portion of her

unified estate and gift tax credit), plaintiffs assert that

Shaines had a duty to advise those present at the July, 1983,

meeting - specifically Mrs. Levy - against the proposed

capitalization of the loans. Plaintiffs say that by remaining

silent, Shaines breached a legal duty he owed to Mrs. Levy that,

in conjunction with plaintiffs’ own negligence (failing to

determine whether a unified tax credit was available, for

example), proximately caused her to incur the taxes and penalties

imposed by the IRS following its audit.

The facts presented here are not typical of cases in which a

non-client seeks to hold an attorney liable for alleged

malpractice. In the usual case, the non-client plaintiff asserts

that the attorney breached a duty of care owed directly to the

non-client, proximately causing reasonably foreseeable injury to

the non-client. See, e.g., Simpson v . Calivas,

(1994)

7 (attorney may be liable to non-client intended beneficiary of

will negligently drafted by that attorney). Here, however,

plaintiffs acknowledge that Shaines neither owed nor breached any

duty to them. See Plaintiffs’ memorandum (document n o . 3 ) at 4

(“defendant correctly argues that plaintiffs in the complaint

have not alleged a breach of a duty owed to plaintiffs. . . . ” ) .

Instead, plaintiffs assert that Shaines breached a duty owed to

his client, Mrs. Levy. See First Amended Complaint at paras. 24-

25.

Since plaintiffs contend that they and Shaines are joint

tortfeasors who breached a shared duty owed to Mrs. Levy, and

because plaintiffs have settled Mrs. Levy’s claims against them,

their contribution claim is ripe under RSA 507-7:f. That statute

provides, in pertinent part:

[A] right of contribution exists between or among 2 or more persons who are jointly and severally liable upon the same indivisible claim, or otherwise liable for the same injury, death, or harm . . . .

RSA 507:7-f, I.1

1 To prevail against Shaines, plaintiffs must also demonstrate that their settlement with Mrs. Levy was “reasonable.” That issue is not presently before the court. It

8 Thus, in order to prevail against Shaines on their

contribution claim, plaintiffs must establish that Shaines (like

plaintiffs themselves) had and breached a duty to inform Mrs.

Levy of pertinent facts within his knowledge relevant to the loan

capitalization plan. As noted above, the complaint does not

allege that Shaines breached any duty owed to plaintiffs. Nor

does it allege that Shaines provided plaintiffs with erroneous

information, upon which they then justifiably relied in preparing

Mrs. Levy’s tax returns. Instead, it focuses on Shaines’ alleged

duty to Mrs. Levy and what plaintiffs say constitutes a breach of

that duty:

Shaines owed a duty to Irene Levy to render advice and services with the skill, care and expertise of an attorney holding himself out as a specialist in tax law and estate planning. Nonetheless, Robert Shaines breached that duty when he failed to advise Irene Levy during the course of joint estate planning discussions

does, however, raise the following question: if Mrs. Levy could only achieve her estate planning goals by capitalizing the loans in question, how was she damaged (beyond interest and penalties levied by the IRS) by the fact that she was required to pay taxes on that capitalization? Of course, had she known that the capitalization of the loans would have been treated as a taxable event, she might have sought to achieve her estate planning goals through alternate means. If there were equally effective alternatives available to her, and if she would have pursued those alternatives instead of the proposal set forth by plaintiffs, then her settlement might well have been “reasonable,” but that remains to be proven.

9 involving plaintiffs that there was a strong probability that the Internal Revenue Service would likely treat the loan capitalization as a taxable gift.

First Amended Complaint, at paras. 2 4 , 25 (emphasis supplied).

Shaines, however, says he had no such duty. He has

submitted an affidavit in which he says:

Mrs. Levy never asked me to advise her regarding capitalizing the loan which she made in 1993, nor regarding the gift tax consequences of capitalizing the loan. She asked her accountants, the plaintiffs in this action, to advise her of the costs of capitalization, which presumably would have included the cost of any gift tax. I was never asked by Mrs. Levy to address this question, and I did not do so until 1996 when the plaintiffs sought my opinion.

Exhibit A to defendant’s motion, Affidavit of Robert Shaines at

para. 2 . Shaines has also submitted an affidavit from his

client, Mrs. Levy, in which she says:

The [plaintiffs in this action] were my accountants, and I had hired them to provide me with tax advice, and to properly prepare my tax returns. I sued them because they failed to advise me that loan capitalizations would be assessed as taxable gifts by the IRS, and because they improperly prepared gift tax returns.

10 I did not sue Robert A . Shaines, Esquire because I never retained M r . Shaines to advise me of the tax consequences of the loan capitalizations. M r . Shaines was not retained to prepare gift tax returns.

Exhibit B to defendant’s motion, Affidavit of Irene Levy, at

paras. 2-3 (emphasis supplied).

Plaintiffs have pointed to no evidence suggesting collusion

between Shaines and Mrs. Levy or otherwise undermining the

accuracy of the representations in their affidavits. Instead,

they simply assert (without citation to any legal authority)

that:

The duty to speak up at the meeting when Robert Shaines knows of the areas of the law that are adverse to the intended goals of his client cannot be controlled exclusively by the statements of attorney and client after the fact and under circumstances where there is an obvious intent of the part of Irene Levy to protect Robert Shaines from this action.

Plaintiffs’ memorandum (document n o . 9 ) at 7 . Plaintiffs then go

on to conclude:

The past performance of Robert Shaines in rendering tax advice to Irene Levy, coupled with his specific knowledge of Irene Levy’s tax credits and his knowledge of the tax consequences of the loan capitalization, is sufficient to create a duty to speak at the meeting if

11 he knows, or in the exercise of reasonable care should know, that his client is about to incur tax consequences as a result of a course of action that he has specifically concurred with.

Plaintiffs’ memorandum at 6-7. As to that legal argument, the

court disagrees. Nevertheless, because the record is silent on

other, potentially dispositive issues discussed below, Shaines’

motion (as one for summary judgment) must still be denied, on the

record as it currently stands.

Plaintiffs’ contribution claim against Shaines turns on the

existence (and breach) of a duty on Shaines’ part to advise Mrs.

Levy about facts within his knowledge and expertise, and for

which purpose he was both engaged by Mrs. Levy and present at the

meeting, that would likely affect the tax consequences associated

with plaintiffs’ proposed capitalization of her corporate loans.

According to both Mrs. Levy (the client) and Shaines (her

attorney), however, Shaines was not retained to provide legal

advice concerning the tax treatment of the corporate loans. To

the contrary, according to Mrs. Levy, that is precisely why she

hired plaintiffs.

12 Absent some evidence that Shaines was hired to provide tax

advice concerning the capitalization of the loans o r , even more

generally, advice or information related to tax returns filed by

Mrs. Levy or the corporation, mere imputed knowledge on his part

that plaintiffs’ proposal might have been ill-advised, or that it

was inadequately thought through does not give rise to an

actionable legal duty to so inform the client. See, e.g.,

Fitzgerald v . Linnus,

(N.J. Super. C t . App.

Div. 2001) (counsel hired to represent the estate of client’s

deceased husband was not obligated to advise client on potential

adverse tax consequences of failing to disclaim some insurance

proceeds in favor of client’s children); Jamison v . Norman,

(Tenn. 1989) (attorney retained by client to pursue

tort claims against third party had no obligation to inform

client that his worker’s compensation claim arising out of same

injury should be filed in neighboring state, to avoid worker’s

compensation carrier’s subrogation rights in underlying personal

injury case).

In other words, the scope of Shaines’ duty to his client is

defined by the purpose(s) for which he was retained.

13 Clients and lawyers may define in reasonable ways the services a lawyer is to provide, for example to handle a trial but not an appeal, counsel a client on the tax aspects of a transaction but not other aspects, or advise a client about a representation in which the primary role has been entrusted to another lawyer. Such arrangements are not waivers of a client’s right to more extensive services but a definition of the services to be performed.

Restatement (Third) The Law Governing Lawyers § 19 cmt. c (2000).

See also Id., at § 16 cmt. c (“The lawyer’s duties are ordinarily

limited to matters covered by the representation. A lawyer who

has agreed to write a contract is not required to litigate its

validity, even though the client’s general objectives may

ultimately be aided by resort to litigation.”); R. Mallen & J.

Smith, Legal Malpractice § 8.2, at 774 (5th ed. 2000) (“The

liability of the attorney depends on whether a duty was breached

that was reasonably within the scope of the employment. . . . The

starting point for this analysis is the [retainer] agreement.”).

According to Mrs. Levy, she did not retain Shaines to

provide advice about the “tax consequences” of the capitalization

of the corporate loans. Nor was Shaines under the impression

that he had been hired to provide tax advice concerning the

14 capitalization of those loans. Consequently, one might

reasonably argue that Shaines had no duty to even ponder, much

less focus o n , research, and advise Mrs. Levy regarding the tax

consequences of the course of action proposed by plaintiffs. As

the court observed in

The role of an attorney can be circumscribed by the terms of his or her engagement by the client. Here the engagement was narrowly conceived by both parties and [the attorney’s] role was clearly delineated. Certainly, [the attorney] could have given advice as to the potential savings when [plaintiff] dies by disclaiming $600,000, but there was no duty to do so. The suggestion that an attorney retained to represent an estate has an affirmative obligation to engage an executrix-wife in post-mortem estate planning fails to recognize the realities of the retention and that of a limited attorney-client relationship.

Fitzgerald v . Linnus,

(emphasis

supplied). Absent an explicit (or fairly implied) understanding

between Shaines and Mrs. Levy to the contrary, Shaines was no

more obligated to consider, research, analyze, or offer legal

advice as to the tax consequences of the proposed loan

capitalization than he was to reflect on the prudence of advice

rendered by a patent attorney related to intellectual property

possessed by Mrs. Levy or the corporation. Stated in simplest

terms, Shaines did not, by agreeing to advise Mrs. Levy as to

15 certain specific legal issues, assume a general obligation to act

as her attorney with respect to all legal issues she might

confront in her personal and/or business life, even those which

might have been discussed at a meeting that Shaines attended.

To prevail on their complaint, plaintiffs must demonstrate

that Shaines breached some cognizable duty owed to Mrs. Levy,

which breach substantially caused or contributed to the cause of

her injury (the adverse tax consequences). To be sure, the

affidavits of Shaines and Mrs. Levy demonstrate that Shaines was

not retained to “advise [Mrs. Levy] regarding capitalizing the

loan which she made in 1993.” Shaines affidavit at para. 2 .

What remains, unclear on this record, however, is just what

Shaines’ legal obligations to Mrs. Levy were. Because he

attended the 1993 meeting, which was held at his office, a

reasonable inference might be drawn (as it is not contradicted by

anything in the current record) that he was present for a purpose

— probably one related to plaintiffs’ loan capitalization

proposal. Of course, he might just as well have been present for

entirely different reasons, such as to provide legal advice

regarding other unrelated agenda items. Absent clarification,

16 however, a jury might reasonably infer, based upon his prior

history of representing Mrs. Levy and the fact that the meeting

took place at his office, that Shaines was engaged by Levy to

attend the meeting to provide pertinent services – perhaps

historical information from the perspective of one schooled in

estate and tax matters that Levy’s accountants might require and

that she might not understand or appreciate. The record is

silent on this point, but one might reasonably posit on this

limited record, that he attended: (1) to answer relevant

questions posed by plaintiffs relating to his prior legal work

for Mrs. Levy (e.g., estate planning devices that might have

exhausted her unified estate and gift tax credit); or (2) to

provide Mrs. Levy with general legal advice and information

necessary to facilitate her own evaluation of the proposed

capitalization of the loans in question, in light of her prior

estate planning activity (as distinct from more narrow advice

concerning the “tax consequences of the loan capitalizations,”

Levy affidavit at 3 ) .

Under those circumstances, it is possible that Shaines owed

(and breached) a distinct duty to advise Mrs. Levy that, by

17 virtue of her prior estate planning activity, she had already

exhausted her unified estate and gift tax credit and, therefore,

plaintiffs’ proposal to capitalize her loans was ill-advised,

since it depended (apparently) on the availability of such

credits to succeed. Alternatively, of course, it is possible

that there were other items on the agenda for that meeting, only

some of which involved Shaines; or that he was present for

entirely different reasons, unrelated to plaintiffs’ proposal; or

that his involvement was limited to listening to plaintiffs and

making himself available in case some matter required his legal

attention. It is also possible that both he and his client, Mrs.

Levy, understood that when the conversation shifted to

consideration of capitalizing her loans to the corporation,

Shaines was not obligated (nor was he even expected) to focus on

the issue, have any input into the advisability of plaintiffs’

plan, volunteer any information that might be related to that

plan, or render any legal advice concerning that plan. He may

well have been thinking about other matters for which he was to

be responsible.

18 At this point, the court need only observe that the record

is silent on these questions. Why Shaines attended the meeting,

the nature of his role at that meeting, and the scope of his

legal engagement are simply not disclosed. S o , even if the

motion to dismiss is treated as one for summary judgment, it has

not been shown that Shaines is entitled to judgment as a matter

of law on the record as developed, because the limited and

sharply focused disclaimers do not reach quite broadly enough to

show that Shaines’ representation (whatever it was) did not

relate to the proposed loan capitalization in any actionable way.

That may be the case; this record simply falls short of

establishing the necessary uncontested facts to support that

conclusion.

Conclusion

To prevail on their claim against Shaines, plaintiffs must

demonstrate that they are “jointly and severally liable upon the

same indivisible claim, or otherwise liable for the same injury”

to Mrs. Levy stemming from the 1996 IRS audit. RSA 507:7-f.

While it is clear from the record that Shaines neither had nor

breached a duty to advise Mrs. Levy on the “tax consequences” of

19 the proposed loan capitalization, it has not been shown that he

did not breach any broader duty to her that could have

contributed to the cause of her injury. Because the record is

silent as to why Shaines attended that 1993 meeting, and as to

the nature of his role (and concomitantly the scope of his duty)

at that meeting, it has not been demonstrated that Shaines is

entitled to judgment as a matter of law.

Defendant’s motion to dismiss (document no. 5 ) is denied,

without prejudice, as a motion to dismiss. And, even treating it

as a motion for summary judgment, as the parties wish, it is

necessarily denied as well. If Shaines files a motion for

summary judgment, it would be helpful if the unresolved issues

identified by the court are addressed, and material facts are

disclosed as either established or disputed.

SO ORDERED.

Steven J. McAuliffe United States District Judge

April 2 5 , 2001

cc: Steven M. Latici, Esq. Cheryl M. Hieber, Esq.

20