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Kay v. McGuirewoods, LLP

Supreme Court of West Virginia

November 9, 2017

JOHN F. KAY, JR., Individually and as Trustee of THE MILDRED F. KAY TRUST, KAY T. ROBERTS and JEAN T. HOLT, Co-Executors of the Estate of FLORENCE K. TEMPLE, W. RICHARD KAY, JR., HENRY W. BATTLE, JULIA T. HUTCHINSON, JENNIE GRAHAM, Executrix of THE ESTATE OF JAMES KIRK GRAHAM, MARGARET K. HUFFMAN, Executrix of THE ESTATE OF HENRY WILLIAM HUFFMAN, JAMES L. KAY, JOHN D. KAY, BARBARA G. RANDOLPH, WILLIAM M. MURPHY, Co-Trustee of THE JESSIE K. THAYER TRUST, MARGARET K. HUFFMAN, Co-Trustee of THE JESSIE K. THAYER TRUST, and THE KAY COMPANY, LLC, Petitioners
v.
MCGUIREWOODS, LLP, Respondent

          Submitted: October 17, 2017

         Appeal from the Circuit Court of Kanawha County Honorable James C. Stucky Civil Action No. 11-C-615

          Kelly Elswick-Hall, Esq. Marvin W. Masters, Esq. The Masters Law Firm, lc Charleston, West Virginia

          Mark A. Ferguson, Esq. Ferguson Law Offices Charleston, West Virginia Counsel for Petitioners

          David B. Thomas, Esq. Susan M. Robinson, Esq. Bryant J. Spann, Esq. Sarah A. Leonard, Esq. Thomas Combs & Spann, PLLC Charleston, West Virginia Counsel for Respondent.

         SYLLABUS

         1. The issue of whether causation and damages can be demonstrated in a legal malpractice case following a settlement is one that necessarily must be determined on a case by case basis.

         2. "A plaintiff in a legal malpractice action has a general duty to mitigate his or her damages. This doctrine requires a plaintiff to take reasonable steps within his or her ability to minimize losses caused by the attorney's negligence. However, a plaintiff is not required to take actions which are impractical, disproportionately expensive, or likely futile. The scope of a plaintiff's duty to mitigate damages depends on the particular facts of the case." Syl. Pt. 4, Rubin Resources, Inc. v. Morris, 237 W.Va. 370, 787 S.E.2d 641 (2016).

         3. "Generally, in a suit against an attorney for negligence, the plaintiff must prove three things in order to recover: (1) the attorney's employment; (2) his/her neglect of a reasonable duty; and (3) that such negligence resulted in and was the proximate cause of loss to the plaintiff." Syl. Pt. 1, Calvert v. Scharf, 217 W.Va. 684, 619 S.E.2d 197 (2005).

         4. Although damages in a legal malpractice claim are measured with reference to the underlying claim of negligence, the malpractice claim is a separate and distinct claim. As a result, a settlement agreement does not automatically extinguish a legal malpractice claim.

          LOUGHRY, CHIEF JUSTICE.

         The petitioners, former shareholders of Kay Company ("Kay Co.") and Kay Co, LLC ("Kay LLC"), [1] appeal from two orders[2] entered by the Circuit Court of Kanawha County through which summary judgment was granted to the respondent McGuireWoods, LLP ("McGuireWoods" or "MW") in connection with claims the petitioners filed against McGuireWoods, their former legal counsel.[3] As grounds for their appeal, the petitioners argue that the circuit court erred in ruling that a settlement reached by all but one of the petitioners[4] with the Internal Revenue Service ("IRS") prevents them from establishing causation and damages on any of their claims. The petitioners further challenge the circuit court's finding that there are no factual issues in need of resolution and its ruling that Mrs. Graham's status as a non-settler with the IRS prevents her from asserting claims against MW. As part of this appeal, McGuireWoods alleges that the petitioners' claims are barred by the five-year statute of limitations which governs Virginia contract claims.[5] Upon our careful review of this matter, we conclude that the circuit court erred in reasoning that the settlement with the IRS prohibits the petitioners from going forward on all of their claims. We further determine that the circuit court erred in ruling that the lack of a settlement with the IRS precluded Mrs. Graham from asserting any claims against MW. We affirm the lower court's rulings with regard to detrimental reliance and joint venture.[6] With regard to the cross-appeal raised by McGuireWoods, we find no merit to the claim and, accordingly, it is denied.

         I. Factual and Procedural Background

         At the center of this case is the sale of the Kay Co., [7] a transaction for which the petitioner shareholders engaged MW to represent their interests. The petitioners initially conferred with McGuireWoods to obtain tax advice with regard to the prospective sale of the Kay Co. stock. One of the specific issues addressed was a concern that gains from the sale and distribution of the Kay Co. stock would be taxed twice-once to the corporation and then again to the individual stockholders. Due to the low basis of such stock, [8] a huge tax consequence was anticipated as a result of the sale.

         While conferring with McGuireWoods on an unrelated matter, Skip Roberts, one of the Kay Co. Board members, [9] mentioned the double taxation issue. He was referred to a particular MW attorney based on his successful avoidance of double taxation in a similar transaction. McGuireWoods advised Mr. Roberts that it could arrange a sale of Kay Co. with favorable tax consequences for a contingent fee of $125, 000.[10] The MW attorney later contacted Mr. Roberts to disclose a buyer with sufficient capital losses to offset gains from the sale of Kay Co.'s portfolio. As a result of this proposed transaction, the MW lawyer advised the Kay Co. shareholders that they would be taxed only once on the capital gains from the sale.[11]

         In a letter dated July 5, 2000, MW described the structure of the proposed transaction as well as the federal income tax consequences to both the shareholders and the company. On the same date, McGuireWoods forwarded an engagement letter to the KayCo. Board of Directors.[12] In the engagement letter, MW set forth the nature of its services as "advising you in connection with the structuring, negotiating and closing of the Sale." McGuireWoods further agreed to provide legal advice "with respect to the federal income tax consequences of the Sale to the Company and its shareholders." To address issues of West Virginia law, MW recommended that Kay Co. consult with local counsel concerning "the Company's legal standing in West Virginia and its outstanding stock."[13]

         After numerous phone conferences, emails and letters were exchanged, [14] the sale of Kay Co. transpired on October 26, 2000. Pursuant to the arrangement outlined by McGuireWoods in its July 5, 2000, correspondence, the stock of Kay Co. was purchased by CMD Statutory Trust ("CMD Trust"). The funds required by CMD Trust to effect the purchase of Kay Co. were leveraged, purportedly with the use of offshore funds. CMD Trust immediately sold the company.[15]

         On August 3, 2007, the IRS assessed twelve former shareholders[16] of the Kay Co. $2.7 million in taxes and $556, 000 in penalties.[17] In late 2009, all but one of the twelve assessed shareholders elected to execute Closing Agreements and settle the tax dispute with the IRS. Collectively, these former Kay Co. shareholders paid almost $1.8 million. Mrs. Graham successfully obtained a Tax Court decision that her husband's estate had no liability as a transferee of the assets of the CMD Co. for the tax year ending October 26, 2000.[18]When the IRS later sought to collect this same federal tax deficiency from Kay LLC, the claim was settled for $5, 000.[19]

         On April 14, 2011, the petitioners filed the underlying action against MW in the Circuit Court of Kanawha County.[20] Immediately after the first deposition was taken, MW filed a motion for summary judgment, which was denied by order issued on February 3, 2013. After substantial discovery had ensued, [21] McGuireWoods filed a renewed motion for summary judgment. As grounds for its motion, MW argued that the petitioners' settlement with the IRS stood as a bar to any final adjudication concerning the legality of the IRS assessment and the related issue of whether its tax advice to the petitioners constituted legal malpractice. Through its ruling issued on May 27, 2015, the circuit court granted MW's renewed motion for summary judgment. Concluding that the IRS settlement prevented the petitioners "from establishing the requisite causal connection between the alleged wrongful acts or omissions of McGuireWoods . . . and any damages, " the circuit court dismissed the complaint with prejudice.[22] The circuit court similarly dismissed the claim of Mrs. Graham based on its finding that she "has not suffered damages because of any alleged malpractice by" MW.[23]

         Following the petitioners' appeal to this Court, we remanded the matter to the circuit court "for the limited purpose of making findings and conclusions with regard to petitioners' claims for misrepresentation, fraud, detrimental reliance, and joint venture."[24]Complying with this directive, the circuit court ruled in its order of December 5, 2016, that the plaintiffs had abandoned their detrimental reliance claim.[25] Grouping the negligent misrepresentation and fraud counts together, the circuit court concluded that the plaintiffs' settlement of the IRS claims precluded them from establishing liability and causation with regard to those claims. Citing its previous ruling of May 27, 2015, the circuit court found this Court's decision in Calvert v. Scharf[26] controlling, opining that the plaintiffs could not prove they received inaccurate or negligent tax advice from MW given the absence of a finding by a competent tribunal that the plaintiffs were actually liable for CMD Co.'s[27]unpaid tax liability.[28] Linking the misrepresentation and fraud counts to the same allegations underlying the petitioners' malpractice claim, the circuit court concluded that those counts similarly "fail[ed] as a matter of law."[29] Addressing the plaintiffs' joint venture claim, the circuit court decided that this theory of imposing vicarious liability failed as a matter of law for the same reasons the negligent misrepresentation and fraud claims failed. Citing the absence of any profit-sharing arrangement between McGuireWoods and CMD Trust or coequal control over a common commercial pursuit, [30] the circuit court further concluded that the plaintiffs had failed to produce evidence of a joint venture.

         The petitioners seek relief from the circuit court's grant of summary judgment and the related dismissal of their action with prejudice. McGuireWoods asks this Court to affirm the lower court's ruling and to grant its cross-appeal seeking application of the five-year statute of limitations for contractual actions that arise under Virginia law.

         II. Standard of Review

         The plenary nature of our review of a summary judgment ruling is well-established. See Syl. Pt. 1, Painter v. Peavy, 192 W.Va. 189, 451 S.E.2d 755 (1994). And the standard we apply to the lower court's decision to grant summary judgment is similarly axiomatic: "A motion for summary judgment should be granted only when it is clear that there is no genuine issue of fact to be tried and inquiry concerning the facts is not desirable to clarify the application of the law." Syl. Pt. 3, Aetna Cas. & Surety Co. v. Fed'l Ins. Co. of New York, 148 W.Va. 160, 133 S.E.2d 770 (1963). Bearing these standards in mind, we proceed to consider whether the trial court erred in its grant of summary judgment.

         III. Discussion

         At the center of the challenged rulings is the postulate that the absence of a tax court ruling validating the IRS assessment[31] automatically precludes any claim by the petitioners against McGuireWoods arising from its legal advice. Because the shareholders[32]elected to settle after incurring substantial legal fees in challenging the tax assessments, the circuit court ruled that certain issues bearing on the petitioners' claims against MW can never be adjudicated. While both the circuit court and MW view this Court's decision in Calvert as compelling this conclusion, a judicious reading of that opinion demonstrates otherwise. See 217 W.Va. 684, 619 S.E.2d 197.

         The issue presented in Calvert was whether the intended beneficiaries of a will had standing to bring a malpractice claim where a settlement precluded a determination of whether the will had properly effectuated the testator's intent. The issue of standing was affirmatively resolved with our holding in Calvert that

[d]irect, intended, and specifically identifiable beneficiaries of a will have standing to sue the lawyer who prepared the will where it can be shown that the testator's intent, as expressed in the will, has been frustrated by the negligence of the lawyer so that the ...

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