The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:
Plaintiffs Lama Holding Company ("Lama") and its foreign
parents, Rasha Investments N.V. ("Rasha") and Rana Investments,
Ltd. ("Rana"), bring this diversity action against defendants
Shearman & Sterling and Bankers Trust Company ("Bankers Trust")
alleging, inter alia, professional malpractice, breach of
fiduciary duty, negligent misrepresentation, and breach of
contract. The alleged wrongdoings arise from circumstances
surrounding Lama's sale of stock in Smith Barney Inc. ("Smith
Barney") to Primerica Corporation ("Primerica") pursuant to a
merger agreement between Smith Barney and Primerica.*fn1
Shearman & Sterling and Bankers Trust now move pursuant to
Fed.R.Civ.P. 12(b)(6) and 12(c) to dismiss the remaining counts
in the complaint.
Lama, Rana, and Rasha were formed in 1982 to facilitate a
group of foreign investors' purchase of 24.9% of Smith Barney
stock. Shearman & Sterling, a partnership organized under the
laws of New York, created Lama, a domestic United States
corporation, and Rana and Rasha, its foreign parents, as a
"General Utilities Structure"*fn2 (the "Structure") whereby
the foreign investors would be able to take advantage of the
then existing tax code. Lama is a Delaware corporation with no
actual place of business in the United States. Rana is a
corporation organized under the laws of the British Virgin
Islands and also has no place of business in the United States.
Rasha is a Netherlands Antilles corporation with no place of
business in the United States. Lama was owned 33 1/3% by Rasha
and 66 2/3% by Rana. Rasha in turn was owned in whole by Rana.
This Structure eliminated United States withholding taxes on
Smith Barney dividends issued to the foreign investors by
paying them to Lama, a domestic corporation, in accordance with
the General Utilities Doctrine. I.R.C. § 337 (1954). In 1982,
when the Structure was organized, payment of United States'
taxes on any profit from the resale of the stock would also be
eliminated by liquidating Lama and distributing the proceeds to
its foreign parents, as also allowed under the General
Utilities Doctrine. Id.
By an agreement dated October 15, 1986, and an amendment
thereto dated November 9, 1986, Bankers Trust was retained by
Rana as its exclusive agent in the sale of the Smith Barney
stock. Exhibit to Bankers Trust Answer and Counter-Claim. By
the terms of the agreement, Bankers Trust was to seek out a
prospective purchaser and set up the transaction to achieve
optimum return for Lama, Rana, and Rasha. In return, Bankers
Trust was to receive 0.7% of the total received on the sale of
the stock as a commission. The agreement further provided that
English law would govern.
Without first consulting either Shearman & Sterling or
Bankers Trust, on May 19, 1987 Lama, Rana, and Rasha executed
an agreement with Smith Barney which required the plaintiffs to
sell their Smith Barney shares to Primerica. This was done in
the manner originally contemplated by the Structure, but the
law had been changed and the desired benefits were no longer
available. Although Lama, Rana, and Rasha realized a profit of
approximately one hundred million dollars on the sale, they
were also required to pay in excess of thirty-three million
dollars in taxes. Upon the consummation of the sale, Bankers
Trust requested payment of their fee. Lama, Rana, and Rasha
refused to pay the full amount of $1,147,319. An amount of
$604,000 was eventually paid.
Lama, Rana, and Rasha allege that Shearman & Sterling and
Bankers Trust had a duty to inform of changes in the law and
did not do so, thereby causing Lama, Rana, and Rasha to incur
an unduly burdensome tax liability.
Shearman & Sterling moves to dismiss this action for failure
to state a claim upon which relief can be granted and for a
judgment on the pleadings. Fed.R.Civ.P. 12(b)(6) and 12(c).
Under Fed.R.Civ.P. 12(b)(6) and 12(c) Shearman & Sterling
claims that Lama, Rana, and Rasha plead insufficient facts to
state a claim. I disagree. The complaint must be viewed in the
light most favorable to the complainant and the factual
allegations of the complaint taken as true. Miree v. DeKalb
County, 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977).
These pleadings are replete with facts sufficient to withstand
this motion to dismiss.
For example, Lama, Rana, and Rasha allege that a specific
inquiry was made of Shearman & Sterling in August or September
of 1986 as to the possible effects on plaintiffs' interests of
a tax bill then under consideration by Congress. Complaint
¶ 45. A partner at Shearman & Sterling allegedly replied that
there were no significant tax changes enacted as of that time,
"but that the firm would inform Plaintiffs if any significant
amendments to the United States tax laws were enacted." Id. If
in fact such a specific commitment was made which was later
handled in a negligent manner, liability may arise on that
basis. In attorney-client agreements there may be liability
"when there [is] a promise to perform and no subsequent
performance, or when the attorney has explicitly undertaken to
discharge a specific task and then failed to do so." Saveca v.
Reilly, 111 A.D.2d 493, 494-95, 488 N.Y.S.2d 876, 878 (3d Dep't
1985). I find the pleadings sufficient on claims for breach and
that questions of what, if anything, was said, and the extent
to which injury was suffered thereby are questions to be
resolved by a jury.
Shearman & Sterling also contends that there was no breach of
a duty to Lama, Rana, and Rasha because the 1986 amendments had
no impact on the Smith Barney investment. Shearman & Sterling
believes that it can show that the Structure was intended
solely to avoid taxes on dividends. This contention plainly
raises issues of fact of the matter. Lama, Rana, and Rasha
explicitly allege in the complaint that the investment was
structured to minimize tax liability for dividend payments
and for subsequent resale. Complaint ¶ 18-20. Taking the
allegations of the complaint as true, the change in law
restricted the manner in which their stocks could be disposed
of. This obviously did have an impact on the investment. Thus,
the pleadings are sufficient to state the causes of action for
negligent misrepresentation, breach of fiduciary duty, and
Shearman & Sterling also contends, that as a matter of law,
it cannot be held accountable for proximately causing the
losses incurred by Lama, Rana, and Rasha. In order to establish
that Shearman & Sterling's acts and omissions were the
proximate cause of the alleged damages, Lama, Rana, and Rasha
must establish that they would not have entered into the
transaction but for Shearman & Sterling's negligent
failure to reveal changes in the tax laws, and that this
failure proximately caused damage to the plaintiffs. See,
Quintel Corp. v. Citibank, 606 F. Supp. 898, 912 (S.D.N.Y. 1985)
(to establish proximate cause, client must show that he would
not have entered into the transaction if attorney had properly
investigated the transaction and that this failure damaged the
client). In this case, Lama, Rana, and Rasha allege that had
they known of the tax law change, they would not have
structured the sale of their Smith Barney holdings in the
manner which they did. They further allege that the structure
of the deal caused them to incur tax liability in excess of
thirty-three million dollars when taxes could have been avoided
entirely. These allegations are sufficient to withstand the
Shearman & Sterling next maintains that even if there was a
duty to keep Lama, Rana, and Rasha informed, their independent
undertakings along with actions taken by Smith Barney and
Bankers Trust constituted intervening events which were the
proximate cause of the injuries. When the acts of a third
person intervene between defendant's conduct and plaintiffs'
injury, the causal connection is not automatically severed.
Derdiarian v. Felix Contracting Corp., 51 N.Y.2d 308, 315,
414 N.E.2d 666, 670, 434 N.Y.S.2d 166, 169 (1980). Liability then
turns on whether the intervening act is a normal or foreseeable
consequence of the situation created by defendant's negligence.
An unforeseeable or extraordinary intervening act may well
break the causal nexus. Questions as to what is normal and
foreseeable are generally for the finder of fact to resolve.
Id. Even if a subsequent act was either tortious or criminal, a
negligent defendant can be insulated from liability only if
that act was not reasonably ...