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January 10, 1991


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 professional malpractice.

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 ...

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