Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.


September 29, 2005.

KENNETH CARROLL, et al., Plaintiffs,
LEBOUF, LAMB, GREEN & MacRAE, L.L.P., et al., Defendants.

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge


Plaintiffs bring a variety of claims against their former lawyers, accountants, and financial advisors, alleging their misrepresentations, material omissions, and negligence caused plaintiffs to participate in an invalid investment and tax strategy and to incur substantial financial damages. Defendant Graf Repetti & Co., LLP ("GRC") moves to dismiss. I. Background

  The amended complaint (the "Complaint") alleges the following facts, which the Court accepts as true for the purposes of this motion.

  At the center of this action is a scheme to develop and promote a tax strategy that would allow persons legally to avoid paying taxes. Defendants Chenery Associates, Inc., Sussex Financial Enterprises, Inc., and Chenery Management, Inc. (collectively, "Chenery"), and their owner, defendant Roy E. Hahn, developed a tax shelter strategy involving non-performing loans made by banks outside the United States (the "NPL Strategies").*fn1 Other contributors to the NPL Strategies included defendants Graham Taylor, R.J. Ruble, and LeBoeuf, Lamb, Greene & MacRae, L.L.P.*fn2 Defendant Sidley Austin Brown & Wood LLP agreed to provide opinion letters regarding the lawfulness of the NPL Strategies.*fn3 Defendant Grant Thornton LLP agreed to prepare tax documents for entities established by Chenery to implement the NPL Strategies.*fn4 These defendants, along with myCFO, myCFO Advisor, and myCFO Broker, worked together to promote the NPL Strategies.*fn5

  In October 2001, plaintiffs Kenneth and Elizabeth Carroll began to consider investing in an NPL Strategy involving distressed, non-performing loans made by Asian banks (the "Asian NPL Strategy").*fn6 The Carrolls met with various representatives of the promoter defendants to discuss the Asian NPL Strategy and its tax-saving possibilities.*fn7 Believing the tax shelter would provide significant, legitimate tax savings, and that it would pass muster with the IRS and the state of New Jersey, the Carrolls decided to participate and included their investment in the strategy on their 2001 tax returns.*fn8 In order to participate, Mr. Carroll purchased Korean Development Bank's interest in a distressed loan pool, called Fund II, and later made additional investments.*fn9 The promoter defendants knew or should have known that the Asian NPL Strategy would be challenged by the IRS and New Jersey, but represented that the strategy was safe and lawful. Both the IRS and the State of New Jersey challenged the deductions taken by the Carrolls, and they subsequently paid substantial additional federal and state taxes and interest.*fn10

  The Complaint does not allege that GRC was involved in the initial promotion of the Asian NPL Strategy. Instead, plaintiffs allege that they hired defendant Jay Brichke, an accountant, in November 2001

"to provide tax planning services, to provide an independent and objective assessment of the tax risks associated with participation in the Asian NPL Strategy, to provide independent and objective advice on the proper tax treatment, for both federal and New Jersey tax purposes, of the Carrolls' participation in that strategy, and to prepare the Carrolls' personal 2001 and 2002 federal and state tax returns."*fn11
The Complaint then alleges that Brichke became affiliated with GRC "[s]ometime in the first half of 2002" and that GRC then "agreed to, and did, provide the services Brichke had been retained to provide," including "assess[ing] and review[ing] the Asian NPL Strategy and its proper tax treatment for both federal and state tax purposes."*fn12

  The Carrolls provided GRC with the Fund II Form K-1 prepared by defendant Grant Thorton to use in preparing their individual tax returns.*fn13 GRC prepared the Carrolls' individual 2001 federal and state tax returns, but never advised plaintiffs that that tax treatment reflected in the K-1 was invalid or risky or that the Carrolls could not claim such a loss on their returns.*fn14 As it turned out, not only did New Jersey and the IRS both reject the tax treatment of the Asian NPL Strategy and assess additional taxes and interest against plaintiffs, but GRC erroneously offset gains and losses of different types of entities, which New Jersey does not permit.*fn15

  The Complaint alleges that GRC thus committed accounting malpractice and caused several kinds of harm to plaintiffs: the investment in the NPL Strategy itself, the loss of legitimate tax saving opportunities, the payment of additional federal and New Jersey taxes and interest, the payment of GRC's own fees, and the payment of fees to new attorneys and accountants to rectify GRC's negligence.*fn16

  GRC moves to dismiss the accounting malpractice and declaratory relief claims for failure to state a claim upon which relief may be granted, arguing (1) GRC was merely a tax preparer, and so had no duty to assess the viability of plaintiffs' tax shelter investments, (2) GRC cannot have caused plaintiffs' damages resulting from the Asian NPL Strategy, as GRC was not involved until after plaintiffs had decided to invest, and (3) plaintiffs cannot recover back taxes and interest as damages.*fn17

  II. Standards Governing Motions to Dismiss

  In resolving a Rule 12(b)(6) motion, the Court accepts as true the factual allegations set forth in the complaint and draws all reasonable inferences in the plaintiffs' favor.*fn18 "Dismissal is appropriate only if [plaintiffs] can prove no set of facts that would entitle [them] to relief."*fn19 The question is not whether plaintiffs ultimately will prevail, but whether they are entitled to offer evidence to support their claims.*fn20

  III. The Merits

  To state a claim for accounting malpractice, plaintiffs must allege (1) GRC had a duty to plaintiffs, (2) GRC breached that duty by not adhering to the standards of the accounting profession, (3) GRC's breach caused injury to ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.