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Carroll v. Leboeuf

June 5, 2009

KENNETH CARROLL, ET AL., PLAINTIFFS,
v.
LEBOEUF, LAMB, GREENE & MACRAE, LLP, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.

MEMORANDUM OPINION

This is an action by plaintiffs for, among other things, alleged fraud and negligent misrepresentation in the inducement of their participation in an allegedly abusive tax shelter. The action has been resolved with respect to all defendants except Chenery Associates, Inc., Chenery Management, Inc. and Sussex Financial Services, Inc. (collectively, "Chenery"). Chenery, which allegedly was a promoter of the tax shelter scheme in which the plaintiffs "invested," moves for summary judgment dismissing the complaint.

Background

Kenneth Carroll sold his business for a $50 million profit in October 2001. In order to manage his new wealth, Mr. Carroll, his wife Elizabeth Carroll and Carroll Capital Holdings LLC ("plaintiffs") hired Crestone Capital Advisors, LLC ("Crestone") to serve as their financial advisors and recommend both investment and tax minimization opportunities.*fn1 Crestone in turn referred plaintiffs to myCFO, a company that provides "investment advisory, brokerage and consulting services" and "investment and estate planning opportunities."*fn2 Crestone informed plaintiffs that myCFO was offering a tax shelter "investment" known as the Asian non-performing loans ("NPL") strategy and encouraged plaintiffs to speak with myCFO representatives about it.*fn3

MyCFO essentially operated as a financial advisor and promoter of tax products and shelters, but did not itself sell them.*fn4 To that end, myCFO worked with Chenery, which designed and sold the NPL strategy along with other tax products. Chenery was not organized to deal directly with individual "investors" and did not market its products to the public. Instead, Chenery relied on financial advisors like myCFO to recommend its NPL strategy to individuals.*fn5

The details of how the NPL program worked to provide tax deferrals or deductions to "investors" are not important for the resolution of this motion. Suffice it to say that Chenery purchased non-performing loans from financial institutions in South Korea and China. It then pooled the loans and established a non-U.S. limited liability corporation ("LLC") to which it contributed them. Following a series of transactions, the U.S. investor purchased the majority of the LLC's interest in the loans. A loan servicer attempted to collect cash from the loan debtors, and eventually the loans were swapped for loans of other investors or sold, triggering a loss to support the desired tax deduction or deferral.*fn6

Chenery retained several law firms to perform due diligence on the loan portfolios that it was interested in purchasing and to provide legal analysis of the NPL program.*fn7 In particular, it hired LeBoeuf, Lamb, Greene & McCrae LLP ("LeBoeuf Lamb") to provide legal analysis and an opinion as to whether participants would be protected from penalties in the event the Internal Revenue Service ("IRS") successfully challenged tax deductions or deferrals based on the NPL strategy.*fn8 It retained also Sidley Austin Brown & Wood LLP ("Sidley Austin") to perform due diligence work.*fn9

On myCFO's recommendation, plaintiffs too retained LeBoeuf Lamb and Sidley Austin to provide counsel regarding their participation in the NPL strategy.*fn10 Both firms noted in their engagement letters that they previously had represented Chenery, but did not state specifically that they had provided assistance to it regarding the NPL strategy.*fn11 LeBoeuf Lamb advised plaintiffs generally about the structure of the NPL program and explained the legal and market risks involved.*fn12 Sidley Austin provided plaintiffs with a letter analyzing relevant law as applied to the NPL transaction and opining that "there is a greater than 50 percent likelihood that the tax treatment will be upheld if challenged by the IRS, [and that] the IRS should not be successful" in imposing penalties against participants for tax positions taken with respect to the NPL strategy.*fn13 LeBoeuf Lamb then reviewed Sidley Austin's opinion and provided a second opinion letter affirming Sidley Austin's conclusion.*fn14

Plaintiffs participated in the NPL program and paid myCFO and Chenery a combined total of over $1.1 million to do so.*fn15 Plaintiffs then took a tax position based on the NPL strategy when they filed their 2001 federal income tax returns in October 2002.*fn16 A little over a year later, plaintiffs filed an amended 2001 federal tax return that deleted the NPL deduction and paid the resulting interest and additional taxes.*fn17 At the time plaintiffs did so, they had not been audited by the IRS, nor had the IRS indicated an intent to audit them.*fn18

Plaintiffs then sued inter alia Chenery, myCFO, LeBoeuf Lamb and Sidley Austin alleging that they had caused plaintiffs to participate in the NPL strategy and to take tax positions in reliance on that strategy when they knew or should have known that the IRS would not accept those positions. Plaintiffs sought compensatory and punitive damages, recovery of fees paid to defendants, attorneys' fees and costs. The case has been resolved as to all defendants except Chenery, which seeks summary judgment dismissing the remaining claims.*fn19

Discussion

A. Legal Standard

Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.*fn20 The Court must view the facts in the light most favorable to the nonmoving party,*fn21 and the moving party has the burden of demonstrating the absence of a genuine issue of material fact.*fn22 Where the burden of proof at trial would fall on the nonmoving party, however, it ordinarily is sufficient for the movant to point to a lack of evidence on an essential element of the nonmovant's claim.*fn23 In that event, the ...


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