By Matt Sharp
Additional reporting by Jonathan Randles and Stewart Bishop.
Editing by Christine Chun.
All Content © 2003-2016, Portfolio Media, Inc.
Law360, New York (July 2, 2015, 3:23 PM ET) — A New York appeals court on Thursday rejected Proskauer Rose LLP’s bid to dodge a malpractice suit alleging that faulty legal advice triggered a more than $255 million tax liability for Overseas Shipping Group Inc., finding the oil tanker company had sufficiently pled a valid claim.
The New York Supreme Court Appellate Division, First Judicial Department, said in a split decision that a lower court correctly ruled that the legal malpractice claim is not time-barred and that OSG had adequately alleged the firm’s advice was the proximate cause of its multimillion-dollar tax bill.
Proskauer argued in its appeal that OSG’s tax problem stemmed from a botched credit agreement negotiated by a different firm and urged the appeals court to overturn New York Supreme Court Judge Jeffrey K. Oing’s September refusal to dismiss the lawsuit — a request denied on Thursday.
“Defendants argue that because the 2006 credit facility agreement was drafted by another law firm, it severed any causal chain between defendants’ work in 2005 and plaintiff’s increased tax liability,” the appeals court said. “However … defendants’ contention is unavailing at this procedural juncture.”
OSG has claimed that Proskauer, its longtime tax adviser, gave the company bad advice with respect to the joint liability of its subsidiary OSG International Inc. and compounded the problem when it later advised the company that the language in the credit agreement was “ambiguous” and didn’t pose a potential problem.
OSG further claimed that its problems date back to 2005, when Proskauer advised the company on a restructuring of its subsidiaries through a so-called “check-the-box election.” That decision consolidated all future untaxed earnings to accumulate at OSG International instead of the company’s foreign subsidiaries and increased OSG’s tax exposure on the company’s foreign shipping income, the complaint said.
The substantial tax problem at the heart of the lawsuit helped push OSG into bankruptcy in November 2012. By February 2013, the Internal Revenue Service hit OSG with a $463 million claim for back taxes for five years since 2004, including $200 million each in 2010 and 2011. That claim was later trimmed to $255.7 million under OSG’s bankruptcy plan.
In a statement on Thursday, Proskauer expressed confidence that OSG’s claims would be tossed after closer examination.
“The Appellate Division simply concluded that OSG’s claims could not be disposed of without further development of the facts during discovery,” the firm said. “To date, that discovery has only confirmed that OSG’s claims are legally and factually baseless. We remain confident that, after review of all the facts, every one of OSG’s claims will be dismissed.”
Counsel for OSG did not immediately respond to a request for comment on Thursday.
Proskauer is represented by Paul Spagnoletti, Heather M. Ward, Andrew S. Gehring and Matthew Jacobs of Davis Polk & Wardwell LLP.
OSG is represented by John M. Brown, Steven L. Hoard and Flannery H. Nardone of Mullin Hoard & Brown LLP and Michael I. Allen and Yoram Miller of Allen Miller LLP.
The case is Overseas Shipholding Group Inc. v. Proskauer Rose LLP et al., case number 650765/2014, in the Supreme Court of the State of New York, County of New York.