NEW YORK, July 31 (Reuters) - A real estate attorney may
have acted negligently but cannot be sued for malpractice
because his clients cannot prove his actions caused their
losses, a divided New York state appeals court said Tuesday.
The Appellate Division, First Department, found in a 4-1
ruling that there was "strong evidence" that Howard Stern acted
negligently when he helped Wo Yee Hing Realty sell a building as
part of an arrangement to defer capital gains taxes, even though
he had no experience handling such transactions.
But the majority ruled that Wo Yee Hing Realty had no
evidence that it would have been able to complete the
transaction and defer its taxes, even if Stern had performed
"To prevail on its claim of legal malpractice, plaintiff
must prove not only that defendant was negligent, but also that
defendant's negligence was a proximate cause of its losses,"
wrote Justice David Saxe for the majority.
In 2006, Wo Yee Hing, a company owned by three brothers,
hired Stern to represent it in the sale of a residential and
commercial building in Manhattan. The brothers planned to sell
the building as part of a 1031 exchange, named for the section
of the Internal Revenue Code that permits such transactions.
Under the law, a company can defer the capital gains tax
resulting from the sale of commercial or investment property if
it identifies a similar "replacement" property within 45 days
and takes possession of that property within 180 days. The
exchange must be done through a "qualified intermediary," a
A 1031 EXCHANGE
The brothers claim that Stern assured them he knew how to
perform a 1031 exchange. Stern asserts that he repeatedly told
them he was unfamiliar with these transactions and that the
brothers told him they would handle the details.
Either way, the majority said, there is evidence Stern acted
negligently by undertaking the preparation of the sales
contract, since by his own admission he was unqualified to
handle a 1031 exchange.
As a result, checks for $10.2 million were made out to Wo
Yee Hing, rather than to an intermediary, making a 1031 exchange
legally impossible, according to the court.
Nevertheless, Wo Yee Hing failed to show it would have been
able to complete the exchange for a replacement property even if
Stern had done everything properly, Saxe wrote.
"Plaintiff failed to present any evidence that it had
identified any property that it was capable of buying within the
statutory time frame. Nor did it present any evidence that it
could have closed on its purchase within 180 days."
The majority also included justices John Sweeny, Dianne
Renwick and Rosalyn Richter.
In dissent, Justice Leland DeGrasse wrote that the
majority's holding was "unrealistic," since the company knew
almost immediately that a 1031 was no longer permissible and
therefore did not bother to identify a suitable property to buy.
"It would have been impossible for plaintiff to purchase or
even identify anything that qualified as replacement property,"
he wrote. "It would also have been pointless for plaintiff to go
through the motions of doing so once it received the proceeds of
Ralph Drabkin, whose firm represents the company, said he
was "at a loss" to explain the majority's reasoning but had not
yet determined whether to appeal.
"Once you learn at a closing that you have failed to meet
the requirements of the 1031 exchange, what rational person
would go forward?" he said. "It's an undue burden that the court
places on the client who relies on the expertise of an
Tracy Peterson, Stern's lawyer, said they were "pleased"
with the ruling.
"Both courts found that as a matter of law, there was no
legal malpractice," she said.
The case is Wo Yee Hing et al v. Howard Stern, Appellate
Division, First Department, No. 7020.
For Wo Yee Hing: Caitlin Robin of Drabkin & Margulies.
For Stern: Tracy Peterson of Braverman & Associates.
(Reporting by Joseph Ax)
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