Taxes not the Leased of Your Worries

Pun intended. Apologies. On Thursday a ruling was issued in an interesting case involving a client’s malpractice suit against its former tax lawyers for allegedly mishandling a lease transaction.[1] The client is Leggiadro Ltd., a high-end, women’s clothing store based in Manhattan, which operates throughout the United States. Leggiadro sued Winston & Strawn LLP (“Winston”) after having to pay city corporate taxes in connection a lease-buyout negotiated by Winston.

The material facts of the case are as follows:

Leggiardo’s flagship retail outlet was located at 680 Madison Avenue, a prominent shopping hub in the heart of Manhattan. [2]  The owner of the building, Carlton House Inc., (“Carlton”) entered into a lease with Leggiardo from 2002 through June 2017.[3]

Carlton sold the building and lease in 2010. The new landlord notified Leggiadro that it wished to negotiate an early termination and buy-out of the Lease because it sought to convert the building into residential and commercial cooperative units.[4]  Leggiadro retained Winston to negotiate a buy-out with the landlord, in order to obtain adequate capital to cover the costs of relocating its flagship store.[5]

Winston negotiated the buy-out. However, Leggiadro subsequently became aware that they incurred unexpected New York State and New York City tax liabilities by virtue of differences in how the state, the city, and the IRS treat S-Corporations for tax purposes. [6]

Leggiadro alleged that Winston committed malpractice by failing to inform them of these tax issues and, if they had, Leggiadro would have negotiated a higher buy-out settlement amount with the Landlord that would have been sufficient to cover Leggiadro's moving costs.[7]

Following Winston’s motion for summary judgment, New York Supreme Court Judge Shirley Werner Kornreich ruled that Leggiadro could not proceed on the theory that it was damaged because it could have obtained more money from the landlord had it known it would have to pay additional city taxes for the buy-out.

Citing speculation and lack of evidence, the Court stated that Leggiadro failed to carry its burden to establish it could have received more money from the buy-out.

However, Winston failed to kill the suit outright.  Summary judgment was denied under Leggiadro’s alternate theory of harm. Leggiardro established a triable issue of fact by arguing that it would have remained in the Madison building for the remainder of the lease term (several years) had it known the tax consequences of leaving early.

We may get a trial after all, but probably won’t since many cases settle after summary judgment rulings.

Regardless, Winston’s failure to advise its client of potential taxes appears to be a major oversight. The first clue should have been the client’s use of an S-corporation, which receives curious tax treatment in numerous situations, compared to its counterparts, namely, the limited liability company (“LLC”) taxed as a partnership.  The second clue was that it was New York, not to mention, Manhattan – a notorious landmine field for tax practitioners.

If Leggiardro could have avoided the additional city taxes by using an LLC structure, Winston might have faced an additional count of malpractice for not advising such. Ostensibly, that would have required Winston to disclose the existence of the taxes in the first place, which obviously, it did not.  Even if the failure to disclose was a nonissue, the failure to properly structure the transaction might have been actionable, assuming a better structure was possible.

— By Michael S. Cooper, Esq., Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Leggiadro Ltd. et al. v. Winston & Strawn LLP, case number 154749/2012, Supreme Court of the State of New York, County of New York.

[2] Leggiadro Amended Complaint, ¶ 8

[3] Id. at ¶ 14

[4] Id. at ¶ 11 & 12

[5] Id. at ¶ 15

[6] Id. at ¶ 25

[7] Id. at ¶ 31