A straight forward allegation of legal malpractice is the first step in a successful claim. A second step is connecting the described shortcomings and the claimed damages. In Lisi v Lowenstein Sandler LLP 2017 NY Slip Op 32411(U) November 16, 2017 Supreme Court, New York County
Docket Number: 160298/2016 Judge Shirley Werner Kornreich finds that where a claim might be stated, damages cannot be linked to the shortcomings.
“In May 2012, Lisi hired LS, a law firm with its principal office in New York City, to negotiate the terms of his employment as a Senior Vice President with A vadel Pharmaceuticals flk/a as Flame! Technologies SA and Eclat Pharmaceuticals, LLC (Flame!). AC iii! 2, 9-11; Dkt. 49 (Retainer Letter). Defendants Defalco and Greenbaum were partners at LS; Defalco was the LS attorney primarily responsible for representing Lisi in the negotiations with Flame!. AC ml 3- 6; Dkt. 49 at 1. ”
“On May 17, 2012, Defalco sent Lisi an email (the Defalco Email) concerning the ongoing negotiations, attaching a revised draft of Lisi’s employment agreement. Dkt. 22 (Defalco Email); Dkt. 60 (copy of DeFalco Email with attachments included). In the email, DeFalco discussed the possibility of making an 83(b) election under the Internal Revenue Code with respect to a grant of restricted stock that was part of Lisi’ s compensation under the attached draft of his employment agreement. 2 See Defalco Email; Dkt. 60 at 6. Defalco began the discussion by informing Lisi that “restricted stock [received] in connection with the provision of services … is taxable to the recipient as compensation income (since it is received in connection with employment); i.e., ordinary income subject to payroll taxes,” based on the stock’s value less any amount paid for it. Defalco Email (emphasis in original). Lisi’s employment agreement was executed on May 28, and took effect on June 25, 2012. Employment Agreement at 1.”
“On December 8, 2016, Lisi commenced this action by filing his summons and initial complaint. Dkt. 1. He subsequently filed the AC on February 6, 2017. Dkt. 3. The AC asserts a single cause of action for legal malpractice, seeking $5,300,000 in damages. AC iii! 75-85. It alleges that LS negligently failed to advise Lisi that he would be taxed at the ordinary income rate on the increase in the value of his option shares upon exercise, rather than at the capital gains rate upon disposition of the shares. It further alleges that, but for this failure to advise, Lisi would not have been “left vulnerable to market fluctuations in the stock price of Flamel,” because he “would have” employed alternative investment strategies, that accounted for the true amount of his tax liabilities, to “receive the optimal market value for [his] Flamel shares.” AC iii! 68-83. LS moved to dismiss on March 21, 2017. Dkt. 13. The court reserved on the motion after oral argument. See Dkt. 67 (8/30/17 Tr.). ”
“Although Lisi’ s lack of records and recollection are insufficient to challenge the authenticity of the Defalco Email, the court finds that the content of the email itself does not unambiguously refute Lisi’ s allegation of professional negligence. The Defalco Email does mention stock options in passing, but not in the portion of the email that discusses the tax treatment of stock “received in connection with employment.” That portion of the email is specifically couched as a general description of the tax consequences that attach to the receipt of restricted stock. And although the email may easily be read to imply that other forms of stocksuch as non-qualified stock options-are likewise subject to ordinary income tax because they are “received in connection with employment,” that advice is never explicitly stated. Accordingly, the Defalco Email does not refute Lisi’s allegation of negligence in a manner that is “essentially undeniable.” See Amsterdam Hosp. Grp., 120 AD3d at 432. Lisi’s malpractice claim nevertheless fails because his allegations are insufficient to show that but for LS’s failure to give proper tax advice, his trading losses would have been avoided. See Leder v Spiegel, 31 AD3d 266, 268 (I st Dept 2006) (“The failure to demonstrate proximate cause mandates the dismissal of a legal malpractice action regardles~ of whether the attorney was negligent.”). Lisi does not (and cannot) allege that LS’s failure to advise him had any effect on the nature of his tax liability-the exercise of his options was always going to be subject to ordinary income tax. He does not allege that he would not have executed the separation agreement had he been properly advised. Rather, Lisi’s theory of loss causation is that, absent proper tax advice, he was unaware of the true amount of the tax liability incurred by the exercise of his options, and was therefore unable to strategically manage his investment post-exercise in a manner that minimized market risk and allowed him to realize “the optimal market value” of his shares. AC iii! 68-71. He acknowledges that the exercise of his options exposed him to “market fluctuations in the stock price of Flame!,” but asserts that, with proper advice, he would not have been left vulnerable to such fluctuations because he “would have locked in his sales price for all options exercised to allow and account for the fixed exercise price and tax basis,” and “would have capitalized on the sale of the shares at a fixed and higher price.” iii! 74, 82-83. “