By Ben Bedell, From New York Law Journal

Fraud claims against Proskauer Rose stemming from a tax shelter scheme it helped sell to the heirs of the Johnson & Johnson fortune will survive a motion to dismiss, the Appellate Division, First Department, ruled Thursday.

A unanimous panel, in an opinion written by Justice Angela Mazzarelli, affirmed a ruling by Manhattan Commercial Division Acting Justice Lawrence Marks, who dismissed legal malpractice claims against Proskauer on statute of limitations grounds but allowed the fraud and punitive damages claims to proceed.

The case is Johnson v. Proskauer Rose, 652075/11.

Lead plaintiff John Seward Johnson Jr., grandson of the pharmaceutical giant’s founder, claims he and his relatives lost $40 million after taking Proskauer’s advice, and in 2001 sold holdings of Johnson & Johnson stock in a transaction that avoided capital gains taxes.

Proskauer had recommended the transaction, which was structured by tax consulting firm The Diversified Group, with whom Proskauer had a fee-sharing agreement.

The IRS and state tax authorities challenged the transaction and assessed $18.3 million in back taxes, interest and penalties, the complaint said. The Johnsons also claim an additional $23 million in damages stemming from lost gains and dividends on the stock, had they retained it, plus $1.3 million in fees paid to Diversified, which then paid over $425,000 to Proskauer.

Proskauer, which is representing itself in the case, argued that the fraud claim was duplicative of the malpractice claim and thus time-barred as well.

The panel disagreed, holding that the Johnsons allege “not only that defendants failed to adequately advise them with respect to the tax strategy,” but also claim that “Proskauer pressured them into the scheme because, at the outset, Proskauer’s paramount concern was preserving its lucrative arrangement with [Diversified], which presumably intended to continue to work with Proskauer to sell the scheme to other high net worth individuals and entities.”

Mazzarelli wrote that Marks had been correct when he “found the fraud claim alleged independent, intentionally tortious conduct,” and that such conduct “gave rise to separate and distinct damages from the malpractice claim.”

Proskauer, relying on Shalam v. KPMG LLP, 89 AD3d 155 (1st Dept., 2011), also argued that the Johnson’s status as wealthy and sophisticated investors meant they should have known the scheme was risky, and they thus failed to meet the detrimental reliance prerequisite for a fraud claim.

Mazzarelli said that argument does not apply when the defendant is a law firm. Proskauer was “required to place plaintiffs’ interests above all else, without regard to [the Johnson’s] perceived pedigrees, fortunes or business savvy,” she said.

Moreover, “one of the things a sophisticated investor is presumed to know to do before entering a transaction is to consult with its attorney,” she said. “That is precisely what plaintiffs did, and they were entitled to rely on defendants’ advice.”

The panel also sustained the Johnson’s claim for punitive damages.

Proskauer allegedly marketed the scheme to at least 380 other clients, the opinion notes.

The complaint “sufficiently alleges that intentional and malicious treatment of those clients as well as a wanton dishonesty as to imply a criminal indifference to civil obligations” was shown, Mazzarelli said.

“Indeed, although we offer no opinion regarding whether the particular scheme at issue was criminal in its manipulation of the tax laws, plaintiffs have demonstrated that similar tax avoidance schemes resulted in the indictments of some of their promoters,” the panel said.

The complaint also names as defendants former Proskauer partner Ira Akselrad, chief of its tax department at the time the scheme was being offered, and trusts and estate tax partner Jay Waxenberg.

Proskauer has brought a third-party claim against the Johnson family’s personal tax advisor, Robert Matthews, a certified public accountant and trustee for the family trusts, alleging that Matthews’ longtime tax planning advice to the plaintiffs renders him solely responsible for covering any damages in the Johnson suit.

Joining Mazzarelli in the opinion were Presiding Justice Luis Gonzalez, Rolando Acosta, Karla Moskowitz and Leland DeGrasse.

Proskauer partner David Lederkramer, who is representing the firm, said the firm welcomed the panel’s dismissal of the malpractice claims. “We will continue to seek dismissal of the remaining claims and are confident we will prevail,” he said.

Retired New Jersey judge Gary Stein, special counsel at Hackensack’s Pashman Stein, argued for the plaintiffs.

“We are pleased that the Appellate Division recognized and upheld the essence of the allegations in the case that Proskauer defrauded not just our clients, but a lot of other clients,” said Pashman Stein member Sean Mack, who is co-counsel on the case.

For more on this story go to: http://www.newyorklawjournal.com/id=1202725138700/Fraud-Claims-Against-Proskauer-Over-Tax-Shelter-Advice-Upheld#ixzz3Yt4LKGdD