Preview
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
SUPREME COURT OF THE STATE OF NEW YORK
NEW YORK COUNTY
PRESENT: HON. ANDREW BORROK PART IAS MOTION 53EFM
Justice
--------------------------------------------------------------------------------X
INDEX NO. 651242/2012
JONATHAN BLOOSTEIN, STEVEN BRANDIS, DAVID
GREENBERG, RICHARD HUANG, SALVATORE ROMO, MOTION DATE N/A, N/A
JOSEPH ROSENHECK, JB 1042 INVESTOR LLC, SBRAN 1042
INVESTOR, LLC, DG 1042 INVESTOR LLC, RH 1042 INVESTOR MOTION SEQ. NO. 007 & 008
LLC, SR 1042 INVESTOR LLC, JR 1042 INVESTOR LLC,
Plaintiff,
-v-
MORRISON COHEN LLP, BRIAN SNARR, JOHN DOES 1 DECISION AND ORDER
THROUGH 10,
Defendant.
---------------------------------------------------------------------------------X
The following e-filed documents, listed by NYSCEF document number (Motion 007) 219, 220, 221, 222,
223, 224, 225, 226, 227, 228, 229, 230, 231, 232, 233, 234, 235, 236, 237, 238, 296, 297, 298, 299,
300, 301, 302, 303, 304, 305, 306, 307, 308, 309, 310, 311, 312, 313, 314, 320, 321, 322, 323, 324
were read on this motion to/for DISMISS .
The following e-filed documents, listed by NYSCEF document number (Motion 008) 239, 240, 241, 242,
243, 244, 245, 246, 247, 248, 249, 250, 251, 252, 253, 254, 255, 256, 257, 258, 259, 260, 261, 262,
263, 264, 265, 266, 267, 268, 269, 270, 271, 272, 273, 274, 275, 280, 281, 282, 283, 284, 285, 286,
287, 288, 289, 290, 291, 292, 293, 294, 295, 315, 316, 317, 318, 319
were read on this motion to/for SUMMARY JUDGMENT (AFTER JOINDER) .
Borrok, J.S.C.
Jonathan Bloostein et al. (the Plaintiffs) are small to mid-sized business owners who engaged
Morrison Cohen LLP (Morrison Cohen) to represent them in connection with a reinvestment
transaction that was designed by Stonebridge Capital (Stonebridge). The terms of the
transaction (the Transaction) are relatively straight forward and not in dispute. Stonebridge and
the Plaintiffs each formed special purpose vehicles. Stonebridge formed the Stonebridge Pass-
Through Trust (Stonebridge Trust). The Plaintiffs each formed a single member limited
liability company (each, a 1042 LLC). The Plaintiffs sold shares in their businesses to their
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 1 of 27
Motion No. 007 008
1 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
employees through Employee Stock Ownership Plan (ESOP) transactions. Each 1042 LLC
issued promissory notes (the LLC Notes) to Stonebridge Trust. Simultaneously, Stonebridge
Trust issued promissory notes (the Pass Through Notes) to Nomura International PLC
(Nomura). The LLC Notes were pledged as collateral for the Pass Through Notes. The
proceeds of the LLC Notes as well as certain cash contributions made by the Plaintiffs were used
to purchase certain corporate bonds (the Underlying Bonds) which were intended to be qualified
replacement property (QRP) under 26 U.S.C. § 1042. The Underlying Bonds were pledged as
collateral for the LLC Notes.
In connection with the Transaction, Brown Rudnick LLP (Brown Rudnick) was retained to
provide an opinion (the Tax Opinion). The scope of the representation is defined on page 8 of
the Tax Opinion which provides in relevant part:
You have requested that we advise you regarding the requirements concerning QRP
under Section 1042(c)(4) of the Code. You have also requested our opinion regarding the
treatment of the Transaction under Section 1042 of the Code. Specifically, you have
asked whether: 1) assuming the Section 1042 Investors have complied with all of the
other substantive and procedural requirements to qualify for non-recognition under
Section 1042 of the Code, whether purchase of the Underlying Bonds through the Section
1042 Investors LLC would qualify as a purchase of QRP in accordance with Section
1042; 2) assuming that the purchase of the Underlying Bonds by the Section 1042
Investor qualifies for non-recognition treatment under Code Section 1042, would the
remaining components of the Transaction cause the Section 1042 Investors to be treated
as having disposed of such QRP; 3) in the event that Section 1042 of the Code did not
apply to the transaction, would additional tax liability be imposed upon the
Securityholders as a result of the inability of the Section 1042 Investors to realize the
benefits of Section 1042 of the Code; and 4) whether any Federal income tax imposed
upon an Issuer will adversely effect its ability to make payments pursuant to the Pass-
Through Notes.
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 2 of 27
Motion No. 007 008
2 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
In addition, you have asked whether the Notes would be treated as Debt or Equity for
U.S. Federal income tax purposes, and whether the ESOP will have any claim of
ownership under the Code as to the Underlying Bonds or the LLC Notes.1
Page 33 of the Tax Opinion under the heading “Opinion” sets forth the actual opinion given by
Brown Rudnick. It provides in relevant part:
Opinion
Based on and subject to the foregoing facts, and subject to the assumptions and
qualifications contained herein, it is our opinion that the LLC will be disregarded as an
entity separate from its owner within the meaning of Code Section 7701 and Treasury
Regulation §§ 301.7701-2 and 301-7701-3, the Section 1042 Investor’s purchase of the
Underlying Bonds through his LLC will be treated as the purchase of QRP; in the event
that Section 1042 of the Code did not apply to the Transaction, no additional tax liability
would be imposed upon the Securityholders as a result of the inability of the Section
1042 Investors to realize the benefit of Section 1042 of the Code; any Federal income tax
imposed upon an Issuer will not adversely affect its ability to make payments pursuant to
the Pass-Through Notes; each class of the Pass-Through Notes will constitute
indebtedness of the related issuer for U.S. federal income purposes; and the ESOP will
not have any claim of ownership under the Code as to the Underlying Bonds or the LLC
Notes.
Based on and subject to the foregoing facts, and subject to the assumptions,
qualifications, and exercise of its judicial discretion, and after full consideration of all of
the relevant discussion contained herein and the reasoned analysis of analogous case law
(though there is no precedent directly on point, the cases are extremely fact-specific, and
the issue relies within the judgment of the courts, which have broad discretion), it is our
opinion that if the matter were properly briefed and presented a U.S. federal court of
competent jurisdiction more likely than not would hold that the remaining components of
the Transaction would not cause a Section 1042 Investor to be treated as having disposed
of the underlying bonds for purposes of Section 1042(e) of the Code.
In other words, and for the avoidance of doubt, the Tax Opinion was a “more likely than not
opinion” given as to likelihood of success if the Internal Revenue Service (IRS) were to
challenge the treatment of the pledge of the Underlying Bonds by attempting to recharacterize
the Transaction as a sale and not as a loan (i.e., as opposed to an enforceability opinion,
1
See Pg. 8 of the Opinion Letter. Although as part of this determination, Brown Rudnick also opined as to whether
the 1042 LLCs would be disregarded for tax purposes pursuant to Treas. Reg. 301.7701-3(b), this portion of their
Opinion is not raised in this case and therefore will not be addressed here.
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 3 of 27
Motion No. 007 008
3 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
substantive non-consolidation or other opinion). Finally, and for the avoidance of doubt, the Tax
Opinion provides that the opinion is “limited to the Federal tax treatment of the transactions or
matters that are the subject of this Opinion.”2
A few days prior to the closing of the Transaction, there was a change in the Event of Default
section of the Nomura loan documents. The documents had provided that Nomura could declare
an Event of Default (and sell the Underlying Bonds causing immediate tax recognition by the
Plaintiffs) if (the Original Rating Trigger Event of Default Provision):
[T]he rating with respect to any Underlying Bond fails to or falls below “B2
by Moody’s or “B” by S&P.3
Shortly before the closing, the provision was modified (the Revised Rating Trigger Event of
Default Provision) to provide that Nomura could call a default if:
[T]he rating with respect to any [sic] financial guaranty insurance policy related to any
Underlying Bond fails to or falls below “B2 by Moody’s or “B” by S&P.4
In other words, pursuant to the Original Rating Trigger Event of Default Provision (i.e., the
original version of the provision), Nomura had the right to call a default if there was a
downgrade in the ratings of the Underlying Bonds,5 but in the Revised Rating Trigger Event of
2
Ex. C, Opinion Letter, Pg. 34, to Attorney Affidavit of Jamie R. Wozman, dated September 11, 2018.
3
Morrison Cohen’s Memorandum of Law in Opposition to Brown Rudnick LLP’s Motion For Summary Judgment
Pg. 3, Fn. 9, citing Affirmation of Brian B. Snarr in Support of Defendants’ Motion for Summary Judgment, dated
September 11, 2018 (NYCSEF Doc. No. 273) (Snarr Aff.), ¶ 15; see also the Affirmation of David Ebert in
Opposition to Brown Rudnick LLP’s Motion for Summary Judgment, dated October 5, 2018 (Ebert Aff. in Opp.),
Ex. 1, ¶ 32.
4
Morrison Cohen’s Memorandum of Law in Opposition to Brown Rudnick LLP’s Motion for Summary Judgment,
Pg. 3, Fn. 10, citing Snarr Aff. ¶17; see also Ebert Aff. in Opp., Ex. 1, ¶ 40.
5
Inasmuch as the bonds were “wrapped bonds,” two ratings downgrades would have to occur to cause an Event of
Default (i.e., the rating of the Underlying Bonds and the guarantor insurer of those Underlying Bonds). The credit
rating of a “wrapped bond” is the higher of (i) the credit rating of the Underlying Bond and (ii) the credit rating of
the insurer that issued the insurance policy guaranteeing payment of the Underlying Bond. See Morrison Cohen’s
Memorandum of Law in Opposition to Brown Rudnick LLP’s Motion for Summary Judgment, Fn. 21, citing Snarr
Aff., ¶ 16; see also Ebert Aff. in Opp., Ex. 1, ¶ 27.
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 4 of 27
Motion No. 007 008
4 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
Default Provision, Nomura could call a default if the insurer of the Underlying Bonds was
downgraded regardless of the rating of the Underlying Bonds.
Following the closing of the Transaction on September 26, 2007, the rating of the insurer of the
Underlying Bonds was downgraded, Nomura called a default and the Underlying Bonds (other
than that of Mr. Bloostein, who covered) were sold causing the Plaintiffs to incur various
damages, including having to pay significant capital gains taxes which the Plaintiffs had
expected to defer until the maturity of the Underlying Bonds.
The Plaintiffs sued Morrison Cohen and Brian Snarr of Morrison Cohen (Mr. Snarr together with
Morrison Cohen, hereinafter, collectively, the MC Defendants) alleging that they were negligent
in failing to address the Revised Rating Trigger Event of Default Provision to which the
Plaintiffs allege they did not agree. The MC Defendants commenced a third-party action against
Stonebridge and Brown Rudnick. The third-party complaint stated three causes of action: (1)
indemnification as against Stonebridge, (2) indemnification and contribution against Brown
Rudnick in connection with the Tax Opinion, and (3) indemnification and contribution with
respect to the documents drafted principally by Brown Rudnick in connection with the
Transaction (the Transaction Documents). Motions to Dismiss were filed and on July 11,
2016, the Court (1) dismissed the claims against Stonebridge, (2) dismissed the indemnification
but not the contribution claim against Brown Rudnick and (3) denied dismissal of the
contribution against Brown Rudnick as to the Opinion Letter (the July 2016 Decision). On April
21, 2017, the Court dismissed the contribution claim against Brown Rudnick as to the
Transaction Documents. Brown Rudnick impleaded Stroock & Stroock & Lavan LLP (Stroock)
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 5 of 27
Motion No. 007 008
5 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
as Stroock had also provided legal services to Stonebridge in connection with the drafting,
editing, and reviewing of the Transaction Documents. Stonebridge commenced an arbitration
proceeding against Stroock alleging legal malpractice relating to the Transaction, which was
resolved pursuant to a settlement agreement. Pursuant to a certain Order of this Court, dated
June 7, 2017, the claims against Stroock were dismissed.
Discovery in this case is now complete and note of issue was filed on August 13, 2018. Brown
Rudnick now moves for summary judgment pursuant to CPLR § 3212 seeking dismissal of
Morrison Cohen’s contribution claim (mtn. seq. no. 007) and the MC Defendants move for
summary judgment pursuant to CPLR § 3212 seeking dismissal of the Plaintiffs’ claims (mtn.
seq. no. 008).
Summary judgment should be granted when the movant presents evidentiary proof in admissible
form that there are no triable issues of material fact and that there is either no defense to the
cause of action or that the cause of action or defense has no merit. CPLR § 3212(b). The burden
is initially on the movant to make a prima facie showing of entitlement to judgment as a matter
of law tendering sufficient evidence in admissible form to demonstrate the absence of any
material fact. Alvarez v Prospect Hosp., 68 NY2d 320, 324 (1986). Failure to make such a
prima facie showing requires denial of the motion. Id., citing Winegrad v New York Univ. Med.
Ctr., 64 NY2d 851 (1985). Once the showing has been made, the burden of going forward with
the proof shifts to the opposing party to produce evidence in admissible form sufficient to
establish the existence of a material issue of fact, which requires a trial. Alvarez, 68 NY2d at
324, citing Zuckerman v City of New York, 49 NY2d 557, 562 (1980).
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 6 of 27
Motion No. 007 008
6 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
I. Brown Rudnick’s Motion for Summary Judgment (Mtn. Seq. No. 007)
Reference is made to the July 2016 Decision. In the July 2016 Decision, the Court noted that
under CPLR § 1401, a claim for contribution is limited to “personal injury, injury to property or
wrongful death,” and that a breach of contract is not an injury to property within the meaning of
CPLR § 1401, citing Board of Educ. of Hudson City School Dist. v Sargent, Webster, Crenshaw
& Folley, 71 NY2d 21, 26 (1987) and Structure Tone, Inc. v Universal Servs. Group, Ltd., 87
AD3d 909, 911 (1st Dept 2011). However, the Court noted that although CPLR § 1401 requires
the existence of tort liability independent of a breach of contract, the mere existence of a contract
does not preclude the possibility of tort liability, citing Landon v Kroll Lab. Specialists, Inc., 91
AD3d 79, 83 (2d Dept 2011). In analyzing Brown Rudnick’s motion to dismiss the contribution
claim, the Court relied on Millennium Import, LLC v Reed Smith LLP, 104 AD3d 190 (1st Dept
2013) and Prudential Ins. Co. of Am. v Dewey, Ballantine, Bushby, Palmer & Wood, 80 NY2d
377 (1992). In Millennium Import, the Court held that attorneys may be liable for their
negligence both to those with whom they have actual privity of contract and to those with whom
the relationship is so close as to “approach privity.” In Prudential, the Court of Appeals held
that a relationship “approaches privity” where (i) there is an awareness by the maker of a
statement that is to be used for a particular purpose, (ii) reliance by a known party in furtherance
of that purpose, and (iii) some conduct by the maker of the statement linking it to the relying
party and evincing its understanding of that reliance. The Court reasoned that Brown Rudnick
was aware that the Tax Opinion was to be used for the purpose of the Transaction, the Tax
Opinion was sent to each Plaintiff, and the Tax Opinion indicated that it could be relied upon by
the Plaintiffs. Inasmuch as the MC Defendants alleged Brown Rudnick’s tortious conduct
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 7 of 27
Motion No. 007 008
7 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
contributed to the injury, the Court denied Brown Rudnick’s motion to dismiss the claim for
contribution because in adjudicating a motion to dismiss, the Court must afford the pleadings a
liberal construction, accepting the allegations as true, provide the plaintiff with every possible
favorable inference, and only grant a motion to dismiss where the factual allegations, taken
together, fail to manifest a cognizable cause of action. AG Capital Funding Partners, L.P. v
State St. Bank & Trust Co., 5 NY3d 582, 591 (2005); Polonetsky v Better Homes Depot, 97
NY2d 46, 54 (2001).
Now, Brown Rudnick brings this motion for summary judgment arguing that there are no issues
of material fact for trial and that dismissal is mandated because there is no evidence that its
conduct in issuing the Tax Opinion fell below the degree of skill commonly exercised by an
ordinary member of the legal community or that the Tax Opinion was the proximate cause of the
loss. In support of its position, Brown Rudnick argues that both Alexis Gelinas, Esq., the
Plaintiffs’ tax expert, and Stanley E. Bulua, Esq., Brown Rudnick’s tax expert, opined that the
conclusions provided in the Tax Opinion were correct, and similar to other opinion letters issued
in connection with transactions like the Transaction, and the MC Defendants have failed to offer
an expert disclosure or report supporting the allegation that Brown Rudnick deviated from the
accepted standard of care in its issuance of the Tax Opinion.6 In addition, Brown Rudnick
argues that although there was a single reference to the Original Rating Trigger Event of Default
Provision on page 25 of the 35-page Tax Opinion, the Tax Opinion is premised on the Revised
Rating Trigger Event of Default Provision, and according to Mr. Bulua, the single reference to
the Original Rating Trigger Event of Default Provision did not affect the conclusion reached in
6
See Merlin Biomed Asset Mgt., LLC v Wolf Block Schorr & Solis-Cohen LLP, 23 AD3d 243 (1st Dept 2005); Zeller
v Copps, 294 AD2d 683, 684 (3d Dept 2002); Orchard Motorcycle Distribs., Inc. v Morrison Cohen Singer &
Weinstein, LLP, 49 AD3d 292 (1st Dept 2008); Schadoff v Russ, 278 AD2d 222 (2d Dept 2000).
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 8 of 27
Motion No. 007 008
8 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
the Tax Opinion. Moreover, Brown Rudnick argues that the MC Defendants cannot prove
proximate cause – i.e., (1) that the Plaintiffs read the Tax Opinion, (2) noticed the single
reference to the Original Rating Trigger Event of Default Provision, and (3) relied on that single
reference to the Original Rating Trigger Event of Default Provision rather than the six references
to the Revised Rating Trigger Event of Default Provision. Furthermore, Brown Rudnick argues
that Mr. Greenberg testified that he did not read the Transaction Documents, let alone the Tax
Opinion, and therefore could not have relied on it in determining whether to enter the
Transaction, and the other four Plaintiffs (Mssrs. Huag, Rosenbeck, Brandis and Bloostein)
testified that they either (x) did not recall if they read the Tax Opinion prior to entering the
Transaction or (y) otherwise did not rely on the Tax Opinion for any other purpose than how the
IRS would treat the transaction. Put another way, Brown Rudnick argues that as a factual matter,
the Plaintiffs did not rely on the Tax Opinion as to what triggering event would result in Nomura
being able to call an Event of Default. Finally, Brown Rudnick argues that reliance on the
Stonebridge economic analysis, which the MC Defendants allege was flawed because it
addressed the Original Rating Trigger Event of Default Provision and not the Revised Rating
Trigger Event of Default Provision, cannot form a basis for finding that Brown Rudnick
breached an accepted standard of care because the MC Defendants have failed to provide any
evidence that the Plaintiffs entered into the Transaction even in part because the Tax Opinion
stated that it relied upon the Stonebridge economic analysis in issuing the Tax Opinion.
In its opposition papers, the MC Defendants argue that the Tax Opinion suffers from a
“fundamental flaw” in that the Revised Rating Trigger Event of Default Provision in the
Transaction Documents is premised on an event that could never occur – i.e., the provision refers
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 9 of 27
Motion No. 007 008
9 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
to an insurance policy rating downgrade and insurance companies, not insurance policies, are
rated.7 In addition, the MC Defendants argue that the analysis performed by Brown Rudnick
turned on, among other factors, the “burdens of ownership” and this, in turn, was based, at least
in part, on the likelihood of a default under the Transaction documents, which included the
“flawed provision” referred to above. Further, the MC Defendants argue that expert testimony is
not necessary to create an issue of fact for the Court to determine that Brown Rudnick committed
malpractice. And finally, the MC Defendants argue that there are issues of fact as to whether the
Plaintiffs relied on the Tax Opinion and whether such alleged reliance proximately caused or
contributed to the Plaintiffs’ alleged damages.
In its reply papers, Brown Rudnick argues that the MC Defendants fail to allege an issue of fact
as to whether Brown Rudnick deviated from the accepted standard of care in its issuance of the
Tax Opinion because the MC Defendants’ opposition papers do not include an expert opinion
that controverts the expert opinion offered by Alexis Gelinas and Stanley Bulua, both of whom
conclude that the Tax Opinion reached the correct conclusion (i.e., that it was more likely than
not that the IRS would treat the transaction as a loan and not a sale)8 and that Brown Rudnick did
not deviate from the accepted standard of care in issuing the Tax Opinion. To the extent that the
MC Defendants argue that the Revised Rating Trigger Event of Default Provision is not
enforceable, this argument was flatly rejected by the First Department.9 In addition, Brown
Rudnick argues that although the MC Defendants correctly point out that Mr. Bulua
7
Morrison Cohen’s Memorandum of Law in Opposition to Brown Rudnick LLP’s Motion for Summary Judgment,
Pg. 3, Fn. 11, citing Snarr Aff. ¶ 15; see also Ebert Aff. in Opp., Ex. 1, ¶ 32.
8
Reply Memorandum of Law Submitted by Third-Party Defendant Brown Rudnick LLP In Further Support of its
Motion For Summary Judgment, Pg. 3., citing Bulua Aff. and the Affidavit of Jamie R. Wozman, dated September
11, 2018, Ex. I, Pg. 52.
9
Stonebridge Capital, LLC v Nomura Intl. PLC, Supreme Court, New York County, Index No. 602081/2008;
Stonebridge Capital, LLC v Nomura Intl. PLC, 68 AD3d 546 (1st Dept 2009).
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 10 of 27
Motion No. 007 008
10 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
acknowledged that the risk of loss was a factor in analyzing whether Brown Rudnick deviated
from the appropriate standard of care, risk of loss is one of seven factors that Brown Rudnick
correctly considered. And, Mr. Bulua concluded that Brown Rudnick did not in fact deviate
from the appropriate standard of care. Furthermore, Brown Rudnick argues that because the MC
Defendants failed to submit an expert affidavit as to the applicable standard of care, it cannot
create a genuine issue of material fact as to Brown Rudnick’s negligence.10 To the extent that
the MC Defendants argue that expert testimony is not necessary, generally, a party seeking to
prosecute a legal malpractice claim must adduce expert testimony delineating the appropriate
standard of professional skill and care to which the attorney was required to adhere under the
circumstances.11 Although an exception exists where the ordinary experience of the fact finder
may provide a sufficient basis for judging if the conduct falls below the requisite standard of
care, the exception is limited to cases where the attorney ignores a well-established filing or
notice requirement, as opposed to analyzing the inclusion of the incorrect version of an event of
default provision in one of the six times that the event of default provision occurs in an opinion
which effects one of seven factors analyzed by the professional in rendering a “more likely than
not” opinion as to the tax treatment of the Transaction. Moreover, Brown Rudnick argues that as
Mr. Bulua attests in his Reply Affidavit, dated October 31, 2018, even applying Mr. Snarr’s
interpretation of the risk associated with the Revised Rating Trigger Event of Default Provision,
the Transaction would be treated as a loan and not a sale by the IRS and thereby Brown Rudnick
did not deviate from the required standard of care.
10
Reply Memorandum of Law Submitted by Third-Party Defendant Brown Rudnick LLP in Further Support of its
Motion for Summary Judgment, Pg. 9 citing Merlin Biomed Asset Mgt., LLC v Wolf Block Schorr & Salis-Cohen
LLP, 23 AD3d 243 (1st Dept 2005); Cosmetics Plus Group, Ltd. v Traub, 105 AD3d 134 (1st Dept 2013).
11
Reply Memorandum of Law Submitted by Third-Party Defendant Brown Rudnick LLP in Further Support of its
Motion for Summary Judgment, Pg. 9 citing Orchard Motorcycle Distribs., Inc. v Morrison Cohen Singer &
Weinstein, LLP, 49 AD3d 292, 293 (1st Dept 2008).
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 11 of 27
Motion No. 007 008
11 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
The Court agrees. The expert testimony indicates that Brown Rudnick’s Tax Opinion was
consistent with the types of tax opinions issued in connection with transactions like the
Transaction at issue and did not fall below the degree of skill commonly exercised by an
ordinary member of the legal community. In addition, the testimony of the Plaintiffs in this case
establishes, at best, minimal reliance on the Tax Opinion – and the purpose for any such minimal
reliance as a factual matter was solely in connection with the treatment of the Transaction if
analyzed by the IRS under Section 1042 (i.e., recharacterization risk). Finally, and perhaps most
importantly, Brown Rudnick’s Tax Opinion is a limited Tax Opinion issued as to whether the
Transaction would more likely than not be recharacterized by the IRS as a sale and not a loan
triggering immediate tax. By its very terms, the Tax Opinion is limited to the foregoing. This
simply is not what caused the harm/loss here. That is, the IRS did not recharacterize the
Transaction as a sale and not a loan, triggering the capital gain recognition. Rather, the capital
gain recognition was triggered by Nomura calling a default under the Transaction documents and
selling the pledged Underlying Bonds because the rating of the insurer of the Underlying Bonds
fell below the level required under the indenture agreement. Put another way, the Tax Opinion,
even if relied on by the Plaintiffs prior to entering the Transaction and even if it had been tested
and proved incorrect (i.e., because the IRS would in fact have recharacterized the transaction as a
sale and not a loan), is wholly irrelevant in that the Tax Opinion was only issued to address the
risk of IRS recharacterization, which did not happen. The loss here occurred due to the default
called by Nomura. The Tax Opinion was not an enforceability opinion, a substantive non-
consolidation opinion, or a business analysis of the risks of the Revised Rating Trigger Event of
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 12 of 27
Motion No. 007 008
12 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
Default Provision versus the Original Rating Event of Default Provision. Accordingly, summary
judgment is appropriate, the motion is granted and the case is dismissed as to Brown Rudnick.
II. The MC Defendants’ Motion For Summary Judgment (Mtn. Seq. No. 008)
In moving for summary judgment, the MC Defendants argue that the Plaintiffs’ claimed
damages, i.e., the capital gains taxes that they sought to defer or avoid, are highly speculative
and otherwise not recoverable under New York law. In this regard, the MC Defendants contend
that capital gains tax payments are not compensable as damages because they arise
independently of any alleged malpractice, and that there is no “non-speculative” basis on which
to determine each Plaintiffs’ damages because damages could be calculated here in one of two
ways: (1) that the Plaintiffs would have avoided capital gains entirely (assuming that the
individual Plaintiff would predecease the bonds’ maturity date), or (2) the Plaintiffs would have
deferred the capital gains taxes (assuming that the individual Plaintiffs would have outlived the
bonds maturity). Picking either scenario, the MC Defendants maintain, would be a matter of
pure speculation, and damages that are contingent on unknowable future events are not
recoverable under New York law. In other words, in short, the MC Defendants’ essential point
and basis for the motion is that “[a] lot could have happened” and the Plaintiffs cannot be
permitted to recover damages as if the tax planning would have necessarily successfully deferred
and, ultimately, avoided the tax, as this would put the Plaintiffs in a better position than if the
alleged malpractice never occurred.
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 13 of 27
Motion No. 007 008
13 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
Relying primarily on Alpert v Shea Gould Climenko & Casey, 160 AD2d 67 (1990) and Thies v
Bryan Cave LLP, 13 Misc 3d 1220[A] (Sup Ct, NY County 2006), the MC Defendants argue that
taxes are not recoverable under New York law and that, in any event, Mr. Snarr acted reasonably
under the circumstances and did not commit malpractice in that he made a strategic calculated
decision based on a good faith belief that the Revised Rating Trigger Event of Default Provision
was unenforceable because insurance companies are rated, not insurance policies,12 to not either
(i) reject the Revised Rating Trigger Event of Default Provision formulation set forth in the final
version of the indenture and require the Original Rating Trigger Event of Default Provision be
the version of the provision included in the final version of the documents so as not to change the
risks of default to which the Plaintiffs were exposed, or (ii) to even discuss the change of the
Revised Rating Trigger Event of Default Provision with the Plaintiffs.13 Put another way, the
MC Defendants argue that the MC Defendants did not commit malpractice when they gambled
that they could play “I gotcha” the Revised Rating Trigger Event of Default Provision is not
enforceable if Nomura in fact called a default (as they did) based on a downgrade of the
insurance company. And, the argument continues, that the gamble was such a sure thing that Mr.
Snarr did not even need to disclose either the gamble that he was taking as to the enforceability
of the provision or the change in business risks between the Original Rating Event of Default
Provision and the Revised Rating Event of Default Provision (i.e., Original Rating Trigger Event
12
See Deposition Transcript of Brian Snarr, dated April 6, 2017, attached as Ex. B to the Affirmation in Opposition
to Defendant’s Motion for Summary Judgment, dated September 28, 2018, of James S. O’Brien, Jr., Pg. 134, lines
16-19, “It was my belief it would be difficult for the indentured trustee to deem that condition satisfied. I thought it
was a drafting error in our favor.”
13
Id., Pgs. 81-83, 97, 110-122, and 136-7, lines 23-6. “Q: Did you send off an email to your clients saying that this
development had occurred? A: I don’t recall. Q: Did you discuss with them at any point prior to the closing that this
development had occurred? A: I don’t recall.” See, also, Pgs. 144-5, lines 18-2, “Q: That was a mistake, though
wasn’t it? A: Not from my perspective. Q: Really? A: I know that Stonebridge approached it as a drafting mistake.
They believed that they made an error and they said as much in their complaint, but I did not regard this as an
unfavorable development for my clients.” See, also, Pg. 147, line 3-5, “Q: You never told or discussed it with
your clients at any time, did you? A: Not that I can recall” (emphasis added).
651242/2012 BLOOSTEIN, JONATHAN vs. MORRISON COHEN LLP Page 14 of 27
Motion No. 007 008
14 of 27
FILED: NEW YORK COUNTY CLERK 02/19/2019 05:00 PM INDEX NO. 651242/2012
NYSCEF DOC. NO. 326 RECEIVED NYSCEF: 02/19/2019
of Default required for a downgrade in both the corporate bonds and the insurance company
insuring the bonds to cause a default (i.e., a downgrade of the rating of two separate companies)
to the Revised Rating Trigger Event of Default where a default was caused by merely a
downgrade in the insurance company (a downgrade of only one of the two separate unrelated
companies) with Jonathan Bloostein,14 Steve Brandis,15 David Greenberg,16 Richard Huang,17
Joseph Rosenheck,18 his clients.19 Finally, the MC Defendants argue that the Plaintiffs simply
14
See Affidavit of Jonathan Bloostein in Opposition to Defendant’s Motion For Summary Judgment, dated
September 28, 2018, ¶¶ 10-12. “10. Snarr never told me about the change that was made to the default trigger
language that eliminated one of the protections. I only learned of it from Larry Kaplan of Stonebridge who had set
up the Transaction, months after the closing. He told me that there had been a change in the Default Trigger
language and that Nomura had declared an event of default because the insurance company insuring the bonds had
been downgraded. 11. Snarr never told me that he knew about the change to the Default Trigger language before the
closing or that he had failed to correct it, but deliberately allowed the changed language to remain in the documents.
He basically made the decision for me to enter the Transaction with the changed Default Trigger language. But that
was my decision to make, not his. 12. I only learned after Snarr’s deposition in April 2017, 10 years later, that Snarr
actually knew about the improper change to the Default Trigger language but decided to leave it in without telling
us. He never revealed that. In fact, at a group meeting after we learned of the change, at which we discussed a
lawsuit against Nomura to prevent the sale of the bonds based on ‘