Court Cannot Determine on Motion to Dismiss Malpractice and Related Claims from Bullshit Tax Shelter that the Statute of Limitations from 1997 Was Not Tolled (9/24/24)

In Cáceres v. Sidley Austin LLP (N. D. GA No 1:23-cv-00844 Dkt # 35 Opinion & Order dated 9/17/24), TN here and CL here, the Court denied the motion to dismiss filed by Sidley Austin (“Sidley,” the giant law firm, here). The Cáceres engaged R.J. Ruble, then a partner at the predecessor firm of Brown & Wood, to opine about a 1997 Midco transaction, an abusive tax shelter transaction in which the Cáceres sought to avoid the double tax upon sale of their corporate business. For an explanation of the Midco transaction, see FTP Practitioner Edition pp. 797-798 and Student Edition p. 537; and for Federal Tax Procedure Blog discussions of Midco transactions, here. Basically, tax shelter promoters use a variety of abusive techniques to avoid the built-in corporate level gain and then the sellers and the promoters share the tax thus illegally evaded, leaving the IRS without the tax. Usually, the promoters use a bullshit tax shelter to try to shield the corporate level tax, and when that tax shelter is denied, there is no money to pay the tax, requiring the IRS to seek the tax from third party such as the Cáceres.

At the motion to dismiss stage, the well-pled pleadings are analyzed to see if they pled sufficiently that, if the allegations and claims are true, a case had been stated. (This is before any factual development by discovery and cannot consider facts outside the complaint that a party may know; it is just a test of the sufficiency of the complaint.) The issue on the motion to dismiss was whether on the facts pled the statute of limitations barred the suit. The underlying transactions (including the legal opinion) were in 1997; this particular suit was brought in state court in 2023 and removed to federal court in 2023. Various claims in the complaint had statutes of limitations that were much shorter than the 20+ years that intervened from the 1997 accrual of the actions claim in the complaint. The question was whether, on the facts pled and claims made, the relevant statutes of limitations were tolled because of Sidley’s actions in hiding its alleged misconduct. The Court held that, on the facts pled, it could not determine that the statute of limitations had not tolled, so the case survived the motion to dismiss.

Perhaps the key fact was the IRS commencement in 2018 of a transferee liability suit under § 6901 against the plaintiffs as shareholders wrongfully sharing the corporate-level tax illegally avoided. See United States v. Henco Holding Corp., 985 F. 3d 1290 (11^th Cir. 2021), here. (Of course, significant audit commotion would have likely preceded for years the filing of the transferee liability suit, but the issue was whether on the facts pled,  the plaintiffs had been fairly put on notice as to the causes of action at a time outside the limitations period.) As described by the Court, the Cáceres alleged (Slip Op. 14-15)

• “that Sidley intentionally withheld information from them about legal defects in its tax advice,38 both  when it issued the advice and when it was later put on notice as to those defects by IRS investigations into former tax-shelter clients.39 These allegations support the reasonable inference that Sidley breached a duty to disclose arising out of its confidential relationship with the Cácereses, who have thus plausibly pled actual fraud.”
• the Cácereses “have plausibly alleged reasonable diligence,” thus causing the statute of limitations to toll during the period Sidley withheld the key facts of its breach of duty from the Cáceres.”

The Court found those allegations sufficient to deny the motion to dismiss.

JAT Comments:

1. Brown & Wood and its partner, R.J. Ruble (and others) were at the center of a massive raid on the Treasury through various bullshit tax shelters. Ruble has featured prominently in Federal Tax Procedure blogs, here, and in Federal Tax Crimes blogs, here. Ruble was convicted (with others) and sentenced to 78 months in prison. (See USAO SDNY Press Release dated 4/2/09), here.)

2. Sidley succeeded to the potential liabilities by acquiring Brown & Wood.

3. On the motion to dismiss, the actual engagement and opinion letters were not considered. Rather, only the Cáceres’ pleadings about the engagement and opinion letters were considered. I have seen a number of Ruble’s opinion letters and they are, well, bullshit. But, I don’t recall that I saw one of his opinion letters on a Midco transaction. So, it’ll be interesting to see exactly what the opinion letter said and whether it was couched with caveats.

4. Now the case will proceed to trial (or perhaps motion for summary judgment). My suspicion is that there will likely be evidence from which a jury could (not must) infer (and render verdict) that tolling did not apply to some or all of the claims that the Court could not determine on motion to dismiss. In other words, the jury could determine that the Cáceres knew or should have known outside the limitations period. We’ll see.

5. Those wanting more on the case can find it here on CourtListener’s free site:

• Docket entries here.
• Cáceres’ Amended Complaint here.
•  Sidley Brief in Support of Motion to Dismiss, here.
•  Cáceres’ Response to Motion to Dismiss, here.
•  Sidley Reply on  Motion to Dismiss, here.