John F. Kay, Jr., Trustee v. McGuireWoods, LLP ( 2017 )

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
September 2017 Term FILED
__________ November 9, 2017
released at 3:00 p.m.
EDYTHE NASH GAISER, CLERK
No. 15-0606 SUPREME COURT OF APPEALS
OF WEST VIRGINIA
__________
JOHN F. KAY, JR., Individually and as Trustee of THE MILDRED F. KAY
TRUST, KAY T. ROBERTS and JEAN T. HOLT, Co-Executors of the Estate
of FLORENCE K. TEMPLE, W. RICHARD KAY, JR., HENRY W. BATTLE,
JULIA T. HUTCHINSON, JENNIE GRAHAM, Executrix of THE ESTATE
OF JAMES KIRK GRAHAM, MARGARET K. HUFFMAN, Executrix of
THE ESTATE OF HENRY WILLIAM HUFFMAN, JAMES L. KAY,
JOHN D. KAY, BARBARA G. RANDOLPH, WILLIAM M. MURPHY,
Co-Trustee of THE JESSIE K. THAYER TRUST, MARGARET K.
HUFFMAN, Co-Trustee of THE JESSIE K. THAYER TRUST, and
THE KAY COMPANY, LLC,
Petitioners
v.
MCGUIREWOODS, LLP,
Respondent
______________________________________________________
Appeal from the Circuit Court of Kanawha County
Honorable James C. Stucky
Civil Action No. 11-C-615
AFFIRMED, IN PART; REVERSED IN PART; AND REMANDED
_______________________________________________________
Submitted: October 17, 2017
Filed: November 9, 2017
Kelly Elswick-Hall, Esq. David B. Thomas, Esq.
Marvin W. Masters, Esq. Susan M. Robinson, Esq.
The Masters Law Firm, lc Bryant J. Spann, Esq.
Charleston, West Virginia Sarah A. Leonard, Esq.
Thomas Combs & Spann, PLLC
Charleston, West Virginia
Mark A. Ferguson, Esq. Counsel for Respondent
Ferguson Law Offices
Charleston, West Virginia
Counsel for Petitioners
CHIEF JUSTICE LOUGHRY delivered the Opinion of the Court.
SYLLABUS
1. The issue of whether causation and damages can be demonstrated in a legal
malpractice case following a settlement is one that necessarily must be determined on a case
by case basis.
2. “A plaintiff in a legal malpractice action has a general duty to mitigate his
or her damages. This doctrine requires a plaintiff to take reasonable steps within his or her
ability to minimize losses caused by the attorney’s negligence. However, a plaintiff is not
required to take actions which are impractical, disproportionately expensive, or likely futile.
The scope of a plaintiff’s duty to mitigate damages depends on the particular facts of the
case.” Syl. Pt. 4, Rubin Resources, Inc. v. Morris, 237 W.Va. 370, 787 S.E.2d 641 (2016).
3. “Generally, in a suit against an attorney for negligence, the plaintiff must
prove three things in order to recover: (1) the attorney’s employment; (2) his/her neglect of
a reasonable duty; and (3) that such negligence resulted in and was the proximate cause of
loss to the plaintiff.” Syl. Pt. 1, Calvert v. Scharf, 217 W.Va. 684, 619 S.E.2d 197 (2005).
4. Although damages in a legal malpractice claim are measured with reference
to the underlying claim of negligence, the malpractice claim is a separate and distinct claim.
As a result, a settlement agreement does not automatically extinguish a legal malpractice
claim.
LOUGHRY, Chief Justice:
The petitioners, former shareholders of Kay Company (“Kay Co.”) and Kay
Co, LLC (“Kay LLC”),1 appeal from two orders2 entered by the Circuit Court of Kanawha
County through which summary judgment was granted to the respondent McGuireWoods,
LLP (“McGuireWoods” or “MW”) in connection with claims the petitioners filed against
McGuireWoods, their former legal counsel.3 As grounds for their appeal, the petitioners
argue that the circuit court erred in ruling that a settlement reached by all but one of the
petitioners4 with the Internal Revenue Service (“IRS”) prevents them from establishing
causation and damages on any of their claims. The petitioners further challenge the circuit
court’s finding that there are no factual issues in need of resolution and its ruling that Mrs.
Graham’s status as a non-settler with the IRS prevents her from asserting claims against
MW. As part of this appeal, McGuireWoods alleges that the petitioners’ claims are barred
by the five-year statute of limitations which governs Virginia contract claims.5 Upon our
careful review of this matter, we conclude that the circuit court erred in reasoning that the
1
Kay Co., LLC is the successor corporation of Kay Co.
2
The first order was entered on May 27, 2015, and the second on December 5, 2016.
3
Those claims were grounded in legal malpractice; negligent misrepresentation; fraud;
detrimental reliance; and joint venture.
4
Mrs. Graham did not enter into a settlement with the IRS; the IRS agreed to forego
collection of the tax assessment from her husband’s estate. See infra note 18.
5
This claim was raised below but never ruled upon by the circuit court.
1
settlement with the IRS prohibits the petitioners from going forward on all of their claims.
We further determine that the circuit court erred in ruling that the lack of a settlement with
the IRS precluded Mrs. Graham from asserting any claims against MW. We affirm the
lower court’s rulings with regard to detrimental reliance and joint venture.6 With regard to
the cross-appeal raised by McGuireWoods, we find no merit to the claim and, accordingly,
it is denied.
I. Factual and Procedural Background
At the center of this case is the sale of the Kay Co.,7 a transaction for which
the petitioner shareholders engaged MW to represent their interests. The petitioners initially
conferred with McGuireWoods to obtain tax advice with regard to the prospective sale of
the Kay Co. stock. One of the specific issues addressed was a concern that gains from the
sale and distribution of the Kay Co. stock would be taxed twice–once to the corporation and
then again to the individual stockholders. Due to the low basis of such stock,8 a huge tax
consequence was anticipated as a result of the sale.
6
The circuit court ruled in its December 5, 2016, order that the plaintiffs had
abandoned any independent claim of detrimental reliance based on a concession that such
reliance related to their claim of fraud. With regard to the plaintiffs’ claim of joint venture,
the trial court ruled in this same order that the plaintiffs had failed to produce any evidence
of the requisite profit-sharing agreement necessary to demonstrate such a theory.
7
Kay Co., a closely held family corporation, was formed in 1929 in West Virginia.
The company, whose primary business concerns were coal, oil, and gas, had acquired a stock
portfolio worth nearly $10 million dollars.
8
The low basis existed due to the lengthy period of ownership.
2
While conferring with McGuireWoods on an unrelated matter, Skip Roberts,
one of the Kay Co. Board members,9 mentioned the double taxation issue. He was referred
to a particular MW attorney based on his successful avoidance of double taxation in a
similar transaction. McGuireWoods advised Mr. Roberts that it could arrange a sale of Kay
Co. with favorable tax consequences for a contingent fee of $125,000.10 The MW attorney
later contacted Mr. Roberts to disclose a buyer with sufficient capital losses to offset gains
from the sale of Kay Co.’s portfolio. As a result of this proposed transaction, the MW
lawyer advised the Kay Co. shareholders that they would be taxed only once on the capital
gains from the sale.11
In a letter dated July 5, 2000, MW described the structure of the proposed
transaction as well as the federal income tax consequences to both the shareholders and the
company. On the same date, McGuireWoods forwarded an engagement letter to the Kay Co.
Board of Directors.12 In the engagement letter, MW set forth the nature of its services as
9
Mr. Roberts was not a Kay Co. shareholder.
10
MW indicated that it had experience in arranging a transaction where, for a reduced
purchase price, an entity with purported business losses would purchase a corporation with
“built in” capital gains. In this case, the purchase price was set at 90% of the Kay Co.’s
portfolio of marketable securities–a reduction of approximately $1 million.
11
The individual stockholders would be subject to long-term capital gains taxes but
the corporation would effectively escape taxation based on the offsetting of the buyer’s
losses against the Kay Co.’s gains.
12
The engagement letter, dated July 5, 2000, was signed by the President of Kay Co.
in Charleston, West Virginia.
3
“advising you in connection with the structuring, negotiating and closing of the Sale.”
McGuireWoods further agreed to provide legal advice “with respect to the federal income
tax consequences of the Sale to the Company and its shareholders.” To address issues of
West Virginia law, MW recommended that Kay Co. consult with local counsel concerning
“the Company’s legal standing in West Virginia and its outstanding stock.”13
After numerous phone conferences, emails and letters were exchanged,14 the
sale of Kay Co. transpired on October 26, 2000. Pursuant to the arrangement outlined by
McGuireWoods in its July 5, 2000, correspondence, the stock of Kay Co. was purchased by
CMD Statutory Trust (“CMD Trust”). The funds required by CMD Trust to effect the
purchase of Kay Co. were leveraged, purportedly with the use of offshore funds. CMD
Trust immediately sold the company.15
13
As recommended by MW, Kay Co. retained both a West Virginia law firm and a
local accounting firm to give it additional advice.
14
MW claims that at least twenty conference calls transpired between it and the Kay
Co. in connection with the proposed sale.
15
The name of Kay Co. was changed by CMD Trust to CMD Co.
4
On August 3, 2007, the IRS assessed twelve former shareholders16 of the Kay
Co. $2.7 million in taxes and $556,000 in penalties.17 In late 2009, all but one of the twelve
assessed shareholders elected to execute Closing Agreements and settle the tax dispute with
the IRS. Collectively, these former Kay Co. shareholders paid almost $1.8 million. Mrs.
Graham successfully obtained a Tax Court decision that her husband’s estate had no liability
as a transferee of the assets of the CMD Co. for the tax year ending October 26, 2000.18
When the IRS later sought to collect this same federal tax deficiency from Kay LLC, the
claim was settled for $5,000.19
On April 14, 2011, the petitioners filed the underlying action against MW in
the Circuit Court of Kanawha County.20 Immediately after the first deposition was taken,
MW filed a motion for summary judgment, which was denied by order issued on February
16
The IRS elected to assess only the Kay Co. Board of Directors who were named on
the MW engagement letter.
17
The IRS went after the former shareholders for the tax deficiency when CMD Co.
did not have sufficient assets to pay the taxes levied against it.
18
The petitioners maintain that the IRS ruling was based upon Nevada collection laws.
See Starnes v. C.I.R., 680 F.3d 417, 427-29 (4th Cir. 2012) (discussing 26 U.S.C. § 6901(a)
and explaining that “[a]n alleged transferee’s substantive liability for another taxpayer’s
unpaid taxes is purely a question of state law . . . ; plac[ing] the IRS in precisely the same
position as that of ordinary creditors under state law”).
19
The IRS did not assess Kay LLC until early 2010.
20
The case was removed to federal district court and then remanded.
5
3, 2013. After substantial discovery had ensued,21 McGuireWoods filed a renewed motion
for summary judgment. As grounds for its motion, MW argued that the petitioners’
settlement with the IRS stood as a bar to any final adjudication concerning the legality of the
IRS assessment and the related issue of whether its tax advice to the petitioners constituted
legal malpractice. Through its ruling issued on May 27, 2015, the circuit court granted
MW’s renewed motion for summary judgment. Concluding that the IRS settlement
prevented the petitioners “from establishing the requisite causal connection between the
alleged wrongful acts or omissions of McGuireWoods . . . and any damages,” the circuit
court dismissed the complaint with prejudice.22 The circuit court similarly dismissed the
claim of Mrs. Graham based on its finding that she “has not suffered damages because of
any alleged malpractice by” MW.23
Following the petitioners’ appeal to this Court, we remanded the matter to the
circuit court “for the limited purpose of making findings and conclusions with regard to
petitioners’ claims for misrepresentation, fraud, detrimental reliance, and joint venture.”24
Complying with this directive, the circuit court ruled in its order of December 5, 2016, that
21
Twenty-six individuals were deposed by this time.
22
Despite its grant of summary judgment to MW on all of the petitioners’ claims
against it, the circuit court only addressed the claim of legal malpractice in its order.
23
The circuit court failed to acknowledge as potential damages the $24,000 in legal
fees Mrs. Graham incurred in challenging the tax assessment issued against her husband.
24
See supra note 22.
6
the plaintiffs had abandoned their detrimental reliance claim.25 Grouping the negligent
misrepresentation and fraud counts together, the circuit court concluded that the plaintiffs’
settlement of the IRS claims precluded them from establishing liability and causation with
regard to those claims. Citing its previous ruling of May 27, 2015, the circuit court found
this Court’s decision in Calvert v. Scharf26 controlling, opining that the plaintiffs could not
prove they received inaccurate or negligent tax advice from MW given the absence of a
finding by a competent tribunal that the plaintiffs were actually liable for CMD Co.’s27
unpaid tax liability.28 Linking the misrepresentation and fraud counts to the same allegations
underlying the petitioners’ malpractice claim, the circuit court concluded that those counts
similarly “fail[ed] as a matter of law.”29 Addressing the plaintiffs’ joint venture claim, the
circuit court decided that this theory of imposing vicarious liability failed as a matter of law
for the same reasons the negligent misrepresentation and fraud claims failed. Citing the
absence of any profit-sharing arrangement between McGuireWoods and CMD Trust or
25
This conclusion was based on the circuit court’s finding that the plaintiffs had
conceded in their Memorandum in Opposition to Defendant’s Motion for Summary
Judgment that the alleged reliance pertained to their fraud claim.
26
217 W.Va. 684, 619 S.E.2d 197 (2005).
27
See supra note 17.
28
The circuit court further ruled that the plaintiffs could not establish that any
damages resulted from the rendering of MW’s tax advice.
29
The circuit court decided that the negligent misrepresentation claim failed for the
same reasons that the malpractice claim failed–inability to establish causation and damages.
And, because “the record does not support a professional malpractice claim, it cannot meet
the more stringent standard required to prove the intentional tort of fraud.”
7
coequal control over a common commercial pursuit,30 the circuit court further concluded that
the plaintiffs had failed to produce evidence of a joint venture.
The petitioners seek relief from the circuit court’s grant of summary judgment
and the related dismissal of their action with prejudice. McGuireWoods asks this Court to
affirm the lower court’s ruling and to grant its cross-appeal seeking application of the five-
year statute of limitations for contractual actions that arise under Virginia law.
II. Standard of Review
The plenary nature of our review of a summary judgment ruling is well-
established. See Syl. Pt. 1, Painter v. Peavy, 192 W.Va. 189, 451 S.E.2d 755 (1994). And
the standard we apply to the lower court’s decision to grant summary judgment is similarly
axiomatic: “A motion for summary judgment should be granted only when it is clear that
there is no genuine issue of fact to be tried and inquiry concerning the facts is not desirable
to clarify the application of the law.” Syl. Pt. 3, Aetna Cas. & Surety Co. v. Fed’l Ins. Co.
of New York, 148 W.Va. 160, 133 S.E.2d 770 (1963). Bearing these standards in mind, we
proceed to consider whether the trial court erred in its grant of summary judgment.
30
See Armor v. Lantz, 207 W.Va. 672, 535 S.E.2d 737 (2000); accord Pyles v. Mason
Cty. Fair, Inc., No. 17-0300, __ W.Va. __, __ S.E.2d __ (November 1, 2017).
8
III. Discussion
At the center of the challenged rulings is the postulate that the absence of a tax
court ruling validating the IRS assessment31 automatically precludes any claim by the
petitioners against McGuireWoods arising from its legal advice. Because the shareholders32
elected to settle after incurring substantial legal fees in challenging the tax assessments, the
circuit court ruled that certain issues bearing on the petitioners’ claims against MW can
never be adjudicated. While both the circuit court and MW view this Court’s decision in
Calvert as compelling this conclusion, a judicious reading of that opinion demonstrates
otherwise. See 217 W.Va. 684, 619 S.E.2d 197.
The issue presented in Calvert was whether the intended beneficiaries of a will
had standing to bring a malpractice claim where a settlement precluded a determination of
31
MW maintains that if the petitioners had fully litigated the CMD Co. tax deficiency
assessed against them as transferees, they would have been successful. While both the circuit
court and McGuireWoods cite a Fourth Circuit case as authority “for the taxpayer on similar
facts,” that case did not resolve the issue of whether the former shareholders qualified as
transferees under federal tax law. Instead, it was decided under North Carolina law that the
Tax Commissioner failed to prove that a reasonably diligent person in the former
shareholders’ position would have had actual or constructive knowledge of the buyer’s non­
payment of the subject taxes. See Starnes, 680 F.3d at 430, 437; see also Weintraut v.
C.I.R., 2016 WL 4040793 at n.61 (U.S. Tax Ct. 2016) (discussing Starnes and stating “it
was irrelevant whether the taxpayers were transferees for purposes of sec. 6901” due to
court’s ruling that “the taxpayers were not liable under applicable State law”).
32
When denoting the shareholders in corporate fashion, we are referencing the eleven
shareholders who settled their claims with the IRS.
9
whether the will had properly effectuated the testator’s intent. The issue of standing was
affirmatively resolved with our holding in Calvert that
[d]irect, intended, and specifically identifiable beneficiaries of
a will have standing to sue the lawyer who prepared the will
where it can be shown that the testator’s intent, as expressed in
the will, has been frustrated by the negligence of the lawyer so
that the beneficiaries’ interest(s) under the will is either lost or
diminished.
217 W.Va. at 685, 619 S.E.2d at 198, syl. pt. 2. Despite this favorable ruling on standing,
we further determined that the Calvert beneficiaries could not pursue a malpractice claim
“under the particular facts of this case” given their inability to demonstrate “they had
suffered damages that were proximately caused by attorney malpractice.” Id. at 686, 619
S.E.2d at 199.
As we explained in Calvert, “in order to prevail in a malpractice action against
a lawyer, the plaintiff must establish not only his or her damages, but must additionally
establish that, but for the negligence of the lawyer, he or she would not have suffered those
damages.” 217 W.Va. at 695, 619 S.E.2d at 208. The decision of the intended beneficiaries
to settle the underlying declaratory judgment action was determined to bar the resolution of
the issue of whether any negligence in the drafting of the subject will proximately caused
injury to the Calverts. Id. at 696, 619 S.E.2d at 209. Due to the unitary issue asserted in the
declaratory judgment action of whether the will validly exercised the power of appointment,
this Court recognized that the settlement of the declaratory judgment action prevented that
10
issue from being decided. And, absent that determination, the intended beneficiaries could
not demonstrate they had suffered loss as a result of the will’s drafting.
Seeking to obtain the same result as in Calvert, MW argues that the settlement
agreement itself was what barred the intended beneficiaries from proceeding against the
will’s preparer. But when this Court concluded in Calvert that damages could not be linked
to the will’s drafting in that case, we were not ruling that a settlement agreement proscribes
proof of causation in all instances. The critical issue of whether causation and damages can
be demonstrated in a legal malpractice case following a settlement is one that necessarily
must be determined on a case by case basis.33 This is clear from a review of our cases in this
area. See, e.g., Rubin Resources, Inc. v. Morris, 237 W.Va. 370, 787 S.E.2d 641 (2016)
(reversing circuit court’s ruling that malpractice plaintiff’s settlement with third party
precluded finding that alleged damages were proximately caused by attorney’s negligence);
Burnworth v. George, 231 W.Va. 711, 749 S.E.2d 604 (2013) (upholding summary
judgment for lawyer because plaintiff was unable to prove he sustained damages from
failure to conduct title search where plaintiff disregarded attorney’s advice to delay closing
for deed of trust inspection and then, through stipulated settlement, forgave collateral
including allegedly defective deed of trust); Sells v. Thomas, 220 W.Va. 136, 640 S.E.2d
33
In its response to the petitioners’ supplemental brief, MW recognizes that the unique
facts of a given case govern the issue of whether an attorney’s negligence may be established
following settlement.
11
199 (2006) (reversing grant of summary judgment to attorney in malpractice case due to
genuine issues of fact regarding whether attorney’s failure to pursue underinsured motorist
claim prior to settlement caused damage to client). In trying to equate the effect of the
settlement in Calvert to the effect of the IRS settlement in this case, MW reaches too far.
Unlike Calvert, where the testamentary dispute was no longer justiciable due to settlement,
the issue presented here of whether the advice given to the petitioners by MW constituted
malpractice, misrepresentation, or fraud can still be litigated. In clear contrast to Calvert,
the IRS settlement did not extinguish the claims at issue here.
Furthermore, in Morris this Court squarely rejected the position advanced by
MW. Like this case, the malpractice at issue was transactional as opposed to litigation-based
malpractice.34 Based on a negligent title examination that failed to identify a declaration of
pooling, the malpractice plaintiff, Rubin Resources, sought to recover damages for its lost
opportunity to substitute a different piece of property in the event of a title defect and lost
proceeds from a gas production agreement that fell through upon discovery of the title
defect. 237 W.Va. at 372-73, 787 S.E.2d at 643-44. When the owner of the oil and gas
leasehold estate informally asserted claims against Rubin Resources, a settlement agreement
was reached. Relying on Calvert, the trial court determined that the settlement precluded
34
As we explained in Morris, transactional malpractice pertains to alleged wrong­
doing in connection with the giving of advice or preparation of documents for a business
transaction. See Morris, 237 W.Va. at 374, 787 S.E.2d at 645.
12
any finding that the malpractice damages sought by Rubin Resources were proximately
caused by the attorney’s admitted negligence.35 When Rubin Resources argued that Calvert
does not stand for the proposition that plaintiffs cannot maintain a legal malpractice action
after settling a lawsuit, this Court emphatically agreed. 237 W.Va. at 376, 787 S.E.2d at
647.
In explanation of why the settlement in Morris was not a bar to a malpractice
proceeding, we simply stated that this Court “declined [in Calvert] . . . to deviate from the
proximate cause standard.” Id. Acknowledging our lack of elaboration in Morris, we now
clarify that the reason why a settlement agreement does not automatically extinguish a legal
malpractice-based claim is because the settled claim is a separate and distinct claim from that
of the malpractice action. In Parnell v. Ivy, 158 S.W.3d 924 (Tenn. Ct. App. 2004), a case
we cited in Morris, the appellate court explained why a settlement of the underlying lawsuit
does not stand as an automatic bar to a malpractice action: “Though the amount of damages
in a malpractice action are measured with reference to the damages sought in the underlying
suit, the injuries suffered by a plaintiff in a malpractice suit are separate and distinct from
those suffered in the underlying suit.” Id. at 927. Expounding further, the court observed:
“Where the termination is by settlement rather than by a
dismissal or adverse judgment, malpractice by the attorney is
more difficult to establish, but a cause of action can be made out
35
While admitting negligence as to the title examination, the attorney denied that his
negligence proximately caused the damages sought by Rubin Resources.
13
if it is shown that assent by the client to the settlement was
compelled because prior misfeasance or nonfeasance by the
attorneys left no other recourse * * * * [The] cause of action for
legal malpractice must stand or fall on its own merits with no
automatic waiver of a plaintiff’s right to sue for malpractice
merely because plaintiff had voluntarily agreed to enter into a
stipulation of settlement.”
Parnell, 158 S.W.3d at 928 (quoting Titsworth v. Mondo, 407 N.Y.2d 793, 796 (N.Y. Sup.
Ct. 1978)).
By insisting that the IRS settlement precludes any subsequent determination
of negligence on its part, MW demonstrates a flawed understanding of Calvert. Moreover,
MW goes further astray in claiming that the petitioners’ proof of damages is dependent on
a judicial upholding of the IRS tax assessment.36 Critically, the petitioners have not limited
the recovery they seek from MW to the amounts they paid to settle the IRS tax assessment.
The nature of their malpractice-based claims is decidedly broader than that. As set forth in
the amended complaint, the petitioners’ claims of legal malpractice, misrepresentation, and
fraud are grounded in the following averments:
29. Plaintiffs specifically asked McGuire to ensure that none of
the parties were engaged in any improper activities, it being the
desire of Kay Co. and its shareholders to only complete the
contemplated transaction if it was completely legitimate, and
would not subject the Kay Co. or Kay LLC to any liability for
corporate taxes arising out of the liquidation of the Portfolio
Securities, thereby limiting their potential taxes only to the
36
MW argues that absent a Tax Court ruling that the IRS assessment was valid, there
can be no causal connection between the attorney’s advice and the client’s alleged damages.
14
capital gains attributable to their shares of the Kay Co. as
outlined in the McGuireWoods opinion letter issued at closing.
30. In this regard, Plaintiffs on more than one occasion asked
McGuire and Rohman to confirm that the transaction was
legitimate and proper.
31. In response to these requests, McGuire assured the
Plaintiffs of the transactions [sic] legitimacy. In fact a McGuire
attorney stated, in an email to certain Kay Co. directors dated
October 23, 2000, that Rohman “is confident that our tax
structure could not be disregarded.”
....
35. McGuire had a duty and responsibility to inform and advise
Plaintiffs of the potential tax liabilities they might face and the
other consequences which Plaintiffs might incur if they entered
into the transaction as designed by McGuire, or to advise
Plaintiffs that they should not enter into the transaction due to
the laws, rules and regulations of the Internal Revenue Service
and the advisory opinions and letters and federal court opinions
interpreting the same.
36. McGuire had a further duty and responsibility to Plaintiffs
to investigate the validity of the purchaser of the stock of Kay
Co. to reasonably ensure that the purchaser was a legitimate
business and in full compliance with applicable tax laws and
that the entity indeed had legitimately incurred tax losses in its
business.
In specifying the damages they are seeking, the Petitioners aver the following:
“Plaintiffs have been required to pay additional taxes, penalties and interest and incur legal
fees, costs and expenses, . . . and have been embarrassed, humiliated, suffered emotional
distress, lost income and opportunity in their business and personal finances and business,
have suffered annoyance and inconvenience and have otherwise been damaged.” Without
a doubt, the IRS settlement is a component of the damages that the Petitioners seek.
15
Critically, however, the damage averments and the ad damnun clause are not confined to or
limited by the amount of the IRS settlement.
While MW faults the petitioners for settling with the IRS rather than litigating
until the issuance of a Tax Court ruling, the law does not penalize the petitioners for their
decision. In fact, as we made clear in syllabus point four of Morris, the law encourages the
mitigation of damages:
A plaintiff in a legal malpractice action has a general duty to
mitigate his or her damages. This doctrine requires a plaintiff
to take reasonable steps within his or her ability to minimize
losses caused by the attorney’s negligence. However, a plaintiff
is not required to take actions which are impractical,
disproportionately expensive, or likely futile. The scope of a
plaintiff’s duty to mitigate damages depends on the particular
facts of the case.
237 W.Va. at 372, 787 S.E.2d at 643; see also Alagia, Day, Trautwein & Smith v.
Broadbent, 882 S.W.2d 121, 125-26 (Ky. 1994) (discussing fact that occurrence of legal
harm and damages were fixed by settlement between IRS and taxpayer law firm).
Whether the petitioners in this case can meet the standard for establishing legal
malpractice is far from clear. That standard was set forth in syllabus point one of Calvert:
“Generally, in a suit against an attorney for negligence, the plaintiff must prove three things
in order to recover: (1) the attorney’s employment; (2) his/her neglect of a reasonable duty;
and (3) that such negligence resulted in and was the proximate cause of loss to the plaintiff.”
16
217 W.Va. at 685, 619 S.E.2d at 198. Despite the uncertainty of whether the petitioners can
prove any of their claims, one thing is certain–the existence of the IRS settlement does not
serve as a bar to the petitioners’ attempt to prove they were damaged as a result of the legal
advice McGuireWoods provided to them.37 As the court articulated in Parnell, although
damages in a legal malpractice claim are measured with reference to the underlying claim
of negligence, the malpractice claim is a separate and distinct claim. See 158 S.W.3d at 927.
As a result, a settlement agreement does not automatically extinguish a legal malpractice
claim.
In ruling that there were no genuine issues of fact to be resolved with regard
to the petitioners’ claims of legal malpractice, negligent misrepresentation, and fraud the
circuit court committed error. However, we find no error in the trial court’s rulings with
regard to detrimental reliance38 and joint venture, and accordingly affirm judgment for MW
on those claims. Given the clear formation of the contract of legal representation in this
37
While MW argues that the tax laws under which the IRS pursued the petitioners did
not change until after the sale of Kay Co., the petitioners disagree and cite to a notice which
was released by the IRS on August 13, 2000, prior to the sale, which indicates that “Son of
Boss [bond and sales strategies]” transactions were illegal and thus subject to close scrutiny.
38
See supra note 25.
17
state,39 we find no merit to the cross-assignment through which MW seeks to apply
Virginia’s five-year statute of limitations for contract claims.40
Based on the foregoing, the summary judgment ruling entered by the Circuit
Court of Kanawha County on May 27, 2015, is reversed; with regard to the clarifying rulings
issued on December 5, 2016, we affirm the finding that the detrimental reliance claim is part
of petitioners’ fraud claim and we affirm the finding that the petitioners have failed to prove
the existence of a joint venture; we reverse the findings that the petitioners’ claims of legal
malpractice, negligent misrepresentation, and fraud fail as a matter of law due to their
settlement with the IRS; accordingly, this matter is remanded to the circuit court to permit
the petitioners41 to proceed on their claims of legal malpractice, negligent misrepresentation,
and fraud.
Affirmed, in part; reversed, in part; and remanded.
39
See Syl. Pt. 3, State ex rel. Coral Pools, Inc. v. Knapp, 147 W.Va. 704, 131 S.E.2d
81, 82 (1963) (“When a contract results from an offer made in one state and an acceptance
in another state, the contract generally will be deemed to have been made in the state in
which the acceptance occurs.”).
40
This Court’s venue-based ruling in Thornhill Group, Inc. v. King, 233 W.Va. 564,
759 S.E.2d 795 (2014), has no bearing on the choice of law issue presented in this case.
41
Mrs. Graham is included in this ruling. The fact that she did not settle with the IRS
has no impact on anything other than the amount of her damages.
18