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De May v. Moore & Bruce

November 6, 2008

JAMES MICHAEL DE MAY ET AL., PLAINTIFFS,
v.
MOORE & BRUCE, LLP ET AL., DEFENDANTS.



The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs James De May, his wife Anne Schrader-De May, and the De May Family Trust have sued their lawyers Charles Bruce and Jonathon Moore, and their firm Moore & Bruce, LLP, for legal malpractice (Count I), breach of fiduciary duty with respect to Bruce's work for the Family Trust and the charitable trust -- the Optimay Foundation (Count II), and constructive fraud relating to defendants' alleged misrepresentations regarding the tax implications of their work for De May, his wife and four foreign trusts (Count III).

The central dispute underlying this litigation relates to defendants' creation of these four offshore trusts in 1996-1998, which were designed by defendants to reduce De May's income tax liability. Nonetheless, during an audit that began in 1999, the IRS rejected defendants' legal position, and ultimately De May entered into consent judgments with the IRS in November 2005 for $6 million, plus interest, for unpaid income taxes, and in July 2006 for gift taxes.

On May 15, 2008, plaintiffs filed suit. In response defendants have filed a Motion to Dismiss or, in the Alternative, Motion for Summary Judgment arguing that plaintiffs' claims are barred by D.C.'s three-year statute of limitations; constructive fraud must fail as a matter of law; the De May Family Trust is not a real party in interest; and De May cannot recover for taxes actually owed to the IRS. Plaintiffs have opposed this motion and, as to the statute of limitations, they invoke the continuous representation doctrine to toll the statute of limitations. As explained more fully below, the Court will deny defendants' motion with respect to the legal malpractice and breach of fiduciary duty claims, finding that the claims are timely given defendants' continuous representation of plaintiffs through at least 2006. However, it will grant defendants' motion with respect to the constructive fraud count and the De May Family Trust.

BACKGROUND

Before the Court can set forth the facts that are relevant to the instant motion, it bears noting that defendants filed a Statement of Undisputed Material Facts (see Defs.' SJ Mem. at 4-11), which plaintiffs have failed to dispute properly as required by LcvR 7(h).*fn1 Instead, plaintiffs have offered a Counter-Statement of Facts (see Pls.' Opp'n at 2-8) that sets forth a host of additional facts that are based on the complaint, the affidavits of the plaintiffs and of Douglas Charnas, a McGuireWoods attorney who represented the De Mays during the IRS audit and Tax Court litigation, and correspondence from the defendants to De May, Charnas and others. As a result, the Court is not confronted by any material disputed issues of fact; rather, the parties focus on different facts. Defendants emphasize the facts relating to the IRS audit and Tax Court litigation and attempt to draw a sharp contrast between defendants' involvement in the creation of the trusts in 1996-1998 (i.e., the alleged malpractice) and their involvement in the IRS audit (i.e., the litigation) in order to argue that these are separate proceedings. In contrast, plaintiffs focus on the multifaceted nature of defendants' legal work, as well as Bruce's work as trustee for two of the trusts, in order to argue that defendants continuously represented De May in tax-related work until at least late 2005 and represented the plaintiffs as their personal lawyers and as lawyers and trustees for the trusts until at least 2006. Therefore, despite the lack of a statement of disputed issues of fact, the Court is able to set forth the facts relevant to this dispute based on the parties' submissions and to decide the legal question of whether plaintiffs' claims are barred by the statute of limitations or are saved by the application of the continuous representation doctrine. These facts can easily be divided according to the three categories of work that defendants performed for plaintiffs -- 1) the creation of the four trusts; 2) the administration of the trusts; and 3) the IRS audit and Tax Court litigation.

I. DEFENDANTS' REPRESENTATION OF PLAINTIFFS

A. Creation of the Trusts

James Michael De May founded a German technology company. (De May Aff.¶ 3.) By the mid-1990's, De May was seeking capital for his growing business. (Id.) In the summer of 1995, De May met Jonathon R. Moore and Charles M. Bruce of the law firm of Moore & Bruce, LLP (collectively "Moore & Bruce" or "defendants"). (Id.) Bruce told De May that his firm specialized in international taxation, estate planning and foreign trusts. (Id. ¶ 4.) Later in 1995, Moore & Bruce incorporated De May's business in Delaware under the name of the Optimay Corporation ("Optimay"), and the law firm helped the company raise money from outside investors. (Id. ¶¶ 3,5.) At this time, Moore and Bruce became personally involved in Optimay's operations: Bruce became a Board member and a legal advisor to De May in his capacity as CEO, while Moore became Chief Counsel for the company. (Id. ¶ 5.)

By 1996, De May began to plan for the eventual sale of Optimay. (De May Aff. ¶ 6.) Moore & Bruce advised De May on a strategy designed to reduce the amount of tax that he would owe in the event of a sale of the company. (Id.; Charnas Aff. ¶ 3.) According to the plan, Moore & Bruce would create four foreign trusts to hold shares of Optimay stock. (De May Aff. ¶ 6.) Based on Moore & Bruce's advice, De May believed that he would not have to pay capital gains taxes from the sale of Optimay stock owned by these trusts. (Charnas Aff. ¶¶ 3,5.)

In February 1996, Moore & Bruce initiated this plan by creating four offshore trusts: the Optimay Foundation ("Foundation");*fn2 the Anne Schrader-De May Trust ("ASDM Trust"); the De May Family Trust ("Family Trust"); and the De May - Optimay Comp Trust ("DM-OC Trust"). (De May Aff. ¶ 6; Pls.' Exh. 3(C).) The settlor of the trusts was De May and the beneficiaries included, among others, members of De May's family. (Charnas Aff. ¶ 3.) Soon after these trusts were created, and based on the advice of Moore & Bruce, De May moved Optimay stock into each of the trusts. (Charnas Aff. ¶ 3.) In a related transaction, De May exchanged some Optimay stock and cash for a stake in Risk Capital Bermuda Fund, L.P. ("Risk Capital") in December 1997. (Defs.' Exh. 4.)

On April 9, 1998, Moore & Bruce amended the terms of the ASDM Trust and the Family Trust and terminated the DM-OC Trust. (Compl. ¶¶ 34-36; Defs.' Facts ¶¶ 7-9.) On April 16, 1998, just one week after these amendments, De May sold Optimay to a subsidiary of Lucent Technologies ("Lucent") for at least $65 million, resulting in a large profit (at least $20 million) for De May and the trusts. (Compl. ¶¶ 40-41; Defs.' Facts ¶ 10.)

B. Moore & Bruce's Administration of Plaintiffs' Trusts

In addition to creating the trusts, Moore & Bruce was also intimately involved in their administration from the very beginning. (Pls.' Exh. 1(A).) Charles Bruce was the key figure, serving as a fiduciary for four separate trusts, with his firm doing much of the legal work relating to the establishment of the trusts. (Pls.' Exh. 1(A); De May Aff. ¶ 6.) The firm's legal work for the trusts continued until April 2006. (Pls.' Exh. 1(F).)

Bruce's most extensive role was with the Family Trust, where he was Chairman of the Committee of Trust Advisors. (Pls.' Exh. 1(A).) He was also trustee of the August 5 Trust, which was a subpart of the Family Trust. (Id.) Bruce held this position at the August 5 Trust until December 2006. (Pls.' Exh. 2(G).) While serving in these roles, Bruce amended the Family Trust, and he appointed CGI Corporate Services Limited ("CGI") as trustee. (SchraderDe May Aff. ¶ 3; Charnas Aff. ¶ 15.) Bruce was also instrumental in the Family Trust's 2006 litigation brought by CGI in the Isle of Man. In this litigation, CGI, the new trustee, challenged certain actions that had been taken by the previous trustees and by Bruce. (Charnas Aff. ¶ 15.) Bruce was active in many facets of this litigation. In May 2006, he wrote to CGI's counsel asking that it withdraw its petition. (Pls.' Exh. 1(A).) In July of that year, he had a lengthy discussion about the case with De May and his wife, and in October he drafted affidavits for the couple.*fn3 (Pls'. Exhs. 2(D), 2(E).)

Bruce was very involved in the other trusts as well. He was co-trustee of the ASDM Trust until Anne Schrader-De May asked him to resign in April 2007. (Schrader-De May Aff. ¶ 3; Pls.' Exh. 2(A).) His work for the ASDM Trust included amending the trust agreement and reviewing the trust's tax returns. (Schrader-De May Aff. ¶ 3; Pls.' Exh. 2(C).) Bruce was also co-trustee of the Foundation until at least May 2006. (Pls.' Exh. 1(A).)

While Bruce played the lead role in administering the trusts, Jonathon Moore was instrumental in a transaction involving De May's home in New Mexico. Moore & Bruce advised De May and his wife that it would be advantageous for their home to be owned by a corporation, which would in turn be owned by the Family Trust. (De May Aff. ¶ 9.) Based on this advice, Moore & Bruce created Coyote Trails, Inc. ("Coyote Trails"), which is wholly owned by the Family Trust. (Id.) Moore did the legal work and served as the president and sole director of Coyote Trails until at least May 2006, when he advised De May on the possible sale or mortgage of his home.*fn4 (Pls.' Exhs. 1(B), 1(F).)

C. IRS Audit and Tax Court Litigation

In June 1999 the IRS began its audit of De May's taxes for the years 1993 through 1998. (Bruce Aff. ¶ 4.) This audit was not unexpected, since, as defendants admit, an audit was contemplated by the parties as early as December 1998. (Defs.' Reply at 3; Defs.' Exh. 2.) As part of the audit, the IRS issued Information Document Requests to De May, and Jonathon Moore assisted in responding to these requests. (Bruce Aff. ¶ 4.)

In June 2002 the IRS began issuing a series of five position statements, called Explanations of Items, addressing the tax consequences of De May's trusts. The first, dated June 10, 2002, concluded that income realized by the Family Trust from the Optimay sale was attributable to De May. (Defs.' Exh. 3.) The second and third, dated June 24, concluded that De May's transfer of Optimay stock to Risk Capital constituted a taxable event, and that income realized by the ASDM Trust from the Optimay sale was attributable to De May. (Defs.' Exh. 4.) The fourth, dated July 2, determined that De May was required to pay an excise tax for the Optimay stock he transferred to the Foundation. (Defs.' Exh. 6.) The last statement, dated November 8, found that income realized by the Foundation and the DM-OC Trust from the Optimay sale was attributable to De May. (Defs.' Exh. 12.)

On July 16, 2002, De May wrote to Bruce to inform him to "hold off doing any further work on my tax situation" until he had a chance to meet with attorneys at McGuireWoods. (Defs.' Exh. 7.) On July 19, De May spoke with Douglas W. Charnas of McGuireWoods about the IRS audit. (Charnas Aff. ¶ 3.) That same day, De May informed Bruce of his decision to "engage[] Douglas Charnas of McGuireWoods to also represent me in connection with the pending IRS audit." (Defs.' Exh. 8.) He told Bruce that Charnas would "take over the primary role in communicating with the IRS on this matter," but asked that Moore & Bruce "co-operate fully with Doug in getting him up to speed on all developments in the audit to date." (Id.) De May also thanked Moore & Bruce "in advance for . . . working with Doug and the other McGuireWoods lawyers in a cooperative and efficient manner to bring the audit to the best possible conclusion." (Id.)

As a result, even though McGuireWoods assumed the lead counsel role in the IRS audit in July 2002, Moore & Bruce continued to work on the audit as well. (De May Aff. ¶ 10.) De May felt that it was important to have Moore & Bruce involved in the litigation because, as the drafter of the trust agreements that were at the heart of the case, it possessed useful knowledge and documents. (Charnas Aff. ¶ 8.) Charnas also thought that Moore & Bruce would be helpful with litigation strategy. (Id.) Consistent with this role, during the summer and fall of 2002, Charnas had several telephone conversations with Bruce about the audit. (Id. ¶ 5.) In December, De May met with Charnas and Bruce at the offices of Moore & Bruce. (Id.) At this meeting, Bruce explained the history of the trusts, and he argued that De May should not be personally liable for the capital gains on Optimay stock held by the trusts. (Id.)

In 2004, the IRS Office of Chief Counsel issued a report upholding the conclusions reached in the Explanations of Items. (Defs.' Exh. 18.) On July 23, 2004, the IRS sent an official deficiency notice to De May, informing him that he owed over $12 million for unpaid income taxes and penalties. (Defs.' Exh. 19.) Charnas, on De May's behalf, filed a petition in the United States Tax Court contesting this deficiency on September 17, 2004. (Defs.' Exh. 20.) Defendants never entered their appearance in the Tax Court. (Bruce Aff. ¶ 9.) On August 31, 2005, the IRS issued another deficiency notice for nearly $3 million for gift taxes.*fn5 (Defs.' Exh. 22.) This deficiency resulted from the determination that the gift market value of the Optimay stock transferred to the trusts in February 1996 was $6.66 per share, not zero, as Moore & Bruce had advised. (Id.) De May filed a second petition in Tax Court contesting the gift tax deficiency on November 17, 2005. (Id.) Again, only McGuireWoods entered an appearance on De May's behalf. (Bruce Aff. ¶ 10.)

In August and September of 2005, around the time of the second deficiency notice, Moore & Bruce continued to assist with the Tax Court litigation. On August 24, Bruce wrote Charnas with suggested responses to interrogatories that had been sent by the IRS. (Pls.' Exh. 3(A).) Two days later, Moore sent his comments regarding the interrogatory responses. (Pls.' Exh. 3(C).) On September 2, Bruce wrote a lengthy memo addressing De May's questions about the trusts and his requests for trust documents. (Pls.' Exh. 3(D).) In this memo, Bruce explained that the purpose of these actions in August 1998 was to "avoid[] triggering taxable income for you when the family moved to the US." (Id.) In October 7, 2005, Moore & Bruce agreed to provide affidavits for use in the Tax Court litigation relating to Bruce's advice to De May "that [he] would not be subject to tax on the gain realized by the Optimay Foundation Trust when it sold the Optimay stock to Lucent." (Pls.' Exh. 4.)

Bruce was also involved in the tax litigation through his fiduciary roles with the trusts. On August 24, 2005, Bruce addressed IRS questions about the migration of the ASDM Trust and Family Trust from Bermuda to the Isle of Man. (Pls.' Exh. 3(A).) Relying on his administrative duties for both trusts, he answered detailed questions about certain trust transactions. (Id.) The next day, he conducted an unsuccessful search for trust documents relating to the migrations. (Pls.' Exh. 3(B).)

In another example, on September 5, 2005, Bruce wrote a memo to CGI, Charnas, De May and Moore about how the tax litigation would affect the trusts. (Pls.' Exh. 3(E).) After reviewing his fiduciary roles at the various trusts, Bruce raised the question of having the Family Trust pay some of the legal fees associated with De May's income tax case before the Tax Court. (Id.) He also suggested that CGI, trustee of the Family Trust, would need to spend "a significant amount of time organizing the trust file and filling in any gaps that may exist." (Id. at 3.) In this memo, Bruce reviewed the history of the tax litigation and discussed Moore & Bruce's role in the audit in ...


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