## Facts

- Foreign investors formed three entities in 1982—Lama Holding Company (Delaware), Rasha Investments N.V. (Netherlands Antilles), and Rana Investments, Ltd. (British Virgin Islands)—to facilitate acquisition of 24.9% of Smith Barney Inc.
- Shearman & Sterling served as counsel and structured the investment using a “General Utilities” tax approach intended to reduce or avoid certain U.S. taxes on dividends and a later resale.
- Plaintiffs alleged they asked Shearman & Sterling about potential future changes in U.S. tax law affecting the structure and that the firm agreed to update them about significant changes.
- U.S. tax law later changed, repealing or limiting the General Utilities doctrine and increasing potential tax exposure on a disposition of the stock.
- Plaintiffs sold the Smith Barney shares to Primerica Corporation, reportedly realizing about $100 million in profit, and were assessed about $33 million in taxes.
- Plaintiffs alleged that timely notice of the tax-law change would have led them to structure the disposition differently and materially reduce or avoid the taxes.
- Plaintiffs sued in diversity, asserting legal malpractice, breach of fiduciary duty, negligent misrepresentation, and breach of contract; Shearman & Sterling moved to dismiss under Rules 12(b)(6) and 12(c).

## Issues

1. Whether the complaint sufficiently alleged that Shearman & Sterling’s representation included a continuing duty to inform plaintiffs of material tax-law changes affecting the structure and a later sale.
2. Whether plaintiffs adequately pleaded proximate causation despite defendants’ argument that plaintiffs’ decision to sell and structure the transaction was an intervening cause.
3. Whether the pleaded facts stated viable claims under New York law for legal malpractice, breach of fiduciary duty, negligent misrepresentation, and contract.

## Decision

- The court denied Shearman & Sterling’s Rule 12(b)(6) and 12(c) motion as to the core claims.
- Accepting the allegations as true, the court held it plausible that Shearman & Sterling undertook an ongoing obligation to advise plaintiffs of significant tax-law changes affecting the structure and disposition.
- The court held proximate cause could not be rejected as a matter of law on the pleadings where plaintiffs alleged they would have structured the transaction differently if warned.
- The court concluded plaintiffs sufficiently alleged duty, breach, causation, and damages to proceed on malpractice and related theories.

## Legal Principles

- On a motion to dismiss or for judgment on the pleadings, the court accepts well-pleaded factual allegations as true and draws reasonable inferences for the nonmovant.
- Under New York law, legal malpractice requires allegations of (1) an attorney–client relationship creating a duty, (2) attorney negligence, and (3) proximate causation of actual, ascertainable damages.
- Where an attorney allegedly undertakes a continuing advisory role, the scope of any ongoing duty may present fact questions inappropriate for resolution on the pleadings.
- Proximate cause in professional-malpractice claims is often fact-dependent; an asserted “intervening” client decision does not defeat causation at the pleading stage when the omission is alleged to have affected how that decision was carried out.
- In an attorney–client relationship, an undertaking to provide updates, combined with nondisclosure of material changes, can support a negligent misrepresentation theory when reliance and damages are plausibly alleged.
- Attorneys owe fiduciary duties to clients, including duties of candor and disclosure within the scope of the representation.

## Conclusion

The court allowed the action to proceed because plaintiffs plausibly alleged that tax counsel promised to monitor and warn of significant tax-law changes, failed to do so before a major stock disposition, and thereby caused the tax liability the plaintiffs claimed could have been avoided or reduced.


Lama Holding Co. v. Shearman & Sterling, 758 F. Supp. 159 (S.D.N.Y. 1991)