Filed 6/24/16 Michelson v. Proskauer Rose LLP CA2/1
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
GARY K. MICHELSON, et al., B259013
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. BC384760)
v.
PROSKAUER ROSE, LLP,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County, Mark
Mooney, Judge. Reversed.
Kinsella Weitzman Iser Kump & Aldisert, Dale F. Kinsella, Patricia A. Millett;
Greines, Martin, Stein & Richland, Irving H. Greines, Edward L. Xanders for Plaintiffs
and Appellants.
Davis Polk & Wardwell, Paul Spagnoletti; Proskauer Rose for Defendant and
Respondent.
__________________________________
1 2
Plaintiffs Dr. Gary K. Michelson and Karlin Holdings Limited Partnership
(collectively, Michelson) appeal from a judgment entered after the trial court granted
summary judgment in favor of defendant law firm Proskauer Rose (Proskauer) in this
action alleging fraud, negligent misrepresentation, breach of fiduciary duty, professional
malpractice, and unfair business practices. We conclude the trial court erred in excluding
certain evidence based on Proskauer’s objections. We also find Michelson has shown
triable issues of material fact. Accordingly, we reverse the judgment.
BACKGROUND
The SDI and Odora Transactions
In or about mid-November 2001, Ernst & Young (EY), an accounting firm with
which Michelson already had a relationship, solicited Michelson regarding participation
in a program called Strategically Diversified Investment or SDI. EY suggested SDI as a
means for Michelson to reduce his tax liability on his substantial 2001 earnings. SDI, a
complex transaction involving investments in foreign currency options, was structured to
create large losses the investor could claim immediately to offset ordinary income.
Moreover, EY projected the proceeds from the later sale of the investment would be
taxed more favorably than ordinary income.
Before investing in SDI, Michelson sought advice from several individuals and
firms in addition to EY (where his principal contact was partner Tom Dougherty).
Michelson’s longtime attorneys at Jeffer Mangels Butler & Mitchell (Jeffer Mangels),
specifically Burton Mitchell, the head of the tax practice at Jeffer Mangels, advised him
regarding the SDI transaction. Michelson also sought advice from his longtime personal
tax accountant, Stephen Collett.
1
Dr. Michelson is a spinal surgeon and inventor who holds hundreds of patents
“covering inventions and techniques related to spinal instruments, surgical implants and
surgical techniques.”
2
Dr. Michelson is the sole director of the general partner of Karlin Holdings
Limited Partnership. Dr. Michelson conducted the transactions and made the financial
investments at issue in this case through Karlin Holdings Limited Partnership.
2
While Michelson was considering an investment in SDI, he learned about a similar
tax-advantageous program called Odora which also involved investments in foreign
currency options and up-front losses he could claim on his tax returns. John Staddon
from Euram, a bank intimately involved with both the SDI and Odora transactions,
contacted Michelson about Odora. Jeffer Mangels also advised Michelson regarding
Odora.
3
Proskauer’s Written Tax “Should” Opinions
Michelson and his advisors (Mitchell and Collett) expressed concern regarding the
risk of an IRS audit if Michelson invested in SDI. Michelson asked EY to indemnify him
against potential IRS penalties, but EY declined. Dougherty explained to Michelson that
he did not need indemnification from EY if he received a tax opinion from a qualified
law firm concluding SDI should survive IRS scrutiny. Dougherty informed Michelson
that Proskauer was prepared to issue Michelson a “should” tax opinion regarding the SDI
transaction, and that such an opinion would insulate him from the IRS imposing under-
reporting penalties. John Staddon from Euram similarly informed Michelson that
Proskauer was prepared to issue a should tax opinion for the Odora transaction, and
further indicated that such an opinion would insulate Michelson from IRS penalties.
Michelson retained Proskauer to prepare the tax opinions regarding the SDI and
Odora transactions for a fee of $150,000. Mitchell, Michelson’s attorney at Jeffer
Mangels, communicated with Proskauer concerning preparation of the tax opinions.
Michelson never had a conversation with anyone at Proskauer regarding the opinions or
the SDI and Odora transactions.
In late November 2001, Proskauer sent Mitchell drafts of the should tax opinions
prior to the dates the SDI and Odora transactions closed at the end of 2001. According to
3
Our statement of the facts includes evidence the trial court excluded based on
Proskauer’s objections (namely, Proskauer’s “should” tax opinions, and statements in
Michelson’s declaration and deposition testimony that he read and relied on the tax
opinions). We include this evidence because we find the trial court abused its discretion
in excluding the evidence for the reasons set forth below.
3
Michelson’s deposition testimony, he read the drafts and was satisfied the language in the
tax opinions was consistent with what EY and Staddon represented would be included in
the opinions. Michelson invested a total of about $120 million in SDI and Odora.
Proskauer and Jeffer Mangels worked together to revise the draft tax opinions.
Numerous drafts were exchanged between the two law firms, with Jeffer Mangels
requesting changes to both the facts and legal analysis. In October 2002, Proskauer
issued eight final tax opinions, four for each transaction (a should opinion, an opinion
that it was more likely than not that Michelson was not required to disclose the
transaction to the IRS, an opinion that it was more likely than not that Michelson would
not be subject to penalties, and a supplemental opinion stating an IRS notice issued after
Proskauer finalized the other opinions did not alter Proskauer’s substantive conclusions).
According to Michelson’s deposition testimony, he read the final opinions.
Stephen Collett believes he reviewed Proskauer’s final tax opinions before filing
Michelson’s 2001 tax return. Michelson claimed tax benefits based on the SDI and
Odora investments. Michelson filed “protective Disclosure Statements” regarding his
participation in SDI and Odora.
The IRS Audit
The IRS audited Michelson’s 2001 tax return and concluded the SDI and Odora
transactions were illegal tax shelters. The IRS disallowed Michelson’s deductions based
on the losses and assessed penalties and required him to pay back taxes. The IRS also
concluded Proskauer’s should opinions were invalid and could not shield him from
penalties because Proskauer was a promoter of SDI and Odora and not an independent
law firm.
Jeffer Mangels represented Michelson in connection with the audit. Michelson
settled with the IRS instead of litigating in court, paying $47,469,813 in back taxes and
$4,746,986 in penalties.
The Complaint in This Action
In February 2008, Michelson filed this action against Proskauer. In the operative
second amended complaint, he asserts causes of action for breach of fiduciary duty,
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fraud, negligent misrepresentation, professional malpractice, and unfair business
practices. Michelson alleges he invested in SDI and Odora based on Proskauer’s
representations it was an independent law firm acting on his behalf, and it would provide
him with should tax opinions attesting to the validity of the SDI and Odora investments
and their likelihood of withstanding IRS scrutiny. He further alleges he claimed tax
deductions for losses generated by SDI and Odora on his 2001 tax returns in reliance on
the formal tax opinions Proskauer prepared for and sent to him. Michelson also alleges
he would not have invested and claimed the losses if Proskauer had disclosed the true
facts of which it was aware, including (1) that Proskauer was not independent, but had
been involved in structuring the SDI and Odora investments, and “its tax opinions
therefore could not insulate Dr. Michelson from protection against IRS penalties;” (2)
that the IRS had identified similar transactions as abusive and illegal tax shelters, and (3)
that Proskauer “had concluded that it was not ‘more likely than not’ that deductions taken
in connection with SDI and Odora would be sustained by the IRS.”
Litigation of Attorney-Client Privilege Issue in Trial Court and This Court
During discovery, Michelson refused to produce to Proskauer his communications
with Jeffer Mangels regarding the SDI and Odora transactions and Proskauer’s tax
opinions, asserting the attorney-client privilege. Proskauer moved to compel Michelson’s
disclosure of these communications, arguing (1) this action placed Michelson’s
privileged communications with Jeffer Mangels directly at issue, and (2) disclosure of
these communications is essential to a fair adjudication of this action. The trial court
denied Proskauer’s motion to compel.
Proskauer sought writ relief in this court. We denied Proskauer’s petition.
(Proskauer Rose, LLP v. Superior Court (Apr. 30, 2013, B245624) [nonpub. opn.].) In
concluding Michelson did not waive the attorney-client privilege between himself and
Jeffer Mangels by filing this action against Proskauer, we explained: “In order to prevail
in his underlying suit against Proskauer, Michelson’s own state of mind and the grounds
on which he decided to invest and take deductions with respect to the SDI and Odora
investments will be at issue. But it is his state of mind that will be at issue, not the state
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of mind of the attorneys with whom he communicated at Jeffer Mangels. No privilege
protects Michelson from disclosure of his own knowledge; but what Jeffer Mangels
might have told him, and what he might have told Jeffer Mangels, remains privileged,
even if Proskauer might find that information relevant and helpful to its defense.
[Citation.] [¶] Michelson’s pleadings do not place in issue the decisions, conclusions, or
mental state of Jeffer Mangels, or the contents of his communications with anyone at that
firm. Michelson’s knowledge and understanding of the subject of his SDI and Odora
investments is discoverable, but the contents of his communications with Jeffer Mangels
on that subject was not put in issue by his suit against Proskauer, and therefore remains
protected by the attorney-client privilege. [Citation.] The fact that Michelson’s
underlying claims place his own state of mind at issue does not place at issue any
otherwise-privileged communications that might or might not have influenced his
thinking or his conduct. If it did, little of the attorney-client privilege would remain.”
(Id. at p. 14.)
Proskauer’s Motion for Summary Judgment
In July 2013, Proskauer moved for summary judgment or, in the alternative
summary adjudication. In its supporting memorandum of points and authorities,
Proskauer argued Michelson cannot show reliance on Proskauer’s advice—a requisite
element of Michelson’s causes of action—due to his refusal to waive the attorney-client
privilege and disclose “the substance of his communications with Jeffer Mangels.” In
support of this argument, Proskauer asserted, “It is beyond dispute that all of Proskauer’s
advice was filtered to [Michelson] through Jeffer Mangels, and [Michelson] has admitted
that he relied on Jeffer Mangels when making his investments.” (Original italics.)
Proskauer also made the following additional arguments in its memorandum of points
and authorities: (1) that “Michelson’s settlement with the tax authorities broke any
causal connection to Proskauer” because “the advice he received from Proskauer was
premised on the expectation that he would litigate against the IRS, which he did not do”
(original italics); and (2) that Michelson cannot prove any of the misrepresentations
alleged in his breach of fiduciary duty and fraud causes of action.
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Michelson filed an opposition addressing the arguments Proskauer raised in
connection with its motion for summary judgment, including Proskauer’s argument
regarding the dispositive effect of Michelson’s assertion of the attorney-client privilege
concerning his communications with Jeffer Mangels. Michelson disputed Proskauer’s
assertion that communications between Michelson and Jeffer Mangels were “‘central to
his claim[s]’ and ‘essential to [his] case.’” Michelson pointed to evidence demonstrating
he invested in SDI and Odora in reliance on “Proskauer’s willingness to issue ‘should’
tax opinions” for these transactions, as Proskauer authorized Tom Dougherty at EY and
John Staddon at Euram to communicate to Michelson. He also pointed to evidence
demonstrating he claimed tax deductions for SDI and Odora on his 2001 tax returns in
reliance on the tax opinions, which Proskauer prepared for and addressed to him, and
which he, himself, read.
Proskauer filed written objections to Michelson’s evidence, asking the trial court
to exclude, among other things, references in Michelson’s declaration in opposition to
summary judgment and in his deposition testimony regarding his reliance on Proskauer’s
tax opinions. In making its objections, Proskauer argued, in pertinent part, “The Court
should exclude all evidence that Michelson relied on legal advice from Proskauer or
received any representations from Proskauer that were filtered through Jeffer Mangels
because [Michelson has] abused the discovery process by selective waiver of the
attorney-client privilege. [Evid. Code, §§ 912, 954.] [Michelson has] aggressively
asserted the privilege to prevent Proskauer from discovering evidence of any
communications between Jeffer Mangels and Michelson. Now, however, [Michelson
seeks] to rely on evidence that Michelson received, read, and relied on information from
Proskauer that he received only through his attorneys at Jeffer Mangels. The proper
remedy where a party has asserted the attorney-client privilege in discovery and then
seeks to introduce evidence that it has previously withheld is to exclude the evidence.”
Of the 42 objections Proskauer made to Michelson’s evidence based on selective
waiver of the attorney-client privilege and the related ground of “fundamental fairness,”
the trial court sustained 39 of them. The court thereby excluded references in
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Michelson’s declaration and deposition testimony, and his accountant Stephen Collett’s
deposition testimony, regarding Michelson’s review of and reliance on Proskauer’s tax
opinions, and also excluded all drafts and final copies of Proskauer’s tax opinions.
The trial court granted Proskauer’s motion for summary judgment. The court’s
order states, in pertinent part: “Proskauer submitted sufficient evidence to establish that
communications from Proskauer to Plaintiffs were filtered through Plaintiffs’ attorneys at
Jeffer Mangels, that Plaintiffs never spoke to anyone from Proskauer, and that Plaintiffs
relied upon parties other than Proskauer. The burden was therefore shifted to Plaintiffs to
establish their reliance on Proskauer’s representations. But Plaintiffs have not shown
what representations by Proskauer they relied on, nor have they shown when they
received those representations. Without that foundation, Plaintiffs cannot, as a matter of
law, establish the necessary elements of reliance or causation because all representations
and information from Proskauer to Plaintiffs were filtered through Plaintiffs’ attorneys at
Jeffer Mangels; Plaintiffs have asserted the attorney-client privilege with respect to those
filtered communications; and the record contains no admissible evidence that Plaintiffs
justifiably relied on Proskauer’s advise or that Proskauer’s advice caused Plaintiffs any
harm. Moreover, Plaintiffs cannot prove, as a matter of law, their claims regarding
omissions. Because Plaintiffs cannot establish the foundational issues underlying their
purported reliance on Proskauer’s representations, neither can they establish those same
foundational issues for their purported reliance on any alleged omissions.” The trial court
entered judgment in favor of Proskauer.
DISCUSSION
Standard of Review
A trial court should grant summary judgment “if all the papers submitted show
that there is no triable issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) A defendant may
establish its right to summary judgment by showing that one or more elements of the
cause of action cannot be established or that there is a complete defense to the cause of
action. (Code Civ. Proc., § 437c, subd. (p)(2).) Once the moving defendant has satisfied
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its burden, the burden shifts to the plaintiff to show that a triable issue of material fact
exists as to each cause of action. (Ibid.) A triable issue of material fact exists where “the
evidence would allow a reasonable trier of fact to find the underlying fact in favor of the
party opposing the motion in accordance with the applicable standard of proof.” (Aguilar
v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.)
“We review the trial court’s decision de novo, considering all the evidence set
forth in the moving and opposition papers except that to which objections were made and
sustained.” (Johnson v. City of Loma Linda (2000) 24 Cal.4th 61, 65-66.) We view the
evidence and the inferences reasonably drawn from the evidence “in the light most
favorable to the opposing party.” (Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at
p. 843.)
The Trial Court’s Exclusion of Evidence Based on Proskauer’s Objections
Michelson contends the trial court erred in excluding Proskauer’s tax opinions,
and references in Michelson’s declaration and deposition testimony and his accountant
Stephen Collett’s deposition testimony regarding Michelson’s review of and reliance on
Proskauer’s tax opinions. We review the evidentiary rulings for abuse of discretion.
(People ex rel. Lockyer v. Sun Pacific Farming Co. (2000) 77 Cal.App.4th 619, 639.)
We agree with Michelson that the court erred.
The trial court excluded this evidence based on the ground Michelson could not
selectively waive his attorney-client privilege with Jeffer Mangels. We disagree with the
court’s assessment that the evidence constitutes privileged communications between
Michelson and Jeffer Mangels.
Michelson retained Proskauer to prepare the tax opinions. Proskauer prepared the
opinions and addressed them to Michelson. Proskauer sent the opinions to Jeffer
Mangels. Michelson has not asserted the attorney-client privilege regarding
communications between Proskauer and Jeffer Mangels. The tax opinions themselves,
which were not privileged for purposes of this litigation when Proskauer sent them to
Jeffer Mangels, do not become privileged when Jeffer Mangels sends them to Michelson.
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What is privileged is Jeffer Mangels’s communications to Michelson. Michelson does
4
not rely on any such communication in opposing the summary judgment motion.
Michelson presented evidence indicating he read Proskauer’s draft and final tax
opinions which were prepared for and directed to him. In his declaration and deposition
testimony he states, based on his own reading of the opinions and information he had
received from persons other than individuals at Jeffer Mangels (e.g., Dougherty and
Staddon), he understood that the tax opinions stated the SDI and Odora transactions
should survive IRS scrutiny in court and that the opinions would insulate him from IRS
penalties. He also states, in investing in the SDI and Odora transactions and claiming the
deductions on his 2001 tax return, he relied on his own reading of the opinions and
information he had received from persons other than individuals at Jeffer Mangels. He
has not disclosed the substance of any communication between himself and Jeffer
Mangels. “Relevant case law makes clear that mere disclosure of the fact that a
communication between client and attorney had occurred does not amount to disclosure
of the specific content of that communication, and as such does not necessarily constitute
a waiver of the privilege.” (Mitchell v. Superior Court (1984) 37 Cal.3d 591, 602.)
This is not a case in which an attorney’s transmission of an unprivileged document
to a client might reveal the attorney’s strategy. (Costco Wholesale Corp. v. Superior
Court (2009) 47 Cal.4th 725, 734 [“‘[T]he [attorney-client] privilege covers the
transmission of documents which are available to the public, and not merely information
in the sole possession of the attorney or client. In this regard, it is the actual fact of the
transmission which merits protection, since discovery of the transmission of specific
public documents might very well reveal the transmitter’s intended strategy’”].)
Proskauer authored the opinion letters for Michelson. Of course Jeffer Mangels was
going to forward copies of the letters to Michelson. The fact Michelson received the
4
Michelson argues there is a triable issue of material fact regarding whether
Proskauer sent the opinions directly to him rather than through Jeffer Mangels. We need
not resolve this issue given our holding the excluded evidence is not privileged.
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opinions from Jeffer Mangels is not privileged information. In opposing the summary
judgment motion, Michelson has not disclosed the content of any communication
between himself and Jeffer Mangels about the tax opinions or the SDI and Odora
transactions.
For these reasons, we find the trial court abused its discretion in excluding this
evidence.
Triable Issues of Material Fact
Considering the evidence the trial court excluded, it is clear Michelson has
demonstrated triable issues of material fact which defeat Proskauer’s summary judgment
motion.
As set forth above, in its memorandum of points and authorities in support of its
summary judgment motion and on appeal, Proskauer argued Michelson cannot show
reliance on Proskauer’s advice because “all of Proskauer’s advice was filtered to
[Michelson] through Jeffer Mangels, and [Michelson] has admitted that he relied on
Jeffer Mangels when making his investments.” (Original italics.) Proskauer asserted
Michelson could not prove reliance without waiving the attorney-client privilege
regarding his communications with Jeffer Mangels. As our discussion in the prior section
of this opinion shows, Michelson has presented admissible, non-privileged evidence
indicating he read the draft and final Proskauer tax opinions and relied on them in
investing in SDI and Odora and in claiming deductions on his 2001 tax return. There is
plenty of other non-privileged evidence in the record, including evidence regarding the
role Jeffer Mangels played in these transactions (e.g., its revision of the draft tax
opinions), for a trier of fact to decide whether Michelson relied on Proskauer’s tax
opinions or counsel from Jeffer Mangels or the advice of others or a combination of all of
5
the above.
5
As we stated in our prior opinion in this matter, Michelson may not waive the
privilege at a later stage of this litigation if he believes communications between himself
and Jeffer Mangels are necessary to prove his case at trial. (Proskauer Rose, LLP v.
Superior Court, supra, B245624, p. 15.)
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Proskauer also argued in its memorandum of points and authorities and on appeal
that “Michelson’s settlement with the tax authorities broke any causal connection to
Proskauer” because “the advice he received from Proskauer was premised on the
expectation that he would litigate against the IRS, which he did not do.” Michelson
presented evidence indicating he settled with the IRS because Proskauer misrepresented
facts and failed to disclose facts which rendered Proskauer’s tax opinions worthless—
e.g., that Proskauer was a promoter of the SDI and Odora transactions and not an
independent law firm, and that the IRS had identified similar transactions as abusive and
illegal tax shelters. It is for the trier of fact to decide whether Michelson’s settlement was
6
a reasonable mitigation of damages.
For the foregoing reasons, we conclude the trial court erred in granting
Proskauer’s summary judgment motion and reverse.
DISPOSITION
The judgment is reversed. Michelson is entitled to recover costs on appeal.
NOT TO BE PUBLISHED.
CHANEY, Acting P. J.
We concur:
JOHNSON, J. LUI, J.
6
We need not address at length the last argument Proskauer raises on appeal in
support of affirmance of the trial court’s grant of summary judgment/summary
adjudication—that there is no evidence in the record supporting Michelson’s “omission
claims.” None of Michelson’s causes of action is based solely on allegations of
omissions. Michelson also alleges misrepresentations. On appeal, Proskauer does not
challenge the sufficiency of the evidence supporting the misrepresentation claims (other
than to ask this court to uphold the trial court’s exclusion of evidence based on selective
waiver of the attorney-client privilege, an argument we already have rejected).
Accordingly, a finding of lack of evidence supporting the allegations regarding omissions
would not defeat any cause of action and is not grounds for affirming summary
judgment/summary adjudication.
Michelson has advanced other grounds for reversal of the summary judgment, but
there is no need for us to address them given our reversal on the above grounds.
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