Appeals Court: Negligence but No Legal Malpractice on Part of Real Estate Attorney

08/01/12

On Tuesday, the Appellate Division, First Department, found that in case of a real estate attorney, Howard Stern, there was “strong evidence” that he had acted with negligence but he cannot be sued for malpractice. The court found on facts and evidence produced that the lawyer's clients were unable to prove his actions caused their losses.

Writing for the 4-1 majority, Justice David Sax observed, “To prevail on its claim of legal malpractice, plaintiff must prove not only that defendant was negligent, but also that defendant's negligence was a proximate cause of its losses.”

In the instant case, the plaintiff Wo Yee Hing Realty alleged that though Howard Stern had no experience in handling similar transactions, he had advised the company to sell a building as part of an arrangement to defer capital gains taxes. The company sued alleging that the real estate attorney was guilty of malpractice. The appeals court did not agree.

The majority ruled that the plaintiff had no evidence that it would have been able to act upon Stern's advice, complete the transaction, and defer its taxes, even if Stern had performed adequately. The court observed, “Plaintiff failed to present any evidence that it had identified any property that it was capable of buying within the statutory time frame. Nor did it present any evidence that it could have closed on its purchase within 180 days.”

However, Justice Leland DeGrasse dissented from the majority's opinion. He held that the majority view was “unrealistic” since the company immediately learnt that a 1031 was no longer permissible and therefore did not bother to identify a suitable property for purchase.

The dissenting judge observed: “It would have been impossible for plaintiff to purchase or even identify anything that qualified as replacement property … It would also have been pointless for plaintiff to go through the motions of doing so once it received the proceeds of the sale.”

While Stern's lawyer was “pleased” with the ruling, the lawyer for the plaintiffs said he was “at a loss” to fathom the majority's reasoning. He said, “Once you learn at a closing that you have failed to meet the requirements of the 1031 exchange, what rational person would go forward?” He further said, “It's an undue burden that the court places on the client who relies on the expertise of an attorney.”

The case is Wo Yee Hing et al v. Howard Stern, Appellate Division, First Department, No. 7020.