(Photo: Rebecca Breyer/ALM)A Fulton County jury has awarded $4.7 million to a longtime Alston & Bird client after finding the law firm’s erroneous tax advice and subsequent cover-up of the error constituted legal malpractice.
The jury issued the Dec. 13 verdict for MSouth Equity Partners after deliberating about seven hours following a two-week trial, said David Pernini, a partner at Atlanta’s Wargo French. French was part of the team that represented MSouth Equity Partners and nearly a dozen other minority shareholders.
Pernini said that, despite Alston & Bird’s efforts to shift blame to an outside accounting firm for the bad tax advice and resulting multimillion-dollar tax liability, the jury found the law firm 100% liable. That accounting firm was not a defendant in the trial.
Alston & Bird made the initial error in 2011, Pernini said. But in 2013, when the error and the potential tax liability was discovered by an outside accounting firm, Alston & Bird doubled down, sticking to its original advice.
“They at all times contended they did not make an error, in 2011, 2013 and 2014,” Pernini said. “This lawsuit was about trying to make our clients whole.”
The jury awarded nearly $4.7 million in compensatory damages to MSouth, finding that Alston & Bird twice engaged in legal malpractice, according to the verdict form.
The jury also awarded an additional $69,897 to MSouth that Alston & Bird billed the partnership after finding the law firm was unjustly enriched as a result of its bad advice, according to Pernini and the verdict form. The jury made no award to the minority partners, finding the law firm had no fiduciary duty to them.
MSouth’s partners include three former ranking executives of Bellsouth Corp.: Barry L. Boniface, Bellsouth’s former chief strategy and development officer who also served as a managing director at Barclays Capital and Lehman Brothers; Charles Stubbs, former president of BellSouth Intelliventure and former CEO of Yellowpages.com; and Mark Feidler, Bellsouth’s former president and COO and former COO of Cingular Wireless.
In addition to Pernini, the Wargo French team representing MSouth included partners Vernon Strickland and Michael French, of counsel Heather Fugitt and associate Kathleen Hicks.
King & Spalding partner Robert Thornton, who joined with partner David Balser to defend Alston & Bird, declined comment.
Alston & Bird’s general counsel and spokespeople could not be reached for comment.
Fulton County Senior Superior Court Judge Elizabeth Long presided over the trial.
MSouth Equity Partners sued Alston & Bird in 2017 to claw back more than $7.6 million in federal and state taxes and interest the investment firm said it was belatedly forced to pay to the IRS. The tax bill surfaced following a 2011 investment deal involving another Alston client in which MSouth held a majority interest, the malpractice complaint said.
MSouth claimed that Alston & Bird lawyers made the initial $15 million error after advising LMS Intellibound Group that its 2011 merger with another investment firm would not be viewed skeptically by the IRS as a way of avoiding taxes. As majority owner of LMS, MSouth’s tax liability was an estimated $7.6 million, according to the complaint.
As part of the sale, “Our client provided a special indemnity in this instance to cover potential fallout from an IRS audit at the same time it was receiving assurances from Alston & Bird” that even though it was having to put money in escrow, at the end of the day it would emerge from the audit unscathed, Pernini said.
He said MSouth asked the jury to award the full $7.6 million in tax payments, interest and penalties, but Alston & Bird lawyers contended that amount should be offset by other future tax benefits they claimed MSouth will eventually realize as a result of Alston’s settlement of the tax audit that resulted in the original liability finding.
According to the complaint, LMS’ merger and a subsequent $60 million cash distribution to LMS shareholders, including MSouth, led to the tax liability. Alston attorneys advised both LMS and MSouth that the legal structure of the deal would prevent it from being considered a “disguised sale” intended to hide taxable earnings from the merger.
When LMS accountants uncovered the error in 2013, Alston & Bird generated an email, memorandum and side letter containing a “post-hac rationalization of the 2011 tax advice that mischaracterized the deal documents,” according to court records reflecting MSouth’s contentions.
By 2014, while advising MSouth on the 2014 merger, Alston & Bird was simultaneously following the advice of the firm’s general counsel and put its malpractice insurance carrier on notice of a possible claim, according to court records. However, the firm never informed MSouth or LMS of the adverse tax issue or of its possible conflict of interest arising from its original, and erroneous advice, MSouth lawyers contended.
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December 19, 2019 at 08:24PM
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Alston & Bird Liable for $4.7M in Legal Malpractice Case | Daily Report - Law.com
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