Opinion
01 Civ. 0771 (LLS).
January 11, 2002
Opinion and Order
Defendants move to dismiss the complaint as barred by the statute of limitations. The motion is granted.
Background
Plaintiff AmBase Corporation ("AmBase"), a Delaware corporation with its principal place of business in Connecticut, was formed in 1975 as a wholly owned subsidiary of City Investing Company ("City Investing"). In 1985, in anticipation of the dissolution and liquidation of City Investing, AmBase and City Investing entered an Assignment and Assumption Agreement ("Assignment Agreement") in which AmBase assumed certain liabilities of City Investing, including an obligation to pay certain income taxes. At about the same time, defendant City Investing Company Liquidating Trust ("the Trust") was formed to assume the liabilities of City Investing "not otherwise provided for." Compl., ¶ 3. Thereafter, City Investing was dissolved and liquidated. Three former AmBase officers and directors, George T. Scharffenberger, Eben W. Pyne, and Lester J. Mantell, have been trustees of the Trust since 1985, although none has been an officer or director of AmBase since Mantell left it in 1996.
In March 1986, as a result of an audit of a City Investing subsidiary, the United States Internal Revenue Service ("IRS") issued a Revenue Agent's Report claiming that AmBase, as agent for City Investing, owed certain amounts which should have been withheld for income tax purposes (the "withholding taxes") in the years 1979 and 1980 from payments made by a subsidiary of City Investing. AmBase began to incur legal expenses and other fees (for which it now seeks compensation from the Trust) in 1986 in an effort to resolve the complexities involved, and to persuade the IRS that City Investing did not owe the withholding taxes.
Over the next few years, the IRS issued other reports in the same connection for the tax years 1981 to 1986.
On May 11, 1995 the IRS filed a Notice of Deficiency, seeking a total of $20.9 million in withholding taxes plus interest from AmBase. On June 29, 1995, AmBase sued in Tax Court, contesting the IRS's claim.
In January 2001 AmBase brought this suit against the Trust seeking a declaration that the Trust rather than AmBase was primarily liable for the $20.9 million in withholding taxes and $120 million in accrued interest by then sought by the IRS, arguing that the liabilities AmBase assumed in the Assignment Agreement did not include the obligation to pay the withholding taxes, which accordingly fell among the other City Investing liabilities assumed by the Trust. AmBase also sought reimbursement from the Trust of $3.2 million AmBase had spent in legal fees. Finally, AmBase sought compensatory damages against the individual trustees for breach of fiduciary duty and against defendant Lester Mantell (a tax lawyer, former AmBase officer, and present trustee of the Trust) for professional negligence and malpractice, for his alleged concealment and failure to advise AmBase that the liability was the Trust's.
Recently, on May 23, 2001, the Tax Court held in favor of AmBase. See AmBase Corp. v. Commissioner of Internal Revenue, Docket No. 11816-95 (United States Tax Court, May 23, 2001). It held that neither City Investing nor AmBase was liable for the withholding taxes. The IRS did not appeal. Because the Tax Court held in favor of AmBase and there is no liability for the withholding taxes, AmBase's only remaining damages are the $3.2 million in legal fees, which it claims the Trust should pay.
The defendants move to dismiss under the New York six-year statute of limitations (except as to the malpractice claim, see page 14 below) and claim collateral estoppel in their favor, based on a December 14, 2000 decision of Chancellor Strine of the Delaware Court of Chancery dismissing a suit, substantially similar to this one, which AmBase filed in 2000 in that court. Chancellor Strine ruled from the bench that AmBase's claims were barred by the Delaware three-year statute of limitations and laches ("Strine Ruling"). On February 7, 2001, he denied AmBase's motion for reargument ("Reargument Opinion")
In its motion to dismiss the Delaware suit, the defendants argued that AmBase's claims accrued in March 1986, when the IRS first issued the report claiming that AmBase, on behalf of City Investing, owed withholding taxes. Defendants asserted that the last possible accrual date of the plaintiff's claims was December 1996, when Mantell left AmBase, because thereafter AmBase could no longer claim tolling of the statute of limitations while the trustee-defendants were "fraudulently concealing the Trust's liability from AmBase." Compl., ¶ 1. Thus, since the suit was commenced in 2000, it was barred by the Delaware three-year statute. Chancellor Strine agreed and dismissed it.
In this present suit, the defendants again assert that the claims accrued in 1986, rendering them untimely under the six-year New York statute of limitations. They also urge that, even if plaintiff's claims were tolled while Mantell allegedly fraudulently concealed AmBase's rights from AmBase, that tolling ceased when he left in 1996. Defendants argue that under the discovery rule, N.Y. C.P.L.R. 203(g), plaintiff only had two additional years from 1996 in which to sue, and suit was barred after 1998.
AmBase argues that its claims did not accrue until 2000, when it discovered and asserted them, and the Trust rejected its demands. Alternatively, it asserts that its claim for indemnity of its legal fees and costs accrued in 2001, when the Tax Court issued its decision. Finally, AmBase submits that its claims accrued at the earliest in 1995, when the IRS issued its Notice of Deficiency, or in 1996, when Mantell left AmBase, making them timely under the New York six-year limitations period.
Except the malpractice claim, which AmBase does not dispute is time barred by a three-year limitations period.
Discussion 1.
Defendants assert that Chancellor Strine held that AmBase's claims accrued in 1986, which they say is a determination that collaterally estops AmBase from asserting that its claims accrued later.
Chancellor Strine's actual holding was that AmBase's claims were untimely under the Delaware three-year statute of limitations. All that was needed to support that holding was his finding that, whenever the claims accrued, it was more than three years before AmBase sued on August 14, 2000. It was sufficient for Chancellor Strine to state, as he did, that AmBase's claims against the defendants were "surely ripe as of 1995, if not in 1986" (Reargument Opinion, at 9). Chancellor Strine did not fix the exact date when the claims accrued. Rather, he held that the claims were barred because they accrued at some earlier time and nothing supported a tolling of the statute of limitations beyond 1996, which was over three years before AmBase brought suit. In denying AmBase's motion for reargument, Chancellor Strine stated (p. 14-18)
But, in the end, I did not rest my dismissal decision on a holding that the statute of limitations began to run before the last of the Trustee Defendants had left AmBase.
Instead, I noted the undisputed fact that all of the Trustee defendants had left AmBase's service by December 1996. Thus, any influence the Trustee Defendants had over AmBase was gone as of that point.
I held that it was clear that AmBase's claims were ripe as of December 1996, that any influence of the Trustee Defendants was gone as of that time, that AmBase possessed all the knowledge it needed to file suit within three years of that time, and that it did not do so.
Since Chancellor Strine's statements about accrual dates for AmBase's claims earlier than 1996 were dicta, relitigation of that question is not precluded. Because New York has a longer statute of limitations for almost all of AmBase's claims, this court must determine their exact date of accrual.
E.g.:
I think that kind of suit could have been brought in 1986. . . .
And I think it is proven that the case could have been brought by the fact that the case now seeks defense costs back to 1986. . . . Giving AmBase all of its due, the claim began to run at least as early as the notice of deficiency, because if you don't act on the notice of deficiency by challenging it, it is going to be reduced to judgment.
(Strine Ruling, at 3-4); "At that time, I reasoned that AmBase could have brought this action against the Trust as earl y as 1986, when the Revenue Report was issued, and certainly by 1995, when the Notice of Deficiency was issued." (Reargument Opinion, at 8).
2.
A. Restitution, Unjust Enrichment and Implied Contract ClaimsAmBase alleges that "Since 1986, AmBase has incurred legal expenses and related costs in the amount of approximately $3.2 million in connection with the IRS dispute and the Withholding Tax Litigation," Compl., ¶ 19, and seeks "all of its costs and expenses incurred in defending against the alleged tax obligation and in prosecuting the Withholding Tax Litigation including its reasonable attorneys' fees," id., p. 17, ¶ C. AmBase claims that the defendants were "unjustly enriched as a result of the benefit conferred at AmBase's expenses [sic] by the payment of these legal fees." Id., ¶ 32.
A claim for unjust enrichment "starts to run upon the occurrence of the wrongful act giving rise to a duty of restitution." Congregation Yetev Lev D'Sarmar, Inc. v. 26 Adar N.B. Corp, 596 N.Y.S.2d 435, 437 (A.D. 2nd Dep't 1993) (citation omitted). The "wrongful act" alleged in the complaint occurred when the defendant-Trustees "endeavored to foist such alleged withholding tax liability upon AmBase," Compl., ¶ 17, which was "[w]hen the withholding tax dispute with the IRS arose in the mid-1980s." Id., ¶ 15. As Chancellor Strine put it, "as AmBase's claims for reimbursement for its expenses back to 1986 demonstrates, AmBase had a litigable dispute with the Trust over which entity should have to deal with the IRS." Reargument Opinion, at 9. AmBase's complaint alleges that "Since 1986, AmBase has incurred expenses" unjustly enriching the Trust, which had the primary obligation to pay the expenses.
On the case as a whole, these claims accrued in 1986, when AmBase received the Revenue Agent's Report and began the work, and incurring the costs, of opposing it. The Notice of Deficiency issued in 1995 continued, but did not commence, the process of defense and the incurring of its costs.
AmBase's position, reiterated in all its claims, is that the statute of limitations begins to run when it learned that the Trust, not AmBase, should have paid these costs.
The statute of limitations, however, runs from the time of a breach or injury and "'[k]nowledge of the occurrence of the wrong on the part of the plaintiff is not necessary.'" Ely-Cruikshank Co. v. Bank of Montreal, 599 N.Y.S.2d 501, 503 (Ct.App. 1993) (quoting Varga v. Credit-Suisse, 171 N.Y.S.2d 674). No fresh breach or "wrongful act giving rise to a duty of restitution" occurred in 1995, 1996 or 2000.
When, through no fault of its own, a plaintiff lacks knowledge of its claims because the defendant concealed them (as alleged here), the statute of limitations is equitably tolled until "'plaintiff either acquires actual knowledge of the facts that comprise [its] cause of action or should have acquired such knowledge through the exercise of reasonable diligence after being apprised of sufficient facts to put [it] on notice.'" Glynwill Investments, N.V. v. Prudential Securities, Inc., 1995 WL 362500 (S.D.N.Y. June 16, 1995), at *3, quoting City of Detroit v. Grinnell Corp., 495 F.2d 448, 460 (2d Cir. 1974). That tolling does not change the time the claim accrued, but merely excuses a delay in suit until actual or imputed discovery. At that point, the situation is governed by N.Y. C.P.L.R. § 203(g) which provides:
where the time within which an action must be commenced is computed from the time when facts were discovered or from the time when facts could with reasonable diligence have been discovered, or from either of such times, the action must be commenced within two years after such actual or imputed discovery or within the period otherwise provided, computed from the time the cause of action accrued, whichever is longer.
In this case, that means within six years from 1986 when the claims accrued, or two years from when they should have been discovered, whichever is longer.
As Chancellor Strine held, any equitable tolling due to the trustee's misrepresentations ended in 1996, when all of the trustees left the service of AmBase (Reargument Opinion, at 14-15):
Given that the Assignment Agreement was fully available to AmBase, as was the IRS Code, there was no reason why AmBase could not have asserted its claim within three years after Mantell's December 1996 departure. AmBase had full notice of the fact that the Assignment Agreement was the basis for it assuming primary liability for City's withholding tax liability. AmBase thus had the information to decide whether to assert a claim. All its board or management had to do was instruct someone to read the contract and the IRS Code.
Given all these circumstances, I held that AmBase's argument that the statute of limitations was equitably tolled beyond December 1996 to be without merit.
Since the unjust enrichment and related claims accrued in 1986, under the six-year statute of limitations, N.Y. C.P.L.R. § 213(2) (McKinney 2000), they are untimely when calculated from their date of accrual. When calculated from their imputed time of discovery in 1996, they are untimely because this present suit was not commenced within the additional two years granted by New York's discovery rule, C.P.L.R. § 203(g), see Glynwill, 1995 WL 362500, at *4 ("Because the doctrine of equitable tolling is subsumed within § 203(g), Riis v. Manufacturers Hanover Trust Co., 632 F. Supp. 1098, 1105 n. 4 (S.D.N.Y. 1986), applicability of that doctrine cannot extend the limitations period beyond the two years prescribed by the statute."). Under any view, the latest that AmBase should have brought its claim was 1998.
B. Indemnity Claim
AmBase also seeks its legal fees and expenses under a theory of indemnification. See Compl., ¶¶ 40-42. Since accrual of an indemnity claim "occurs upon payment by the party seeking indemnity,"McDermott v. City of New York, 428 N.Y.S.2d 643, 646 (Ct.App. 1980), AmBase asserts that its indemnity claim did not accrue until May 2001, when there was a final determination by the Tax Court.
AmBase's claim that the Trust was liable for defending the tax litigation rests on its interpretation that the Assignment Agreement does not burden it with "withholding taxes;" nothing in the Agreement contemplates that AmBase would assume liabilities to be reimbursed by the Trust in the future. The Assignment Agreement does not envision that AmBase would defend against claims by the IRS and be reimbursed later. Rather, the Agreement stated that AmBase would assume certain tax liabilities of City Investing. As Chancellor Strine stated (Strine Ruling, at 2-3):
This is not a case of sort of secondary indemnification, where someone has a contract in which they are primarily liable and they know that some other corporation or some other source is secondarily liable and where there is no expectation that the party that is secondarily liable will do anything until a liability really arises. That is not this kind of case. This wasn't a situation where AmBase was expected to defend this for 20-some odd years and then be able to just turn around at the time of a judgment and say to the liquidating trust, "Now you pay the judgment."
Thus, there is no basis for a contractual claim of indemnity arising in May 2001 when the tax litigation became final. Any claim to indemnity arises, not under the Assignment Agreement, but solely because it is imposed or implied by the law: in other words, by the unjust enrichment equitable claims dismissed above.
C. Breach of Fiduciary Duty Claim
AmBase alleges that the individual defendant-trustees should have informed AmBase that the Trust, rather than AmBase, was responsible for the legal fees and expenses of defending against the IRS claims. It claims that, as officers and directors of AmBase, they breached duties of "loyalty, care and good faith" beginning when "the withholding tax dispute with the IRS arose in the mid-1980s." Compl., ¶ 15.
Under C.P.L.R. § 213(7), a claim by a corporation against a present or former director or officer, like a breach of contract claim, accrues "upon breach, rather than plaintiff's discovery of the breach." Whitney Holdings, Ltd. v. Givotovsky, 988 F. Supp. 732, 743 (S.D.N.Y. 1997).
AmBase asserts that its claim accrued in 1996 when Mantell left AmBase because the trustee-defendants continually breached their fiduciary duties up until that time. The complaint, however, does not allege fresh breaches that occurred after the original breach in the "mid-1980s" when the trustee-defendants endeavored to foist such alleged withholding tax liability upon AmBase." Compl., ¶ 17. The fact that the trustee-defendants remained officers and directors of AmBase does not mean that their alleged breaches reoccurred over and over again until Mantell left in 1996. Cf. Korn v. Merrill, 403 F. Supp. 377, 388 (S.D.N.Y. 1975) (holding that defendant investment advisor's continued receipts of fees from plaintiff after it made fraudulent representations to the plaintiff were not "a series of independent and continuing injuries" which could extend the statute of limitations, but merely elements of plaintiff's damages); Lowell Wiper Supply Co. v. The Helen Shop, Inc., 235 F. Supp. 640, 644 (S.D.N.Y. 1964) (continual excessive rental payments on renewal leases, allegedly entered into due to defendant fiduciary's fraud, did not give "rise to a separate and distinct cause of action. . . .")
Like AmBase's other claims, the breach of fiduciary duty claim accrued in 1986, and is barred under the six-year statute of limitations and the two year discovery rule.
The claims against Pyne and Schaffenberger, two of the trustees, are barred even under plaintiff's continuing wrong theory because they left AmBase in 1993, more than six years before AmBase brought suit.
D. Professional Negligence and Malpractice Claim
AmBase alleges that Mantell, "AmBase's professional tax advisor," committed malpractice by failing "to provide competent and reliable advice on matters regarding AmBase's tax or tax-related liabilities." Compl., ¶ 50.
AmBase does not dispute that the statute of limitations for professional negligence and malpractice is three years under C.P.L.R. § 214(6), see Pl. Memo dated March 9, 2001, at 23, and it is dismissed.
CONCLUSION
The defendants' motion to dismiss based on the statute of limitations is granted. The Clerk shall dismiss the complaint.