85693086 14 - nylawyer.nylj.comnylawyer.nylj.com/adgifs/decisions14/100614proskauer2.pdf · Dated: April 11, 2014 Paul Spagnoletti Heather M. Ward Andrew S. Gehring Matthew Jacobs

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

OVERSEAS SHIPHOLDING GROUP, INC.,

Plaintiff,

- against -

PROSKAUER ROSE, LLP, ALAN P. PARNES, RICHARD H. ROWE, PETER G. SAMUELS, and STEVEN O. WEISE,

Defendants.

Index No. 650765/2014

DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS

Dated: April 11, 2014 Paul Spagnoletti Heather M. Ward Andrew S. Gehring Matthew Jacobs DAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, NY 10017 Phone: 212-450-4577Facsimile: 212-701-5577

Counsel for Defendants Proskauer Rose LLP, Alan P. Parnes, Richard H. Rowe, Peter G. Samuels, and Steven O. Weise

FILED: NEW YORK COUNTY CLERK 04/11/2014 INDEX NO. 650765/2014

NYSCEF DOC. NO. 7 RECEIVED NYSCEF: 04/11/2014

TABLE OF CONTENTS

PAGE

TABLE OF AUTHORITIES .......................................................................................................... ii

PRELIMINARY STATEMENT .....................................................................................................1

SUMMARY OF FACTS AND ALLEGATIONS ...........................................................................5

I. OSG’s Credit Agreements .......................................................................................6

II. OSG Retains Proskauer to Advise on Independent Matters ....................................8

III. The 2011 Memorandum and OSG’s Hidden Documents ......................................10

IV. OSG’s Collapse and Continued Drawdowns .........................................................15

LEGAL STANDARDS .................................................................................................................18

ARGUMENT .................................................................................................................................19

POINT I. THE 2011 MEMORANDUM DID NOT CAUSE ANY OF OSG’S ALLEGED DAMAGES ..............................................21

A. OSG Knew It Had Documents Relevant to the Conclusion of the 2011 Memorandum ............................................22

B. OSG Knew the Parties to the Credit Agreements Had Intended That OIN Guarantee OSG’s Obligations ............................24

POINT II. OSG’S CHECK-THE-BOX CLAIM IS FATALLY DEFICIENT .......................28

A. Proskauer Did Not Continuously Advise OSG on Its Check-the-Box Elections ............................................28

B. Proskauer’s Check-the-Box Advice Did Not Cause Any of OSG’s Alleged Damages ......................................32

POINT III. OSG’S CAUSES OF ACTION ARE DUPLICATIVE .........................................35

POINT IV. THE COMPLAINT SHOULD BE DISMISSED WITH PREJUDICE ................36

CONCLUSION ..............................................................................................................................37

ii

TABLE OF AUTHORITIES

PAGE

CASES

A&R Kalimian, LLC v. Breger, Gorin & Leuzzi, LLP,307 A.D.2d 813 (1st Dep’t 2003) ................................................................................24, 27

Ableco Fin. LLC v. Hilson, 109 A.D.3d 438 (1st Dep’t 2013) .....................................................24

Al Fayed v. Barak, No. 601354/06, 2006 N.Y. Misc. LEXIS 3250(Sup. Ct., N.Y. Cnty. Oct. 23, 2006), aff’d 39 A.D.3d 371 (1st Dep’t 2007) ....................... 22

Atlas v. Metro. Life Ins. Co., 181 N.Y.S. 363 (App. Term, 1st Dep’t 1920) .................................... 22

Biondi v. Beekman Hill House Apartment Corp., 257 A.D.2d 76 (1st Dep’t 1999),aff’d, 94 N.Y.2d 659 (2000) ........................................................................................19, 26

Byron Chem. Co. v. Groman, 61 A.D.3d 909 (2d Dep’t 2009) ........................................................ 31

Campaign for Fiscal Equity v. State, 86 N.Y.2d 307 (1995) .........................................................18

Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 N.Y.3d 269 (2011) ........................................................................................................27

Cliffstar Corp. v. Alpine Foods, LLC, No. 09-CV-00690(A)(M), 2012 U.S. Dist. LEXIS 187360 (W.D.N.Y. July 18, 2012) .................................................. 22

CLP Leasing Co. v. Nessen, 12 A.D.3d 226 (1st Dep’t 2004) .......................................................... 28

Cosmetics Plus Grp., Ltd. v. Traub, 105 A.D.3d 134 (1st Dep’t), leave to appeal denied, 22 N.Y.3d 855 (2013) ...................................................................... 35

Delcor Labs., Inc. v. Cosmair, Inc., 169 A.D.2d 639 (1st Dep’t 1991) .........................................19

Dignelli v. Berman, 293 A.D.2d 565 (2d Dep’t 2002) ...................................................................... 32

Dombrowski v. Bulson, 19 N.Y.3d 347 (2012) .............................................................................21

Duane Morris LLP v. Astor Holdings Inc., 61 A.D.3d 418 (1st Dep’t 2009) ...............................28

E*Trade Fin. Corp. v. Deutsche Bank, AG, No. 05 Civ. 902 (RWS), 2006 U.S. Dist. LEXIS 82428 (S.D.N.Y. Nov. 13, 2006) .................................................... 23

Elardo v. Town of Oyster Bay, 176 A.D.2d 912 (2d Dep’t 1991).................................................34

Estate of Nevelson v. Carro, Spanbock, Kaster & Cuiffo,290 A.D.2d 399 (1st Dep’t 2002) ................................................................................ 35-36

iii

European Am. Bank v. Cain, 79 A.D.2d 158 (2d Dep’t 1981) ......................................................35

Finova Capital Corp. v. Berger, 18 A.D.3d 256 (1st Dep’t 2005) .................................................24

Fishberger v. Voss, 51 A.D.3d 627 (2d Dep’t 2008) .....................................................................26

Fortress Credit Corp. v. Dechert LLP, 89 A.D.3d 615 (1st Dep’t 2011), leave to appeal denied, 19 N.Y.3d 805 (2012) ..................................................................21

Green v. Conciatori, 26 A.D.3d 410 (2d Dep’t 2006) ...................................................................21

Johnson v. Societe Generale S.A., 94 A.D.3d 663 (1st Dep’t 2012) ................................................. 36

Krichmar v. Scher, 82 A.D.3d 1164 (2d Dep’t 2011) ........................................................................ 28

Kush v. City of Buffalo, 59 N.Y.2d 26 (1983) ..............................................................................34

LaBrake v. Enzien, 167 A.D.2d 709 (3d Dep’t 1990) ....................................................................... 35

Maurice W. Pomfrey & Assoc., Ltd. v. Hancock & Estabrook, LLP, 50 A.D.3d 1531 (4th Dep’t 2008) .......................................................................................... 32

MIG, Inc. v. Paul, Weiss, Rifkind, Wharton & Garrison, L.L.P., 701 F. Supp. 2d 518 (S.D.N.Y. 2010),aff’d, 410 F. App’x 408 (2d Cir. 2011) ............................................................................ 31, 35

Miller v. Liberty Mut. Fire Ins. Co., 48 Misc.2d 102 (N.Y. Sup. Ct., Kings Cnty. 1965) ............... 22

Ming v. Hoi, 163 A.D.2d 268 (1st Dep’t 1990) ................................................................................. 36

Mitschele v. Schultz, 36 A.D.3d 249 (1st Dep’t 2006)..................................................................29

Nuzum v. Field, 106 A.D.3d 541 (1st Dep’t 2013) ............................................................................ 31

Reichenbaum v. Cilmi, 64 A.D.3d 693 (2d Dep’t 2009) ...............................................................35

Rite Aid Corp. v. Grass, 48 A.D.3d 363 (1st Dep’t 2008) ................................................................. 23

Rosenbaum v. Sheresky Aronson Mayefsky & Sloan, LLP, 100 A.D.3d 731 (2d Dep’t 2012) .......................................................................................34

Rovello v. Orofino Realty Co., 40 N.Y.2d 633 (1976) ..................................................................19

Rudolf v. Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d 438 (2007) ............................21, 33

Serino v. Lipper, 47 A.D.3d 70 (1st Dep’t 2007) ............................................................................... 30

Shalam v. KPMG LLP, 89 A.D.3d 155 (1st Dep’t 2011) ............................................................ 23, 27

iv

Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879 (S.D.N.Y. 1999) ................................... 23

Shumsky v. Eisenstein, 96 N.Y.2d 164 (2001) ..............................................................................30

Siwiec v. Rawlins, 103 A.D.3d 703 (2d Dep’t 2013) ....................................................................33

Sobel v. Ansanelli, 98 A.D.3d 1020 (2d Dep’t 2012) ....................................................................19

Somma v. Dansker & Aspromonte Assocs., 44 A.D.3d 376 (1st Dep’t 2007) .............................34

Spinale v. Tag’s Pride Produce Corp., 44 A.D.3d 570 (1st Dep’t 2007) .......................................... 23

State v. Rock, 147 Misc.2d 231 (N.Y. Sup. Ct., Saratoga Cnty. 1990) ............................................. 22

Stolmeier v. Fields, 280 A.D.2d 342 (1st Dep’t),leave to appeal denied, 96 N.Y.2d 714 (2001) ......................................................23, 24, 27

Sun Graphics Corp. v. Levy, Davis & Maher, LLP, 94 A.D.3d 669 (1st Dep’t 2012) .................28

Tigulla v. Porzio, 255 A.D.2d 504 (2d Dep’t 1998) ......................................................................34

Transp. Workers Union of Am. Local 100 AFL-CIO v. Schwartz, 32 A.D.3d 710 (1st Dep’t 2006) ............................................................................................. 31

Williamson v. PricewaterhouseCoopers LLP, 9 N.Y.3d 1 (2007) .............................................. 28, 30

STATUTES AND RULES

26 C.F.R. § 301.7701-3 ....................................................................................................................... 29

26 U.S.C. § 956(d) ................................................................................................................. passim

N.Y. C.P.L.R. 214 ............................................................................................................................... 28

N.Y. C.P.L.R. 3013 ..................................................................................................................20, 32

N.Y. C.P.L.R. 3211 ..................................................................................................................18, 26

OTHER AUTHORITIES

David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., C.P.L.R. § 3211:9 (2014) ............................................19

Defendants Proskauer Rose LLP (“Proskauer”), Alan P. Parnes, Richard H. Rowe, Peter

G. Samuels, and Steven O. Weise (together, “Defendants”), respectfully submit this

memorandum of law in support of their motion to dismiss the complaint (the “Complaint”) of

Overseas Shipholding Group, Inc. (“OSG” or the “Company”) in its entirety.

PRELIMINARY STATEMENT

This case involves time-barred and baseless claims of legal malpractice against Proskauer

by a now-bankrupt entity—OSG—for tax liabilities it concedes arise entirely from a 2006 loan

agreement that was structured, negotiated, and documented by a different law firm and in which

Proskauer played no role. As set forth below, this Court should dismiss OSG’s unfounded

claims with prejudice because OSG cannot establish the necessary element of causation or the

timeliness of its claims.

In 2006, OSG entered into a massive $1.8 billion revolving credit facility. That facility

contained language that made one of OSG’s foreign subsidiaries, OSG International, Inc.

(“OIN”), “jointly and severally” liable with OSG. One potential interpretation of the “joint and

several” language was that it operated as a guarantee by OIN of the debt of its domestic parent

OSG. If the “joint and several” obligation was in fact a guarantee, then Section 956(d) of the

Internal Revenue Code would deem the amount of OSG’s borrowings under the 2006 facility to

be a dividend from OIN to OSG, to the extent that OIN had previously untaxed earnings and

profits. If OIN were deemed to have paid such a dividend to OSG, the amount would be subject

to taxation in the United States as income.

In connection with its bankruptcy proceedings, OSG decided to concede the tax liability

that arose under the 2006 agreement and negotiated a settlement with the Internal Revenue

Service (the “IRS”) in which OSG would pay $225 million in taxes for its borrowings,

2

substantially all of which related to calendar year 2010. In this action, OSG seeks to recover the

taxes it agreed to pay the IRS. OSG alleges that the liability should be borne by Proskauer, on

claims of malpractice and breach of fiduciary duty.

But Proskauer had no involvement in the structuring, negotiation, or documentation of the

2006 revolving credit agreement. OSG retained Clifford Chance LLP (“Clifford Chance”) to

structure, negotiate, and document that loan. OSG also had its General Counsel, James Edelson,

work on the loan documents, together with a team of OSG executives who were seasoned and

knowlegeable on matters of law, taxation, accounting, and shipping finance. Proskauer was not

retained to work on the loan, and, indeed, Proskauer played no part at all in connection with the

agreement. In sum, OSG omits and ignores the parties that actually do bear responsibility for the

supposed error that OSG complains of, and instead tries to shift blame to Proskauer even though

the firm played no role in connection with the 2006 agreement.

OSG latches on to events in 2011—five years after the seminal events of 2006 when the

loan agreement was made—in the hope of pinning the blame on Proskauer. But OSG’s own

allegations and the documentary record plainly and conclusively establish that none of

Proskauer’s 2011 work could have been the cause of any of OSG’s alleged harm. In 2011, OSG

engaged Proskauer to document a new credit facility for the first time in nearly a decade. Upon

review of an initial draft from creditors’ counsel that was based on the 2006 agreement,

Proskauer immediately identified the potential Section 956(d) problem: The 2006 credit

agreement that Clifford Chance and OSG’s executive team had structured contained “joint and

several” language. Proskauer raised the alarm with the Company, and OSG then asked

Proskauer to develop arguments that could eliminate or mitigate OSG’s tax problem.

3

The principal argument Proskauer developed was based on an extensive body of legal

doctrine that would have mitigated OSG’s risk of liability if, in fact, the parties to the 2006 loan

agreement did not intend that OIN be a guarantor of OSG’s repayment obligations. OSG

repeatedly (and, we now know, falsely) represented to Proskauer that OSG never intended that

OIN would be responsible for the obligations of OSG. OSG also repeatedly (and, we now know,

falsely) represented to Proskauer that OSG had no documents that would be relevant to

Proskauer’s analysis. OSG knew that these representations formed the critical foundation for the

argument Proskauer had crafted in mid-2011 (the “2011 Memorandum”).

Perhaps the most stunning example of the Complaint’s many distortions is the statement

that, in late October 2012, OSG found documents that it “had previously been unable to locate”

but which “shed no light” on Proskauer’s 2011 analysis. What the Complaint fails to say is that

both the existence and the content of the documents provided to Proskauer for the first time in

late 2012 directly contradicted the critical representations that OSG made to Proskauer at the

time Proskauer was analyzing the relevant issues. It is clear that the content of this trove of

documents completely undermines the facts on which Proskauer’s advice was expressly

predicated. Even more striking, although these files were located in a central and readily

accessible place at OSG, the Company falsely represented to Proskauer for nearly 15 months that

they simply did not exist.

OSG also dredges up advice provided by Proskauer nearly a decade ago in 2005

regarding a restructuring of certain of the Company’s subsidiaries (through so-called “check-the-

box” elections), in an attempt to blame Proskauer for tax liability OSG incurred in subsequent

years. Glossing over the critical import of the intervening 2006 credit agreement, the Complaint

blithely asserts that Proskauer’s earlier advice somehow caused the Company liability. Yet that

4

assertion is completely undermined by OSG’s admission that the tax liability arose entirely from

drawdowns on the 2006 credit facility—a transaction entered into after the check-the-box

elections were made and with which Proskauer had absolutely no involvement.

The Complaint should be dismissed, with prejudice, for each of the following reasons:

1. The arguments Proskauer crafted for the 2011 Memorandum are not actionable.

A necessary element of a malpractice claim is causation, and the Complaint and associated

documentary evidence negate causation as a matter of law. OSG made two critical factual

representations to Proskauer in providing the necessary foundation for the 2011 Memorandum:

(i) that there were no documents that shed light on whether the parties intended that OIN should

be a guarantor, and (ii) that OSG never intended that OIN be responsible for OSG’s loan

repayment obligations. Because both of those representations made by OSG were indisputably

false and OSG is charged with knowledge of that falsity, OSG could not, as a matter of law, have

relied on the 2011 Memorandum. Proskauer’s memorandum, therefore, could not have been the

cause of any of OSG’s alleged damages. (Point I, infra.)

2. OSG’s claim with regard to tax advice Proskauer gave in 2005 should be

dismissed as untimely. New York’s three-year statute of limitations for professional negligence

ran in 2008, and the 2005 tax claims have been barred since then. OSG utterly fails to establish

any basis for a continuing representation toll because the 2005 tax advice ended when it was

acted upon by OSG’s making a check-the-box election whereby certain of OSG’s foreign

subsidiaries became treated as a single taxpayer in 2005. (Point II.A, infra.)

3. OSG’s “check-the-box” claim also must be dismissed on causation grounds. As

the Complaint admits, there was no adverse tax consequence, and hence no injury, that arose

merely by reason of the 2005 check-the-box elections. Rather, all of OSG’s alleged damages

5

flow exclusively from the subsequent 2006 credit agreement on which Proskauer did not work.

Proskauer cannot be held accountable for the “joint and several” structure that Clifford Chance

and OSG’s team of executives put in place, and the 2005 tax claim should thus be dismissed.

(Point II.B, infra.)

4. Finally, OSG’s second cause of action for breach of the duty of loyalty should be

dismissed as duplicative of the first cause of action for breach of the duty of care. Under New

York’s duplicative claims doctrine, claims that rest on the same facts and seek the same damages

are duplicative and cannot be simultaneously maintained. Here, the second cause of action is

founded squarely on the facts alleged, and the damages sought, in the first and should be

dismissed. (Point III, infra.)

Having already had the benefit of briefing these precise issues before another court and

revising the Complaint—albeit futilely—to attempt to remedy its deficiencies, OSG should not

be permitted to repeatedly reassert meritless claims against Defendants. Any dismissal should be

made with prejudice.

SUMMARY OF FACTS AND ALLEGATIONS

OSG is a multi-national company with, among others, two wholly owned subsidiaries—

OSG Bulk Ships, Inc. (“OBS” or “OSG Bulk”) and OSG International, Inc. (“OIN”), the latter of

which is a foreign corporation that conducts OSG’s foreign operations. (Compl. ¶ 22.)

Proskauer has represented OSG from time to time on a variety of discrete legal matters,

providing OSG with advice in connection with mergers and acquisitions, certain commercial

finance issues, certain regulatory matters, and certain specific tax-planning questions. (Id. ¶ 27.)

OSG regularly uses other counsel and professional advisors.

6

The Complaint’s central allegations are focused on a series of events beginning in 2011,

when, for the first time in nearly a decade, OSG hired Proskauer to negotiate and document a

new credit agreement, and Proskauer identified problematic language in OSG’s operative credit

agreement from 2006. According to the Complaint, after raising the issue with the Company,

Proskauer negligently advised OSG regarding the interpretation and tax implications of the

identified “joint and several” language (the “Section 956(d) Claim”). The Complaint also

reaches back nearly ten years to assert that Proskauer was negligent when advising the Company

on the effect of certain tax elections—the check-the-box elections—made during subsidiary

restructurings in 2005 (the “Check-the-Box Claim”).

I. OSG’s Credit Agreements

In the 1990s, Proskauer represented OSG in connection with negotiating and

documenting certain agreements to obtain unsecured revolving credit facilities for OSG, OBS,

and OIN. (Id. ¶ 36.) Each of the credit agreements contains a provision pertaining to repayment

of the amount each company borrows through the facility. For instance, the credit agreement

entered into in 1997 states that “[e]ach Borrower severally, and not jointly, agrees to repay to the

Banks the principal of each [advance] made to such Borrower.”

OSG also retained Proskauer to assist with securing an additional $350 million credit

facility, documented in an agreement entered into on April 18, 2000 (the “2000 Credit

Agreement”). (See id.) The language of the repayment clause in that agreement was different

than in prior agreements, providing that “[e]ach Borrower jointly and severally agrees to repay to

the Banks the principal of each Advance made to the Borrowers.” (Aff. of Peter G. Samuels in

Supp. of Defs.’ Mot. to Dismiss (“Samuels Aff.”), Ex. A § 4.1.) The following year, Proskauer

was also engaged by OSG to obtain another, $300 million credit facility. (Compl. ¶ 37.) The

7

resulting agreement, dated December 12, 2001 (the “2001 Credit Agreement”), contains a “joint

and several” repayment provision identical to the one in the 2000 Credit Agreement.1

Against a shifting backdrop of tax and other regulations in the years that followed (id.

¶ 33), OSG’s operations continued to expand and the Company continued to require additional

financing. It did not, however, retain Proskauer in connection with those later credit

transactions, and Proskauer provided no advice on them. Rather, from 2002 through 2005, the

negotiation and documentation of OSG’s credit agreements were handled by its in-house counsel

and its in-house tax and accounting professionals. (Id. ¶ 41.) These agreements contain “joint

and several” repayment provisions. (Id.)

In early 2006, OSG, OBS, and OIN retained finance and tax lawyers at Clifford Chance

for the purpose of structuring and documenting a $1.8 billion unsecured revolving credit

agreement (Samuels Aff., Ex. B (the “2006 Credit Agreement”)), later reduced to $1.5 billion

(Compl. ¶ 42; Samuels Aff. ¶ 3). In connection with that transaction, OSG “terminated all of its

unsecured revolving credit facilities . . . that existed prior thereto.” (Samuels Aff., Ex. C at 63.)

While the terms of the massive 2006 Credit Agreement—including the repayment provisions—

differed substantially from OSG’s prior credit agreements, the agreement continued to provide

that the loans would be made “to the Borrowers on a joint and several basis.” (Id., Ex. B

§ 1.01(a), (b).)

As described further infra, the “joint and several” structure would—at OSG’s

insistence—be used again in a 2011 agreement intended to replace the 2006 Credit Agreement

1 OSG is not asserting any claims stemming from the 2000 or 2001 Credit Agreements, notwithstanding its gratuitous and baseless assertions about Proskauer’s supposedly negligent advice in connection with these agreements. (Compl. ¶ 40.)

8

upon its expiration (the “Forward Start Agreement”).2 Until retained in 2011 to advise on the

Forward Start Agreement, Proskauer had not handled OSG’s loan work for nearly ten years.

II. OSG Retains Proskauer to Advise on Independent Matters

Proskauer did not represent OSG in connection with any credit agreements from 2002

through 2010. OSG did, however, engage Proskauer in connection with other discrete matters

during that period. Each engagement was specifically requested by OSG, independent of the

others, and limited in scope to an OSG-defined subject. (See, e.g., Compl. ¶ 51.)

For instance, in 2004, OSG retained Proskauer to review the structure of the Company’s

foreign subsidiaries in light of a newly enacted law with tax implications for U.S. corporations

with foreign operations. (See Samuels Aff., Ex. D at 2.) As the culmination of that engagement,

Proskauer partner Alan Parnes drafted a memorandum dated March 3, 2005 entitled

“Restructuring of Certain Foreign Subsidiaries” in which he addressed making “check-the-box”

elections for certain subsidiaries of OIN in light of the new law and OSG’s organizational

structure at that time.3 (Compl. ¶ 46.) Those elections permit multiple corporations to be treated

as a single taxpayer—i.e., their separateness is “disregarded”—for purposes of U.S. income

taxation. The check-the-box elections, which OSG made in 2005, thus enabled greater free-flow

of cash between certain specifically enumerated foreign subsidiaries of OSG. (Id.)

Making the check-the-box elections neither triggered a tax nor raised any issue under

Section 956. While the elections did increase the profits attributable to OIN—which OSG

2 The Forward Start Agreement was never drawn upon, and Proskauer’s work in connection with that agreement is not at issue here. 3 An eligible foreign corporation with only one owner can elect to be disregarded as a separate entity for U.S. tax purposes. This election is made quite easily by checking a box on a simple three-page form that is then filed with the IRS. Hence, these elections are commonly referred to as “check-the-box” elections.

9

acknowledged in writing would be a result of the elections before Proskauer advised on them4—

they did not actually create any tax liability for OSG. Absent an OIN guarantee of the

obligations of OSG, the profits were simply not subject to taxation under Section 956(d).

However, when OSG and Clifford Chance later decided to use the “joint and several” language

in the 2006 Credit Agreement, they utilized a structure that the IRS determined triggered liability

under Section 956(d). (See Compl. ¶¶ 47 (OSG’s liability “could have been avoided entirely

either by not making the check-the-box elections . . . or by not entering into a loan agreement

that had the joint and several structure” (emphasis added)), 48 (“the check-the-box elections

resulted in the addition of . . . untaxed future earnings and profits in OIN that subsequently

became subject to U.S. income tax liability under Section 956 because of OIN’s joint and several

liability” (emphasis added)), 95(m) (the elections created the “potential for Section 956 tax

liability”).)

Proskauer has also advised OSG on a variety of other tax issues throughout the years.

(Id. ¶ 51.) As a multinational shipping corporation, OSG frequently encounters questions

pertaining to taxation in wide-ranging circumstances and arising under numerous Internal

Revenue Code provisions. After providing OSG with the check-the-box memorandum in 2005,

however, Proskauer did not provide further advice to OSG with respect to these elections. Some

of the questions Proskauer did address involved Subpart F of the Internal Revenue Code, and a

subset of those questions pertained to various issues that involved Section 956. But none of

those questions in any way concerned the “joint and several” structure of OSG’s credit

agreements, and none is alleged to have given rise to any improper tax liability. (See id.)

4 See Samuels Aff., Ex. D at 2 (November 1, 2004 e-mail from OSG Controller Jerry Miller noting that, “[f]or US tax purposes,” check-the-box elections by OIN’s subsidiaries “will be treated as liquidating all such subsidiaries into OIN”).

10

III. The 2011 Memorandum and OSG’s Hidden Documents

Having secured significant financing for itself and its subsidiaries for years to come

through the 2006 Credit Agreement handled by Clifford Chance, OSG did not seek a new credit

facility until nearly five years later. In early 2011, the Company began work on the “Forward Start

Facility,” which was intended to replace the facility under the 2006 Credit Agreement when it

expired in 2013. (Id. ¶ 53.) Although it had been almost a decade since Proskauer last advised

OSG on a credit agreement, OSG engaged Proskauer to document the Forward Start Facility. (Id.)

In connection with this engagement, Parnes reviewed a draft of the Forward Start

Agreement prepared by the lenders and immediately identified a potential problem with the

draft’s provision that the revolving loans would be made “to the Borrowers on a joint and several

basis.” (Id. ¶ 54.) The issue applied equally to the 2006 Credit Agreement, which had been in

effect during the preceding five years and in which Clifford Chance had included the same “joint

and several” language. Proskauer immediately brought the issue to the attention of James

Edelson, OSG’s Senior Vice President and General Counsel. (Id. ¶ 55.)

Proskauer told Edelson that the “joint and several” language was problematic for OSG

under the rules governing the income tax treatment of earnings by controlled foreign

subsidiaries. Specifically, Proskauer advised that if “joint and several” were interpreted to be a

guarantee by OIN (OSG’s foreign subsidiary) of OSG’s obligations under its credit agreement,

income tax liability would already have been triggered under Section 956(d) of the Internal

Revenue Code, 26 U.S.C. § 956(d). (See id.) After internal discussions at OSG, the Company

asked Proskauer to develop potential arguments that would eliminate or reduce any tax liability

arising from the “joint and several” language in the 2006 Credit Agreement, and Proskauer

began drafting a memorandum that evaluated such arguments. (See id. ¶¶ 56-57.)

11

Proskauer provided OSG with three drafts of the 2011 Memorandum—an initial draft on

May 9, a second draft on May 23, and a draft dated June 1, 2011 deemed final by OSG on June

22—that stated that OSG ought to prevail in litigation against the IRS on the Section 956(d)

issue because: (1) based on leading treatises and a wealth of case law—together with the specific

factors discussed in the memorandum—the “joint and several” language in the credit

agreements, as drafted, was reasonably susceptible of multiple readings and therefore

ambiguous;5 and (2) based on the representations made to Proskauer by OSG, the Company did

not intend “joint and several” to mean that OIN would be a guarantor or co-obligor of OSG’s

debt. (Compl., Ex. A at 3, 13.) Critically, the second premise of each draft of the memorandum

was based on two vital—yet false—OSG representations that OSG’s management repeatedly

made to Proskauer about its intent.6

Indeed, the Complaint admits that, before the memorandum was finalized, OSG “critically

vetted Proskauer’s draft opinion” and had “numerous discussions [with Proskauer] about its

analyses of the issues.” (Compl. ¶ 63.) As the 2011 Memorandum itself reflects—in the initial,

second, and final drafts—during these and other discussions OSG represented to Proskauer that

“OSG would not have entered into the [2000 to 2006 Credit Agreements] . . . had senior

management believed that OIN was responsible for the obligations of OSG and OSG Bulk.”

(Compl., Ex. A at 3; Samuels Aff., Ex. F at 3; Samuels Aff., Ex. G at 3.) Similarly, OSG’s senior

5 The conclusion that the “joint and several” language was ambiguous was based on a variety of factors, including the presence of specific language suggesting that “separate,” not “co-obligor,” liability was intended; the unlikelihood that the parties would have intended to make OIN a guarantor of OSG because of the tremendous increase in tax liability that could result; and the lack of waivers of guarantor defenses, which are routine in contracts creating guarantor obligations. (Compl., Ex. A at 11-12.) That conclusion, however, is not at issue on this motion. 6 The Complaint repeatedly alleges that Parnes decided that there was “no tax solution” to the “joint and several” issue but that this conclusion was never conveyed to OSG. (Compl. ¶¶ 56, 57, 62, 65, 68, 77, 95(c), 100(d).) This assertion is immaterial to the instant motion but, in all events, is both patently false and facially implausible: Had Proskauer never told OSG of its analysis, there would have been no reason for OSG and Proskauer to pursue the detailed contract interpretation analysis set forth in the 2011 Memorandum, which itself notes that a tax solution is, at best, “difficult.” (Compl., Ex. A at 6.) Should it be necessary in the course of further proceedings, Proskauer will establish that it acted prudently and disclosed all material information to OSG.

12

management “strongly state[d] that they never intended that OIN would be responsible for the

obligations of OSG or OSG Bulk under the [2000 to 2006 Credit Agreements].” (Compl., Ex. A at

12-13; Samuels Aff., Ex. F at 12; Samuels Aff., Ex. G at 12-13.)

This representation was critical to Proskauer’s analysis because, as far as Proskauer knew,

there was no documentary evidence that would shed light on the intent of the parties to the credit

agreements—which was “the pivotal issue” in the 2011 Memorandum’s analysis. (Compl., Ex. A

at 6.) Before drafting the memorandum, Proskauer had searched its own files (from nearly a

decade earlier) for insight into the issue but found none.7 Proskauer had also asked OSG to search

its files for anything it might have that could aid the analysis in the 2011 Memorandum. (Compl.

¶ 58.) In response, OSG (through Edelson, Senior Vice President and General Counsel of OSG)

reported to Proskauer that “it could not find anything” of relevance to the memorandum. (Id.)

These two representations—Edelson’s representation that OSG had no documents that

would shed light on the parties’ intent in connection with the “joint and several” language and

senior management’s representation that the Company never intended OSG’s debts to be

guaranteed by OIN—are essential to every step of the 2011 Memorandum. Had Proskauer been

provided with the relevant documents in OSG’s files, or told of OSG’s actual intent, it plainly

would not have arrived at the conclusions it did. But Proskauer had no reason to suspect it was

being misled by OSG and, relying squarely on those critical representations, ultimately reasoned

that “section 956 should not apply so as to cause OSG to include OIN’s deferred earnings in

7 The 2011 Memorandum includes a footnote about the only contemporaneous parol evidence Proskauer had at the time of drafting, Proskauer’s billing records: “It seems clear from our time records that the issue of the tax implications of the joint and several language of the credit agreement was identified during the 2000 loan negotiations and discussed not only internally at Proskauer and with OSG, but also with counsel to the lenders.” (Compl., Ex. A at 13 n.57.) OSG makes the false assertion that Proskauer “specifically represented” in the 2011 Memorandum that “the time entries showed that evidence from Proskauer’s own files supported the conclusion that the parties had not intended joint and several liability for OIN under the 2000 agreement.” (Compl. ¶ 64.) As is plain from its face, the memorandum did not draw conclusions from the existence of the time entries as to the parties’ intent with respect to the “joint and several” language.

13

OSG’s income” because, based on those representations, “a court should not enforce ‘joint and

several’ liability against OIN in the event OSG or OSG Bulk could not repay its borrowings.”

(Compl., Ex. A at 13.)

As described more fully below, it was not until nearly 15 months after Proskauer had

written the 2011 Memorandum that Proskauer was asked to turn it into a tax opinion. (Compl.

¶ 86.) At that time, OSG finally informed Proskauer that it had a trove of documents easily

accessible in its offices that were relevant to the parties’ intent in connection with the “joint and

several” language in the credit agreements.8 (See id. ¶ 89.)

This late-breaking revelation directly contradicted OSG’s critical representation to

Proskauer that OSG had no documents of relevance. Moreover, these documents were not

merely relevant to the “joint and several” issue but, on their face, conclusively demonstrated both

that the inclusion of those words in the credit agreements was intentional and that the intended

meaning was “guarantor or co-obligor.” Had Proskauer known about these documents, it never

would have reached the conclusion in the 2011 Memorandum that OSG ought to prevail in

convincing a court that the credit agreements should not create Section 956(d) liability. Indeed,

upon learning of the existence of these previously undisclosed documents, Proskauer refused to

issue the tax opinion that OSG requested (see id. ¶ 87)—a request OSG made despite its

knowledge that the contradictory documents sat in its files. Cumulatively, the documents in

OSG’s files left no room for doubt that OSG, OBS, and OIN were fully intended to be co-

obligors. Most importantly, OSG knew that the documents eviscerated crucial premises

underlying the memorandum—(1) that the Company had no documents of relevance to the

8 OSG disingenuously refers to these documents as “relevant to the negotiation and drafting of the 2000 credit agreement” (Compl. ¶ 89), but they pertain broadly to the Company’s credit agreements from 2000 to 2006 (Samuels Aff. ¶ 9).

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memorandum, and (2) that, as “strongly state[d]” by OSG senior management to Proskauer for

inclusion in the 2011 Memorandum, OSG never intended that OIN be a guarantor.

By way of example, OSG’s files contained a mark-up of a draft term sheet for the 2006

Credit Agreement that plainly demonstrates—contrary to OSG’s representations to Proskauer—

that both OSG and its counsel Clifford Chance understood and intended that OIN be a guarantor of

OSG’s debts through the “joint and several” structure. Specifically, counsel to the lenders sought

to “[d]iscuss tax implications of guarantees from non US subsidiaries.” (Samuels Aff., Ex. H at 1.)

Clifford Chance responded that “[n]o subsidiary guarantees should be required [because] OSG

Bulk and [OIN] . . . will be joint and several borrowers under the Credit Facility.” (Id. at 1 n.1

(emphasis added).) Thus, Clifford Chance asserted on behalf of its client OSG that the banks did

not need OIN’s subsidiaries to guarantee OSG’s debts precisely because it believed that OIN’s

joint and several liability amounted to a guarantee. That clear assertion directly contradicted OSG

senior management’s assertions to Proskauer that the parties never could have intended “jointly

and severally” to mean that OIN would guarantee OSG’s repayment obligations.

Also in OSG’s files was a March 29, 2000 draft of the 2000 Credit Agreement with a

handwritten question from OSG’s in-house counsel: “different accounting/tax treatment – joint

& several –/ OSG guarantee?” (Samuels Aff., Ex. I at 1.) Questioning whether the “joint and

several” structure would result in different tax treatment from the OSG guarantee of OIN that

had been used in prior agreements, OSG clearly understood the import of avoiding an OIN

guarantee of OSG. A subsequent April 4, 2000 draft of the agreement in OSG’s files bore a

comment from that same in-house counsel indicating that OSG was rejecting the “joint &

several” language and “offer[ing]” to replace it instead “with OSG guarantee of OIN”—

evidencing the plain understanding that “joint and several” would make OIN a guarantor of

15

OSG. (Samuels Aff., Ex. J at 28.) In accord with that understanding, OSG’s in-house counsel

had struck or written “NO” next to the “joint and several” language where it appeared in the draft

agreement. (Id. at 1, 28, 29.) Yet, in a later e-mail exchange among the bank lenders regarding

the 2000 Credit Agreement, the lenders had asked whether “the Borrowers [are] jointly and

severally liable for all obligations?” (Samuels Aff., Ex. K at 2.) OSG wrote next to that question

“OK,” acquiescing in the “joint and several” structure used in the final agreement and agreeing

that OSG and OIN should, in fact, each be responsible for the obligations of the other. (Id.)

These documents and numerous others, which were readily available in OSG’s own files

before Proskauer delivered the 2011 Memorandum, wholly undermine the foundation of the 2011

Memorandum. Unknown to Proskauer, OSG had asked Proskauer to draft a memorandum—by

OSG’s own admission, vetted by and thoroughly discussed with OSG—that hinged on crucial

misinformation supplied by OSG to Proskauer and belied by documents within OSG’s possession.

IV. OSG’s Collapse and Continued Drawdowns

On May 26, 2011, prior to the completion of the 2011 Memorandum, OSG finalized the

Forward Start Agreement. (Compl. ¶ 66.) Despite being fully aware of the potential Section

956(d) issue and attendant risks, “OSG determined that it was not necessary or commercially

reasonable to renegotiate the Forward Start Facility or the 2006 credit agreement to address the

joint and several/Section 956 issue” (id. (emphasis added)), and executed a final Forward Start

Agreement with the very same “joint and several” language as the 2006 Credit Agreement.

Thus, when confronted in 2011 with a business decision between protecting against a tax risk or

protecting the terms of a financing, OSG elected to protect its financing terms.

In late 2011, OSG reopened negotiations with the bank lending group under the Forward

Start Agreement in an attempt to secure additional financing. (Id. ¶ 73.) During those

16

negotiations, the lenders insisted that certain of OIN’s assets be pledged as collateral for any

further financing, given OSG’s deteriorating financial state. (Id.) The ensuing discussions about

avoiding liability under Section 956(d) drew attention to the “joint and several” language in the

existing 2006 credit facility—straining negotiations with the lenders, who had begun expressing

concern about OSG’s potential tax liability. (Id. ¶¶ 73-75.)

OSG, worried that it did not have sufficient financing to continue its operations, began

considering drawing down the funds remaining in the 2006 credit facility.9 (Id. ¶ 75.) The

Complaint alleges that, prior to that drawdown, Proskauer reaffirmed for OSG the validity of the

2011 Memorandum’s conclusions—specifically, that there was an ambiguity about the meaning

of “joint and several” in the credit agreements and that, absent any contradictory evidence and in

continued reliance on OSG’s representations about its intent with respect to the language, a court

ought to determine that OIN had not guaranteed OSG’s debt. (Id. ¶¶ 76-77.) Spurred by its need

for liquidity and the perceived threat that the lenders under the 2006 Credit Agreement might

refuse to honor additional drawdowns on that facility, on July 16, 2012 OSG drew down the

remainder of the capacity of the 2006 facility, $343 million. (Id. ¶¶ 75, 78.)

Following the additional drawdown, negotiations with the bank lending group broke

down. (See id. ¶¶ 79-80.) In a subsequent September 2012 meeting of OSG’s board of directors,

the board directed Proskauer to meet with OSG’s outside auditors PricewaterhouseCoopers

(“PwC”) to discuss the conclusions of the 2011 Memorandum. (Id. ¶ 84.) After meeting with

Proskauer in October 2012, PwC asked Proskauer to provide it with a tax opinion on the “joint

and several” issue. (Id. ¶¶ 86.)

9 In the five years that had passed since the 2006 Credit Agreement’s execution, OSG had—without any possibility of having relied on Proskauer’s 2011 advice—already borrowed more than $830 million under that facility. (Cf. Compl. ¶ 78.)

17

While Proskauer was in the process of considering whether it could provide the requested

tax opinion, OSG advised Proskauer—for the first time—that, contrary to OSG’s earlier

representations, the Company in fact had a cache of documents pertaining to the negotiation and

documentation of the 2000 through 2006 Credit Agreements. (See id. ¶ 89.) As described

above, these documents undermined critical premises of the 2011 Memorandum—i.e., that OSG

had no other documents relevant to the parties’ intent and that the Company did not intend for

OSG and OIN to be co-obligors. Proskauer, now realizing that it had been misled by OSG and

that the arguments in the 2011 Memorandum were factually unfounded, refused to issue the

requested tax opinion. (See id. ¶ 87.)

Meanwhile, OSG issued guidance that its financial statements for the previous three years

could not be relied upon, and, on November 14, 2012, it filed for Chapter 11 relief. (Id. ¶¶ 88,

91.) OSG thereafter self-reported to the IRS that it owed additional income taxes due to the

“joint and several” language in its credit agreements. (Id. ¶ 92.) On December 19, 2013, OSG

filed a Current Report on Form 8-K with the U.S. Securities and Exchange Commission (the

“SEC”) stating that OSG had agreed with a notice of proposed adjustment issued by the IRS,

which provides that OSG will include additional taxable income under Section 956 in respect of

calendar years 2010 and 2011. (Samuels Aff., Ex. N at 2.) Of the $225 million of liability

pursuant to that adjustment, more than $211 million relates to calendar year 2010—the year

prior to the issuance of the 2011 Memorandum.10

On November 18, 2013, OSG initiated an action against Defendants in the United States

Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), alleging claims of

malpractice and breach of fiduciary duty extending back more than a decade to the year 2000.

10 The $463,013,177.63 referenced in the Complaint (Compl. ¶ 92) was taken from an old, outdated IRS proof of claim. The IRS’s January 21, 2014 third amended proof of claim seeks an aggregate amount of only $255,760,439.22, of which $225 million relates to additional taxable income under Section 956(d). (See Samuels Aff., Ex. L.)

18

(Samuels Aff., Ex. M.) On January 17, 2014, Defendants simultaneously moved to dismiss that

complaint and for the Bankruptcy Court to abstain from the action. After both motions were

fully briefed, Defendants’ abstention motion was granted on February 21, 2014.

Defendants subsequently initiated an action before this Court against two of OSG’s

officers, alleging, inter alia, fraud and negligent misrepresentation with respect to the false

representations that OSG had no relevant documents and that the Company did not intend that

OIN guarantee its debt. See Proskauer Rose LLP v. Edelson, No. 650596/2014 (Feb. 23, 2014).

Approximately three weeks later, on March 11, OSG filed a substantially revised complaint in

this Court.

Defendants now move to dismiss the Complaint with prejudice because, despite having

had the opportunity to replead in light of Proskauer’s motion to dismiss filed in the Bankruptcy

Court, OSG cannot establish the element of causation of either its Section 956(d) Claim or its

Check-the-Box Claim, nor can it establish that tolling of its time-barred 2005 claim is warranted.

LEGAL STANDARDS

Under CPLR 3211(a)(1), (5), and (7), a party may move for judgment dismissing a claim

asserted against it on the ground that a meritorious defense “is founded upon documentary

evidence,” the claim is barred by the applicable statute of limitations, or the claim fails to state a

cause of action.

In assessing a motion to dismiss for failure to state a cause of action, a court must

determine whether the “plaintiff can succeed upon any reasonable view of the facts stated.”

Campaign for Fiscal Equity v. State, 86 N.Y.2d 307, 318 (1995) (emphasis added and internal

quotation marks omitted). Allegations that “consist[] of bare legal conclusions” or are

“inherently incredible or flatly contradicted by documentary evidence” are neither “presumed to

19

be true [nor] accorded every favorable inference.” Biondi v. Beekman Hill House Apartment

Corp., 257 A.D.2d 76, 81 (1st Dep’t 1999) (internal quotation marks omitted), aff’d, 94 N.Y.2d

659 (2000). Courts may—and do—grant motions to dismiss where defendants submit

evidentiary material that “establish[es] conclusively that plaintiff has no cause of action.”

Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 635-36 (1976).

If “any part of a single cause of action is subject to separate and severable address by a

CPLR 3211(a) ground,” then so much of the claim that is legally insufficient should be

dismissed. David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., C.P.L.R.

§ 3211:9 (2014). Accordingly, on a motion to dismiss, any aspect of a cause of action for which

an essential element cannot be established should be dismissed, see Delcor Labs., Inc. v.

Cosmair, Inc., 169 A.D.2d 639, 640 (1st Dep’t 1991) (affirming a partial dismissal of claims for

fraud), and a court should dismiss as much of the claim as is untimely, see Sobel v. Ansanelli, 98

A.D.3d 1020, 1023 (2d Dep’t 2012) (affirming dismissal “of so much of that cause of action as

was predicated upon alleged acts or omissions occurring” outside the statute of limitations).

ARGUMENT

At its core, this action is about the 2011 Memorandum and related advice that Proskauer

provided to the Company regarding the interpretation of the “joint and several” language in

OSG’s prior credit agreements. That advice, however, was premised on false information

provided to Proskauer by OSG itself. As a matter of both logic and law, the Company could not

have relied on advice that it knew was grounded in misinformation. Accordingly, OSG simply

cannot establish the requisite element of causation for its Section 956(d) Claim, and that

malpractice claim should be dismissed.

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As a fallback position, OSG has attempted to predicate a claim on events that are nearly a

decade old involving advice Proskauer rendered in 2005 regarding the restructuring of OIN’s

subsidiaries through check-the-box elections. The Check-the-Box Claim, however, is barred by

the statute of limitations, which expired in 2008—six years ago, or twice as long ago as the

underlying statute of limitations itself. Despite multiple paragraphs of the Complaint dedicated

solely to this fatal issue, OSG has not met its substantial burden to establish tolling. The Check-

the-Box Claim must be dismissed as time-barred.

The Check-the-Box Claim should also be dismissed for lack of causation because, as is

acknowledged in the Complaint, the check-the-box elections in themselves resulted in no injury.

Rather, all of the Company’s alleged damages arose after the elections were made, as a direct

result of borrowings made under the 2006 Credit Agreement, which was structured, negotiated,

and documented by Clifford Chance and the OSG executive team. That intervening agreement

and related advice necessarily severs any link between Proskauer’s 2005 work and OSG’s

claimed injury. Proskauer cannot be held responsible for the tax consequences of a later credit

agreement from which it was entirely excluded. OSG’s attempt to hold Proskauer responsible is

facially absurd and wholly at odds with New York law.

As discussed more fully below, OSG’s claims should be dismissed with prejudice.11

11 To the extent OSG is trying to assert a claim of malpractice based on Proskauer’s purported failure to advise the Company of the “joint and several” issue between 2005 and 2011, OSG’s pleading is wholly inadequate. While identifying a host of discrete engagements during that period (see Compl. ¶ 51), the Complaint does not explain the scope of any of those engagements, how they relate to OSG’s credit agreements or Section 956(d), any drawdowns made (and thus damages incurred) in reliance on that advice, or indeed any details that could put Proskauer on notice of what OSG is attempting to allege. See N.Y. C.P.L.R. 3013 (“Statements in a pleading shall be sufficiently particular to give the court and parties notice of the transactions . . . intended to be proved . . . .”). Moreover, if OSG is trying to claim that Proskauer is liable for not discovering the “joint and several” issue in its role as disclosure counsel, that assertion is preposterous. The suggestion that disclosure counsel would be responsible for determining the legal implications of every exhibit to an SEC filing—which, in the case of OSG’s Form 10-Ks, routinely number in the dozens—has no basis in law or practice.

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POINT I. THE 2011 MEMORANDUM DID NOT CAUSE ANY OF OSG’S ALLEGED DAMAGES

The allegations of the Complaint and the documentary evidence negate any claim that

OSG could have relied on the 2011 Memorandum or Proskauer’s related advice. As is evident

from the 2011 Memorandum and OSG’s allegations, the memorandum’s conclusion was based

on, inter alia, the following fundamental premises: (1) the Company had no documentary

evidence bearing on the parties’ intended meaning of “joint and several”; and (2) OSG senior

management “never intended that OIN would be responsible for the obligations of OSG or

OSG Bulk under the [2000 through 2006 Credit Agreements].” Critically, both of these

premises were false.

Significantly, the allegations of the Complaint and the documentary record conclusively

establish that both of these premises were supplied to Proskauer by OSG itself (Compl. ¶ 58;

Compl., Ex. A at 3, 12-13),12 and that they were subsequently “critically vetted” over the course

of “numerous discussions” with OSG senior management (Compl. ¶ 63). As a matter of law,

OSG is charged with knowledge of the content of the Company’s files, and, as a matter of logic,

a client simply cannot rely on advice it knows is based on false information. The 2011

Memorandum and related advice therefore could have been neither the “but for” nor the

proximate cause of any of OSG’s damages, both of which OSG is required to establish. See

Dombrowski v. Bulson, 19 N.Y.3d 347, 350 (2012); Rudolf v. Shayne, Dachs, Stanisci, Corker

& Sauer, 8 N.Y.3d 438, 442 (2007).

12 New York courts have found the provision of misinformation by a client sufficient in itself to absolve an attorney of any malpractice liability. See, e.g., Green v. Conciatori, 26 A.D.3d 410, 411 (2d Dep’t 2006) (on a motion to dismiss, holding that defendants had not committed malpractice because “an attorney should not be held liable for ignorance of facts which the client neglected to tell him or her”); cf. Fortress Credit Corp. v. Dechert LLP, 89 A.D.3d 615, 617 (1st Dep’t 2011) (on a motion to dismiss, holding that defendant law firm had not breached a duty of care with respect to its advice in an opinion letter to a third party because the firm “had no reason to suspect” that its client had misled it), leave to appeal denied, 19 N.Y.3d 805 (2012).

22

A. OSG Knew It Had Documents Relevant to the Conclusion of the 2011 Memorandum

Contrary to its representations to Proskauer, OSG had a trove of documents “relevant to

the negotiation and drafting of the 2000 credit agreement.”13 (Compl. ¶ 89.) A fundamental

premise of the 2011 Memorandum—that OSG had no relevant documents—was therefore false.

Accordingly, as a matter of law, OSG could not have relied on the advice contained in the 2011

Memorandum.

OSG has admitted that a crucial first step in the analysis underlying the 2011

Memorandum was for Proskauer to determine whether any documents pertaining to the parties’

intent existed. (Id. ¶ 58 (prior to drafting the 2011 Memorandum, Proskauer asked OSG to

search the Company’s files for relevant documents).) Such documents were so important to

Proskauer’s analysis that the 2011 Memorandum cites to and discusses the only relevant

documents of which Proskauer was aware, even though they were only billing records that shed

no light on the parties’ intent. (See Compl., Ex. A at 13 n.57; see also Compl. ¶¶ 58, 64.)

OSG has also admitted that it had documents that were relevant to Proskauer’s analysis.

(Compl. ¶ 89.) These critical sources of key information were within OSG’s possession and

knowledge when the 2011 Memorandum was drafted and remained within OSG’s possession and

knowledge during the entire period OSG claims to have relied on that memorandum.14 OSG

13 Again, notwithstanding OSG’s insincere and incomplete characterization, the documents in OSG’s possession show, on their face, that they pertained to the drafting and negotiation of all of the Company’s credit agreements between 2000 and 2006. (Samuels Aff. ¶ 9.) 14 It is indisputable that a company is chargeable with knowledge of documents in its possession. Indeed, this principle is so fundamental that a company is charged not only with knowing that it possesses documents but also with knowledge of their contents. See Al Fayed v. Barak, No. 601354/06, 2006 N.Y. Misc. LEXIS 3250, at *11-12 (Sup. Ct., N.Y. Cnty. Oct. 23, 2006) (finding that an individual’s receipt of a document warranted charging him with knowledge of its contents (citing State v. Rock, 147 Misc.2d 231, 235 (N.Y. Sup. Ct., Saratoga Cnty. 1990))), aff’d 39 A.D.3d 371 (1st Dep’t 2007); Cliffstar Corp. v. Alpine Foods, LLC, No. 09-CV-00690(A)(M), 2012 U.S. Dist. LEXIS 187360, at *23 (W.D.N.Y. July 18, 2012) (similar); Atlas v. Metro. Life Ins. Co., 181 N.Y.S. 363, 364 (App. Term, 1st Dep’t 1920) (a “company must be charged with knowledge of the facts shown by its own records”); Miller v. Liberty Mut. Fire Ins. Co., 48 Misc.2d 102, 105 (N.Y. Sup. Ct., Kings Cnty. 1965) (a plaintiff who had possession of an

23

nevertheless chose not merely to withhold them but also to affirmatively represent that the

documents did not exist. Taken together, these undisputed facts unequivocally preclude OSG

from establishing that Proskauer caused its damages.

OSG’s dubious assertion that it had been “unable to locate” these documents until

October 2012 despite their central location in the Company’s office (Compl. ¶ 89) is irrelevant

and cannot salvage OSG’s claims. Under New York law, OSG is responsible for knowing the

contents of its files and is charged with constructive knowledge of their contents. Thus, because

OSG’s own files contradicted the factual premises of Proskauer’s 2011 Memorandum, as a

matter of law, OSG could not have relied on the memorandum’s conclusion or any related

advice. The 2011 Memorandum therefore could not have been the “but for” or the proximate

cause of any of OSG’s alleged damages.

Stolmeier v. Fields, 280 A.D.2d 342 (1st Dep’t), leave to appeal denied, 96 N.Y.2d 714

(2001), is instructive. In that case, a third party entered into a contract with home improvement

contractors for their services, and the contract was later held unenforceable because the

contractors did not have the appropriate license. The contractors sued their attorneys for

malpractice on the grounds that the attorneys had never made known the license requirement.

Having found that the plaintiffs “must be deemed to have been aware” of the requirement

insurance policy was “chargeable with knowledge of its contents”); see also Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879, 894 (S.D.N.Y. 1999) (“a party is charged with knowledge of what its agents know and the contents of its available records” and “cannot plead ignorance to information that is from sources within its control” (internal quotation marks omitted)); E*Trade Fin. Corp. v. Deutsche Bank, AG, No. 05 Civ. 902 (RWS), 2006 U.S. Dist. LEXIS 82428, at *4-5 (S.D.N.Y. Nov. 13, 2006).

Regardless, OSG was put on inquiry notice before delivery of even the first draft of the 2011 Memorandum when Proskauer asked it to search for relevant documents, thereby charging OSG with knowledge of any information it possessed or could have accessed with reasonable diligence. Cf. Shalam v. KPMG LLP, 89 A.D.3d 155, 157-58 (1st Dep’t 2011) (in the fraud context, holding that information possessed by plaintiff, and “contained in documents in his possession, conclusively establish that he knew or should have known” the reality and risks of defendants’ advice); Rite Aid Corp. v. Grass, 48 A.D.3d 363, 364 (1st Dep’t 2008) (in the fraud context, holding that “plaintiffs were on inquiry notice [of the fraud] based on their own financial records and communications”); Spinale v. Tag’s Pride Produce Corp., 44 A.D.3d 570, 571 (1st Dep’t 2007) (in the fraud context, holding that plaintiff was “put . . . on inquiry notice of the financial facts he claim[ed] were fraudulently concealed” because “any documents that might have been necessary for plaintiff to discover the fraud . . . were in his possession”).

24

independently of the defendants, the court held that defendants’ advice to enter into the contract

without discussing the need for a license therefore could not have been the proximate cause of

plaintiff’s losses. Id. at 343; see also A&R Kalimian, LLC v. Breger, Gorin & Leuzzi, LLP, 307

A.D.2d 813, 813 (1st Dep’t 2003) (holding that failure to advise a client about a lease did not

constitute legal malpractice because “a partner in plaintiff [the client] knew about the lease . . . ,

and any ultimate reliance that plaintiff may have placed on any misrepresentations . . . cannot be

attributed to defendants”); Ableco Fin. LLC v. Hilson, 109 A.D.3d 438, 439 (1st Dep’t 2013)

(holding that there could be no malpractice claim against counsel for negligently failing to advise

about a fact where the documentary record showed that plaintiff knew that fact from another

source); Finova Capital Corp. v. Berger, 18 A.D.3d 256, 258 (1st Dep’t 2005) (holding that,

where a plaintiff did not “rel[y] on defendant’s alleged negligently rendered opinion,” the

plaintiff had failed to establish proximate causation).

Here, OSG’s claimed losses could not have been caused—proximately or in fact—by

Proskauer’s advice because OSG knew that documents existed that were relevant to the analysis

and that an essential premise of the 2011 Memorandum was therefore false. As mandated by

both common sense and law, a client cannot rely on legal advice it knows is without basis in fact.

Accordingly, OSG’s Section 956(d) Claim should be dismissed with prejudice.

B. OSG Knew the Parties to the Credit Agreements Had Intended That OIN Guarantee OSG’s Obligations

OSG’s 2011 claims also should be dismissed because the substance of the documents it

“discovered” in 2012 directly contradicts the critical and unequivocal representation OSG made

to Proskauer in connection with the 2011 Memorandum—i.e., that OSG did not intend for OIN

to guarantee the debts of OSG in connection with the 2006 Credit Agreement.

25

The 2011 Memorandum could not be more clear that its conclusion was based on “the

statements of senior management of OSG that OSG would not have entered into the [2000 to

2006 Credit Agreements] . . . had senior management believed that OIN was responsible for the

obligations of OSG and OSG Bulk under these agreements.” (Compl., Ex. A at 3.) This premise

is so important to the analysis that it is repeated at the end of the memorandum:

Senior management of OSG, whom we have advised over the years that OIN can not guarantee borrowings by OSG or any other domestic borrower, strongly state that they never intended that OIN would be responsible for the obligations of OSG or OSG Bulk under the [2000 to 2006 Credit Agreements].

(Id. at 12-13.)15 Indeed, OSG’s intent as to OIN’s status as a guarantor was “the pivotal issue” to

the memorandum’s analysis. (Id. at 6.)

Yet, as demonstrated by the documents OSG disclosed to Proskauer for the first time in

October 2012, OSG’s “strong” representation to Proskauer about the Company’s intent was

patently false. Simply put, the documents OSG “discovered” in 2012 plainly show that OSG had

in fact intended “joint and several” to make OIN a guarantor of OSG’s obligations.

As discussed above, among the hoard of documents that OSG “discovered” in 2012 was a

draft term sheet for the 2006 Credit Agreement in which Clifford Chance noted that OIN’s

subsidiaries need not otherwise guarantee OSG’s debts specifically because OIN “will be [a]

15 These statements in the 2011 Memorandum—which was “critically vetted” by OSG’s senior management (Compl. ¶ 63)—unequivocally demonstrate the falsity of OSG’s assertion that “[t]he only representation OSG management made to Proskauer in connection with Proskauer’s analysis was that OSG never understood and never intended that the joint and several structure of its credit agreements would trigger Section 956 tax liability” (id. ¶ 61). OSG’s representations to Proskauer went much further than that: The Company affirmatively represented that it had not intended that OIN guarantee OSG’s obligations. It is telling that OSG—confronted by the unmistakable meaning of the documents in its files—is now forced to deny that it made representations that are clear from the face of the 2011 Memorandum.

Similarly belied by documentary evidence is the Complaint’s assertion that “Proskauer did not seek any representations of fact from OSG management, nor did OSG management provide Proskauer with any representations of fact, prior to OSG’s receipt of the May 9 Draft” (id.); that draft contains identical language regarding management’s intentions (Samuels Aff., Ex. F at 3, 12), and OSG has alleged that the Company represented that it had no documents of relevance prior to that draft’s completion (Compl. ¶ 58). No matter where the 2011 Memorandum’s premises came from, however, OSG cannot pretend that it did not know what the memorandum was based on or that the premises were false.

26

joint and several borrower[] under the Credit Facility” (Samuels Aff., Ex. H at 1)—in other

words, OIN was already responsible for OSG’s obligations, so its subsidiaries did not need to

make the same guarantee.16 Likewise, a draft of the 2000 Credit Agreement questions whether a

“joint & several” structure would affect the tax treatment of borrowings under that agreement

(id., Ex. I at 1), while a later draft bears a comment from OSG’s in-house counsel indicating that

OSG was rejecting the “joint & several” language and “offer[ing]” instead an “OSG guarantee of

OIN” (id., Ex. J at 28). OSG was proposing, in effect, to avoid Section 956(d) liability by only

having OSG guarantee OIN’s borrowings and not the other way around—a position from which

OSG later retreated by agreeing to the “joint and several” structure.17 Individually and together,

these documents show far more than that the “inclusion of the joint and several language in the

2000 credit agreement was not inadvertent” (Compl. ¶ 89); they demonstrate that OSG

understood and intended that the “joint and several” structure would operate as a guarantee

between the entities.

Even assuming arguendo that there is any doubt about the precise meaning of these

critical documents, there can be no doubt that the documents, at the very least, raise serious

questions about what OSG intended by the “joint and several” language when negotiating its

2006 Credit Agreement. A fortiori, OSG’s unequivocal representation to Proskauer in 2011 that

“[s]enior management of OSG . . . never intended that OIN would be responsible for the

16 The Court is expressly permitted to consider documents external to the pleadings on a motion to dismiss. See N.Y. C.P.L.R. 3211(a)(1). Where such evidence negates the facts upon which the complaint is predicated, the motion should be granted. Biondi, 257 A.D.2d at 81; see also Fishberger v. Voss, 51 A.D.3d 627, 628 (2d Dep’t 2008) (affirming dismissal of a claim based on allegations that a condition was not “reasonably discoverable” because “evidentiary material submitted on the motion to dismiss demonstrated . . . that the condition could, in fact, have been discovered by the plaintiffs”). 17 Moreover, in an e-mail exchange among the bank lenders regarding the 2000 Credit Agreement, the lenders had asked whether “the Borrowers [are] jointly and severally liable for all obligations?” (Samuels Aff., Ex. K at 2.) OSG wrote next to that question “OK,” evidencing a clear intent that OSG and OIN should, in fact, be responsible for the obligations of the other, thus undermining any contention that the meaning of “jointly and severally” was ambiguous in these circumstances. (Id.)

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obligations of OSG” (Compl., Ex. A at 12-13) could not and should not have been made. The

2011 Memorandum was predicated on OSG’s clear statements about its intent, but the

documents in OSG’s own files directly contradicted those statements. Once again, because the

Company is charged with knowledge of its files, see supra note 14, OSG could not, as a matter of

law, have relied on Proskauer’s 2011 Memorandum, which was predicated on OSG’s false

statements. Accordingly, OSG cannot establish the requisite element of causation. See

Stolmeier, 280 A.D.2d at 343; A&R Kalimian, 307 A.D.2d at 813; see also Centro Empresarial

Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 N.Y.3d 269, 278-79 (2011) (holding that,

if a plaintiff “has the means available to him of knowing, by the exercise of ordinary intelligence,

the truth or the real quality of the subject of the [defendant’s] representation, he must make use

of those means, or he will not be heard to complain that he was induced to enter into the

transaction by misrepresentations” (internal quotation marks omitted)); Shalam, 89 A.D.3d at

158 (in the fraud context, because “plaintiff was in possession of sufficient information to

preclude him from accepting without question [defendants’] representations,” he could not have

reasonably relied on those representations).

In sum, the documents OSG had in its possession, and which were unknown to Proskauer

until October 2012, conclusively demonstrate that OSG’s categorical representations to

Proskauer about its intentions in entering into the credit agreements were false—and that OSG

knew Proskauer’s advice was based on the Company’s false information. OSG’s knowledge of

its own documents precludes any claim that the Company relied on the 2011 Memorandum and

related advice, and establishes, as a matter of law, that Proskauer was neither the “but for” nor

the proximate cause of OSG’s alleged damages. OSG’s Section 956(d) Claim should be

dismissed with prejudice.

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POINT II. OSG’S CHECK-THE-BOX CLAIM IS FATALLY DEFICIENT

OSG’s claim as to Proskauer’s 2005 advice—provided almost nine years ago—

concerning OSG’s check-the-box elections fails because it is time-barred and because no

damages resulted from the check-the-box elections themselves. Either ground is sufficient for

dismissal, and the Check-the-Box Claim should, accordingly, be dismissed with prejudice.

A. Proskauer Did Not Continuously Advise OSG on Its Check-the-Box Elections

As addressed when the timeliness of OSG’s claims was first briefed before the

Bankruptcy Court, the check-the-box advice was rendered in 2005, and New York’s three-year

malpractice statute of limitations expired in 2008.18 The Check-the-Box Claim is therefore

untimely unless the statute of limitations is subject to a toll through at least November 14, 2012,

the date the Company filed its bankruptcy petition. It is OSG’s burden to demonstrate that

tolling is warranted. See Krichmar v. Scher, 82 A.D.3d 1164, 1165 (2d Dep’t 2011) (after a

showing that plaintiff’s time to sue has expired, “the burden shifts to the [plaintiff] to establish

that the statute of limitations has been tolled”); CLP Leasing Co. v. Nessen, 12 A.D.3d 226, 227

(1st Dep’t 2004). Despite the substantial revisions made to its Complaint, OSG has utterly failed

to meet its burden.

Tolling on grounds of continuous representation requires plaintiffs to allege not simply

that “defendants continued to represent them during the three years preceding the

commencement of the action,” but that the “representation pertained to the specific matters at

issue” in the malpractice claim for which tolling is sought. Sun Graphics Corp. v. Levy, Davis &

Maher, LLP, 94 A.D.3d 669, 669 (1st Dep’t 2012); see also, e.g., Duane Morris LLP v. Astor

Holdings Inc., 61 A.D.3d 418, 420 (1st Dep’t 2009) (subsequent representation must “pertain[]

18 Malpractice claims are governed by a three-year limitations period, see N.Y. C.P.L.R. 214(6), and accrue “when the malpractice is committed, not when the client discovers it.” Williamson v. PricewaterhouseCoopers LLP, 9 N.Y.3d 1, 7-8 (2007).

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specifically to the matter in which the attorney committed the alleged malpractice” (internal

quotation marks omitted)); Mitschele v. Schultz, 36 A.D.3d 249, 253 (1st Dep’t 2006)

(subsequent representation must have been “in connection with the particular transaction which

is the subject of the action”). Proskauer’s advice on making the check-the-box elections ended in

2005 when OSG was provided with a memorandum on the subject and OSG then made the

elections. No one anticipated that Proskauer would continue advising on the elections and,

indeed, Proskauer never did provide subsequent advice on making those elections. Those facts

are fully supported by the allegations of the Complaint and alone are fatal to the Company’s

claim of continuous representation.

The Check-the-Box Claim pertains specifically to the alleged failure of Proskauer’s 2005

check-the-box memorandum to adequately address the “tax consequences resulting from the

check-the-box elections.” (Compl. ¶¶ 48, 49; see also id. ¶ 95(i) (alleging that Proskauer was

negligent in “advising OSG to make the check-the-box elections”).) Yet nowhere does the

Complaint even suggest that Proskauer advised OSG on those elections after March 3, 2005.

(See, e.g., id. ¶¶ 5 (Proskauer advised OSG to make the elections “[i]n 2005”), 12 (Proskauer

provided “negligent advice to OSG in 2005 regarding the check-the-box elections”), 100(e)

(alleging increased exposure to tax liability “in connection with [Proskauer’s] 2005 tax

advice”).)

Once the check-the-box elections had been made, the governing regulations themselves

closed the door on any possible continuing representation for at least five years. After making a

check-the-box election, except for certain narrow exceptions not applicable here, “the entity cannot

change its classification by election again during the sixty months succeeding the effective date of

the election.” 26 C.F.R. § 301.7701-3(c)(1)(iv). With the check-the-box elections being

30

unchangeable for at least five years, the advice leading up to them necessarily came to an end and

the need for any further advice disappeared. Thus, simply as a matter of the applicable law, the

representation could not have been continuous: It had reached its legal terminus.

In fact, the Company has actually admitted that it never anticipated needing further

advice on the check-the-box elections, categorically precluding tolling: It is firmly established

that, when a plaintiff is “unaware of any need for further legal services” on the matter at issue, it

may not avail itself of the continuous representation doctrine. Shumsky v. Eisenstein, 96 N.Y.2d

164, 169 (2001); see also Williamson, 9 N.Y.3d at 10 (holding that the continuous representation

doctrine applies only where the parties “were acutely aware of the need for further

representation”). Here, OSG’s allegation that “[n]o one at OSG had any knowledge of the tax

liability resulting from Proskauer’s advice on the check-the-box elections” (Compl. ¶ 48) is an

express admission that the Company could not have believed that additional representation on

the elections was necessary.

In an attempt to bolster its continuous representation position, the Complaint alleges that

Proskauer continuously advised the Company “to ensure that OIN’s foreign income was not

subjected to tax in the U.S.” (Id. ¶ 50.) Yet the laundry list of discrete engagements alleged by

OSG only serves to demonstrate that the continuous representation doctrine does not apply:

According to OSG, Proskauer’s advice pertained to “a wide range of issues” that were independent

of each other and were plainly not the same transaction as the 2005 check-the-box elections. (Id.

¶ 51.) OSG’s interactions with Proskauer were no more than a “‘continuing general relationship

with a lawyer . . . involving only routine contact for miscellaneous representation.’” Serino v.

Lipper, 47 A.D.3d 70, 76 (1st Dep’t 2007) (not tolling the statute of limitations as to audit work

because subsequent audit services were merely “the continuation of the professional relationship”).

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Most strikingly, not a single one of those engagements even purports to have anything to do with

the making of the check-the-box elections by OIN’s subsidiaries in 2005.19

MIG, Inc. v. Paul, Weiss, Rifkind, Wharton & Garrison, L.L.P., 701 F. Supp. 2d 518

(S.D.N.Y. 2010), aff’d, 410 F. App’x 408 (2d Cir. 2011), illustrates the point. In that case, plaintiff

brought a malpractice claim years after the allegedly negligent drafting of a document governing

the conversion rights associated with plaintiff’s preferred stock. The plaintiff asserted application

of the continuous representation doctrine because the defendant firm had written and reviewed

subsequent SEC filings concerning the preferred stock, gave “targeted legal advice with regard to

the Preferred Stock,” and issued two memoranda pertaining to errors related to the preferred stock.

Id. at 521. The court, however, found tolling unwarranted: The SEC filings, although discussing

the preferred stock, “did not . . . address the Preferred Holders’ conversion rights under section 8—

the provision containing the alleged malpractice,” and the subsequent advice was part of the firm’s

“routine representations” where it “acted as [plaintiff’s] outside corporate counsel.” Id. at 526-28.

Likewise here, any tax advice Proskauer gave to OSG following the check-the-box elections was

routine for a multinational company and not specifically concerned with the subject matter of the

2005 check-the-box advice. See also, e.g., Nuzum v. Field, 106 A.D.3d 541, 541 (1st Dep’t 2013)

(finding tolling inappropriate because the preparation of promissory notes and the later drafting of

documents pertaining to the proceeds of those notes were “insufficiently related”); Byron Chem.

Co. v. Groman, 61 A.D.3d 909, 910-11 (2d Dep’t 2009) (finding tolling inappropriate despite

“defendants’ subsequent representation in matters unrelated to the specific matter that gave rise to

19 In fact, the only mention of advice regarding any check-the-box elections after 2005 is the factually bereft assertion that Proskauer provided OSG with “[a]dvice to file the check-the-box elections for . . . the Floating, Storage and Offloading (‘FSO’) joint venture (2008).” (Compl. ¶ 51.) That advice does not bear at all on the propriety of, or have any factual relationship to, the 2005 advice—the FSO joint venture did not even exist in 2005. (See Samuels Aff., Ex. E at 7.) However, even had the later advice pertained to the “particular transaction” at issue in 2005, Transp. Workers Union of Am. Local 100 AFL-CIO v. Schwartz, 32 A.D.3d 710, 713 (1st Dep’t 2006), it would still not save the Check-the-Box Claim because there are no allegations that Proskauer rendered any related advice after the applicable bar date.

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the alleged malpractice”); Maurice W. Pomfrey & Assoc., Ltd. v. Hancock & Estabrook, LLP, 50

A.D.3d 1531, 1533 (4th Dep’t 2008) (tolling inappropriate even though defendant “continued to

provide legal services” to plaintiff because those services were not “in connection with the

employment agreement” underlying the malpractice action); Dignelli v. Berman, 293 A.D.2d 565,

565-66 (2d Dep’t 2002) (not tolling a claim related to the purchase of a farm despite defendants’

representation of plaintiffs “in their various general business dealings,” including those which were

“incidentally connected to the day-to-day business of the . . . farm”).

OSG has failed to meet its burden of pleading that the 2005 check-the-box advice

continued for years after 2005. There is no basis for tolling the statute of limitations, and the

Company’s Check-the-Box Claim should be dismissed with prejudice.

B. Proskauer’s Check-the-Box Advice Did Not Cause Any of OSG’s Alleged Damages

The Check-the-Box Claim should be dismissed for the additional and independent reason

that OSG cannot establish that Proskauer’s advice proximately caused any damages. On

February 9, 2006, OSG replaced all of its existing credit facilities with the 2006 Credit

Agreement (Samuels Aff., Ex. C at 63)—which was structured, negotiated, and documented by

OSG’s in-house lawyers and outside counsel at Clifford Chance (see Compl. ¶ 42). Proskauer

played no role in creating the 2006 Credit Agreement. Because all of OSG’s alleged damages

flow from borrowings under that agreement, any pre-2006 advice provided by Proskauer could

not have been the proximate cause of those damages.20 Accordingly, OSG cannot show that

20 While OSG broadly alleges that “every time [it] borrowed money under one of [its] credit agreements, the amount borrowed was deemed to be a distribution by OIN to OSG” and therefore subject to taxation (Compl. ¶ 10), in fact its damages arise only from drawdowns under the 2006 Credit Agreement. As confirmed by a recent SEC Form 8-K filed by OSG, no Section 956(d) tax liability resulted from drawdowns under pre-2006 credit facilities. (Samuels Aff., Ex. N at 2 (noting that “OSG will include additional taxable income under Section 956 of the Internal Revenue Code in respect of 2010 and 2011” (emphasis added)).)

Regardless, the only drawdowns the Complaint actually mentions occurred after May 2011 (e.g., Compl. ¶¶ 72, 78). OSG has thus inadequately pleaded any damages arising prior to 2011. See N.Y. C.P.L.R. 3013 (a pleading

33

Proskauer’s check-the-box advice—rendered in 2005—was the cause of any of its damages, and

OSG’s Check-the-Box Claim should be dismissed. See Rudolf, 9 N.Y.3d at 442 (requiring a

malpractice plaintiff to demonstrate that the defendant “proximately caused plaintiff to sustain

actual and ascertainable damages”).

The intervention of Clifford Chance utilizing the “joint and several” structure in the 2006

Credit Agreement completely severs any causal relationship between Proskauer’s pre-2006 advice

and OSG’s alleged damages. The Complaint proves this very point, affirmatively alleging that

“the check-the-box elections resulted” only “in the addition of . . . untaxed future earnings and

profits in OIN” and not in the tax liability of which OSG complains. (Compl. ¶ 48.) Those future

earnings and profits created no liability in and of themselves; they only “subsequently became

subject to U.S. income tax liability under Section 956 because of OIN’s joint and several liability

under the credit agreements.” (Id. (emphasis added); see also id. ¶ 95(m) (the check-the-box

elections “caused OIN’s U.S. property to increase dramatically thus creating potential for Section

956 tax liability” (emphasis added)).) Because OSG’s liability arises only from drawdowns under

the 2006 Credit Agreement on which Proskauer did not work (id. ¶ 42), Proskauer’s 2005 check-

the-box advice was not the proximate cause of OSG’s liability.

The Complaint goes even further in establishing that it was Clifford Chance’s use of the

“joint and several” structure in the 2006 Credit Agreement that directly caused OSG’s tax

liabilities. As OSG admits, the liability OSG attributes to the check-the-box elections “could

have been avoided entirely either by not making the check-the-box elections . . . or by not

entering into a loan agreement that had the joint and several structure.” (Id. ¶ 47 (emphasis

added).) Proskauer, whose work on the check-the-box elections ended nearly a year prior to the

must “be sufficiently particular to give the court and parties notice of the transactions . . . intended to be proved and the material elements of each cause of action”); Siwiec v. Rawlins, 103 A.D.3d 703, 704 (2d Dep’t 2013) (“Conclusory allegations of damages or injuries . . . are insufficient.”).

34

execution of the 2006 Credit Agreement, simply does not occupy a place in the causal chain.

See, e.g., Rosenbaum v. Sheresky Aronson Mayefsky & Sloan, LLP, 100 A.D.3d 731, 732-33

(2d Dep’t 2012) (where predecessor law firm ended its representation of plaintiff a year prior to

the relevant transaction, that firm “could not have been a proximate cause” of plaintiff’s

damages); Tigulla v. Porzio, 255 A.D.2d 504, 505 (2d Dep’t 1998) (holding that, as a matter of

law, although defendant’s breach “may have determined the gravity of the consequences

resulting from the [injury],” it nevertheless did not cause the “independent intervening act[]

which operate[d] upon but [did] not flow from the original negligence” (internal alterations

omitted)); Elardo v. Town of Oyster Bay, 176 A.D.2d 912, 913 (2d Dep’t 1991) (holding that, as

a matter of law, “an intervening act will be deemed a superseding cause and will serve to relieve

the defendant of liability when the act . . . so attenuates the defendant’s [alleged] negligence

from the ultimate injury that responsibility for the injury may not be reasonably attributed to the

defendant” (quoting Kush v. City of Buffalo, 59 N.Y.2d 26, 33 (1983))).

OSG acknowledges that both its in-house lawyers and Clifford Chance had ample

opportunity after the check-the-box elections were made to avoid any Section 956(d) liability by

structuring the 2006 Credit Agreement differently.21 Indeed, as OSG has put it, “a reasonably

competent lawyer would have advised the client of the adverse tax consequences flowing from

the joint and several language.” (Compl. ¶ 59.) That admission forecloses any possible

causative role of Proskauer’s 2005 check-the-box advice. See, e.g., Somma v. Dansker &

Aspromonte Assocs., 44 A.D.3d 376, 377 (1st Dep’t 2007) (affirming dismissal of malpractice

claim when “plaintiff’s successor counsel had sufficient time and opportunity to adequately

protect plaintiff’s rights”). The proximate cause of OSG’s damages was not the advice rendered

21 OSG was well aware that, (i) for US tax purposes, the elections would increase the profits attributable to OIN by treating its subsidiaries as liquidated into OIN and (ii) borrowings by domestic companies guaranteed by foreign subsidiaries would “be treated as deemed distribution[s]” for purposes of Section 956(d). (Samuels Aff., Ex. D at 1, 2.)

35

by Proskauer in 2005 but rather the intervening and superseding decision of OSG—after the

check-the-box elections had been made—to implement an agreement with a “joint and several”

structure that created significant tax liability for the Company.

POINT III. OSG’S CAUSES OF ACTION ARE DUPLICATIVE

In attempting to remedy the problems it faced on Proskauer’s motion to dismiss before

the Bankruptcy Court, OSG has restyled its former breach of fiduciary duty claim as a legal

malpractice claim. But—regardless of what the Company chooses to name its claim—it is

duplicative of the first cause of action and should be dismissed.

A party cannot simultaneously maintain two claims that “ar[i]se out of the same facts” and

do “not involve any damages that [are] separate and distinct.” Cosmetics Plus Grp., Ltd. v. Traub,

105 A.D.3d 134, 143 (1st Dep’t), leave to appeal denied, 22 N.Y.3d 855 (2013).22 OSG apparently

believes that, because the causes of action allege breaches of different duties, it has successfully

differentiated them. But this precise line of reasoning has previously been rejected.23 See MIG,

701 F. Supp. 2d at 532 (dismissing breach of fiduciary duty claim as duplicative of malpractice

claim despite plaintiff’s argument that the claim derived not from a breach of the duty of care, but

from “breach of other duties . . . viz. the duties of loyalty and honesty”).

This result is mandated by the principle that “it is not the theory behind a claim that

determines whether it is duplicative,” but the facts supporting it. Estate of Nevelson v. Carro,

22 Although the cases cited herein pertain to the dismissal of other causes of action as duplicative of a malpractice claim, the analysis applies with even more force here, where OSG has attempted to assert two malpractice claims to address the same conduct. See European Am. Bank v. Cain, 79 A.D.2d 158, 162 (2d Dep’t 1981) (holding that “a plaintiff can have but one recovery for one wrong” and therefore “has but a single cause of action” to address the alleged wrongdoing (internal quotation marks omitted)). 23 To the extent the second cause of action is attempting to allege failure to disclose or concealment of malpractice, those allegations are insufficient to differentiate it from the first. See Reichenbaum v. Cilmi, 64 A.D.3d 693, 694-95 (2d Dep’t 2009) (dismissing breach of duty claim as duplicative of malpractice claim and noting that “mere failure to disclose malpractice” does not give rise to a distinct claim (internal quotation marks omitted)); LaBrake v. Enzien, 167 A.D.2d 709, 711 (3d Dep’t 1990) (in a legal malpractice action, “a defendant’s concealment or failure to disclose his own malpractice without more does not give rise to a cause of action for fraud or deceit separate and distinct from the customary malpractice action”).

36

Spanbock, Kaster & Cuiffo, 290 A.D.2d 399, 400 (1st Dep’t 2002) (dismissing breach of

fiduciary duty claim as duplicative of malpractice claim). Here, OSG’s two claims are based on

precisely the same facts regarding Proskauer’s allegedly improper advice on the check-the-box

elections and the import of the “joint and several language.” (Compare. e.g., Compl. ¶ 95 (c),

(m), with id. ¶ 100 (d), (e).) Indeed, many of the allegations underlying each claim are virtually

identical. (Compare, e.g., id. ¶ 95(b), (d), (e), (f), (g), (h), (o), with id. ¶ 100(g), (h), (i), (j), (k),

(l), (m).) Likewise, the Complaint’s wholly inadequate damages allegations do not even attempt

to identify what damages are to be allocated to which claim (id. ¶¶ 98, 103), while the prayer for

relief affirmatively conflates the damages ostensibly arising from the two claims (id. at 46).

OSG has given its claims different names, but the reality is that they address the same

conduct and seek to recover the same damages. In these circumstances, the second cause of

action should be dismissed.

POINT IV. THE COMPLAINT SHOULD BE DISMISSED WITH PREJUDICE

It is a basic principle of law that a plaintiff should not be permitted to repeatedly bring the

same meritless claims against a defendant. See, e.g., Johnson v. Societe Generale S.A., 94 A.D.3d

663, 663 (1st Dep’t 2012) (affirming dismissal with prejudice of an amended complaint served in

response to a motion to dismiss); Ming v. Hoi, 163 A.D.2d 268, 269 (1st Dep’t 1990) (dismissing

with prejudice where amended complaint was “still deficient”). The issues presently before the

Court were also briefed in full before the Bankruptcy Court in Delaware, and—prior to refiling its

Complaint in New York—OSG made substantial revisions in a vain attempt to circumvent

Proskauer’s arguments. (Compare, e.g., Compl. ¶¶ 50-52, 89-90, with Samuels Aff., Ex. M.) But

the Complaint remains rife with fatal weaknesses. Having had a fair chance to correct those

deficiencies, OSG should not be accorded another. Dismissal should be with prejudice.

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CONCLUSION

For the foregoing reasons, Defendants respectfully request that the Court dismiss the

Complaint with prejudice.

Dated: New York, New York April 11, 2014

DAVIS POLK & WARDWELL LLP

By: s/ Paul Spagnoletti Paul Spagnoletti

Paul SpagnolettiHeather M. Ward Andrew S. GehringMatthew JacobsDAVIS POLK & WARDWELL LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000

Counsel for Defendants Proskauer Rose LLP, Alan P. Parnes, Richard H. Rowe, Peter G. Samuels, and Steven O. Weise