In a legal malpractice case where one of plaintiffs’ own experts admitted that the law regarding a certain type of tax liability was unsettled at the time defendant attorneys advised plaintiffs, the jury verdict for defendant was upheld.
In Estate of Hawk v. Chambliss, Bahner & Stophel P.C., No. E2022-01420-COA-R3-CV (Tenn. Ct. App. July 31, 2024), plaintiffs filed a legal malpractice claim against defendants related to certain tax advice. In 2003, defendants advised plaintiffs during a transaction related to the sale of the assets of two bowling alleys. A company called MidCoast Investments expressed interest in purchasing the assets, and it claimed to have a way to save plaintiffs from being liable for certain taxes related to the transfer.
In a letter to plaintiffs, defendants stated that MidCoast appeared to be legitimate and that it had conducted many similar transactions. This letter suggested obtaining financial information in order to negotiate a letter of intent.
MidCoast did not provide financial information. In a second letter to plaintiffs, defendant advised that MidCoast’s parent entity was agreeing to indemnify plaintiffs, and that “the possibility that the selling shareholders…will be liable for income tax is remote.”
The sale to MidCoast occurred, but later MidCoast and many people associated with it faced federal charges. In 2007, the IRS informed plaintiffs that they were liable for large tax liabilities. Following tax litigation and a forbearance agreement, this legal malpractice suit was filed. After a trial, the jury found that the legal malpractice claim was not time-barred but that defendants were not liable for malpractice. This ruling was affirmed on appeal.
After discussing several evidentiary issues, the Court addressed plaintiffs’ assertion that “the jury’s verdict should be set aside because it is not supported by material evidence.” The Court noted that “[g]enerally, attorneys are not liable for mistaken opinion on a point of law that has not been settled by a court of highest jurisdiction, and on which reasonable attorneys may differ.” (internal citation omitted). In this case, defendants presented three experts who stated that the advice defendants gave plaintiffs did not rise to the level of professional negligence. Further, one of plaintiffs’ own experts “conceded that in 2003, when [defendants] gave the advice at issue in this case, the law was unsettled with regards to how transferee liability would be applied in a case such as this one.”
This case “came down to a battle of the experts,” and the Court ruled that there was material evidence to support the jury’s verdict for defendants. The judgment was therefore affirmed.
The Court of Appeals released this opinion 3.5 months after oral arguments.