Overseas Shipholding Group said that on March 11 it re-filed its legal malpractice lawsuit against its former counsel, Proskauer Rose, and four of its partners, in New York State Supreme Court in Manhattan, according to the company’s 2013 10-K filed today with the Securities and Exchange Commission.
As reported, the bankruptcy court overseeing the company’s Chapter 11 proceedings late last month “abstained” from hearing the lawsuit, which had been filed as an adversary action in the company’s bankruptcy in Wilmington, Del. As reported, Proskauer had asked the bankruptcy court to dismiss the lawsuit – a request upon which the bankruptcy court did not rule – or, alternatively, abstain from hearing the case on the grounds that New York State Supreme Court was a more appropriate court to consider the matter, which involved questions of state law and events occurring in New York (see “Dismissal sought on ‘baseless’ Overseas Shipholding malpractice suit,” LCD, Jan. 22, 2014).
As also reported, the company alleged that certain advice Proskauer rendered in connection with credit pacts the company entered into in 2000 and 2001 led to the inclusion of similar language in the company’s replacement $1.8 billion credit agreement in 2006 (for which the company had different legal counsel), which in turn ultimately led to a tax liability of about $463 million (subsequently settled for $264.3 million).
The tax liability required the company to restate its financials for the previous dozen years, and precipitated its Chapter 11 filing in November of 2012.
The suit further alleged that Proskauer sought to cover up its negligence in a legal opinion rendered to the company a decade later, in 2011, as the company was seeking to refinance its 2006 credit facility (see “Overseas Shipholding sues former attorneys over tax advice,” LCD, Nov. 19, 2013).
Proskauer has denied all of the allegations, and has asserted that Overseas Shipholding is using it as a scapegoat for its tax liability. With respect to the advice provided in 2000 and 2001, Proskauer argues that the claims are barred by the statute of limitations. Proskauer further notes that it provided no advice in connection with the 2006 credit agreement.
But it is company’s claims regarding the legal opinion Proskauer rendered in 2011 – and the alleged attempted cover-up of its earlier negligence – that could wind up emerging as a flashpoint.
Proskauer argued in its motion to dismiss filed in bankruptcy court that the allegedly negligent cover-up advice it provided to Overseas Shipholding in 2011 was based on misrepresentations that the company itself made to the law firm, and for which Proskauer could not be held liable.
But perhaps in recognition of the strategy that the best defense is a good offense, Proskauer filed its own lawsuit on Feb. 23, also in New York State Supreme Court, against two former Overseas Shipholding executives, general counsel James Edelson and CFO Myles Itkin, alleging that their misrepresentations constituted fraud, constructive fraud, and breaches of fiduciary duties.
As reported, Overseas Shipholding’s tax liability was based on revenue earned by the company’s foreign subsidiaries that the company had excluded from its tax calculations, but later determined was taxable revenue because those foreign units were guarantors under the company’s credit agreements.
The potential liability first came to light in 2011 when Proskauer was working on a replacement facility for the company, and noticed that the company’s foreign units had “joint and several” liability under the 2006 credit agreement – contract language that could trigger the tax liability.
At the time, Proskauer advised that the company’s ultimate liability would, however, depend upon the interpretation of the phrase “joint and several,” or more specifically, whether the company and its lenders intended for the “joint and several” language in its various credit agreements to operate as a guarantee of the debt by its foreign subsidiaries, or whether it merely resulted from sloppy and inexact drafting of documents.
To that end, Proskauer’s suit said the law firm researched the history of the credit agreement and discovered that the “joint and several” language was first used, and copied from, the company’s earlier credit agreements in 2000 and 2001.
According to the Proskauer lawsuit, the firm’s own records contained no information regarding the company’s intent at that time with respect to whether “joint and several” was intended to serve as a guaranty of the debt. Edelman and Itkin both said that the company had no documents bearing on the issue, but that their recollections were that there was never an intent that the company’s foreign subsidiaries serve as guarantors under the company’s credit agreements. Based on these representations, Proskauer concluded that the weight of evidence established that the foreign units were not intended as guarantors under the company’s credit agreements.
Proskauer said it sought to conduct additional analysis of the issue, but Overseas Shipholding prevented Proskauer from pursuing the matter further or obtaining additional evidence.
According to Proskauer, 15 months later, PriceWaterhouseCoopers, Overseas Shipholding’s auditor, asked the law firm to recast its legal memorandum as an legal opinion on the “joint and several” issue. At that time, according to the lawsuit, “Edelson finally revealed that OSG had a trove of documents easily accessible in its offices that conclusively demonstrated both that the inclusion of ‘joint and several’ in the credit agreements was intentional and that the intended meaning was ‘guarantor or co-obligor.’”
According to Proskauer’s lawsuit, those documents showed, among other things, that both Overseas Shipholding and its law firm at the time of the 2006 credit agreement, Clifford Chance LLP, “understood and intended for the company’s foreign units to act as guarantors under the 2006 credit agreement.”
“Had Proskauer known about these documents, it never would have reached the conclusion in  that OSG ought to prevail in convincing a court that the credit agreements should not create [a tax] liability,” the lawsuit said.
At that point, Proskauer said the company cut off its relationship with the law firm and handed the matter over to its restructuring counsel, which is Cleary Gottlieb Steen & Hamilton.
“Adding insult to injury,” Proskauer alleged, “OSG’s management then caused OSG to commence a baseless malpractice and breach of duty lawsuit against Proskauer in an attempt to recover OSG’s extensive tax liabilities.”
The Proskauer suit alleges that Edelson and Itkin’s actions constituted fraud and negligent misrepresentation that created “significant legal fees for Proskauer” and damaged the “professional reputations” of Proskauer and the four partners named in the Overseas Shipholding lawsuit.
Proskauer also asked that if it is ultimately found liable for legal malpractice, then Edelson and Itkin should be required to pay any damages on Proskauer’s behalf since, according to the suit, their misrepresentations are the basis for any incorrect advice. – Alan Zimmerman