More than 25 years ago, an Iowa man was lucky enough to win $3 million in his state’s lottery.
But that’s where John Flanery’s good fortune ended.
Flanery later consulted with a tax lawyer in Connecticut, who advised him to sell his winnings, which were to be paid out in annual installments, to a financing company that offered a lump-sum payment. The lawyer incorrectly advised Flanery of the tax consequences of such a transaction, and he ended up with the Internal Revenue Service at his door, demanding $163,523.
Flanery eventually sued the lawyer, the law firm and the financing company. But when he realized the full extent of his damages, five years had passed. That was a problem, since many lawsuits are supposed to be filed within three years.
After nine years in the court system, the unusual case made its way up to the state Supreme Court, where a narrow, 4-3 majority ruled on June 16 that the statute of limitations had, in fact, expired on Flanery’s attempted suit.
“I think the court’s decision in effect creates a roadmap for how you can use a fiduciary to accomplish fraud,” said Flanery’s lawyer, Thomas Willcutts, of the Willcutts Law Group in Hartford. “Where people have their guard up against salespeople, the law is different for fiduciaries. People trust fiduciaries.”
Flanery’s tale begins in 1988 when he won $3 million in an Iowa state lottery drawing. Payment was to be received in 20 annual installments of $150,000. In the year following Flanery’s big win, Singer Asset Finance Co. and other similar businesses attempted to persuade him to sell his installment payouts for a lump-sum payment. Flanery initially declined.
Then in early 1999, Singer formed a business relationship with attorney Glenn MacGrady, whose practice included offering what he touted as “independent” professional advice to lottery winners. But even the Supreme Court justices conceded that the arrangement was “tainted by a conflict of interest.”
Specifically, MacGrady had a business relationship with Singer and he would try to get lottery winners to accept the company’s offer. He did this by telling Flanery and others that they could avoid an annual tax on the winnings if they accepted the lump-sum payment and treated it as a one-time sale of a capital asset.
“This was particularly alluring to a person like Mr. Flanery, whose family are generations of farmers in Iowa,” said Willcutts. “They know the preferential treatment of capital assets like land. This is something that resonates with him, so this caught his interest. What he didn’t know was that this tax expert was part of [Singer's] sales team.”
On March 23, 1999, Flanery entered into a retainer agreement with MacGrady’s firm, Hartford-based Pepe & Hazard, which a few years ago merged with McElroy, Deutsch, Mulvaney & Carpenter. The agreement said MacGrady and the firm would represent Flanery in his sale of his installment payments and that their attorney-client relationship would end when their services pertaining to the sale were complete.
By June 1999, on MacGrady’s advice, Flanery had entered into a contract with Singer stating that he would sell his remaining eight installment payments totaling $1.2 million for a discounted lump-sum payment of $868,500.
In September 1999, Pepe & Hazard sent Flanery a final bill of sale. Flanery later filed his 1999 tax return listing the full lump-sum payment as the proceeds of a sale of a capital asset. In October 2002, the IRS told Flanery it did not agree with his interpretation of the tax laws and said he owed them $163,523.
Flanery then contacted MacGrady, who was no longer with Pepe & Hazard. MacGrady defended his tax advice and encouraged the Iowa man to join his group of similarly situated lottery winners who were challenging the IRS’s treatment of their lump-sum payments. Flanery joined the group, but the appeal was unsuccessful.
Throughout this entire ordeal, Flanery claimed that MacGrady never revealed his business relationship with Singer. In 2005, Flanery hired Willcutts as his new attorney and they sued Singer, MacGrady and Pepe & Hazard. The law firm and finance company were accused of aiding and abetting in MacGrady’s breach of fiduciary duty and all three defendants were accused of Connecticut Unfair Trade Practices Act violations.
In June 2009, the trial court dismissed the lawsuit. The court said the three-year statute of limitations began to run in September 1999, when the attorney-client relationship ended after the final bill of sale was sent out, and expired in September 2002.
It wasn’t until October 2002 that Flanery contacted MacGrady about the poor tax advice.
But Willcutts argued that the continuing course of conduct doctrine should apply. In other words, he said, since the IRS problems arose from the attorneys’ earlier actions, the statute of limitations should have been extended. He appealed the trial court ruling, but the state Appellate Court ruled that the continuing course of conduct doctrine does not apply to CUTPA claims. Willcutts appealed again and the Supreme Court agreed to take up the case. But it, too, rejected Willcutts’ argument.
“MacGrady’s original wrongdoing ceased in September 1999 after the plaintiff sold his lottery winnings to the defendant and MacGrady’s representation of the plaintiff, and any conflict of interest due to MacGrady’s simultaneous representation of [Singer Asset] ended,” wrote Chief Justice Chase Rogers. “Accordingly, when MacGrady resumed his presumably wrongful course of conduct in October 2002, more than three years later, when he advised the plaintiff to join a tax appeal group, the three-year statutes of limitations already had run.”
Retired Justice Flemming Norcott Jr. penned a dissent that was joined by Justices Dennis Eveleigh and Carmen Espinosa.
“[MacGrady's] statement in 1999 that he would assist the plaintiff were he to run into tax trouble with the IRS in the future operated to cultivate the very fiduciary relationship that he ultimately breached with his conflict of interest; this had the effect of creating a continuing course of conduct that extended the statute of limitations in this case,” wrote Norcott.
Eliot Gersten, of Pullman & Comley, who represented Singer in this case, said he was happy with the ruling.
“Our clients are pleased to have this case over with after nine years,” said Gersten. “The court’s decision dismissing the case based upon a statute of limitations defense was fair, although my client denied all the material facts.”
Willcutts said he previously settled his case against Pepe & Hazard out of court but declined to reveal the terms of the agreement.
He said his client is now 75 years old and was forced to sell some farmland that his family had owned for more than a century after the tax problems surfaced. Willcutts said it is a common story of lottery winners to lose a majority of their winnings after bad investments and the tax consequences are factored in.
With regard to the law, Willcutts called the ruling a “dangerous precedent.”
“It seems to defeat the purpose of having special rules that attach to fiduciaries,” said Willcutts. “Normally, a fiduciary has a duty of loyalty, candor and full disclosure. The whole idea is you’re supposed to be able to trust the fiduciary. If the fiduciary hides something from you, he [shouldn't be able] to use the statute of limitations to hide behind responsibility.”
Anthony Minchella, of Minchella & Associates in Middlebury, focuses part of his practice on CUTPA cases. Minchella said he agrees with the dissenting justices’ view and thinks that jury should have had an opportunity to decide the case.
“I think the fact the lawyer may have been able to remedy the wrong by advising his client to file an amended return within three years of filing should have allowed tolling to apply to the aiding and abetting the breach of fiduciary duty claim,” said Minchella. “It seems clear Singer set the arrangement up to specifically take advantage of the fiduciary relationship the lawyer had with the plaintiff. Funny how the lack of that special relationship between Singer and the plaintiff allowed [Singer] to walk away scot-free.”•