Alan Parnes, Proskauer Rose partner, and James Edelson, general counsel to Overseas Shipholding Group ()
After its former client sued the firm for malpractice, Proskauer Rose and four of its partners have sued the client’s senior executives, claiming the malpractice suit has harmed the firm’s reputation and led it to incur substantial legal fees (See Complaint).
Proskauer is suing James Edelson, the general counsel to Overseas Shipholding Group (OSG); and Myles Itkin, the company’s former chief financial officer in Manhattan Supreme Court.
The firm and the partners—Alan Parnes, Richard Rowe, Peter Samuels and Steven Weise—claim the executives solicited legal advice from Proskauer based on “materially false and misleading representations.”
Ultimately, OSG filed for Chapter 11 relief in 2012 and a year later sued Proskauer for malpractice, claiming the company expected to have to pay hundreds of millions of dollars in U.S. taxes due to Proskauer’s advice (See Complaint).
Proskauer and the four partners are claiming fraud, constructive fraud, negligent misrepresentation and contribution against the executives. They say they have “suffered tremendous reputational damage as a result of OSG’s meritless [claims].”
OSG, an international energy transportation company, routinely entered into multi-million dollar credit agreements with lenders for itself and its subsidiaries, OSG Bulk Ship (OBS) and OSG International Inc. (OIN), the firm’s suit says.
Proskauer said that in late 2005, OSG retained Clifford Chance to help its in-house counsel, led by Edelson, in negotiating a $1.8 billion unsecured revolving credit agreement.
The agreement, finalized in 2006, provided that OSG and the two subsidiaries were each able to draw down on the credit facility, but the funds were to be provided to the borrowers “on a joint and several basis,” the firm said.
In late 2010, Proskauer said OSG retained it to negotiate a new credit agreement that would provide OSG and the two subsidiaries with a $900 million line of credit when the 2006 agreement expired.
According to Proskauer, Parnes saw an issue with the “joint and several basis” phrase, which was the same language used in the 2006 credit agreement.
If the “joint and several” language meant that OSG and subsidiary OIN were co-obligors of any amounts borrowed under the credit facilities, the subsidiary would have effectively guaranteed OSG’s debts, Proskauer said. Accordingly, the income of subsidiary OIN, which is a foreign operation, would potentiality be taxable to the company and OSG could face “hundreds of millions of dollars of unpaid tax liability” from its 2006 credit agreement.
Parnes informed Edelson of the issue. According to Proskauer, Itkin and Edelson said in discussions with the firm that neither OSG nor the lender of the 2006 credit agreement had intended for the language to make OIN a guarantor of OSG’s obligations.
Proskauer partners told Edelson and Itkin that OSG might have a viable argument against the tax liability if the evidence established that the parties didn’t intend to create a guarantee of OSG’s obligations by subsidiary OIN.
OSG asked Proskauer to look into these arguments and Proskauer was to draft a memorandum laying out its analysis.
Proskauer said it searched its own files relating to the credit agreements it worked on for OSG in 2000 and 2001 to determine the phrase’s intent but could not locate relevant documents.
Edelson told Proskauer that OSG was searching its own files, the complaint said.
“Upon information and belief, OSG was in fact not conducting a search of its documents and Edelson knowingly misrepresented otherwise to Samuels. Edelson knew, and intended, that Proskauer would rely on his false representations,” Proskauer said.
In May 2011, Proskauer provided Edelson and Itkin with a first draft of its memo, which argued that available evidence supported that the parties had not intended to make the OIN subsidiary a guarantor of OSG, according to the firm. In follow-up discussions, Edelson and Itkin did not suggest to Proskauer that the argument’s premises were false, the suit said.
According to Proskauer, Edelson “knowingly deceived” the firm into drafting the memo, “in an attempt to disguise OSG’s enormous tax problem while the company was in the midst of a financially uncertain situation.”
‘Trove of Hidden Documents’
In May 2011, OSG entered into a new credit agreement, but within a few months began preparing refinancing negotiations, Proskauer said. These discussions drew attention to the “joint and several” language in the 2006 credit agreement and the bank lending group expressed concerns about OSG’s potential tax liability, Proskauer said.
“Spurred by its need for liquidity, and with knowledge that its own false representations were a fundamental basis of the Memorandum, OSG drew down the funds that remained in its 2006 credit facility—approximately $340 million,” Proskauer said in its complaint.
Negotiations with the bank lending group broke down, and OSG became focused on a bankruptcy filing. Proskauer was hired as its restructuring counsel.
Around this time, when Proskauer was asked to turn the memo into an opinion, the firm said it learned of a “trove of hidden documents.”
In late October 2012, Samuels, while at OSG’s offices, saw for the first time “numerous documents that wholly undermined Edelson’s and Itkin’s repeated assertions” to Proskauer that the parties to the credit agreements never intended that OIN guarantee OSG’s obligations, the firm said in its complaint.
For example, OSG had a document that “plainly indicates that both OSG and its counsel Clifford Chance understood and intended that OIN be a guarantor of OSG’s debts under that agreement via the ‘joint and several’ structure.”
“Had Proskauer been aware of these documents prior to drafting the Memorandum, it would have materially altered its conclusion,” the firm said. In the end, the firm refused to provide a formal tax opinion.
Also in October 2012, OSG informed the firm that Proskauer would be replaced with new restructuring counsel, and OSG revoked the firm’s access to its offices.
The following month, OSG and 180 of its affiliates, including OIN and OBS, filed for Chapter 11 relief in Delaware bankruptcy court.
About a year after its bankruptcy filing, OSG brought suit against Proskauer and the four partners in bankruptcy court, claiming malpractice and breach of fiduciary duty. OSG claimed, in reliance on Proskauer’s advice, it continued to borrow hundreds of millions of dollars under its credit agreement “under the mistaken assumption it could so without incurring any incremental U.S. income tax liability.”
OSG, in its malpractice suit last November, cited an IRS claim for more than $463 million, “largely based” on the joint and several issue.
Responding to the suit, Proskauer moved for abstention, arguing it should be litigated in New York state court. Delaware Bankruptcy Judge Peter Walsh granted the firm’s abstention motion this month, effectively halting the case there.
In its own lawsuit in New York, Proskauer said it believes OSG intends to file a new action against the firm in another jurisdiction. Proskauer said it has incurred more than $1 million in legal fees in defending against “OSG’s baseless claims” and its legal fees will grow if the company reasserts those claims.
Paul Spagnoletti, a Davis Polk & Wardwell partner representing Proskauer and the partners, said in a statement, “We are very pleased that Judge Walsh has agreed with Proskauer that New York is the most appropriate forum in which to litigate this matter.” He declined to comment further.
Edelson told the New York Law Journal Tuesday he had not yet selected counsel and he declined to comment on the suit. David Kistenbroker, a Dechert partner representing Itkin, did not return a message seeking comment.
Meanwhile, OSG’s attorney in the bankruptcy suit, Michael Busenkell at Gellert Scali Busenkell & Brown in Wilmington, Del., declined to comment. OSG representatives did not return messages seeking comment.