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NEW YORK � Davis Polk & Wardwell did not commit legal malpractice in its handling � ultimately successfully � of a longstanding federal tax case for AmBase Corp. and is entitled to a fee of more than $1.4 million, the New York Court of Appeals ruled unanimously Thursday. Davis Polk was retained in 1992 to represent AmBase in a dispute over about $20 million in federal withholding taxes the Internal Revenue Service sought from the company for 1979 through 1985. In May 2001, the U.S. Tax Court ruled that AmBase owed none of the money sought by the IRS. Though it won the tax case, AmBase balked when Davis Polk submitted a bill for a $1,424,104 “success fee” that was provided for in the retainer agreement between the company and the firm. The fee was calculated at 150 percent of Davis Polk’s billed time, subject to a $2 million cap. AmBase filed a legal malpractice claim and sought to have Davis Polk return previously paid legal fees. It contended that Davis Polk should have informed the company sooner that it did not appear AmBase would be liable for any of the taxes sought by the IRS. AmBase argued that its financial condition was weakened, and its economic opportunities were limited, because it had to carry a large loss reserve for years on the possibility that it could lose the tax case. Both Manhattan Supreme Court Justice Louis York and the Appellate Division, 1st Department, in AmBase Corporation v. Davis Polk & Wardwell, 30 A.D. 3d 171, 172 (2006), dismissed the complaint. Both lower courts, like the Court of Appeals on Thursday, found AmBase’s contention that it suffered from the lack of earlier notice it was probably off the hook for the tax bill “purely speculative” and an insufficient basis for a legal malpractice claim.
AmBase balked when Davis Polk submitted a bill for a $1,424,104 ‘success fee’ that was provided for in the retainer agreement between the company and the firm.

In AmBase Corp. v. Davis Polk & Wardwell, 51, Judge Carmen Beauchamp Ciparick wrote Thursday that Davis Polk “exercised the ordinary reasonable skill and knowledge commonly possessed by a member of a legal profession” as established under McCoy v. Feinman, 99 N.Y. 2d 295, 301-302 (2002). Judge Ciparick wrote that AmBase carried the loss reserve for years before it retained Davis Polk and that Davis Polk told the company after reviewing the case that AmBase had a “very strong case” and it would probably not face tax liability. The court also dismissed AmBase’s argument that it was denied due process under the federal and state constitutions when Justice York ordered it to pay the “success fee” without a separate proceeding for the recovery of a money judgment. AmBase’s attorneys never requested a hearing to determine the reasonableness of how the fee was calculated, Ciparick noted. She wrote that the court would not decide the question in the AmBase case of whether a legal malpractice claim is precluded in New York by virtue of a plaintiff winning a complete victory in the action that underlies the claim. Joel Stashenko is a reporter with the New York Law Journal, a Recorder affiliate.

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