Allan Haley v. Whitman & Ransom

Case type: Legal malpractice
Attorney: Vito A. Costanzo
Law Firm: Holland & Knight
Venue: California Superior Court, Los Angeles County
Side:  Defendant
Trier of fact: Jury
Testimony Issue: Liability and damages
Testimony Date: March 1993 
Case Summary: Plaintiff devised a complex loan transaction purportedly to capitalize a newly created company.  The IRS disallowed the loan, and plaintiff entered into a dispute with the IRS that lasted over ten years.  During this time the tax deficiency increased six-fold due to interest and penalties.  Ultimately the IRS placed a lien on plaintiff’s assets. Early in the dispute plaintiff’s attorney failed to file a timely response to an IRS request for admissions.  Plaintiff contended that, had his attorney not erred, the IRS would have allowed the loan interest deductions.  Plaintiff claimed also that the lien forced him to accept unfavorable financing terms, resulting in excess interest charges and lost earnings. Plaintiff sued his attorney, demanding restitution for the lien and other economic losses.
Testimony summary: Understanding the original loan transaction was central to the attorney’s defense.  Mr. Neches determined the substance as opposed to the form of the loan by analyzing relevant documents, which included loan agreements, financial statements of plaintiff’s company, copies of canceled checks, tax documents and the depositions of plaintiff and his wife. Plaintiff claimed he had funded his business, a wine importing company, with a loan from a business associate.  However, Mr. Neches’  review of the documents revealed critical facts to the contrary.  The same day the original loan was funded, plaintiff returned the borrowed funds to an entity controlled by the business associate.  Purported interest on the loan was borrowed and returned in the same fashion. Mr. Neches testified on defendant’s behalf that this circular flow of funds, along with other aspects of the loan, confirmed that the loan was a sham transaction lacking economic substance.  He testified that the IRS uses this fundamental test to disallow abusive tax deductions.  Therefore, plaintiff would not have “won his case” with the IRS despite the attorney’s error.
Result: The jury found the attorney negligent, but found no liability due to the sham nature of the original transaction.  Mr. Neches had created a simple exhibit depicting the circular nature of the loan.  Interviewed after their decision, jurors said Mr. Neches’ testimony and the exhibit helped persuade them to find no liability. The judgment was affirmed by the Court of Appeal of the State of California, Second Appellate District.