The Massachusetts Court of Appeals, located in Boston, affirmed summary judgment in favor of an attorney in a legal malpractice case. In Scanlon v. Dukess, a real estate investor sold a property in Brockton, Massachusetts and sought to purchase a replacement property in order to defer capital gains tax on the sale, which is permitted by federal statute 26 U.S.C. § 1031 and is known as a ‘1031 exchange’.
Under that statute, the investor had to identify to the IRS possible replacements within 45 days of the sale of the Brockton property and then complete the purchase within 180 days. The investor listed three properties, but only one in Taunton, which was leased by a drugstore, qualified for a 1031 exchange.
After the 45 days had passed, the investor consulted his long time attorney about the purchase of the Taunton property. The attorney advised him that he would have to assume the existing lease, but failed to inform him that the lease did not contain a condemnation clause, which would prevent the drugstore from sharing in the proceeds of an eminent domain taking. The investor purchased the property on the final day of the 180 day period.
Over one year later, the Commonwealth of Massachusetts took the property by eminent domain. After four and one half years of litigation with the state and the drugstore, the parties settled on a final award, and the investor was paid, but the drugstore took a portion of the monies, as permitted under the lease.
The investor then filed a legal malpractice action against the attorney, claiming that he negligently failed to inform him of the provisions of the lease. The investor sought damages, including the amount the drugstore received, and his attorney’s fees and costs from the litigation with the drugstore. The attorney successfully moved for summary judgment and the investor appealed.
The Massachusetts Appeals Court affirmed. The investor claimed that he would have purchased a different property, had the attorney advised him about the lack of a condemnation clause. However, under § 1031, the investor could only purchase the properties identified within the 45 day period, and since he retained the attorney after this period had elapsed, he could not show that the attorney’s conduct caused his damages. Therefore, the malpractice claim failed as a matter of law.
Decision: Scanlon v. Dukess