Yung v. Grant Thornton, LLP
563 S.W.3d 22
Mo. Ct. App.2018Background
- The Yungs (William and Martha Yung and the 1994 William J. Yung Family Trust) purchased Grant Thornton LLP’s (GT) Lev301 tax‑shelter product in 2000 to move $30 million from Cayman corporations into the U.S. allegedly without federal income tax.
- GT marketed Lev301 despite internal doubts and regulatory notices (BOSS, Son‑of‑BOSS, and related Treasury regulations) and provided a "more likely than not" tax opinion and other assurances; GT also omitted material adverse information to the Yungs.
- The Yungs relied on GT’s representations, executed the leveraged distribution, did not report the distributions on 2000–2001 returns, were later audited, assessed taxes/interest/penalties, and settled with the IRS in 2007.
- The Yungs sued GT for fraud, omission, negligence, and sought compensatory and punitive damages; after a bench trial the trial court awarded ~ $20M compensatory and $80M punitive damages.
- The Court of Appeals affirmed liability and compensatory damages but reduced punitive damages to equal compensatory damages; the Kentucky Supreme Court affirmed liability and compensatory damages and reinstated the $80M punitive award.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Liability for fraud (misrepresentation & omission) / justifiable reliance | Yung: GT knowingly misrepresented Lev301’s legality and withheld material facts; Yungs justifiably relied on GT as trusted tax advisor. | GT: Yungs were sophisticated, knew risks and purpose (tax avoidance) and thus could not justifiably rely; opinion’s “>50%” language was a red flag. | Court: Affirmed fraud and omissions; reliance is a fact question and substantial evidence supports the trial court’s finding of justifiable reliance. |
| Recoverability of taxes, interest, and penalties as compensatory damages | Yung: Taxes/interest/penalties were proximately caused by GT’s fraud/negligence and are recoverable to make plaintiff whole. | GT: Tax obligations arise from the Code, not accountant negligence; awarding taxes/interest would create a windfall. | Court: Kentucky adopts case‑by‑case approach; taxes and IRS interest are recoverable if proximately caused by defendant’s wrongful conduct; trial court’s award sustained. |
| Attorney‑client privilege / discovery of outside counsel advice | Yung: Katz Teller’s limited advice was not a substantive second opinion; partial disclosure to IRS does not waive privilege for other communications. | GT: Yungs put Katz Teller advice at issue (implied waiver) and/or waived privilege by disclosing to IRS; discovery should have been compelled. | Court: No implied waiver; limited disclosure resulted in partial waiver only; trial court did not err in denying broader discovery. |
| Punitive damages remittitur and due process (excessiveness) | Yung: GT’s prolonged, intentional deceit justifies substantial punitive award ($80M; 4:1 ratio). | GT: $80M punitive is grossly excessive given large compensatory damages; appellate reduction to 1:1 required. | Court: Performed de novo review under State Farm/BMW; found GT’s conduct highly reprehensible and $80M punitive (4:1) not grossly excessive; reinstated $80M. |
Key Cases Cited
- Flegles, Inc. v. TruServ Corp., 289 S.W.3d 544 (Ky. 2009) (elements and reliance principles for fraud by misrepresentation)
- Hanson v. Am. Nat'l Bank & Trust Co., 865 S.W.2d 302 (Ky. 1993) (reasonable‑reliance as jury/factfinder question)
- State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003) (due‑process guideposts for punitive damages review)
- BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996) (three guideposts for punitive damages: reprehensibility, ratio, comparable penalties)
- TXO Prod. Corp. v. Alliance Res. Corp., 509 U.S. 443 (1993) (limits on punitive damages and comparative analysis)
- Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001) (appellate de novo review requirement for punitive‑damages due‑process analysis)
- DCD Programs, Ltd. v. Leighton, 90 F.3d 1442 (9th Cir. 1996) (taxes as consequential damages discussion in accountant‑malpractice context)
- Alpha I, L.P. v. United States, 93 Fed. Cl. 280 (2010) (explaining role and reliance on "more likely than not" tax opinions)
- Alpert v. Shea Gould Climenko & Casey, 160 A.D.2d 67 (N.Y. App. Div. 1990) (case denying recovery of taxes/interest in a tax‑shelter context; discussed and distinguished)