FOURTH DIVI SION March 13, 2008

No. 1-06-2899 BDO SEIDMAN, L

LP, ) Appeal from the ) Circuit Court of Plaintiff -Appella nt, ) Cook County ) v. ) No. 02 CH 10438 ) PETER HARRI S, Ind

ividually and as Ag ent For T

hose ) Persons Subscribing to Insurance Policy No. 9624771 00; ) NICK WARD, I

ndividually and as Ag ent For Those Persons ) Subscribing to Insurance

Policy Nos. 9624772 00 and ) 9624773 00; SYNDICATE 2020 at L loyd's of L ondon ) (Lloy d's ); SYNDICATE 435 at L loyd's; SYNDICATE 510 ) at Lloy d's; SYNDICATE 190 at L loyd's; SYNDICATE ) 702 at Lloy

d's; SYNDICATE 33 at L loyd's; SYNDICATE ) 1207 At Lloy

d's; 839 at Lloy

d's; with all the respect to ) Honorab le the 1999 y

ear of a ccount; L IBE RTY MUTUA

L I NSURANCE ) Richard A. Seibel and COMPANY (UK) LI

MITED; QBE I

NTERNATIONAL ) Honorab le INSU RANCE LIMI

TED; LEXIN GTON I

NSURANCE ) Stuart E. Palmer, COMPANY; a

nd SR INTERNATIONAL BUSI NESS ) Judge s Pres idin g. INSURANCE CO., L TD., ) ) Defend ants-App ellees. ) JUSTICE O'BRI EN delive

red the o pinion of t

he court : Plaintiff , BDO Sei dman, L

LP, br ought a n insuran ce cove rage a ction ag ainst def

endants, the underwriters of plaintiff's professional liability policy, for their f

ailure to indemnify plaintiff agains t a loss all egedly

covere d by

the policy. T

he trial c ourt gr

anted de fendant s' motion

to dismiss count I of plaintiff's fourth amende d complaint that sought indemnification for $16 million of plaintiff's total loss under the policy. Plaintiff appe als pursuant to Supreme Court Rule 304( a) (155 I

ll. 2d R. 304 (a)). We

affirm. Plaintiff is in the pu

blic acc ounting b

usiness a nd provide d tax acco

unting se rvices toNo. 1-06-2899

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James R. Gibson and certain entities controlled by Gibson, spec ifically, SBU, I nc., and related entities ( SBU). SB U had ope rated a s a struc tured-s ettlemen t company

, promising

to assume liabilitie s of defe

ndants in p ersonal -injury

actions, and to provide per sonal-in jury plaintiff s a st rea m o f fu nds bas ed o n t he f ut ure val ue o f th e ob li gat io ns a ss um ed f rom th e de fen dan ts . In exchange for assuming the liabilities of defenda nts in personal-injury ac

tions, SBU received proceeds from the underly ing settlements, which it was supposed to invest in order to provide a

return to the injure d plaintif

fs. SBU's contracts with the personal-injury plaintiffs required that it place the settlement proceeds in trust and invest them only in sa fe United States Treasury instruments, to ensure that they alway

s would be available to cover long-term medica l costs and other expenses. SBU was not required to report the funds as income, as funds invested in g overnment securities qualify for exemption under Internal Revenue Code se ction 130 (26 U.S.C. §130 (1994)). From October 1994 to September 1996, Gibson diverted the funds held in trust and instead invested them in a chain of grocery stores. Prior to doing so, SBU and Gibson sought guidance from

plaintiff . Plaintiff advised t hat Gibson

could use

the funds , but that d

oing so would constitute a taxable event, as the funds no longer would qualify under Internal Reve

nue Code section 130. Plaintiff also advised Gibson that he would have to purchase additional United Sta

tes Trea sury

obligat ions to re place th e liquida

ted Unite d States Tr

easury obligat ions in SBU's clients' trusts. Gibson proceeded to diver t the funds, but failed to report that income to the Internal Revenue Ser

vice. In January

2002, Gibson pleaded guilty to conspiracy to c ommit mail and wire fraud.No. 1-06-2899

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Gibson's conviction was vacated in January 2004, but on remand he was convicted again and resentenced. On April 12, 2002, the United States Attorney c harged plaintiff with misprision of felony, alleg

ing that plaintiff knowingly concealed the felony

fraud of its client, SBU. Plaintiff waived its right to be prosecuted by indictment, and agreed to be prosecuted via a criminal information. The US Attorney' s Office (USAO) and plaintiff ultimately agreed to resolve the USAO investigation through entry of a pretrial diversion agree ment (PTD agreement.) Pursuant to the PTD agreement, prosecution was def erred while plaintiff completed 18 months of supervision. Per the PTD agreement, plaintiff was re quired to cooperate with the government investigation by providing testimony and producing documents. Further, plaintiff agree d to pay $16 million t

o a "fun d established by

the Gove rnment for the victim restitu tion of fo rmer cli ents of SBU." The $16 million represented the amount that Gibson had re ceived from his clients and failed to report as taxable income. The PTD agre ement provided that any unused funds would be "distributed to the United States Postal Inspection Service Consumer Fraud Awareness Fund Account, said monies to be used to support activities which facilitate and support the preve ntion and investigation of frauds against the public." On April 1 2, 2002, pl aintiff a nd the USA O appea

red bef ore the f ederal district c ourt to obtain judicial approval of the PTD agreement. Pursuant ther eto, the parties presented the court with a stip

ulation of facts. I n pertine nt part, the partie s stipulate d as follo ws: "10. Between in or about April and June 1996, partners a nd employees ofNo. 1-06-2899

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[plaintiff's] former St. Louis office prepa red the SBU, Inc. (

Florida) tax return for tax ye ar 1995. I n connection with th e prepa ration of that retu rn, part ners of t he forme r St. L ouis office, including Stephen R. Krause and Douglas Beckmey er, were aware that Gibson and SBU had failed to purchase United States Treasur y obligations for c ertain structured settleme nt trusts a nd that SB U was mak

ing per iodic pay ments to ce

rtain of t hose structured settlement clients. At Gibson's direction, Stephen R. Krause there after listed those settlement funds received as 'liabilities' on the SB U, Inc. (Florida) return for tax year 1995. N o federal tax was paid on those 'liabilities.' Stephen R. Krause f orwarded the prepared tax return to Gibson for filing on June 24, 1996. 11. During in or about October, 1996, partners of the former St. Louis office, including Stephen R. Krause and Douglas B eckmeye r, knew and understood that, in order to financ e the pur

chase a nd opera tion of the

groce ry store ch ain, Gibson and SBU sold United States Treasury

obligations which had been held in certain of SBU' s clients' trusts. Partners in the former St. Louis office , including Stephen R. Krause and Douglas Beckme ye r, also knew and un

derstood that Gibson and SBU

used SBU 's clie

nts' settleme nt funds to

purchas e and ope

rate the groce ry store ch ain instea

d of to pur

chase United Sta

tes Trea sury

obligat ions to fun

d SBU's clients' trusts. 12. Partners in the former St. Louis office , including Stephen R. Krause and Dougla s Beckm ey er, knew and unde rstood tha t Gibson an

d SBU re ceived a

pproximate ly sixteen million dollars ($16,000,000) in settlement funds between October, 1994 and Septembe r, 1996, b ut had not p

urchase d United Sta

tes Trea sury

obligat ions with th eseNo. 1-06-2899

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funds. 13. On or about July 7, 1997, the I nternal Revenue Service (I RS) sent to SBU, Inc. (Florida) , a Notice of Tax Examination for the tax year e nding October 31, 1993 (hereinafter referr

ed to as the 'tax examination'). During the course of that tax examination, the IRS inquired about documents relating to tax y ears 1994 and 1995. 14. During July or Aug

ust, 1997, partners of the former St. Louis off ice, including Stephen R. Krause, Douglas Be ckmeyer , and the managing partner of the forme r St. Louis o ffice, Walt er Knep per, h ad int ernal d iscus sion s conc ernin g Gibso n's and SBU's failure to purchase U nited States Treasury

obligations for certain structured settleme nt clients ' trusts

and the us e of SBU 's clie nts' set tlement f unds and b onds to purchase and operate the g rocery store chain. 15. On or about September 9, 1997, Gibson executed a power of attorney on behalf of SBU, Inc . (Florida) authorizing Stephen R. Krause of BD O to act as the taxpayer repr

esentative in connection with the tax examination described in paragraph 13, above. T he power of attorney

was subse quently

transmitte d to the I

RS. 16. On December 18, 1997, Stephen R. Krause and Gibson discussed the f ailure by Gibson and SBU to purc hase United States Treasury obligations with settlement funds received during 1995 and 1996. Stephen R. Krause informed Gibson that the receipt of those funds would be 100% taxable as income. At that time, Stephen R. Krause knew that Gibson's rec eipt and u se of the funds to pu

rchase and oper ate the g rocery store chain resulted in taxable income to SBU and that SBU and Gibson had failed to report thatNo. 1-06-2899

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income to the IRS. 17. On January 8, 1998, in response to the I RS' December 17, 1997 request for documents, Stephen R. Krause submitted documents in connection with the ongoing tax examination (the 'Submission'). At that time, Krause knew that Gibson had committed a felony in connec

tion with th e tax y

ear 1995 return, to wit, atte mpted tax ev asion, in violation o f Title 26 , United Sta tes Code, Section 72 01. I n that Submi ssion, Kra

use failed to inform the

IRS of informat ion that wa s materia

l to the determinat

ion of inc ome for tax year 1995, i.e. that Gibson had not purchased United States Treasury obligations with settle

ment fund s recei

ved and that Gibson had, inste ad, used those fun ds to purchase and operate the grocer

y stores which we

re not qualified assets under I nternal Revenue Code Section 130." After the district court was presented with the stipulation of facts, plaintiff' s vicechairma n Jack Weisb aum eng aged in the follow

ing coll oquy

with the c ourt: "[THE COU

RT]: I w as *** pre sented th is after noon a stip

ulation of facts consisting of six typewritten pag es. *** [I]t appears that y our signature as vice-chairma n appears on here, that of Jack A. Weisbaum. I s that in fact your sig nature on the stipulation of facts? [MR. WEISBAUM]: It [is], your H onor. [THE COURT]: Very well. *** Do y ou understand the legal parlance of a stipulation of facts, what it means to s ay

that y ou stipula te to facts? [MR. WEISBAUM]: I do, y our Honor.No. 1-06-2899

-7- [THE COURT]: Would y ou tell me j ust gene

rally what y our unde rstandin g is. [MR. WEISBAUM]: My understanding is that based on my information and knowledge that the facts that we are stipulating are true, in fact did occur in the way that they are depicted to have occurred.

*** [THE COURT]: *** What you are telling me is that every thing in here is true. [MR. WEISBAUM]: That is correct, y our Honor. [THE COURT]: And that further means that *** it is unnecessary for the government to prove any

of this because y

ou agree with the gover

nment and indeed you repres ent to the

court an d yo u're a sking the

court to a

ct on that repres entation

that all th

is is true. [MR.WEISBAUM]: That is correct, y our Honor. [THE COURT]: All right. The court finds that the stipulation of facts sets out and recites facts that are facts indee d and that it is unnecessary for the government to prove any of the matter

s contained therein." On Augu st 27, 2003 , the distr ict cour t entere d an orde

r finding that plain

tiff "ha s fully complied with all requirements" of the PTD agre ement. Accordingly , the court dismissed the criminal information with prejudice. The order further ma de clear that "[plaintiff] did not enter a guilty plea in the a

bove-captioned matter, the Court never entere d a judgment of conviction against [plaintiff] in the above-captioned matter and the Court does not do so now." Meanwhile, at all relevant times, plaintiff maintained professional liability insuranceNo. 1-06-2899

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covera ge from defend ants a nd ot her in suran ce comp anies that a greed to parti cipat e in pl ainti ff's professional liability insurance program. Plaintiff paid premiums totaling $4,620,000 to just the primary lay

er of insurers to obtain the benefits of these policies. Defe ndants acted as lead underwr iters and insured p laintiff

under thr ee sepa rate but related policies, while the

excess insurers underwrote specific perce ntages of the total insurance provided and insure d plaintiff under seven separate policies. Plaintiff paid millions more in premiums to the excess insurers for that coverage. Pursuant to the policy lang uage, defendants ag

reed to indemnify pla

intiff up to the specified amounts "against loss, including but not limited to associated expenses" a rising from "any act, error [or] omission" during the provision of professional service s. In the wake of the filing by Gibson's v

ictims of v arious c ivil lawsu its, plaint iff timely advised d efenda nts of the first of t he SBU- related

civil act ions, as w ell as the

additiona l civil lawsu its an d the U SAO's c rimi nal in vesti gation . On Ap ril 17 , 2002 , defen dants denie d cove rage pursuant to a policy exclusion tha t states: "This policy excludes *** [t]o the extent it is uninsurable by law: (a) any cl ai m o r c la im s f

or fi ne s, pe na lt ie s, pu ni ti ve or ex em pl ar y da ma ge s i mp os ed by a judgment or any

other final adjudication." Plaintiff filed an amended complaint against defenda nts on July 1, 2002, seeking damag es and a declaration of coverag e. Defendants filed a motion to dismiss under section 2-619(a)(9) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(9) (West 2004)). On January 12, 2004, the circuit court dismissed in pertinent part a portion of count I of plaintiff's amended complaintNo. 1-06-2899

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relating to indemnification of the $16 million in restitution payments. The circuit court found that New York law governed the pa rties' rights and obligations. The court de nied coverage under the public policy of New Y ork beca

use it fou nd that the

$16 million was a "pu

nitive pa yme nt" and "criminal restitution." Plaintiff subsequently filed a four th amended complaint. In count I , plaintiff reasserted the allegations that it was entitled to indemnification of the $16 million. On October 3, 2006, the circuit c ourt issue d its writte n order d ismissing with prej udice co

unt I o f plaintif

f's fou rth amended complaint. The court stated that the January 12, 2004, order and the October 3, 2006, order were "now final and immediate ly appeala ble and there is no just reason for delay ing either enforc ement or

appeal. " Plaintif

f filed th is timely appeal. A dismissal under section 2-619(a)(9) resembles the g rant of a motion for summary judgment. Van Meter v. Darien Park District , 207 Ill. 2d 359, 377 (2003). I n reviewing such a dismissal, the cour

t conside rs whethe r the existe

nce of a genuin e issue of

materia l fact sho uld have precluded the dismissal or whether, absent an issue of material fact, dismissal was proper as a matter of law. Van Meter , 207 I ll. 2d at 37 7-78. Rev iew is de novo . Van Meter , 207 Ill. 2d at 377. A dismissal order may be a ffirmed "if it is justified in the law for any reason or ground appear ing in the record regar dless of w

hether t he parti cular r

easons given by

the trial court, or its specific fin dings, are correct or sound." Natural Gas Pipeline Co. of America v. Phillips Petroleum Co. , 163 Ill. App. 3d 136, 142 (1987). In the present case, th e partie s agre e that Ne w York la w is contr olling, a nd that Drexel Burnham Lamber

t Group, Inc. v. Vigilant I nsurance Co. , 595 N.Y.S.2d 999, 157 Misc. 2d 198No. 1-06-2899

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(1993) sets forth the applicable New York public policy . Investment bank Drexel Burnha m sought insurance coverag e after pleading guilty to mail and securities fraud and pay ing $650 million in criminal and civil penalties stemming from the illegal acts of its employ ees. Drexel Burnham , 595 N.Y.S.2d at 1010, 157 Misc. 2d at ___. In finding for the insurers, the court held: "It is long st anding public pol icy

that 'no one shall be permi tted to pro fit by

his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire prope rty by his own crime.' [Citation.] It is basic law that when parties are in particeps criminis , t he re is to be no in de mn if ic at io n f or a c ul pa bl e p ar ty. [Citation.]

*** Indemnification from insurers for admitted criminal conduct cannot be permitted. [It is] barred by considerations of public p olicy." Drexel Burnham , 595 N.Y.S.2d at 1010, 157 Misc. 2d at ___. In the present case , as discussed above, the USAO charge d plaintiff with misprision of felony under

18 U.S.C. §4 (1994), alleging that plaintiff knowingly concealed the felony

fraud of its client , SBU. The

misprision

statute pr ovides: "Misprision of felony Wh oe ve r, ha vi ng kn ow le dg e o f t he ac tu al co mm is si on of a f el on y co gn iz ab le by a court of the United States, conceals and does not as soon as possible make known the

same to so me judge

or other person in civil or mi litary

authority under the United Sta

tes, shall be fined under this title or imprisoned not more than three y ears, or both." 18No. 1-06-2899

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U.S.C. §4 (1994). As discussed, in response to the charge of misprision of fe lony, the parties ente red into a PTD agreement deferring prosecution. The parties also stipulated: that plaintiff was aware of SBU's fraud relating to SBU 's use of clients' settlement funds to purchase a nd operate a grocery store chain instead of to purchase United States Treasur y obligations; that plaintiff knew tha t the receip t and use o f the fun ds to purchase and

operate the gro cery

store ch ain resu

lted in taxa

ble income to SBU and t

hat SBU a

nd Gibson had faile d to repor t that income to the I

RS; and tha

t in January 1998, pla intiff re sponded to

an I RS reques t for doc

uments, bu

t failed t o report therein that Gibson had committed attempted tax evasion by investing the se ttlement funds in grocery stores instead of United States Treasury instruments. Plaintiff's vice-chairman expressly affirmed the stipula

tion of fa cts in ope n court. Taken together, the stipulation of facts pursuant to the PTD ag reement shows that plaintiff engaged in conduct whic h constituted misprision of felony by knowingly c oncealing the felony fra ud of its client, SBU. Under New York public policy, as set forth in Drexel Burnham , indemnification for such criminal conduct is barred by public policy. Plaintiff contends that the conduct admitted in the stipulation was not plaintiff's, but rather only tha

t of plaintiff's St. Louis office. Plaintiff' s contention is without merit, where the PTD agreement states that it was executed based on plaintiff' s "accepting responsibility for your [plaintiff's] behavior as set forth in the 'Stipulation of Facts' a nd by y our authorized signature on this Agr eement. " Moreover, the

district c ourt aske d plaintif f's vic e-chai

rman, Mr . Weisbaum , "What I want to be

sure, tho ugh, fr om you while y

ou are he re, do y ou under stand tha

t, first of all,No. 1-06-2899

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you are binding

*** in this case BDO Seidman, LL P?" Mr. Weisbaum responded, "I do, y our Honor." Accord ingly , we aff

irm the Janu

ary 12, 2004, a

nd Octobe

r 3, 2006, dismissal o

rders. Affirmed. NEVIL LE, P.J., and MURPHY, J., concur.