Court Opinion

ID: 3173522
Source: CourtListenerOpinion
Date Created: 2016-01-29 17:03:37.471487+00
Date Added: 2024-06-11T11:59:45.891445
License: Public Domain

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                           Illinois Official Reports                         Reporter of Decisions
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                                                                             accuracy and integrity of
                                                                             this document
                                   Appellate Court                           Date: 2016.01.27 11:27:51
                                                                             -06'00'

                  Lane v. Deutsche Bank, AG, 2015 IL App (1st) 142968

Appellate Court       R.J. LANE, Plaintiff-Appellant, v. DEUTSCHE BANK, AG, and
Caption               BDO SEIDMAN, LLP, n/k/a BDO USA, LLP, Defendants-Appellees.

District & No.        First District, Third Division
                      Docket No. 1-14-2968

Filed                 November 4, 2015

Decision Under        Appeal from the Circuit Court of Cook County, No. 14-L-39; the Hon.
Review                Eileen O’Neill Burke, Judge, presiding.

Judgment              Affirmed.

Counsel on            Lewis & Roberts, PLLC, of Charlotte, North Carolina (Gary V.
Appeal                Mauney and James A. Roberts III, of counsel), and Law Offices of
                      Michael T. Reagan, of Ottawa (Michael T. Reagan, of counsel), for
                      appellant.

                      Taft Stettinius & Hollister LLP, of Chicago (J. Timothy Eaton and
                      Jonathan Amarilio, of counsel), and Duval & Stachenfeld LLP, of
                      New York, New York (Allan N. Taffet and Keith Blackman, of
                      counsel), for appellee Deutsche Bank, AG.

                      DLA Piper LLP, of Chicago (Michael S. Poulos, Joseph Collins, Raja
                      Gaddipati, and Pamela Begaj, of counsel), DLA Piper LLP, of
                      Philadelphia, Pennsylvania (Joseph Kernen, of counsel), DLA Piper
                      LLP, of New York, New York (Cary B. Samowitz, of counsel), and
                      DLA Piper LLP, of Baltimore, Maryland (James D. Mathias, of
                      counsel), for appellee BDO USA, LLP.
     Panel                    PRESIDING JUSTICE MASON delivered the judgment of the court,
                              with opinion.
                              Justices Lavin and Pucinski concurred in the judgment and opinion.

                                               OPINION

¶1         In January 2014, plaintiff R.J. Lane filed a complaint against defendants Deutsche Bank
       and BDO Seidman (collectively, defendants), among others, alleging fraud, civil conspiracy,
       and breach of fiduciary duty. These allegations arose from defendants’ promotion of an
       illegitimate tax shelter in which Lane invested in October 2000. Defendants moved to dismiss
       the complaint on the ground that Lane’s claims were time-barred. The circuit court agreed, and
       Lane appeals. We agree that Lane’s claims are time-barred and affirm.

¶2                                           BACKGROUND
¶3         Lane is a former president and chief operating officer of a computer software company. In
       2000, Lane exercised certain stock options in that company and realized $250 million in
       ordinary income. In his complaint, Lane alleges that in an effort to “manage and account for
       that income,” he consulted BDO Seidman, his longtime accounting firm. BDO Seidman’s Tax
       Solutions Group helped clients minimize taxes on income by creating structured investment
       strategies in partnership with Deutsche Bank. One such strategy was known as Partnership
       Option Portfolio Securities (POPS).
¶4         Michael Kerekes, Lane’s point of contact at BDO Seidman, allegedly advised Lane that the
       POPS strategy utilized trades and warrant investments that carried a reasonable probability of
       profit, but would more than likely result in losses that could be deducted from his income for
       tax purposes. In support of the legality of this strategy, Kerekes provided Lane with an opinion
       letter authored by Peter Cinquegrani, an attorney with the Washington, D.C., office of Arnold
       & Porter. Cinquegrani’s letter indicated that POPS met legal standards to produce tax benefits
       and could withstand a challenge by the federal government. Kerekes advised Lane that
       Cinquegrani’s letter would protect Lane in the event of an IRS investigation and prevent any
       assessment of penalties because Arnold & Porter was not affiliated with either BDO Seidman
       or Deutsche Bank.
¶5         Based on these representations, Lane elected to participate in the POPS shelter in October
       2000. He acquired a 99% interest in Vanadium Partners Fund, LLC, the entity through which
       the losses would flow, and guaranteed a $250 million loan Deutsche Bank had made to
       Vanadium. Vanadium and Deutsche Bank went on to execute hundreds of trades, and the
       losses that resulted were assigned to Lane. Lane also made an initial investment of $18 million,
       which he was told would go toward warrants for various start-up companies.
¶6         Lane, believing in the legitimacy of the tax shelter, then filed a 2000 tax return (prepared
       by BDO) claiming over $249 million in losses from the POPS transactions. In doing so, he
       avoided paying taxes on $250 million in income at a 35% rate, resulting in $87.5 million in tax
       savings. Although he lost his initial $18 million POPS investment, he realized, at least
       temporarily, a net gain of $69.5 million.
¶7         Unbeknownst to Lane, however, defendants had misrepresented many elements of the
       POPS strategy. First, Arnold & Porter was not acting independently, but was working with

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       BDO Seidman and Deutsche Bank to promote POPS. Furthermore, Lane’s guarantee of the
       loan to Vanadium was riskless, as Deutsche Bank retained sufficient collateral in the event
       Vanadium defaulted on the loan, and Lane’s $18 million investment went not to start-up
       companies, but to BDO Seidman, Deutsche Bank, and Arnold & Porter as a fee for arranging
       the tax shelter. Finally, the POPS transactions, rather than conveying a reasonable probability
       of profit, were rigged to result in a loss.
¶8          The POPS shelter had also come under scrutiny by the IRS at the time Lane elected to
       participate. On August 11, 2000, the IRS issued Notice 2000-44, which warned that
       “artificially high basis” transactions were “not allowable for federal income tax purposes” as
       they lacked economic substance because they did not correspond to actual economic losses.
       Upon receipt of the notice, Kerekes immediately sent a memorandum to others in BDO
       Seidman’s Tax Services Group in which he concluded that the firm’s POPS strategy fell under
       those disallowed under the notice.
¶9          In January 2002, two years after Lane filed his tax return claiming $250 million in losses,
       the IRS announced an amnesty program for taxpayers who admitted involvement in shelters
       akin to POPS. Specifically, the IRS offered taxpayers who disclosed their involvement with
       certain illegal shelters the opportunity to avoid paying penalties for underpayment of taxes.
       Kerekes provided Lane with a copy of the amnesty announcement, but allegedly downplayed
       its significance and represented to Lane that the POPS shelter was not among those the IRS
       found to be illegal. Lane heeded Kerekes’s advice not to seek amnesty.
¶ 10        Several months later, in May 2002, the government initiated an action in the United States
       District Court for the Northern District of Illinois to enforce summonses that were served on
       BDO Seidman as part of an investigation into whether BDO Seidman promoted illegal tax
       shelters. During the course of that action, in October 2002, Lane and other BDO Seidman
       clients intervened anonymously to prevent the disclosure of their identities. The district court
       ruled against them and held that the identities of BDO Seidman’s clients were not privileged.
       The court further ordered BDO Seidman to notify its clients of the investigation and give them
       an opportunity to intervene. Lane took advantage of this opportunity in June 2004 and sought
       to block the disclosure of opinion letters and correspondence he received from BDO Seidman
       offering tax advice.
¶ 11        Meanwhile, the government moved to order the disclosure of the memorandum Kerekes
       authored in August 2000 in response to Notice 2000-44. Although the court ultimately ruled in
       favor of BDO Seidman and found the Kerekes memorandum privileged, the contents of the
       memorandum were quoted in large part in the government’s motion filed in December 2004.
       Specifically, the government quoted Kerekes as follows: “It seems clear that our transactions
       are listed transactions under Notice 2000-44. In addition, under the new definition, it seems
       very probably [sic] that our transactions lack economic substance and/or are tax-structured.”
¶ 12        In 2005, the IRS informed Lane that it was auditing Vanadium’s 2000 tax return. And in
       the ensuing years, several of those involved in promoting the POPS shelters pled guilty to
       criminal charges, beginning with Cinquegrani in September 2008. According to Lane’s
       complaint, Cinquegrani admitted to participating in a conspiracy to defraud the IRS by
       authoring “bogus” tax opinions and entering “phony” consulting agreements with other tax
       shelter promoters. Then, in February 2009, Kerekes pled guilty to carrying out illegal shelters,
       admitting that he prepared fraudulent documents to deceive the IRS about the nature of BDO
       Seidman’s tax shelter strategies. Six months later, Robert Greisman, a partner at BDO

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       Seidman, pled guilty to the same, acknowledging that he knew the tax shelter transactions had
       no reasonable profit potential.
¶ 13       On January 31, 2013, the IRS issued a notice of deficiency to Lane informing him that the
       $250 million loss he claimed on his 2000 tax return was disallowed and that he was obligated
       to pay back taxes, interest and a penalty. Lane settled with the IRS in December 2013 and filed
       this action against defendants on January 3, 2014.
¶ 14       With respect to BDO Seidman, Lane alleged breach of fiduciary duty, fraud, and civil
       conspiracy. Lane further alleged that Deutsche Bank aided and abetted BDO Seidman’s breach
       of fiduciary duty and fraud and also participated with BDO Seidman in a civil conspiracy. The
       circuit court granted defendants’ motion to dismiss the complaint on the ground that it was
       time-barred, and Lane timely appeals.

¶ 15                                             ANALYSIS
¶ 16        Plaintiff’s sole contention on appeal is that the circuit court erred in dismissing his claims
       as untimely pursuant to section 2-619(a)(5) of the Code of Civil Procedure. 735 ILCS
       5/2-619(a)(5) (West 2014). A motion to dismiss under section 2-619 admits the legal
       sufficiency of the plaintiff’s complaint, but asserts an affirmative defense or other matter that
       defeats the claim. Patrick Engineering, Inc. v. City of Naperville, 2012 IL 113148, ¶ 31. We
       accept as true all well-pleaded facts in the plaintiff’s complaint and draw reasonable inferences
       from those facts in favor of the plaintiff as the nonmoving party. Chicago Title Insurance Co.
       v. Teachers’ Retirement System, 2014 IL App (1st) 131452, ¶ 13. Our review of a dismissal
       order under section 2-619 is de novo. Solaia Technology, LLC v. Specialty Publishing Co., 221
Ill. 2d 558, 579 (2006).
¶ 17        We begin by setting forth the statutes of limitation applicable to Lane’s claims against
       Deutsche Bank and BDO Seidman. Lane’s claims against Deutsche Bank, as “civil actions not
       otherwise provided for,” were required to be brought “within 5 years next after the cause of
       action accrued.” 735 ILCS 5/13-205 (West 2014). And Lane’s causes of action against BDO
       Seidman, a public accounting firm, are subject to a two-year statute of limitations, beginning
       from the time plaintiff “knew or should reasonably have known” of BDO Seidman’s acts or
       omissions in performing professional services. 735 ILCS 5/13-214.2(a) (West 2014).
¶ 18        As is apparent, the statutes differ not only in their length, but in their start dates. Section
       13-205 provides that the limitations period commences when the cause of action “accrues,” or
       when “facts exist that authorize the bringing of a cause of action.” Khan v. Deutsche Bank AG,
       2012 IL 112219, ¶ 20. A tort cause of action, for example, accrues when the elements of duty,
       breach, causation, and injury are present. Id.; see also Hermitage Corp. v. Contractors
       Adjustment Co., 166 Ill. 2d 72, 77 (1995) (tort causes of action generally accrue when plaintiff
       suffers injury). Section 13-214.2(a), on the other hand, implicates the so-called “discovery
       rule,” postponing the start of the limitations period until plaintiff knows or reasonably should
       know that he was injured and that his injury was wrongfully caused. Dancor International, Ltd.
       v. Friedman, Goldberg & Mintz, 288 Ill. App. 3d 666, 672-73 (1997).1

           1
            This is not to say that claims subject to the limitations period under section 13-205 may never
       receive the benefit of the discovery rule. To the contrary, the rule may be invoked to mitigate the
       potentially harsh results of a mechanical application of the five-year limitations period (Khan, 2012 IL
112219, ¶ 20), but in contrast to section 13-214.2, the rule is not built into the statute.

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¶ 19       Resolution of the timeliness issue thus requires us to determine both when Lane’s claims
       accrued (when Lane was injured) and when they were discovered (when Lane was on notice of
       his injury). Lane argues that his claims accrued on January 31, 2013, with the IRS’s issuance of
       the notice of deficiency, and prior to that time there was no cause of action for him to discover.
       In other words, he maintains that the date of accrual was concurrent with the date of discovery.
       For this proposition, Lane relies almost exclusively on our supreme court’s decision in Khan,
       2012 IL 112219.
¶ 20       In Khan, plaintiffs paid defendants $1 million in 1999 and 2000 to participate in tax
       shelters they later discovered were illegitimate. Id. ¶ 23. The IRS began auditing plaintiffs’
       1999 and 2000 tax returns in May 2003, but plaintiffs did not file suit against defendants until
       nearly 10 years later, in 2009, after receiving a notice of deficiency from the IRS. Id. ¶¶ 1-3,
       27. Plaintiffs argued that the discovery rule tolled the statute where defendants affirmatively
       misled them as to the legality of the tax shelter strategies. Id. ¶¶ 24-25. Specifically, plaintiffs
       alleged that defendants provided them with opinion letters from a purportedly independent law
       firm which stated that the IRS Notice 2000-44 was “ ‘more likely than not legally
       inapplicable’ ” to the tax shelter strategies in which plaintiffs had participated. Id. ¶ 25.
       Moreover, plaintiffs alleged that defendants advised them not to participate in the IRS’s 2000
       amnesty program. Id. ¶¶ 25-26. Defendants responded that the statute began to run in 1999 or
       2000 with plaintiffs’ $1 million fee payment or, at the latest, by May 2003, when plaintiffs
       hired independent counsel to represent them in the IRS audit. Id. ¶¶ 23, 27.
¶ 21       The supreme court agreed with defendants that “a portion” of plaintiffs’ injuries occurred
       in 1999 and 2000 with the payment of the $1 million fee, but held that plaintiffs could not have
       known their injuries were wrongfully caused at that time due to defendants’ acts of
       concealment. Id. ¶¶ 25-26. The court went on to grapple with and reject the May 2003 start
       date, stating: “As of May 2003, no injury had occurred. Plaintiffs had filed their tax returns and
       claimed tax losses based on the options transactions. At that point, they had received the
       promised tax benefits. Further, plaintiffs alleged in their complaint that they had been assured
       by some of the alleged coconspirators that the IRS notices did not apply to them.” Id. ¶ 42.
       Again, the court held that because defendants concealed the negative tax consequences of
       participating in the shelters–i.e., the other “portion” of plaintiffs’ injury–the statute remained
       tolled as of May 2003. See id. Ultimately, the court concluded that plaintiffs could not have
       discovered that their injuries were wrongfully caused until the IRS served them with a notice of
       deficiency. Id. ¶ 45.
¶ 22       Lane reads Khan as setting forth a bright-line rule that any cause of action by a taxpayer
       suing as a result of a deficiency notice accrues when the taxpayer receives the notice of
       deficiency. Not so: the court in Khan did not consider when plaintiffs’ cause of action accrued,
       but when it was discovered. Id. (“[T]he discovery rule applies in this case.”). Indeed, the
       supreme court did not hold that plaintiffs’ injury first occurred with the receipt of the
       deficiency notice, but that the deficiency notice put them on notice of an injury and its
       wrongful cause. Id. And although the supreme court did not specify when plaintiffs’ causes of
       action accrued, it can be inferred that accrual occurred sometime before receipt of the notice of
       deficiency. Were it otherwise, plaintiffs would not have required the benefit of the discovery
       rule, because without accrual of the cause of action, there was nothing for plaintiffs to discover
       prior to receipt of the notice of deficiency. See id. ¶ 41 (quoting MC Baldwin Financial Co. v.
       DiMaggio, Rosario & Veraja, LLC, 364 Ill. App. 3d 6, 22 (2006)).

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¶ 23       Since we determine that Khan did not set forth a bright-line rule for statute of limitations
       purposes, we turn to a fact-specific analysis of Lane’s claims to determine both the date of
       accrual and the date of discovery. See Hermitage Corp., 166 Ill. 2d at 78 (discovery rule
       applies on case-by-case basis). With regard to the date of accrual, Lane’s claims of fraud,
       breach of fiduciary duty, and civil conspiracy are all premised on the same general
       allegations–namely, that defendants knowingly misrepresented the legitimacy of the POPS
       shelter, which induced Lane to pay “substantial fees” and resulted in tax penalties and
       disallowance of tax deductions. There is no dispute that these knowing misrepresentations of
       fact and breaches of duty occurred in 2000, when defendants worked to convince Lane to
       invest in POPS. “A portion” of Lane’s injury also occurred at this time, when he invested $18
       million to participate in POPS only to later learn the investment constituted a total loss. See
       Khan, 2012 IL 112219, ¶¶ 25-26 (holding that plaintiffs were injured upon payment of $1
       million fee to defendants to participate in tax shelter later disallowed by IRS).
¶ 24       To be sure, Lane’s tax-related injuries did not occur until years later, but Lane was not
       required to know the “full extent” of his injury before the statute of limitations was triggered.
       Id. ¶ 22 (quoting Golla v. General Motors Corp., 167 Ill. 2d 353, 364 (1995)). Instead, the
       statute begins to run “when the plaintiff is injured, rather than when the plaintiff realizes the
       consequences of the injury or the full extent of her injuries.” Golla, 167 Ill. 2d at 364. Thus,
       Lane’s causes of action accrued in 2000 or 2001, when he learned that his $18 million
       investment was lost.
¶ 25       We turn then to the second part of the analysis, that is, when Lane should have known this
       loss was wrongfully caused. Ordinarily, the trier of fact is in the best position to determine
       when a plaintiff knew or should have known of his injury and its wrongful cause, but when the
       facts are undisputed and only one conclusion emanates from those facts, we may decide this
       question as a matter of law. Nolan v. Johns-Manville Asbestos, 85 Ill. 2d 161, 171 (1981).
¶ 26       Lane, just as the plaintiffs in Khan, was not immediately aware that his $18 million loss
       was an injury wrongfully caused. Indeed, he too alleged in his complaint that defendants
       concealed his injury by informing him in 2002 that the IRS offer of amnesty to those who
       participated in illegal tax shelters did not apply to POPS participants. But unlike the Khan
       plaintiffs, events occurring after this act of concealment were sufficient to put Lane on notice
       of his injury and its wrongful cause.
¶ 27       First, Lane’s participation in the BDO Seidman summons litigation made him aware of the
       contents of the Kerekes memorandum in 2004, which in turn put him on notice that contrary to
       what Kerekes told him in 2002, Kerekes believed POPS was among the shelters the IRS
       deemed illegitimate. Then, in 2005, Lane learned that Vanadium Partners, the entity through
       which Lane’s losses flowed, was being audited. Finally, and most importantly, on September
       11, 2008, Peter Cinquegrani, the attorney who had prepared the letter to Lane opining on the
       legality of the POPS strategy, pled guilty to defrauding the IRS by authoring false opinion
       letters and entering into a phony consulting agreement with other tax shelter promoters.
       Cinquegrani’s conviction, as a matter of public record, was sufficient to put Lane on notice that
       his $18 million loss was wrongfully caused. See Diotallevi v. Diotallevi, 2013 IL App (2d)
111297, ¶ 35 (where facts giving rise to claim were matters of public record, plaintiff knew or
       should have known injury was wrongfully caused). In other words, by September 2008, Lane
       was “under an obligation to inquire further to determine whether an actionable wrong was
       committed.” Nolan, 85 Ill. 2d at 171. The fact that the IRS did not issue the deficiency notice to

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       Lane until January 2013 simply means that the full extent of Lane’s injuries did not become
       apparent until that time. But this does not alter our conclusion that the fact of Lane’s injury and
       the likelihood that it was wrongfully caused were or should have been apparent to Lane, at the
       latest, by 2008.
¶ 28       In sum, we hold that Lane’s causes of action against defendants accrued in 2000 or 2001,
       and he knew or should have known that his injury was wrongfully caused by September 2008.
       Thus, his January 2014 complaint was filed beyond both the five-year statute of limitation
       applicable to Deutsche Bank and the two-year statute applicable to BDO Seidman.

¶ 29                                       CONCLUSION
¶ 30      For the reasons stated, we affirm the circuit court’s order dismissing Lane’s complaint as
       time-barred.

¶ 31      Affirmed.

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