Advance Trading, Inc. v. Lieben, Whitted, Houghton, Slowiaczek & Cavanagh, P.C.
| Decision Date | 20 December 2012 |
| Docket Number | No. 1:12-CV-0033,1:12-CV-0033 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | ADVANCE TRADING, INC., an Illinois corporation, Plaintiff, v. LIEBEN, WHITTED, HOUGHTON, SLOWIACZEK & CAVANAGH, P.C., L.L.O, and T. GEOFFREY LIEBEN, individually, Defendants. |
Hon. Joan H. Lefkow
On January 5, 2012, plaintiff Advance Trading, Inc. ("ATI") filed the present action for breach of contract and, alternatively, for professional negligence against Lieben, Whitted, Houghton, Slowiaczek & Cavanagh, P.C., L.L.O. (the "Lieben firm" or "the firm") and T. Geoffrey Lieben ("Lieben") (collectively, "defendants") alleging that defendants' negligent legal advice caused a retirement plan administered by ATI to engage in multiple prohibited transactions under the Internal Revenue Code (the "Code") resulting in damages to ATI. Defendants now move to dismiss the complaint under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) for lack of subject matter jurisdiction and failure to state a claim. For the reasons set forth herein, defendants' motion (dkt. #19) will be denied.
ATI is a commodity brokerage firm incorporated in Illinois with its principal place of business in Bloomington, Illinois. The Lieben firm is a legal services provider incorporated in Nebraska with its principal place of business in Omaha, Nebraska. The firm specializes in financial, estate and retirement planning. T. Geoffrey Lieben is a member of the firm who concentrates his practice in the creation and utilization of employee stock ownership plans ("ESOPs").2
ATI has established an ESOP and 401(k) plan (the "Plan") to provide its employees with retirement benefits. In the fall of 2003, ATI retained Lieben and his firm to advise it on various matters including how to conform with the terms of the Plan and the Code. Over the next several years, ATI sought defendants' advice on these and other benefits-related matters. Specifically, in January 2009, ATI sought defendants' guidance on whether the Plan could make pre-age 59½ distributions to participants in accordance with the Code and applicable federal and state laws. On January 21, 2009, defendants advised ATI via email that it was appropriate for the Plan to make pre-age 59½ distributions to participants and sent ATI a draft amendment to the Plan (the "amendment") purportedly accomplishing this goal. (Compl. Ex. A & B.) ATI adopted this amendment and informed participants that they could elect to transfer their 401(k) deferral accounts and safe harbor matching contribution accounts to individual retirement accounts ("IRAs") without disqualifying the Plan or incurring penalties under the Code.
In or around August 2011, ATI learned that the amendment in fact prohibited distributions of employee-elected deferrals and was silent on the topic of safe harbor contributions. ATI also discovered that the Code prohibited pre-age 59½ distributions of employee elected deferrals and safe harbor contributions. After ATI adopted the amendment but before it learned of these restrictions, several of its employees transferred funds from their 401(k) accounts to IRAs and ATI made distributions to them in violation of the Code ("disqualifying distributions").
On August 28, 2011, Lieben stated in an email to ATI that his January 21, 2009 email was "poorly worded." (Compl. Ex. C.) On August 30, 2011, Lieben sent a memorandum to ATI admitting that "[t]he transfer of 401(k) deferrals and safe harbor contributions violate the provisions of Section 401(k) of the . . . Code" and setting out several possible courses of action for ATI. (Id. Ex. D.) Thereafter, ATI contracted with new counsel to revise the Plan.
ATI now alleges that as a result of defendants' negligent advice it incurred $287,347.35 in IRS excise taxes, and $1,924.59 and $1,795.13 in late filing and payment assessments for the 2009 and 2010 plan years. ATI also asserts that it incurred $47,194.83 in attorneys' fees and a $2,500 filing fee to participate in the IRS's Voluntary Compliance Program, which allowed ATI to self-correct the disqualifying distributions. (See Pl.'s Resp. at 14.) ATI seeks to recover these amounts from defendants.
Rule 12(b)(1) provides that a case will be dismissed if the court lacks the authority to hear and decide the dispute. Fed. R. Civ. P. 12(b)(1). If subject matter jurisdiction is not evident from the face of the complaint, the court analyzes the motion to dismiss under Rule 12(b)(1) as any other motion to dismiss. United Phosphorous, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003) (en banc), overruled on other grounds by Minn-Chem, Inc. v. Agrium Inc., 683 F.3d 845 (7th Cir. 2012). When presented with a facial challenge, "the court does not look beyond the allegations in the complaint, which are taken as true for purposes of the motion." Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 444 (7th Cir. 2009). Where, as here, "evidence pertinent to subject matter jurisdiction has been submitted . . . 'the district court may properly look beyond the jurisdictional allegations of the complaint . . . to determine whether in fact subject matter jurisdiction exists.'" Sapperstein v. Hager, 188 F.3d 852, 855 (7th Cir. 1999) (quoting United Transp. Union v. Gateway W. Ry. Co., 78 F.3d 1208, 1210 (7th Cir. 1996)). The plaintiff bears the burden of proving that the jurisdictional requirements have been met. Kontos v. United States Dep't of Labor, 826 F.2d 573, 576 (7th Cir. 1987).
A motion to dismiss under Rule 12(b)(6) challenges a complaint for failure to state a claim upon which relief may be granted. Fed. R. Civ. P. 12(b)(6); General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). In ruling on a 12(b)(6) motion, the court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. Dixon v. Page, 291 F.3d 485, 486 (7th Cir. 2002). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of a claim's basis, but must also establish that the requested relief is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868(2009); see Bell Atl. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. At the same time, the plaintiff need not plead legal theories. Hatmaker v. Mem'l Med. Ctr., 619 F.3d 741, 743 (7th Cir. 2010). Rather, it is the facts that count.
Defendants first move to dismiss the complaint for lack of subject matter jurisdiction. The district court possesses diversity jurisdiction over all civil actions where the parties are citizens of different states and the amount in controversy exceeds $75,000 exclusive of interests and costs. 28 U.S.C. § 1332(a). The parties do not dispute that their citizenship is diverse;3 rather, defendants argue that ATI cannot meet the amount in controversy requirement because ATI was not liable for the excise taxes it now seeks to recover from defendants. Under the legal certainty test, the court possesses subject matter jurisdiction over ATI's claims unless it appears "to a legal certainty that the claim is really for less than the jurisdictional amount." St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 289, 58 S. Ct. 586, 82 L. Ed. 845 (1938), superseded by statute on other grounds; see Meridian Sec. Ins. Co. v. Sadowski, 441 F.3d 536, 543 (7th Cir. 2006). As the party asserting jurisdiction, ATI bears the burden of demonstrating by a preponderance of the evidence that the amount in controversy is at least $75,000. See Blomberg v. Serv. Corp. Int'l, 639 F.3d 761, 763 (7th Cir. 2011); Meridian Sec. Ins. Co., 441 F.3d at 543.
26 U.S.C. § 4975(a); see O'Malley v. Comm'r, 96 T.C. 644, 651 (1991) (). A prohibited transaction that is not corrected within the taxable period is subject to a tax equal to 100 percent of the amount involved, which is to be paid by "any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such)." 26 U.S.C. § 4975(b).
Defendants argue that any participation by ATI in a prohibited transaction was as "a fiduciary acting only as such," and therefore ATI is not obligated to pay the resulting excise tax. ATI counters that it qualifies as both a "fiduciary" and a "disqualified person" under the Code, and it was not acting solely as a fiduciary when it participated in the...
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