Bdo Seidman, Llp v. Harris

• Decision Date: 13 March 2008
• Docket Number: No. 1-06-2899.,1-06-2899.
• Citation: 379 Ill.App.3d 918,885 N.E.2d 470
• Parties: BDO SEIDMAN, LLP, Plaintiff-Appellant, v. Peter HARRIS, Individually and as Agent For Those Persons Subscribing to Insurance Policy No. 9624771 00; Nick Ward, Individually and as Agent For Those Persons Subscribing to Insurance Policy Nos. 9624772 00 and 9624773 00; Syndicate 2020 at Lloyd's of London (Lloyd's); Syndicate 435 at Lloyd's; Syndicate 510 at Lloyd's; Syndicate 190 at Lloyd's; Syndicate 702 at Lloyd's; Syndicate 33 at Lloyd's; Syndicate 1207 at Lloyd's; 839 at Lloyd's; with all the respect to the 1999 year of account; Liberty Mutual Insurance Company (UK) Limited; QBE International Insurance Limited; Lexington Insurance Company; and SR International Business Insurance Co., Ltd., Defendants-Appellees.
• Court: United States Appellate Court of Illinois

885 N.E.2d 470

379 Ill.App.3d 918

BDO SEIDMAN, LLP, Plaintiff-Appellant, v. Peter HARRIS, Individually and as Agent For Those Persons Subscribing to Insurance Policy No. 9624771 00; Nick Ward, Individually and as Agent For Those Persons Subscribing to Insurance Policy Nos. 9624772 00 and 9624773 00; Syndicate 2020 at Lloyd's of London (Lloyd's); Syndicate 435 at Lloyd's; Syndicate 510 at Lloyd's; Syndicate 190 at Lloyd's; Syndicate 702 at Lloyd's; Syndicate 33 at Lloyd's; Syndicate 1207 at Lloyd's; 839 at Lloyd's; with all the respect to the 1999 year of account; Liberty Mutual Insurance Company (UK) Limited; QBE International Insurance Limited; Lexington Insurance Company; and SR International Business Insurance Co., Ltd., Defendants-Appellees.

No. 1-06-2899.

Appellate Court of Illinois, First District, Fourth Division.

March 13, 2008.

DLA Piper US, LLC, Chicago (Michael Poulos, Jonathan D. King, Denise C. Castillo, Raja Gaddipati, of counsel), for Plaintiff-Appellant.

Wilson Elsner Moskowitz Edelman & Dicker LLP, Chicago (David M. Holmes, Penelope S. Hopper, of counsel); Wilson Elsner Moskowitz Edelman & Dicker LLP, New York City (Thomas W. Hyland, Joseph L. Francoeur, of counsel); Wilson Elsner Moskowitz Edelman & Dicker LLP, White Plains, NY (Michael J. Case, of counsel), for Defendants-Appellees.

Justice SHEILA M. O'BRIEN delivered the opinion of the court:

Plaintiff, BDO Seidman, LLP, brought an insurance coverage action against defendants, the underwriters of plaintiff's professional liability policy, for their failure to indemnify plaintiff against a loss allegedly covered by the policy. The trial court granted defendants' motion to dismiss count I of plaintiff's fourth amended complaint that sought indemnification for $16 million of plaintiff's total loss under the policy. Plaintiff appeals pursuant to Supreme Court Rule 304(a) (155 Ill.2d R. 304(a)). We affirm.

Plaintiff is in the public accounting business and provided tax accounting services to James R. Gibson and certain entities controlled by Gibson, specifically, SBU, Inc., and related entities (SBU). SBU had operated as a structured-settlement company, promising to assume liabilities of defendants in personal-injury actions, and to provide personal-injury plaintiffs a stream of funds based on the future value of the obligations assumed from the defendants. In exchange for assuming the liabilities of defendants in personal-injury actions, SBU received proceeds from the underlying settlements, which it was supposed to invest in order to provide a return to the injured plaintiffs.

SBU's contracts with the personal-injury plaintiffs required that it place the settlement proceeds in trust and invest them only in safe United States Treasury instruments, to ensure that they always would be available to cover long-term medical costs and other expenses. SBU was not required to report the funds as income, as funds invested in government securities qualify for exemption under Internal Revenue Code section 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 that Gibson could use the funds, but that doing so would constitute a taxable event, as the funds no longer would qualify under Internal Revenue Code section 130. Plaintiff also advised Gibson that he would have to purchase additional United States Treasury obligations to replace the liquidated United States Treasury obligations in SBU's clients' trusts. Gibson proceeded to divert the funds, but failed to report that income to the Internal Revenue Service.

In January 2002, Gibson pleaded guilty to conspiracy to commit mail and wire fraud. 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 charged plaintiff with misprision of felony, alleging 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 U.S. Attorney's Office (USAO) and plaintiff ultimately agreed to resolve the USAO investigation through entry of a pretrial diversion agreement (PTD agreement.) Pursuant to the PTD agreement, prosecution was deferred while plaintiff completed 18 months of supervision.

Per the PTD agreement, plaintiff was required to cooperate with the government investigation by providing testimony and producing documents. Further, plaintiff agreed to pay $16 million to a "fund established by the Government for the victim restitution of former clients of SBU." The $16 million represented the amount that Gibson had received from his clients and failed to report as taxable income. The PTD agreement 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 prevention and investigation of frauds against the public."

On April 12, 2002, plaintiff and the USAO appeared before the federal district court to obtain judicial approval of the PTD agreement. Pursuant thereto, the parties presented the court with a stipulation of facts. In pertinent part, the parties stipulated as follows:

"10. Between in or about April and June 1996, partners and employees of [plaintiff's] former St. Louis office prepared the SBU, Inc. (Florida) tax return for tax year 1995. In connection with the preparation of that return, partners of the former St. Louis office, including Stephen R. Krause and Douglas Beckmeyer, were aware that Gibson and SBU had failed to purchase United States Treasury obligations for certain structured settlement trusts and that SBU was making periodic payments to certain of those structured settlement clients. At Gibson's direction, Stephen R. Krause thereafter listed those settlement funds received as `liabilities' on the SBU, Inc. (Florida) return for tax year 1995. No federal tax was paid on those `liabilities.' Stephen R. Krause forwarded 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 Beckmeyer, knew and understood that, in order to finance the purchase and operation of the grocery store chain, 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 Beckmeyer, also knew and understood that Gibson and SBU used SBU's clients' settlement funds to purchase and operate the grocery store chain instead of to purchase United States Treasury obligations to fund SBU's clients' trusts.

12. Partners in the former St. Louis office, including Stephen R. Krause and Douglas Beckmeyer, knew and understood that Gibson and SBU received approximately sixteen million dollars ($16,000,000) in settlement funds between October, 1994 and September, 1996, but had not purchased United States Treasury obligations with these funds.

13. On or about July 7, 1997, the Internal Revenue Service (IRS) sent to SBU, Inc. (Florida), a Notice of Tax Examination for the tax year ending October 31, 1993 (hereinafter referred to as the `tax examination'). During the course of that tax examination, the IRS inquired about documents relating to tax years 1994 and 1995.

14. During July or August, 1997, partners of the former St. Louis office, including Stephen R. Krause, Douglas Beckmeyer, and the managing partner of the former St. Louis office, Walter Knepper, had internal discussions concerning Gibson's and SBU's failure to purchase United States Treasury obligations for certain structured settlement clients' trusts and the use of SBU's clients' settlement funds and bonds to purchase and operate the grocery 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 BDO to act as the taxpayer representative in connection with the tax examination described in paragraph 13, above. The power of attorney was subsequently transmitted to the IRS.

16. On December 18, 1997, Stephen R. Krause and Gibson discussed the failure by Gibson and SBU to purchase 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 receipt and use of the funds to purchase and operate the grocery store chain resulted in taxable income to SBU and that SBU and Gibson had failed to report that income to the IRS.

17. On January 8, 1998, in response to the IRS' 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 connection with the tax year 1995 return, to wit, attempted tax evasion, in violation of Title 26, United States Code, Section 7201. In that Submission, Krause failed to inform the IRS of information that was material to the determination of income for tax year 1995, i.e. that Gibson had not purchased United States Treasury obligations with settlement funds received and that Gibson had, instead, used those funds to purchase and operate the grocery stores which were not qualified assets under Internal Revenue Code Section 130."

After the district court was presented with the stipulation of facts, plaintiff's vice-chairman Jack Weisbaum engaged in the following colloquy with the court:

"[THE COURT]: I was * * * presented this afternoon a stipulation of facts consisting of six typewritten pages. * * * [I]t...