Coe v. BDO Seidman, L.L.P.

• Decision Date: 31 August 2015
• Docket Number: No. 1–14–2215.,1–14–2215.
• Citation: 40 N.E.3d 393
• Parties: Douglas COE, Jacqueline Coe, GFLIRB, LLC, ALAKE, LLC, and DBICHA, LLC, Plaintiffs–Appellants, v. BDO SEIDMAN, L.L.P., and Michael Whitacre, Defendants–Appellees.
• Court: United States Appellate Court of Illinois

40 N.E.3d 393

Douglas COE, Jacqueline Coe, GFLIRB, LLC, ALAKE, LLC, and DBICHA, LLC, Plaintiffs–Appellants

v.BDO SEIDMAN, L.L.P., and Michael Whitacre, Defendants–Appellees.

No. 1–14–2215.

Appellate Court of Illinois, First District, First Division.

Aug. 31, 2015.

Foote, Mielke, Chavez & O'Neil, Geneva (Craig S. Mielke, of counsel), and Loewinsohn Flegle Deary, LLP, Dallas, TX (David R. Deary, Jeven R. Sloan, Wilson E. Wray, and John W. McKenzie, III, of counsel), for appellants.

DLA Piper LLP, Philadelphia, PA (Joseph Kernen, of counsel), DLA Piper LLP, New York, NY (Cary B. Samowitz, of counsel), DLA Piper LLP, Chicago (Michael S. Poulos, Raja Gaddipati, and Pamela Begaj, of counsel), and DLA Piper LLP, Baltimore, MD (James D. Mathias, of counsel), for appellee BDO Seidman, L.L.P.

Martin, Brown, Sullivan, Roadman & Hartnett, Ltd., Chicago (Steven S. Brown, William G. Sullivan, and Mason N. Floyd, of counsel), for appellee Michael Whitacre.

OPINION

Justice HARRIS delivered the judgment of the court with opinion.

¶ 1 Plaintiffs, Douglas Coe, Jacqueline Coe, GFLIRB, LLC, ALAKE, LLC, and DBICHA, LLC, appeal the orders of the circuit court granting defendants BDO Seidman, L.L.P. (BDO), and Michael Whitacre's motion to stay the action pending arbitration and defendants' motion for a protective order limiting discovery pursuant to the arbitration clause. On appeal, plaintiffs contend that the arbitration provision is unenforceable as part of BDO's conspiracy to commit fraud. Plaintiffs also contend that the trial court erred in granting the stay pending arbitration because their claims arise from defendant BDO's investment and legal advice, and such claims are expressly excluded from arbitration by the contracts signed by the parties. Plaintiffs' final contention is that the arbitration provisions are unconscionable. For the following reasons, we affirm.

¶ 2 JURISDICTION

¶ 3 The trial court granted defendant's motion to stay the proceedings pending arbitration on June 20, 2014. Plaintiffs filed their notice of appeal on July 18, 2014. Accordingly, this court has jurisdiction pursuant to Illinois Supreme Court Rule 307, allowing appeals of interlocutory orders as of right. Ill. S.Ct. R. 307 (eff. Feb. 26, 2010).

¶ 4 BACKGROUND

¶ 5 The following are the facts pertinent to the resolution of this appeal. In 2001, plaintiff Douglas Coe was the president and majority shareholder of a private company which he sold and received, after cashing in his stock ownership, a substantial sum. He sought the services of BDO, which advised him to use its distressed debt strategy on his tax returns to offset ordinary income and/or capital gain. Coe and his wife, Jacqueline, established GFLIRB, LLC, DBICHA, LLC, and ALAKE, LLC, as part of the distressed debt strategy. In connection with the implementation of this strategy, plaintiffs and BDO entered into a consulting agreement on August 4, 2001.¹

¶ 6 Portions of the consulting agreement relevant to this appeal are as follows:

“2. Services

(a) During the Term, BDO agrees to provide the following consulting services to the client (the “Services”): consulting services in conjunction with the sale of equity interest(s) in certain entities, including assistance in determining the overall effects of potential sales price(s) and allocations thereof, assisting the Client and/or the Client's advisors in structuring the Transaction(s) to attain the most beneficial tax results, and assisting with certain income tax, estate tax, personal financial planning and other financial aspects of various anticipated investment activities. BDO is not in the business of providing investment or legal advice or related services, thus, none of the services to be rendered by BDO to Client can or will include investment or legal advice and should not be considered as investment or legal advice. Client acknowledges and represents that it will, and is, not relying upon BDO for investment or legal advice or related services.

(b) BDO will provide the Client with an opinion concerning the federal income tax consequences of the Transactions. The opinion will be in addition to and not in lieu of the opinion the Client will receive from legal counsel.

* * *

5. Indemnification The Client, at its own expense, shall release and indemnify, defend and hold BDO and its affiliates, along with their respective partners, employees, agents, designees, insurers and assignees, harmless from and against, all losses, claims, damages, liabilities, costs and expenses * * * incurred, caused by or arising out of the performance of the Services by BDO for the Client * * *. This indemnity excludes a final adjudication that BDO engaged in gross negligence or willful misconduct in performing the Services which gave rise to the loss, claim, damage, liability, cost or expense sought to be recovered. * * *

6. No Warranty BDO makes no warranties, express or implied, under this Agreement with respect to the Services or otherwise. * * * As stated above, the Services to be provided in connection with this Agreement include the issuance of an opinion regarding the federal income tax consequences of the Transactions. In this regard, BDO accepts responsibility for the opinion BDO will provide to Client. BDO does not assume any responsibility whatsoever, and shall not be held liable for, any legal and/or tax opinions regarding any strategies that may be implemented by Client during the term of this Agreement. Client acknowledges and agrees that BDO has advised the Client to retain a law firm for legal as well as tax opinions on any strategies or Transactions in which Client engages during the term of the Agreement. The Client's exclusive remedy, and BDO's sole liability to the Client, for any cause whatsoever related in any way to this Agreement or to the Services provided by BDO to Client, shall be limited to the dollar amount of the Consulting Fees actually paid to BDO by the Client under this Agreement. * * *

* * *

8. Dispute Resolution

* * * (d) If any dispute, controversy or claim arises in connection with the performance or breach of the agreement and cannot be resolved by facilitated negotiations (or the parties agree to waive that process) then such dispute, controversy or claim shall be settled by arbitration in accordance with the laws of the State of New York, and the then current Arbitration Rules for Professional Accounting and Related Disputes of the American Arbitration Association (“AAA”), except that no pre-hearing discovery shall be permitted unless specifically authorized by the arbitration panel, and shall take place in the city in which the BDO office providing the relevant Services exists, unless the parties agree to a different locale.

(e) Such arbitration shall be conducted before a panel of three (3) persons, one (1) chosen by each party and the third selected by the two (2) party-selected arbitrators. * * *

* * *

11. Governing Law This Agreement shall be governed and construed in accordance with the laws of the State of New York, except for its conflict of law principles.”

12. Entire Agreement This Agreement * * * sets forth the entire agreement between the parties with respect to the subject matter herein, superseding all prior agreements, negotiations or understandings, whether oral or written, with respect to such subject matter.”

(Emphasis in the original).

The tax services agreement Coe signed on behalf of GFLIRB, LLC, on April 9, 2002, contains the same arbitration clause as is found in the consulting agreement above.

¶ 7 BDO issued the opinion letter referenced in the consulting agreement on April 15, 2002. It states that Coe requested “opinions regarding certain federal income tax consequences of the investment transactions (“Transactions”).” BDO further stated that it believed “it is more likely than not that our opinions set forth herein would be upheld by a court if they were challenged by the Service, properly framed and presented for argument, and fully litigated on the merits.”

¶ 8 In accordance with the consulting agreement, Coe claimed deductions on his tax returns in tax years 2001 through 2007. The Internal Revenue Service (IRS) subsequently audited his tax returns from those years and disallowed the strategy as an illegal and abusive tax shelter. Coe settled with the IRS for “substantial back-taxes, penalties, and interest.” Plaintiffs filed the original complaint against defendants on December 6, 2012, and filed an amended complaint on November 21, 2013. The complaint alleged that BDO conspired to design, market, sell, and implement investment strategies it knew the IRS would disallow. It further alleged that BDO made these representations to convince the Coes to enter into the consulting agreement and participate in BDO's distressed debt strategy. Relying on BDO's misrepresentations, the Coes executed the agreement and implemented the investment strategies. Plaintiffs requested as damages the amount of the IRS settlement plus $805,000 in fees the Coes paid to BDO pursuant to the consulting agreement.

¶ 9 The complaint also sought a declaration that “any arbitration agreement provision contained in any of the Agreements is also null and void for the reasons set forth herein, including but not limited to the arbitration provision was procured by fraud, was fraudulently induced, and/or the fraud permeated the entire agreement, including the arbitration provision.” In his affidavit, Douglas Coe stated that the parties discussed the arbitration provisions and that BDO represented these provisions “as bona fide dispute resolution procedures that would benefit all parties.” BDO indicated that the provisions “offer a legitimate, good faith alternative to resolve disputes between the parties,” and further stated that since the parties “were unlikely to have any disputes,” the arbitration provisions were unlikely to be invoked. Coe stated that he “accepted their representations as to the purpose and effect of the arbitration provisions”...