Denney v. Jenkens & Gilchrist
| Decision Date | 30 April 2004 |
| Docket Number | No. 03 Civ. 5460(SAS).,03 Civ. 5460(SAS). |
| Citation | 340 F.Supp.2d 338 |
| Parties | Thomas DENNEY, R. Thomas Weeks, Norman R. Kirisits, Kathryn M. Kirisits, TD Cody Investments, L.L.C., RTW Investments, L.L.C., NRK Syracuse Investments, L.L.C., DKW Partners, DKW Lockport Investors, Inc., Donald A. Destefano, Patricia J. Destefano, DD Tiffany Circle Investments L.L.C., Tiffany Circle Partners, Diamond Roofing Company, Inc., Jeff Blumin, JB Hilltop Investments L.L.C., Kyle Blumin, KB Hoag Lane Investments, L.L.C., L. Michael Blumin, MB St. Andrews Investments, L.L.C., Fayetteville Partners, and Laurel Hollow Investors, Inc., on their own behalf and on behalf of all others similarly situated, Plaintiffs, v. JENKENS & GILCHRIST, a Texas Professional Corporation, Jenkens & Gilchrist, an Illinois Professional Corporation, BDO Seidman, L.L.P., Pasquale & Bowers, L.L.P., Cantley & Sedacca, L.L.P., Dermody, Burke, and Brown, Certified Public Accountants, PLLC, Paul M. Daugerdas, Paul Shanbrom, Edward Sedacca, Deutsche Bank Ag, and Deutsche Bank Securities, Inc., d/b/a Deutsche Bank Alex Brown, A Division of Deutsche Bank Securities, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
David R. Deary, Ralph Canada, Shore & Deary, L.L.P., Dallas, TX, for Plaintiffs.
Douglas E. Whitney, Michael A. Pope, McDermott, Will & Emery, Chicago, IL, for Defendants Jenkens & Gilchrist and Paul Daugerdas.
Michael R. Young, Michelle Nadel, Brian A. Turetsky, Willkie Farr & Gallagher, New York City, for Defendants BDO Seidman and Paul Shanbrom.
Ronald S. Herzog, Snow Becker Krauss P.C., New York City, for Defendants Pasquale & Bowers.
Lawrence M. Hill, Seth C. Farber, Dewey Ballantine, L.L.P., New York City, for Defendants Deutsche AG and Deutsche Bank Securities.
Kenneth A. Payment, Harter, Secrest & Emery L.L.P., Rochester, NY, for Defendants Dermody, Burke & Brown.
Todd Belous, Shari Lewis, Rivkin Radler L.L.P., Uniondale, NY, for Defendants Cantley & Sedacca.
Plaintiffs allege in this putative class action that defendants violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, and are liable for damages and other relief arising from unjust enrichment, breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duties, fraud, negligent misrepresentation, professional malpractice, "unethical, excessive and illegal fees," and conspiracy.1 The BDO Defendants Pasquale Defendants, and Deutsche Bank Defendants now move to compel arbitration.
This case arises out of tax and consulting services offered by several professional law and accounting firms, and marketed to three groups of investors. In the First Amended Class Action Complaint ("Compl."), the plaintiff investors allege that in 1999, the Jenkens Defendants developed a tax shelter known as Currency Options Bring Reward Alternatives, or "COBRA."2 Thereafter, the Jenkens defendants recruited the BDO Defendants to market COBRA, and the BDO Defendants, in turn, asked the Pasquale Defendants to assist BDO and Jenkens in directly marketing COBRA to Pasquale's and Dermody's wealthy clients. See Compl. ¶ 72.
Because of their longstanding relationships with the individual plaintiffs,3 the Pasquale Defendants had intimate knowledge of the individual plaintiffs' finances, and therefore knew that in 1999, the plaintiffs expected substantial capital gains from certain stock holdings. See id. ¶¶ 78-79. The Pasquale Defendants told the plaintiffs about a "loophole" in the Internal Revenue Code that could reduce their taxes, and recommended that plaintiffs meet with the BDO Defendants to learn more about COBRA. The plaintiffs subsequently met with Paul Shanbrom of BDO, who described the COBRA tax strategy. See id. ¶¶ 80-83. Specifically, Shanbrom told plaintiffs that "by forming a partnership to engage in foreign currency option transactions, it was possible to create large capital and/or ordinary losses for tax purposes that would largely eliminate or offset their expected substantial capital gain and/ordinary income in 1999." Id. ¶ 83. Shanbrom assured plaintiffs that BDO had an independent opinion letter from Jenkens & Gilchrist, a major law firm, substantiating the legality and validity of the COBRA tax shelter. See id. ¶ 82.
In October, 1999, the plaintiffs agreed to engage in COBRA transactions. At the recommendation of the BDO and Pasquale Defendants, plaintiffs retained Jenkens & Gilchrist to provide legal advice relating to COBRA. See id. ¶¶ 92-93. And on the advice of the Jenkens Defendants, the individual plaintiffs formed various corporate entities (the "corporate plaintiffs") in order to carry out the COBRA transactions.4 See id. ¶¶ 93-101.
The Jenkens Defendants provided various instructions to plaintiffs so that plaintiffs could carry out the COBRA transactions. In particular, the Jenkens Defendants referred plaintiffs to the Deutsche Bank Defendants, and the Deutsche Bank defendants subsequently advised plaintiffs to open accounts at DB Alex Brown. Thereafter, the Deutsche Bank and Jenkens Defendants counseled plaintiffs with respect to the COBRA transactions, and carried out the transactions on plaintiffs' behalf. See id. ¶¶ 92-127.
Plaintiffs' COBRA transactions resulted in losses. The Pasquale and BDO Defendants prepared plaintiffs' tax returns for 1999, and utilized the COBRA losses to offset plaintiffs' capital gains in those returns. Plaintiffs signed and submitted the returns to the Internal Revenue Service ("IRS") and state taxing authorities. See id. ¶¶ 152-65. Plaintiffs contend that at the time the BDO and Pasquale Defendants prepared the tax returns and advised plaintiffs to sign the returns, they knew or should have known that on December 27, 1999, the IRS issued a notice indicating that losses arising from "transactions wholly lacking in economic substance (e.g. COBRA) are not properly allowable for Federal income tax purposes." Id. ¶ 146.
In August, 2000, the IRS published a notice that "clearly and unequivocally informed accountants and tax attorneys across the country that [the IRS] believed the COBRA tax shelter was illegal ... [and that] the IRS believed it had [] addressed transactions like COBRA in [the December 27, 1999] notice..." Id. ¶ 171. Nonetheless, the Jenkens Defendants continued to issue opinion letters attesting to the validity and legality of the COBRA transactions, and advising plaintiffs that the COBRA losses could properly be used as capital and ordinary losses for tax purposes. Additionally, the Pasquale Defendants prepared plaintiffs' 2000 tax returns to reflect the COBRA losses, and on the advice of the Pasquale Defendants, plaintiffs signed and submitted those returns to the IRS. See id. ¶¶ 175-81.
The DeStefano Plaintiffs completed their COBRA transactions in 2001.5 The Pasquale and BDO defendants subsequently advised the DeStefano Plaintiffs that they should retain the Cantley Defendants, rather than the Jenkens Defendants, to provide an opinion letter with respect to the propriety of utilizing the COBRA losses on the DeStefanos' 2001 tax returns. The Cantley Defendants provided such an opinion letter in April, 2002. According to plaintffs, the Cantley Defendants knew the letter was "bogus" at the time it was issued. Plaintiffs further allege that the BDO and Pasquale Defendants advised the DeStefano Plaintiffs to retain Cantley & Sedacca in late 2001 because the Jenkens Defendants were unwilling to issue an opinion letter in light of the IRS notices. See id. ¶¶ 184-91.
In December, 2002, the New York State Revenue Department notified plaintiffs that the Tax Shelter Unit had selected their 1999 state income tax returns for audit. The DeStefano Plaintiffs were further notified that their 2000 income tax returns had also been selected for audit. The IRS subsequently notified all plaintiffs that their 1999 federal tax returns had been selected for audit, and notified the DeStefano Plaintiffs that their 1999, 2000, and 2001 returns had been selected for audit. See id. ¶ 201. Nonetheless, in January, 2003, the BDO Defendants advised plaintiffs not to participate in either the federal or the New York State tax amnesty programs. See id. ¶ 203.
In June, 2003, the IRS "formalized its position regarding CORBA ... by issuing new regulations [] retroactive to October 18, 1999 ... The Regulations invalidate COBRA ..." Id. ¶ 223. The IRS further indicated that the COBRA transactions are invalid under both the new regulations, and under two existing provisions of the Internal Revenue Code. See id. ¶ 225.
In addition to the losses plaintiffs experienced in carrying out the COBRA transactions, plaintiffs have incurred and will continue to incur substantial damages in the form of fees paid to attorneys and accountants retained to address the audits.6 See id. ¶¶ 229-38.
On October 8, 1999, plaintiff L. Michael Blumin, on behalf of Jefyle Equipment Corp., Inc., entered into a consulting agreement with BDO (the "Blumin Agreement"). The Blumin Agreement was effective through September 30, 2000, and included the following language:
WHEREAS, [Jefyle Equipment Corp.] is interested in expanding its business operations into new strategic markets (the "Expansion");
WHEREAS, BDO is in the business of providing accounting and consulting services; and
WHEREAS, [Jefyle Equipment Corp.] desires BDO to provide certain tax, financing and business consulting services in connection with the Expansion, and BDO desires to provide such services...
Consulting Agreement between BDO and Jefyle Equipment Corp., Ex. 4 to the Affidavit of Michael R. Young ("Young Aff."), counsel to the BDO Defendants, at "whereas" clauses.
The contract required BDO to provide the following services: "assistance in financing business, real estate ventures and financing corporation...
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...Circuit reversed the decision of the United States District Court for the Southern District of New York in Denney v. Jenkens & Gilchrist, 340 F.Supp.2d 338 (S.D.N.Y.2004). See Denney v. BDO Seidman, L.L.P., 412 F.3d 58, 66 (2d Cir.2005). The Intervenors moved for reconsideration under Rule ......
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