Khan v. BDO Seidman, LLP

• Decision Date: 17 October 2012
• Docket Number: 4–12–0360.,Nos. 4–12–0359,s. 4–12–0359
• Citation: 2012 IL App (4th) 120359,365 Ill.Dec. 137,977 N.E.2d 1236
• Parties: Shahid R. KHAN; Ann C. Khan; Uviado LLC; Jonction, LLC; and Leman, LLC, Plaintiffs–Appellants, v. BDO SEIDMAN, LLP; and Michael Collins, Defendants–Appellees, and Gramercy Advisors, LLC; Gramercy Asset Management, LLC; Gramercy Financial Services, LLC; Tall Ships Capital Management, LLC; Jay A. Johnston; Marc Helie; Decastro, West, Chodorow, Glickfield & Nass, Inc.; Financial Strategy Group, PLC; and Paul Shanbrom, Defendants. Shahid R. Khan; Ann C. Khan; SRK Wilshire Investments, LLC; SRK Wilshire Partners; SRK Wilshire Investors, Inc.; Thermosphere FX Partners, LLC; and KPASA, LLC, Plaintiffs–Appellants, v. BDO Seidman, LLP; and Michael Collins, Defendants–Appellees, and Deutsche Bank AG; Deutsche Bank Securities, INC., d/b/a Deutsche Bank; Alex Brown; David Parse; Equilibrium Currency Trading, LLC; Samyak Veera; Grant Thornton, LLP; Gramercy Advisors, LLC; Jay A. Johnston; Marc Helie; and Paul Shanbrom, Defendants.
• Court: United States Appellate Court of Illinois

2012 IL App (4th) 120359

977 N.E.2d 1236

365 Ill.Dec. 137

Shahid R. KHAN; Ann C. Khan; Uviado LLC; Jonction, LLC; and Leman, LLC, Plaintiffs–Appellants,

v.BDO SEIDMAN, LLP; and Michael Collins, Defendants–Appellees,andGramercy Advisors, LLC; Gramercy Asset Management, LLC; Gramercy Financial Services, LLC; Tall Ships Capital Management, LLC; Jay A. Johnston; Marc Helie; Decastro, West, Chodorow, Glickfield & Nass, Inc.; Financial Strategy Group, PLC; and Paul Shanbrom, Defendants.

Shahid R. Khan; Ann C. Khan; SRK Wilshire Investments, LLC; SRK Wilshire Partners; SRK Wilshire Investors, Inc.; Thermosphere FX Partners, LLC; and KPASA, LLC, Plaintiffs–Appellants,

v.BDO Seidman, LLP; and Michael Collins, Defendants–Appellees,andDeutsche Bank AG; Deutsche Bank Securities, INC., d/b/a Deutsche Bank; Alex Brown; David Parse; Equilibrium Currency Trading, LLC; Samyak Veera; Grant Thornton, LLP; Gramercy Advisors, LLC; Jay A. Johnston; Marc Helie; and Paul Shanbrom, Defendants.

Nos. 4–12–0359, 4–12–0360.

Appellate Court of Illinois,

Fourth District.

Oct. 17, 2012.

David R. Deary (argued) and Carol E. Farquhar, both of Loewinsohn Flegle Deary, LLP, of Dallas, Texas, and James D. Green, of Thomas, Mamer & Haughey, LLP, of Champaign, for appellants.

Michael S. Poulos, Andrew R. Gifford, Mark A. Bradford, and Raja Gaddipati, all of DLA Piper LLP (US), of Chicago, and Cary B. Samowitz (argued), of DLA Piper LLP (US), of New York, New York, for appellees.

OPINION

Justice APPLETON delivered the judgment of the court, with opinion.

[365 Ill.Dec. 139]¶ 1 The plaintiffs in these two consolidated appeals are Shahid R. Khan and his spouse, Ann C. Khan, along with various partnerships and limited-liability companies that Shahid R. Khan formed, allegedly on the advice of BDO Seidman, LLC (BDO), for the purpose of creating tax shelters. Thermosphere FX Partners, LLC (Thermosphere), is one of the partnerships. (Whenever we refer to “Khan” in the singular, we will mean Shahid R. Khan, because, according to the complaint, he was the one who transacted all the business with BDO and the other defendants.) The only defendants who are parties to these two appeals, the only appellees, are BDO and one of its employees, Michael Collins. (When referring collectively to BDO and its employees named in these actions, we will call them the “BDO defendants.”) Plaintiffs have sued BDO, Collins, and other persons and business entities for leading plaintiffs into some flawed “tax-advantaged investment strategies.”

¶ 2 Plaintiffs have been before us twice before in this litigation. Khan v. BDO Seidman, LLP, 404 Ill.App.3d 892, 343 Ill.Dec. 946, 935 N.E.2d 1174 (2010)( Khan I ); Khan v. BDO Seidman, LLP, 408 Ill.App.3d 564, 350 Ill.Dec. 63, 948 N.E.2d 132 (2011)( Khan II ). In Khan I, we decided which of plaintiffs' claims against the BDO defendants had to be arbitrated pursuant to plaintiffs' written “consulting agreement” with BDO. We held that only the claims for breach of contract came within the scope of the arbitration clause. Khan I, 404 Ill.App.3d at 895, 343 Ill.Dec. 946, 935 N.E.2d 1174. The Supreme Court of Illinois has denied BDO's petition for leave to appeal from our judgment in Khan I( Khan v. BDO Seidman, LLP, 239 Ill.2d 555, 348 Ill.Dec. 191, 943 N.E.2d 1101 (2011) (table)), and the Supreme Court of the United States has denied BDO's petition for a writ of certiorari( BDO Seidman, LLP v. Khan, ––– U.S. ––––, 132 S.Ct. 96, 181 L.Ed.2d 25 (2011)). Thus, Khan I has reached finality in the appellate process.

¶ 3 The appellate process is not yet exhausted in Khan II—but first let us recount what Khan II is all about. In Khan II, we rejected the contention that plaintiffs' claims against Deutsche Bank AG; Deutsche Bank Securities, Inc.; and an accounting firm, Grant Thornton LLP, were barred by statutes of limitations and a statute of repose. Khan II, 408 Ill.App.3d at 566, 350 Ill.Dec. 63, 948 N.E.2d 132. (We will refer to Deutsche Bank, Deutsche Securities, and their employees as the “Deutsche Bank defendants.”) Those three defendants in Khan II petitioned the supreme court for leave to appeal. The supreme court granted their petitions and consolidated their appeals. Khan v. BDO Seidman, LLP, (Nos. 112219 & 112221, cons.) (Sept. 28, 2011). On March 20, 2012, the supreme court heard oral arguments in the consolidated appeals, and its decision is pending.

¶ 4 On March 14, 2012, on remand from our decisions in Khan I and Khan II, the trial court granted motions by BDO and Collins to stay the trial court proceedings until (1) the supreme court issued its decision in Grant Thornton's appeal and (2) plaintiffs' claims of breach of contract were arbitrated. Plaintiffs disagree with this stay. They appeal pursuant to Illinois Supreme Court Rule 307(a)(1) (eff. Feb. 26, 2010).

¶ 5 We find no abuse of discretion in staying the trial court proceedings until the supreme court issues its opinion in Grant Thornton's appeal. We find an abuse of discretion, however, in staying the proceedings until the claims of breach of contract are arbitrated, considering that after our analysis in Khan I, little or nothing of the breach-of-contract claims is left. Therefore, we modify the stay so as to make it last only for the duration of Grant Thornton's appeal to the supreme court. We affirm the trial court's judgment as modified and remand this case for further proceedings subject to the stay—which the trial court, in its discretion, may eventually lift if it finds that Grant Thornton's appeal is not proceeding with sufficient dispatch.

¶ 6 I. BACKGROUND

¶ 7 In Champaign County case Nos. 09–L–139 and 09–L–140, plaintiffs brought actions against the BDO defendants; the Deutsche Bank defendants; Grant Thornton, LLP; and other persons and business entities for duping plaintiffs into setting up tax shelters that the Internal Revenue Service (IRS) regarded as abusive and illegal. According to the complaints in the two cases, these tax shelters were designed to follow, at least ostensibly, a two-pronged strategy—“Plan A” and “Plan B,” so to speak. First, in Plan A, Khan was to make an “investment,” by which, the BDO defendants told him, he stood a good chance of making a profit. It is unclear how much Khan understood about this “investment,” but it was a bet with Deutsche Bank on what a certain foreign currency would be worth on a certain date. If Khan lost money in this “investment,” he was not to worry, because Plan B would kick in and that very loss would be put to lucrative use. Through some transfers between partnerships and limited-liability companies specially created for this purpose, Khan would be able to use the “ investment” loss as a tax loss, to reduce his federal income tax. Not just one but a series of these tax shelters was created.

¶ 8 Both prongs of this “tax-advantaged investment strategy” were a falsehood, plaintiffs allege. For one thing, the “investments” were designed to ensure that Khan would lose money (and that the broker, Deutsche Bank, would make money), and further, plaintiffs allege, it should have been apparent to anyone with a reasonable degree of competence in tax law that the IRS would disallow the claimed tax losses as a sham—and then impose large penalties for the overdue income tax. The strategies appear to be variations on the “Son of BOSS” plan, which, reduced to its essence, works this way. X pays Y, say, a million dollars. Y pays X a million dollars. X counts the million dollars he paid Y as a tax loss without offsetting it by the million dollars Y paid him. See 106 Ltd. v. Commissioner of Internal Revenue Service, 684 F.3d 84, 86 (D.C.Cir.2012). In their complaints in the two cases, plaintiffs raised a variety of legal theories, e.g., fraud, negligent misrepresentation, fraudulent concealment of a cause of action, rescission, an illusory contract, and (as an alternative to the theories of rescission and an illusory contract) breach of contract.

¶ 9 Some of the defendants raised affirmative defenses. The BDO defendants invoked an arbitration agreement between BDO and Khan. Khan I, 404 Ill.App.3d at 894, 343 Ill.Dec. 946, 935 N.E.2d 1174. The Deutsche Bank defendants invoked the statute of limitations in section 13 –205 of the Code of Civil Procedure (735 ILCS 5/13–205 (West 2008)). Khan II, 408 Ill.App.3d at 566, 350 Ill.Dec. 63, 948 N.E.2d 132. Grant Thornton invoked the statute of limitations in section 13–214.2(a) (735 ILCS 5/13–214.2(a) (West 2008)), as well as the statute of repose in section 13–214.2(b) (735 ILCS 5/13–214.2(b) (West 2008)). Khan II, 408 Ill.App.3d at 566, 350 Ill.Dec. 63, 948 N.E.2d 132.

¶ 10 In Khan I, we considered the BDO defendants' affirmative defense that all of plaintiffs' claims against them had to be arbitrated.

¶ 11 In Khan II, we considered, inter alia, the affirmative defenses of the Deutsche Bank defendants and Grant Thornton that plaintiffs' claims against them were time-barred.

¶ 12 A. The Scope of the Arbitration Clause ( Khan I )

¶ 13 In preparation for each of the “investments,” which were supposed to yield a profit for Khan or, alternatively, a loss that, after being passed through partnerships, would reduce his federal income-tax liability, BDO required Khan's signature on “consulting agreements,” each of which contained an identically worded arbitration clause. Khan I, 404 Ill.App.3d at 893, 910, 343 Ill.Dec. 946, 935 N.E.2d 1174. The trial court held that all of plaintiffs' claims against the BDO defendants came within the scope of this arbitration clause. Id. at 894, 343 Ill.Dec. 946, 935 N.E.2d 1174.

¶ 14 Plaintiffs appealed, and in Khan I we affirmed the trial court's judgment in part and reversed it in part, concluding that, by its terms, the arbitration clause covered only plaintiffs' alternative claims against the BDO defendants for breach of contract. Id. at 895, 343 Ill.Dec. 946, 935 N.E.2d 1174. (Justice Turner dissented in part: he was of the opinion that the...