Khan v. Gramercy Advisors, LLC

• Citation: 61 N.E.3d 107,406 Ill.Dec. 503
• Decision Date: 30 June 2016
• Docket Number: No. 4–15–0435.,4–15–0435.
• Parties: Shahid R. KHAN; Ann C. Khan; Uviado, LLC; Jonction, LLC; and Leman, LLC, Plaintiffs–Appellees, v. GRAMERCY ADVISORS, LLC; Gramercy Asset Management, LLC ; Gramercy Financial Services, LLC ; Tall Ships Capital Management, LLC; and Jay A. Johnston, Defendants–Appellants.
• Court: United States Appellate Court of Illinois

61 N.E.3d 107

406 Ill.Dec. 503

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

v.GRAMERCY ADVISORS, LLC; Gramercy Asset Management, LLC ; Gramercy Financial Services, LLC ; Tall Ships Capital Management, LLC; and Jay A. Johnston, Defendants–Appellants.

No. 4–15–0435.

Appellate Court of Illinois, Fourth District.

Opinion Filed June 30, 2016.

Modified Upon Denial of Rehearing Oct. 3, 2016.

Glenn A. Stanko, of Rawles, O'Byrne, Stanko, Kepley & Jefferson, P.C., Champaign, and Michael E. Petrella, Sean F. O'Shea (argued), and Thomas Gardner, all of O'Shea Partners LLP, of New York, New York, for appellants.

William J. Brinkmann, of Thomas, Mamer & Haughey, LLP, of Champaign, and David R. Deary, Wilson Wray, Jeven R. Sloan, W. Ralph Canada, Jr. (argued), and K. Adam Rothey, all of Loewinsohn Flegle Deary, LLP, Dallas, Texas, for appellees.

OPINION

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

¶ 1 The plaintiffs are Shahid R. Khan (Khan); his spouse, Ann C. Khan; and some limited liability companies, in which, pursuant to the “2002 and 2003 Distressed Debt Strategies,” Khan bought majority interests. The strategies proved to be ineffectual tax shelters, as the Khans later came to realize. The limited liability companies generated losses, which the Khans claimed in their individual income tax returns so as to reduce their taxable income, but after auditing their returns, the Internal Revenue Service (IRS) disallowed the losses as artificial and lacking in economic substance. Consequently, the Khans incurred genuine financial loss in the form of interest, penalties, and the amounts they had paid for the creation and implementation of the tax shelters. Now plaintiffs seek damages from defendants for inducing them, by allegedly fraudulent misrepresentations, to buy the tax shelters and to use them for the 2002 and 2003 tax years. The defendants are Gramercy Advisors, LLC (Gramercy Advisors); Gramercy Asset Management, LLC (Gramercy Asset Management); Gramercy Financial Services, LLC (Gramercy Financial); Tall Ships Capital Management, LLC (Tall Ships); and Jay A. Johnston.

¶ 2 None of these defendants is domiciled in Illinois. Therefore, they filed a motion for dismissal in the trial court, arguing that exercising personal jurisdiction over them in Illinois would violate due process. Without an evidentiary hearing, the court denied their motion, finding, on the basis of the documentary submissions, that it would be consistent with due process to subject defendants to the specific jurisdiction of Illinois. We granted defendants leave to appeal. See Ill. S. Ct. R. 306(a)(3) (eff. July 1, 2014).

¶ 3 In our de novo review, we find that two of the defendants, Gramercy Advisors and Johnston, have made minimum contacts with Illinois and that exercising personal jurisdiction over them would be consistent with due process. But we find no minimum contacts with Illinois by the remaining defendants, Gramercy Asset Management, Gramercy Financial, and Tall Ships. Therefore, we affirm the trial court's judgment in part and reverse it in part: as to Gramercy Advisors and Johnston, we affirm the denial of the motion for dismissal, but as to Gramercy Asset Management, Gramercy Financial, and Tall Ships, we reverse the denial of the motion for dismissal.

¶ 4 I. BACKGROUND

¶ 5 A. The Places Where the Parties Reside or Are Domiciled

¶ 6 According to the complaint, the Khans are citizens of Illinois and reside in Champaign, Illinois, and the remaining three plaintiffs—UVIADO, LLC (UVIADO); JONCTION, LLC (JONCTION); and LEMAN, LLC (LEMAN)—are Delaware limited liability companies and have their principal place of business in Houston, Texas.

¶ 7 The defendants that are limited liability companies—Gramercy Advisors, Gramercy Asset Management, Gramercy Financial, and Tall Ships—are Delaware companies and have their principal place of business in Greenwich, Connecticut, according to the complaint.

¶ 8 “On information and belief,” the complaint alleges that the remaining defendant, Johnston, is a citizen of Connecticut and that he has his principal place of business in Greenwich. Johnston states, in his affidavit of April 21, 2015, that he is a comanaging member of Gramercy Advisors and that he resides in Puerto Rico.

¶ 9 B. The Fee–Sharing Agreement Between BDO Seidman, LLP, and Gramercy Advisors

¶ 10 Paul Shanbrom states as follows in his own affidavit, likewise dated April 21, 2015. From July 1987 to December 2008, he was a partner at BDO Seidman, LLP (BDO), where he was a member of the “Tax Solutions Group.” (According to the complaint, BDO has its principal place of business in Chicago.) As a member of this group, Shanbrom “was specifically charged with the task of negotiating the terms of BDO's arrangement with Gramercy with regard to their joint efforts in offering tax-advantaged transactions to potential clients, including those at issue in the instant proceedings.” The person at “Gramercy” he negotiated with was Johnston. (Shanbrom does not define the term “Gramercy” in his affidavit—but, again, Johnston was a comanaging member of Gramercy Advisors, and as we soon will discuss, Gramercy Advisors is the entity to which BDO paid fees pursuant to these negotiations between Shanbrom and Johnston.)

¶ 11 On January 10, 2001, Shanbrom and Johnston reached a “[n]ew deal,” under which BDO and Gramercy Advisors would split the fees “charged to clients in connection with the tax-advantaged transactions jointly promoted by BDO and Gramercy [,] * * * which included the tax-advantaged transaction involving distressed debt (engaged in by the Khans in the tax years 2002 and 2003).”

¶ 12 The term “[n]ew deal” is in a note handwritten by Shanbrom at the time of the negotiation and attached to his affidavit. According to this note, the “[o]ld deal” between BDO and Gramercy Advisors was 50/50 of net fees, but the “[n]ew deal” would be 66% for BDO and 34% for Gramercy Advisors, although, when it came to “[p]erformance,” the split would be 20% for BDO and 80% for Gramercy Advisors.

¶ 13 Shanbrom describes the contemplated joint efforts of BDO and Gramercy Advisors as follows:

“As part of this fee-splitting agreement between BDO and Gramercy, it was understood and agreed to that BDO had primary responsibility for, among other things, identifying potential clients and assisting in the marketing of the Transactions and that Gramercy had primary responsibility for, among other things, handling all aspects of the investments and transactional documents necessary to implement the [t]ransactions, in addition to assisting in marketing the [t]ransactions to clients identified by BDO. It was on this basis of BDO's and Gramercy's joint efforts that BDO and Gramercy orally agreed to the division of fees and profits as outlined in my January 10, 2001, notes.”

¶ 14 The record contains the printout of an e-mail, dated January 22, 2001, from Robert Jones to Judy Geiselhart, both of BDO. The subject line is “Bonus for Paul Shanbrom,” and the text of the e-mail reads: “Please process a $100,000 bonus for Paul Shanbrom in recognition of his achievement in re-negotiating the joint venture between Gramercy and Tax Solutions.” (An affidavit of Todd Simmens, BDO's national managing partner of tax risk management, authenticates this e-mail as a business record of BDO.)

¶ 15 C. The Joint Efforts of BDO and Gramercy Advisors To Sell the 2002 Distressed Debt Strategy to Khan

¶ 16 1. The Alleged Meeting in Urbana, Illinois

¶ 17 In his affidavit, dated April 1, 2014, Khan states the following. Around June 2001, Shanbrom, a partner at BDO—a firm that Khan describes as his and his wife's “longtime accountants”—solicited the Khans to participate in a “new Foreign Currency Derivative Strategy” (which is the subject of Khan v. Gramercy Advisors, LLC, 2016 IL App (4th) 150436–U, 2016 WL 3364747, and which, to be clear, we will not consider as a suit-based contact in the present case—this case is about the 2002 and 2003 Distressed Debt Strategies, not the 2001 Foreign Currency Derivative Strategy—although, merely for the sake of a coherent narrative, we occasionally will refer to the 2001 Foreign Currency Derivative Strategy). In order that Khan could learn more about the 2001 Foreign Currency Derivative Strategy, Shanbrom “referred [him] to [']Gramercy,[']” which Khan defines in his affidavit as “Gramercy Advisors and its many affiliated entities.” Shanbrom even arranged for a representative from “Gramercy” to meet with Khan at his executive office in Urbana, Illinois, in the summer of 2001 (Khan says in his affidavit). Khan cannot remember the name of the person Shanbrom brought along to this meeting in Urbana, but he remembers that Shanbrom introduced him as a “Gramercy operating partner.”

¶ 18 Khan continues in his affidavit:

“This meeting lasted between 45 minutes and one hour. During the meeting the Gramercy partner described Gramercy's investment capabilities generally and in particular with regard to distressed debt investments, and solicited my investment with Gramercy. Shanbrom and the Gramercy operating partner further represented that BDO and Gramercy had worked together on these types of investments before, had other investors lined up to participate, that the product was bullet-proof, and that prominent law firm opinions backed up the product.”

¶ 19 Defendants, on the other hand, dispute that they or any agent of theirs visited Khan in Urbana. In the summer of 2001, the “Gramercy”-affiliated companies had a total of only eight officers and employees—Johnston, Robert Young, Robert Lanava, Rodd Kauffman, Robert S. Koenigsberger, Marc Hélie, Robert Rauch, and Renato Mazzuchelli—and they all have signed affidavits stating they never personally met with Khan in Illinois and that, as far as they know, none of their colleagues did, either.

¶ 20 2. Telephone Calls From “Gramercy ” to Khan, in Illinois

¶ 21 After this meeting in Urbana (Khan...