Khan v. Gramercy Advisors, LLC

• Decision Date: 15 June 2016
• Docket Number: NO. 4-15-0436,4-15-0436
• Citation: 2016 IL App (4th) 150436 -U
• Parties: 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-Appellees, v. GRAMERCY ADVISORS, LLC; and JAY A. JOHNSTON, Defendants-Appellants.
• Court: United States Appellate Court of Illinois

2016 IL App (4th) 150436-U

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-Appellees, v. GRAMERCY ADVISORS, LLC;and JAY A. JOHNSTON, Defendants-Appellants.

NO. 4-15-0436

APPELLATE COURT OF ILLINOIS FOURTH DISTRICT

June 15, 2016

NOTICE

This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1).

Appeal from Circuit Court of Champaign County

No. 09L140

Honorable Jeffrey B. Ford, Judge Presiding.

JUSTICE APPLETON delivered the judgment of the court.

Justices Turner and Steigmann concurred in the judgment.

ORDER

¶ 1 Held: Defendants have made minimum contacts with Illinois, and exercising personal jurisdiction over them in Illinois is fair and reasonable under the circumstances of this case.

¶ 2 The plaintiffs are Shahid R. Khan (Khan); his spouse, Ann C. Khan; and some business entities in which, pursuant to the "2001 Foreign Currency Derivative Strategy," he bought majority interests. As it turned out, the strategy was an abusive tax shelter, although the Khans claim not to have known that at the time. The business entities generated losses, which the Khans claimed in their individual income tax returns so as to reduce their taxable income. After an audit, however, the Internal Revenue Service (IRS) disallowed the losses as contrived or artificial, and consequently, the Khans incurred genuine financial losses in the form of interest, penalties, and the amounts they had paid for the creation and implementation of the tax shelter.

Now plaintiffs seek damages from defendants, Gramercy Advisors, LLC (Gramercy), and Jay A. Johnston, among others, for peddling the tax shelter to them.

¶ 3 Neither defendant is domiciled in Illinois. Gramercy has its principal place of business in Connecticut, and Johnston resides in Puerto Rico. For that reason, 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 motions, 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).

¶ 4 In our de novo review, we find no violation of due process in the exercise of personal jurisdiction over defendants. Therefore, we affirm the trial court's denial of their motion for dismissal.

¶ 5 I. BACKGROUND

¶ 6 A. The Fee-Sharing Agreement Between BDO Seidman, LLP and Gramercy

¶ 7 In an affidavit of April 21, 2015, Paul Shanbrom states the following. From July 1987 to December 2008, he was a partner at BDO Seidman, LLP (BDO), and a member of its tax solutions group. (According to the complaint, BDO has its principal place of business in Chicago.) As a member of the tax solutions 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. (Johnston states, in his own affidavit of April 21, 2015, that he is a co-managing member of Gramercy.)

¶ 8 On January 10, 2001, Shanbrom and Johnston reached a "[n]ew deal," under which BDO and Gramercy would split the fees "charged to clients in connection with the tax-advantaged transactions jointly promoted by BDO and Gramercy beginning in the year 2001, which included *** the so-called 'Gramercy II' transaction involving investments in foreign currency (engaged in by the Khans in tax year 2001)." 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 the note, the "[o]ld deal" between BDO and Gramercy was 50/50 of net fees," but the "[n]ew deal" would be 66% for BDO and 34% for Gramercy, although, when it came to "[p]erformance," the split would be 20% for BDO and 80% for Gramercy.

¶ 9 Shanbrom describes the contemplated joint efforts of BDO and Gramercy 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."

¶ 10 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.)

¶ 11 The record also contains a printout of an e-mail, dated December 12, 2001, in which Johnston requests Gramercy's share of Khan's fee. The e-mail is addressed to Jones, and it lists "the clients and fees for 2001." One of the listed clients is "Shahid Khan," and next to his name is the amount $250,000.

¶ 12 B. The 2001 Foreign Currency Derivative Strategy

¶ 13 1. Selling the Strategy to Khan

¶ 14 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." Shanbrom told them that, regardless of whether they received a profit or a loss on any investments they made pursuant to this strategy, they would realize "substantial tax benefits" in a "completely legal" way.

¶ 15 In order that Khan could learn more about this strategy, Shanbrom referred him to Gramercy. Shanbrom even arranged for a representative from Gramercy to meet with Khan at his executive office in Urbana, Illinois, in summer 2001 (according to Khan's affidavit). Khan could not remember the name of the person Shanbrom brought along to the meeting in Urbana, but he remembered that Shanbrom introduced him as an "operating partner" of Gramercy.

During the meeting, which lasted 45 minutes to an hour, the partner from Gramercy "solicited [Khan's] investment with Gramercy." Both Shanbrom and the Gramercy partner "represented that *** that the product was bullet-proof " and "backed up" by "prominent law firm opinions."

¶ 16 Defendants, on the other hand, dispute that anyone from Gramercy visited Khan in Urbana. All eight persons who were employed by Gramercy in summer 2001—Robert Lanava, Jay A. Johnston, Robert Young, Rodd Kauffman, Robert S. Koenigsberger, Marc Hélie, Robert Rauch, and Renato Mazzuchelli—have signed affidavits stating that they never met with Khan in Illinois and that, as far as they know, no one else at Gramercy did, either.

¶ 17 After this meeting in Urbana (Khan continues in his affidavit), the "Gramercy operating partner" followed up with two or three telephone calls to Khan in Illinois. This Gramercy operating partner recommended that Khan "invest additional cash (several millions) to lend further legitimacy to the investment and enhance the return on the investment, and further [assured Khan] that a prominent law firm opinion on the transaction would issue." (According to the complaint, Proskauer Rose, LLP (Proskauer), later issued an opinion letter to the effect that the 2001 Foreign Currency Derivative Strategy generated legitimate tax losses. But the opinion letter, plaintiffs allege, did not represent the independent opinion of an independent law firm; rather, BDO and Proskauer were in cahoots, as evidenced by the fact that Shanbrom "reviewed the opinion letter and made certain revisions.")

¶ 18 In August 2001, Shanbrom arranged for a conference call between Khan, himself, and Johnston "to further discuss the 2001 Foreign Currency Derivative Strategy." Khan recounts this conference call as follows:

"12. *** Shanbrom initiated the call, Johnston joined in, and I participated in the call from my office in Illinois. During the call, I introduced myself to Johnston and told him about my Illinois-based businesses and residency. During the call, Johnston explained the steps of the 2001 Foreign Currency Derivative Strategy and reiterated Shanbrom's claims regarding the 2001 Foreign Currency Derivative Strategy's potential to provide tax benefits. Johnston further touted what he described as Gramercy's special expertise with distressed debt investments and its long history of achieving high rates of return. Johnston promised me that Gramercy could achieve results for my wife and me (and the other Plaintiffs) that few, if any, other investment firms could provide. Gramercy, through Johnston, confirmed to me that it had a history of working with BDO and reiterated that the 2001 Foreign Currency Derivative Strategy was a completely legal way to make above average returns, while simultaneously achieving substantial tax benefits, regardless of the investments' losses or gains.

***

14. Again, before Plaintiffs ever entered into any agreements with Gramercy, during the call referenced in paragraph 12, BDO's Shanbrom and Gramercy's Johnston advised me that the 2001 Foreign Currency Derivative Strategy could yield a substantial profit and at the

...