KHAN v. SEIDMAN

• Citation: 343 Ill.Dec. 946,935 N.E.2d 1174,404 Ill.App.3d 892
• Decision Date: 29 October 2010
• Docket Number: No. 4-10-0002,4-10-0003.,4-10-0002
• 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-Appellants, v. BDO SEIDMAN, LLP; Paul Shanbrom; Michael Collins; 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; and Marc Helie, Defendants-Appellees. Shahid R. Khan; Ann C. Khan; Uviado, LLC; Jonction, LLC; and Leman, LLC, Plaintiffs-Appellants, v. BDO Seidman, LLP; Paul Shanbrom; Michael Collins; Gramercy Advisors, LLC; Gramercy Asset Management, LLC; Gramercy Financial Services, LLC; Tall Ships Capital Management, LLC; Jay A. Johnston; Marc Helie; DeCastro, West, Chodorow, Glickfeld and Nass, Inc.; and Financial Strategy Group, PLC, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

404 Ill.App.3d 892
935 N.E.2d 1174
343 Ill.Dec. 946

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; Paul Shanbrom; Michael Collins; 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; and Marc Helie, Defendants-Appellees.
Shahid R. Khan; Ann C. Khan; Uviado, LLC; Jonction, LLC; and Leman, LLC, Plaintiffs-Appellants,
v.
BDO Seidman, LLP; Paul Shanbrom; Michael Collins; Gramercy Advisors, LLC; Gramercy Asset Management, LLC; Gramercy Financial Services, LLC; Tall Ships Capital Management, LLC; Jay A. Johnston; Marc Helie; DeCastro, West, Chodorow, Glickfeld and Nass, Inc.; and Financial Strategy Group, PLC, Defendants-Appellees.

Nos. 4-10-0002, 4-10-0003.

Appellate Court of Illinois,Fourth District.

Sept. 16, 2010.
Rehearing Denied Oct. 29, 2010.

935 N.E.2d 1175

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935 N.E.2d 1176

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935 N.E.2d 1177

James D. Green, Thomas, Mamer & Haughey, LLP, Champaign, David R. Deary (argued), Carol E. Farquhar, Jeven Sloan, Loewinsohn Flegle Deary, LLP, Dallas, TX, for Shahid R. Khan.

Andrew R. Gifford, Mark A. Bradford, Raja Gaddipati, Chicago, Cary B. Samowitz (argued), New York, NY, DLA Piper LLP (US), for BDO Seidman, LLP.

Roger D. Higgins, Alison H. Moore, Thompson, Coe, Cousins & Irons, LLP, Dallas, TX, Richard J. Sapinski, Sills Cummis & Gross, P.C., Newark, NJ, for Paul Shanbrom.

Melissa Murphy-Petros, Michael P. Tone, Wilson, Elser, Moskowitz, Edelman & Dicker LLP, Chicago, for DeCastro, West, Chodorow, Glickfeld & Nass, Inc.

Justice APPLETON delivered the opinion of the court:

343 Ill.Dec. 949

In these two consolidated cases, Champaign County case Nos. 09-L-139 and 09-L-140 (Nos. 4-10-0003 and 4-10-0002, respectively, on appeal), plaintiffs are Shahid R. Khan and his wife, Ann C. Khan, along with various business entities that the Khans formed, on the advice of their accountants at BDO Seidman, LLP (BDO), for the purpose of shuffling assets around and generating artificial tax losses. The Khans did not know, however, that they were doing anything illegal. BDO had been their accounting firm for years, and it sold them on the so-called “investment strategies” as legitimate ways to make a profit and at the same time to minimize income taxes. And to be doubly safe, the Khans went to supposedly independent law firms recommended by BDO, namely, Jenkens & Gilchrist, P.C. (Jenkens); Proskauer Rose, L.L.P. (Proskauer); and DeCastro, West, Chodorow, Glickfeld & Nass, Inc. (DeCastro), which gave the Khans opinion letters reassuring them that they could claim the losses in their income-tax returns; but the opinion letters were worthless because these law firms were in cahoots with BDO, so plaintiffs allege.

The upshot is that the Khans lost a lot of money, not only the fees and premiums they paid to defendants to carry out the “investment strategies,” but also the back taxes, interest, and penalties they had to pay to the Internal Revenue Service (IRS) when it disallowed the claimed losses. All this is according to the complaints, in which the Khans sue BDO and two of its employees, Paul Shanbrom and Michael Collins, along with a variety of alleged coconspirators that helped with the sham investments and other transactions necessary to the creation of the abusive tax shelters.

Pursuant to sections 2-619(a)(1) and (a)(9) of the Code of Civil Procedure (Code) (735 ILCS 5/2-619(a)(1), (a)(9) (West 2008)), BDO, Collins, and Shanbrom moved either to dismiss the complaints or to stay the actions, on the ground that the Khans and BDO had entered into an arbitration agreement that encompassed plaintiffs' claims. The trial court granted the BDO defendants' motion to compel arbitration in the two cases, holding that all of the claims came within the scope of the arbitration clause.

Plaintiffs appeal from this ruling on a number of grounds, and we agree with one of their arguments, namely, that the arbitration agreement does not cover the claims that plaintiffs assert in their complaints. Or, more precisely, it does not cover all of the claims. The only claims we

343 Ill.Dec. 950

935 N.E.2d 1178

find to be subject to arbitration are those for breach of contract, which plaintiffs plead in the alternative. We find no evidence, in the text of the contract, that plaintiffs ever agreed to arbitrate the other claims, such as those for breach of fiduciary duty, negligent misrepresentation, fraud, and civil conspiracy.

According to the contractual language, a claim is subject to arbitration only if it relates to, or arises from, BDO's “performance” of the contract. (Actually, there are several contracts, called “consulting agreements,” but they are identical in their germane provisions.) In the complaints in the two cases, plaintiffs frame their claims in a variety of legal theories, but when one reduces the claims to their essence, they mostly relate to tasks that the consulting agreements expressly exclude from BDO's promised performance. Essentially, in both cases, plaintiffs sue the BDO defendants for harming them financially in three ways: (1) giving them dishonest investment advice, (2) preparing defective income-tax returns for them, and (3) conspiring with law firms to issue bogus opinion letters attesting to the legality of losses claimed in the tax returns. The second item folds into the third item because, according to the consulting agreements, the client is supposed to confirm the correctness of the tax returns by conferring with a law firm and, in fact, the consulting agreements make clear that although BDO will prepare the client's tax returns, BDO will not thereby offer any legal opinions or tax opinions and that the client should not understand BDO as doing so. The consulting agreements disavow not only legal opinions but also “investment advice” as being part of BDO's performance. It follows that only the alternative counts for breach of contract, or failure to perform, fall within the scope of the arbitration clause. Therefore, we affirm the trial court's judgments in part, reverse them in part, and remand these two cases for further proceedings.

I. BACKGROUND A. Case No. 09-L-140 1. The 1999 Digital Options Strategy a. BDO Promotes the Digital Options Strategy to Shahid Khan

Beginning in approximately 1993, BDO performed auditing services for Chromecraft, a company of which Shahid Khan was part owner. Michael Collins, a partner at BDO, was in charge of auditing services for Chromecraft, and by 1999, he had been one of Khan's trusted accountants and advisors for some six years.

In 1999, Khan requested his own partner at Chromecraft to ask Collins if he knew anyone who could advise him on purchasing foreign currency. Khan needed foreign currency because he was in negotiations to purchase a Canadian company that manufactured plastic automobile bumpers and the Japanese owners of the company wanted to be paid in Japanese yen.

Collins referred Khan to Paul Shanbrom, who was a member of BDO's Tax Solutions Group and reputedly an expert in foreign-currency trading, and in September 1999, Khan and one of his estate-planning advisors had a meeting with Collins and Shanbrom. The meeting went beyond the subject of simply purchasing foreign currency. Shanbrom introduced Khan to an “investment strategy” involving the purchase and sale of digital options on foreign currency (the Digital Options Strategy), a strategy which, according to Shanbrom, not only gave Khan a chance to double his money but which also allowed him to claim a tax loss if he lost money on his investments in foreign currency.

935 N.E.2d 1179

343 Ill.Dec. 951

When someone buys an option, that person buys the right, but not the obligation, to buy or sell a given quantity of assets (in this case, foreign currency) at a fixed price, or “strike price,” within a specified time, regardless of the market price, or “spot price,” of the assets. An option is “digital,” or “binary,” if the investor stands to win or lose a predetermined amount in full: in other words, the payout will be all of the predetermined amount or nothing (1 or 0, in binary terms). Essentially, a digital option is an all-or-nothing wager that the spot price will be at or above a given price on a certain date-or it can be an all-or-nothing wager that the spot price will be beneath the given price on that date.

If the investor is betting that the spot rate will be at or above the given price on a certain date, the investor has a long option. On the other hand, if the investor is betting that the spot rate will be at or below the given price on a certain date, the investor has a short option.

b. The Consulting Agreement of November 12, 1999

On November 12, 1999, BDO and Flex-N-Gate Corporation, of which Shahid Khan was president, entered into a contract entitled “Consulting Agreement,” and this contract contained an arbitration clause. (We learn the details of the consulting agreements from BDO's motion for dismissal, to which the consulting agreements are attached as exhibits; the rest of the information in Part I of this order comes from plaintiffs' complaint.) The arbitration clause embraces all claims arising in connection with the performance or breach of the consulting agreement; and in the parts of the agreement defining BDO's performance, certain clauses limit or qualify other clauses. On the one hand, BDO will provide consulting services in conjunction with the buying and selling of investments, but, on the other hand, BDO will provide no “investment advice or services.” Similarly, on the one hand, BDO will help with structuring investment transactions so as to achieve the most beneficial tax results and will prepare the client's income-tax...