Kipnis v. Bayerische Hypo-Und Vereinsbank, AG

• Decision Date: 17 April 2015
• Docket Number: No. 14–11959.,14–11959.
• Citation: 784 F.3d 771
• Parties: Donald KIPNIS, Lawrence Kibler, Barry E. Mukamal As Chapter 7 Trustee of the Estate of Donald Kipnis, Kenneth A. Welt As Chapter 7 Trustee of the Estate of Lawrence Kibler, Plaintiffs–Appellants, v. BAYERISCHE HYPO–UND VEREINSBANK, AG, a corporation, a.k.a. Unicredit Bank AG, HVB U.S. Finance, Inc., a.k.a. Unicredit U.S. Finance, Inc., Defendants–Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

784 F.3d 771

Donald KIPNIS, Lawrence Kibler, Barry E. Mukamal As Chapter 7 Trustee of the Estate of Donald Kipnis, Kenneth A. Welt As Chapter 7 Trustee of the Estate of Lawrence Kibler, Plaintiffs–Appellants

v.BAYERISCHE HYPO–UND VEREINSBANK, AG, a corporation, a.k.a. Unicredit Bank AG, HVB U.S. Finance, Inc., a.k.a. Unicredit U.S. Finance, Inc., Defendants–Appellees.

No. 14–11959.

United States Court of Appeals, Eleventh Circuit.

April 17, 2015.

Michael Guerra Dickler, Scott F. Hessell, Sperling & Slater, Chicago, IL, Dennis G. Kainen, Weisberg Kainen Mark, PL, Miami, FL, for Plaintiffs–Appellants, Donald Kipnis and Lawrence Kibler.

Wifredo A. Ferrer, Dennis G. Kainen, U.S. Attorney's Office, Miami, FL, for Plaintiff–Appellant, Kenneth A. Welt.

Mark P. Ressler, Henry Brownstein, Michael Hanin, Kasowitz Benson Torres & Friedman, LLP, New York, N.Y., Ann Marie St. Peter–Griffith, Kasowitz Benson Torres & Friedman, LLP, Miami, FL, for Defendants–Appellees.

Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 1:13–cv–23998–CMA.

Before HULL, BLACK and MELLOY,^* Circuit Judges.

Opinion

PER CURIAM:

In this diversity case, plaintiffs-appellants Donald Kipnis and Lawrence Kibler (collectively, “Plaintiffs”), along with plaintiffs-appellants Barry Mukamal and Kenneth Welt,¹ appeal the district court's Federal Rule of Civil Procedure 12(b)(6) dismissal of their complaint against defendants-appellees Bayerische Hypo-Und Vereinsbank, AG and HVB U.S. Finance, Inc. (collectively, “HVB”) as barred by the applicable statutes of limitations. After review and oral argument, we certify a question to the Florida Supreme Court as outlined below.

I. BACKGROUND

This appeal arises out of the parties' participation in an income tax shelter scheme known as a Custom Adjustable Rate Debt Structure (“CARDS”) transaction. In short, Plaintiffs alleged that HVB and its co-conspirators defrauded Plaintiffs by promoting and selling CARDS for their own financial gain.

A. 2001 Introduction to CARDS

Plaintiffs are owners of Miller & Solomon General Contractors, Inc. (“M & S”), one of the largest general contractors in south Florida. In 1999, M & S lost over $3 million, which substantially reduced its working capital just as south Florida was entering a construction boom. Plaintiffs sought to increase M & S's bonding capacity in anticipation of the construction boom, but were unable to secure the desired long-term financing from conventional bank sources.

Michael DeSiato was both Plaintiffs' and M & S's accountant. In 2000, DeSiato was introduced to Roy Hahn of Chenery Associates, Inc. (“Chenery”), a financial and tax services boutique that developed and promoted CARDS transactions. DeSiato told Plaintiffs that CARDS was the type of financing that could increase M & S's bonding capacity and provide tax benefits that would flow to Plaintiffs. Starting in 2000, Chenery and HVB marketed the CARDS strategy to Plaintiffs.

Plaintiffs analyzed CARDS to determine whether implementing the strategy would allow M & S to participate in more construction projects. However, Plaintiffs did not examine the various steps in a CARDS transaction and neither Plaintiffs nor DeSiato fully understood the complicated procedures involved. Instead, Plaintiffs relied on the reputations of HVB and Sidley Brown & Wood LLP (“Sidley”), a law firm that had prepared an opinion letter representing CARDS as an economically substantive strategy that would pass IRS scrutiny.

B. CARDS Transactions, Generally

CARDS transactions are designed to create the appearance of a tax loss without any actual economic loss. A CARDS transaction has three steps.

In the first step, a Delaware limited liability company (“LLC”) is formed to serve as the borrower. The borrower LLC is comprised entirely of foreign members to avoid being subject to U.S. taxation. Once formed, the borrower LLC obtains a euro-denominated loan from an international bank. The borrower LLC then purchases two certificates of deposit (“CDs”) from the lending bank—one with 85% of the loan proceeds and the other with 15% of the loan proceeds. The loan proceeds, in the form of the two CDs, are immediately pledged to the lending bank as collateral for the loan.

In the second step, the CARDS customer buys the smaller, 15% CD from the borrower LLC. In exchange, the CARDS customer assumes joint and several liability for the full value of the loan and agrees to pay 100% of the loan principal when the loan reaches its maturation date. In the third step, the CARDS customer converts the 15% euro-denominated CD into U.S. dollars, which the customer then gives back to the lending bank as collateral for the loan. In the absence of other acceptable collateral, the money never leaves the custody and control of the lending bank.

This currency exchange is a taxable event generating tax benefits. To achieve the benefits, the CARDS customer claims that his cost basis in the exchanged currency is the entire loan amount—not just the 15% portion he actually received from the borrower LLC. This discrepancy creates a tax loss of 85% of the original loan amount, which is used to offset ordinary income. However, because both the 85% and 15% CDs are held by the lending bank and are used to repay the loan, the paper loss created by the currency exchange is illusory.

C. Plaintiffs' CARDS Transaction: December 2000—December 2001

Plaintiffs' CARDS transaction, which commenced on December 5, 2000, and terminated on December 5, 2001, worked as follows. HVB, a large German bank, served as the lender. Wimbledon Financial Trading LLC (“Wimbledon”), formed on October 11, 2000, by two United Kingdom citizens, served as the borrower.

On December 5, 2000, Wimbledon entered into a credit agreement with HVB, in which HVB agreed to lend Wimbledon €6,700,000 over a 30-year term with interest. On the same day, Wimbledon requested that HVB transfer the € 6,700,000 to Wimbledon's HVB account. Wimbledon issued a promissory note to HVB for €6,700,000, maturing on December 5, 2030, and HVB credited Wimbledon the same amount. Wimbledon then pledged all of its holdings at HVB as collateral. Also on December 5, 2000, Wimbledon purchased an HVB time deposit in the amount of €5,679,792, maturing on December 5, 2001.

On December 21, 2000, Wimbledon and Plaintiffs entered into a purchase agreement and an assumption agreement. Under the purchase agreement, “Wimbledon sold each Plaintiff a portion of the [loan] in the form of a term deposit in the amount of €520,500 (for a total of [€]1,005,000), plus accrued interest, held in Wimbledon's pledged HVB account.” The term deposits, which amounted to 15% of the €6,700,000 loan, were transferred to Plaintiffs' HVB account on December 27, 2000. As part of the purchase agreement, Plaintiffs assumed joint and several liability “for all obligations under the [credit agreement] not covered by Wimbledon's collateral.”

Under the assumption agreement, Plaintiffs assumed joint and several liability for Wimbledon's obligations, including repayment of the entire €6,700,000 loan. As collateral, Plaintiffs pledged all of their right, title, and interest in the accounts and instruments they held with HVB, as well as all proceeds thereof.

With these agreements in place, Wimbledon, HVB, and Plaintiffs took the following steps to execute the assumption of the loan. On December 21, 2000, Plaintiffs wired HVB a total of $1,198,000 to buy three time deposits maturing on December 5, 2001. On December 27, 2000, HVB transferred the €1,005,000 referenced in the purchase agreement between Plaintiffs and Wimbledon into Plaintiffs' HVB account. Also on December 27, 2000, HVB exchanged €733,750 of the €1,005,000 it had credited to Plaintiffs for $682,387.50, at a rate of 0.93 U.S. dollars to the euro. On January 11, 2001, HVB exchanged the remaining € 271,250 for $256,331.25, at a rate of 0.945 U.S. dollars to the euro.

After Plaintiffs deposited $1,198,000 with HVB, HVB allowed M & S to withdraw $1,037,680 of the loan proceeds to use as it wished. On January 11, 2001, Plaintiffs began using the withdrawn loan proceeds. Specifically, Plaintiffs wired (1) $382,000 in fees from their HVB account to an account held by Chenery (as the promoter of the CARDS transaction)² and (2) $556,718.75 to M & S's account at Mellon Bank.

On November 13, 2001, less than one year after initiation of the CARDS transaction, HVB informed Plaintiffs that full repayment of the loan was due on December 5, 2001. HVB did so despite its prior representations that it would maintain the loan for 30 years. On December 5, 2001, the mandatory repayment date, Plaintiffs' deposits at HVB were converted to the euro at the December 22, 2000 exchange rate. Had the December 5, 2001 exchange rate been applied instead, Plaintiffs would have made a profit of $70,200 from the currency exchange. Plaintiffs' CARDS transaction closed on December 5, 2001, once all of the borrowed money was repaid with the pledged collateral.

D. HVB Publicly Admits Fault: February 2006

CARDS transactions and their providers, such as HVB, have been the subject of investigation by federal authorities.³ As a result of its involvement in CARDS, HVB was charged with participating in a conspiracy to defraud the United States, to commit tax evasion, and to make false and fraudulent tax returns.

On February 13, 2006, HVB entered into a deferred prosecution agreement (“DPA”) with the U.S. Department of Justice. HVB admitted that, between 1996 and 2003, it assisted tax evasion by U.S. citizens by participating in and implementing fraudulent tax shelter transactions, including CARDS. HVB acknowledged that “the documentation used to implement CARDS ... falsely stated that the loans were 30-year loans whereas, in truth and fact, as HVB and other participants knew and understood, they were loans of approximately one year in duration.” HVB admitted that “CARDS transactions ... involved false representations” and “had no purpose...