Khan v. BDO Seidman, LLP
408 Ill. App. 3d 564
| Ill. App. Ct. | 2011Background
- Khan and related entities formed to generate artificial losses for tax advantages and relied on advisors from BDO, Deutsche Bank, and related firms.
- Two consolidated appeals involve 1999 Digital Options Strategy and 2000 COINS Strategy, both said to lack economic substance and to generate improper tax losses.
- Deutsche Bank and Brown allegedly assisted in implementing the strategies; Grant Thornton allegedly prepared the 2000 tax return for Thermosphere FX Partners.
- Jenkens & Gilchrist issued opinions asserting legality of the strategies; IRS publications warned against such schemes (Notices 1999-59 and 2000-44).
- The IRS later disallowed the losses in 2008, leading to back taxes, interest, and penalties; plaintiffs sued in 2009 seeking damages.
- The trial court dismissed as time-barred or untimely, but the appellate court held the actions were not time-barred and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the Deutsche defendants' claims time-barred? | Khan contends discovery rule tolls; fraud/duty claims arose from pre-2010 conduct. | Defendants argue statutes of limitations and repose bar the actions. | Not time-barred; claims survive under de novo review. |
| Did Khan plead a fiduciary duty and negligent misrepresentation against the Deutsche defendants? | Khan alleges broker/agent owed duty to give honest, competent advice pre- and post-transaction. | Defendants contend no fiduciary duty beyond ordinary broker-client relationship. | Counts I and III pleaded to state a claim; fiduciary duty and negligent misrepresentation exist. |
| Does pre-agency fiduciary duty apply, and did it attach before contract forms? | Pre-contract conference and reliance created a fiduciary duty that preceded written documents. | No pre-existing fiduciary duty; disclaimers negate reliance. | Pre-agency fiduciary duty found; reliance and trust supported; duty cannot be evaded by later disclaimers. |
| Which law governs fiduciary duty analysis—New York or Illinois? | Contracts choose New York law; pre-existing relationship may rely on NY fiduciary standards. | Illinois law should govern due to locus of transaction and pleadings. | New York law governs contract-based provisions, but NY fiduciary principles guide the analysis. |
| Is there ripeness/assessment-based timeliness under 13-214.2(b) for Grant Thornton’s conduct? | Repose provision lengthens the period after assessment; injury ripens upon IRS assessment. | Grant Thornton urges strict five-year limit with no extension unless assessment occurs. | Section 13-214.2(b) interpreted to lengthen to two years after assessment or settlement; action not barred absent assessment. |
Key Cases Cited
- Federated Industries, Inc. v. Reisin, 402 Ill.App.3d 23 (Ill. App. Ct. 2010) (discovery-rule accrual for accounting malpractice involving tax liability)
- de Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293 (2d Cir. 2002) (broker liability for initial honest and competent advice; no ongoing duty absent facts)
- Armstrong v. Guigler, 174 Ill.2d 281 (Ill. 1996) (implied fiduciary duties arise from agency/relationship principles)
- Martin v. Heinold Commodities, Inc., 163 Ill.2d 33 (Ill. 1994) (pre-agency fiduciary duty when special trust and reliance exist)
- Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (N.Y. 1959) (no-reliance clauses do not bar fiduciary/justifiable reliance in some contexts)
- Blue Chip Emerald LLC v. Allied Partners Inc., 299 A.D.2d 278 (N.Y. App. Div. 2002) (fiduciary duties require full disclosure despite contractual disclaimers)
- International Engine Parts, Inc. v. Feddersen & Co., 9 Cal.4th 606 (Cal. 1995) (Feddersen rule on when malpractice damages begin for tax-related cases)
- Apple Valley Unified School Dist. v. Vavrinek, Trine, Day & Co., 98 Cal.App.4th 934 (Cal. App. 2002) (limits of applying Feddersen to accounting malpractice not involving tax return prep)
- Van Dyke v. Dunker & Aced, 46 Cal.App.4th 446 (Cal. App. 1996) (distinguishes Feddersen when damages occur before IRS assessment)