Menzies v. Seyfarth Shaw LLP
197 F. Supp. 3d 1076
N.D. Ill.2016Background
- Plaintiff Steven Menzies, co‑founder/executive of Applied Underwriters, used a Northern Trust‑designed estate/tax plan (2003 and 2004) involving loans, trusts, substitutions and opinion letters from Seyfarth to avoid capital‑gains tax on sales of AUI stock; Christiana acted as trustee and Euram Bank provided structured notes/loans.
- Berkshire Hathaway bought the AUI stock in 2006 for ~$64M; Menzies did not report the sale as taxable, relying on the tax‑shelter structure and Seyfarth opinion letters.
- IRS audited, found the shelters abusive, recharacterized the sale as Menzies’s taxable sale, and Menzies paid about $10.4M in taxes, penalties, and interest.
- Menzies sued Seyfarth, Taylor, Northern, and Christiana asserting RICO (substantive and conspiracy) plus state claims (fraud, negligence, breach of fiduciary duty, unjust enrichment), seeking >$10.4M.
- Defendants moved to dismiss under Rules 9(b), 12(b)(2) and 12(b)(6); the court granted dismissal of the RICO counts without prejudice for failure to plead a RICO pattern/continuity but denied (without prejudice) dismissal of state claims pending potential amendment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sufficiency of RICO enterprise pleading | Alleged association‑in‑fact: lawyers, bankers and trustees acted in concert to market/implement the tax scheme | The interactions were ordinary commercial referrals/transactions, not an enterprise | Enterprise adequately alleged at pleading stage (Boyle/Turkette/Bible guidance) |
| RICO “pattern” (continuity) | Multiple mail/wire predicate acts over ~31 months show a closed‑ended pattern supporting RICO | The acts comprise one scheme targeting one victim (Menzies) with a natural end; no threat of repetition | Pattern dismissed: closed‑ended continuity and threat of continuity insufficient; RICO counts dismissed without prejudice (adopted U.S. Textiles, Olive Can logic) |
| Operation/management (Reves) — conduct element | Defendants directed/operated the scheme (referrals, drafting opinion letters, trustee services) | Some defendants only provided professional services and thus were not operators/managers | Allegations met Reves at pleading stage; participation alleged sufficient to show operation/management or knowing facilitation |
| PSLRA §1964(c) RICO exception (whether RICO barred by securities‑fraud overlap) | RICO claims not barred because scheme is tax fraud and securities transactions were incidental to tax avoidance | RICO barred because conduct could be actionable as securities fraud (PSLRA) | PSLRA exception does not apply: conduct was tax shelter fraud not fraud “in connection with” purchase/sale of securities; RICO bar not triggered |
Key Cases Cited
- AnchorBank, FSB v. Hofer, 649 F.3d 610 (7th Cir. 2011) (Rule 12(b)(6) pleading standard principles)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (facial plausibility standard)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading requires more than labels/conclusions)
- Turkette, United States v., 452 U.S. 576 (1981) (definition of association‑in‑fact enterprise)
- Boyle v. United States, 556 U.S. 938 (2009) (three‑part test for association‑in‑fact enterprise)
- H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229 (1989) (pattern requires continuity plus relationship)
- Reves v. Ernst & Young, 507 U.S. 170 (1993) (operation‑management test for §1962(c))
- Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985) (civil RICO purposes and liberal construction)
- U.S. Textiles, Inc. v. Anheuser‑Busch Cos., Inc., 911 F.2d 1261 (7th Cir. 1990) (single‑scheme/single‑victim may defeat continuity)
- Roger Whitmore’s Automotive Servs., Inc. v. Lake County, 424 F.3d 659 (7th Cir. 2005) (continuity analysis and commonsense result)
- Bible v. United Student Aid Funds, Inc., 799 F.3d 633 (7th Cir. 2015) (enterprise and economic interdependence analysis)
- MLSMK Inv. Co. v. J.P. Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011) (discussed re: PSLRA §1964(c) interpretation)
- Rezner v. Bayerische Hypo‑Und Vereinsbank AG, 630 F.3d 866 (9th Cir. 2010) (tax‑scheme where securities incidental does not trigger PSLRA bar)
- Ouwinga v. Benistar 419 Plan Servs., Inc., 694 F.3d 783 (6th Cir. 2012) (PSLRA exception not applied where securities incidental to tax fraud)