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March 22, 2001


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.


These actions, which have been consolidated for all purposes, arise from a dispute between The Diversified Group, Inc. ("DGI") and Paul Daugerdas, in connection with the Optional Partnership Strategy ("OPS"), a tax strategy designed to enable individuals or corporations to achieve tax savings through the use of European-style digital options. In the first action, No. 00 Civ. 0771, DGI is suing Daugerdas for breach of fiduciary duty, breach of contract and unjust enrichment.*fn1 Specifically, DGI alleges that Daugerdas, as DGI's attorney, breached his fiduciary duty to DGI by disclosing and marketing the OPS to his clients without fairly compensating DGI or obtaining its consent. See DGI's Complaint ("DGI Compl.") ¶¶ 26-29. In addition, DGI alleges that by failing to refer potential clients who might have benefitted from the OPS to DGI, Daugerdas breached the terms of a valid contractual understanding between the parties. See id. ¶¶ 32, 33.

In the second action, No. 00 Civ. 6484, the law firm of Jenkens & Gilchrist ("J & G"), Daugerdas' current employer, asks this Court to vindicate its rights in the first action by declaring that: (1) J & G, via Daugerdas or otherwise, had no contractual obligation to refer clients to DGI; (2) J & G was never obligated to refer clients to DGI; and (3) the OPS allegedly disclosed to Daugerdas was not confidential.*fn2

Jurisdiction over both actions is based on diversity of citizenship pursuant to 28 U.S.C. § 1332.

Daugerdas and J & G (collectively the "moving parties") have filed separate motions for summary judgment pursuant to Federal Rule of Civil Procedure 56(c). For the reasons set forth below, their motions are denied in part and granted in part.


A. The Parties

DGI is engaged in the business of conceiving and marketing products and methods designed to help taxpayers minimize their corporate and/or personal income taxes. See 9/7/00 Deposition of James Haber ("Haber Dep."), President of DGI, Ex. 2 to Paul Daugerdas' Motion for Summary Judgment ("Daugerdas Mot."), at 7-8. DGI is not a licensed accounting firm nor does it engage in the practice of law. See id. DGI's business includes "developing tax strategies and using them in transactions meeting clients' particular business and investment objectives." Affirmation of Orrin Tilevitz in Opposition to the Motions for Summary Judgment ("Tilevitz Aff."), Vice President and General Counsel of DGI, Ex. 6 to the Affidavit of John McConnell in Opposition to the Motions for Summary Judgment ("McConnell Aff."), Counsel for DGI, ¶ 6.

Daugerdas is a Certified Public Accountant and is licensed to practice law in Illinois. See Affidavit of Paul Daugerdas in Support of his Motion for Summary Judgment ("Daugerdas Aff."), Ex. 9 to Daugerdas Mot., ¶ 2. A majority of Daugerdas' work involves rendering legal opinions on tax strategies upon the advice and suggestion of entities such as DGI. See id. ¶ 7. Prior to 1994, Daugerdas was employed by Arthur Anderson & Co., holding a variety of positions, including Partner in Charge of the Futures and Options Tax Practice. See id. ¶ 5. From 1994 to December 28, 1998, Daugerdas was a partner at the law firm of Altheimer & Gray ("A & G"), where the last position he held was Chairman of the Tax Department. See id. ¶ 4.

B. The Relationship between DGI and Daugerdas

Haber and Daugerdas have known each other for approximately ten years. See Haber Dep. at 25-26; 10/11/00 Deposition of Paul Daugerdas ("Daugerdas Dep."), Ex. 10 to Daugerdas Mot., at 108. Despite this, the precise nature of their relationship is in dispute.

In July 1992, Haber sent Daugerdas materials describing various financial products marketed by DGI. See 7/9/92 Letter, Ex. 9 to McConnell Aff. In the accompanying letter, Haber expressed his belief that Daugerdas would keep these materials confidential. See id. Haber sent Daugerdas additional materials and a similar letter two and one-half months later. See 9/23/92 Letter, Ex. 10 to McConnell Aff.

In March 1995, Daugerdas, an attorney with A & G at the time, agreed to evaluate the merits of a tax strategy designed by DGI to assist companies in utilizing excess foreign tax credits. Daugerdas signed a confidentiality agreement stating that any information provided to him by DGI for this purpose would be kept confidential. See 3/1/95 Letter, Ex. 12 to McConnell Aff. However, the confidentiality agreement expressly permitted Daugerdas to present this strategy to prospective clients if they agreed to sign a confidentiality agreement. See id. In the event a prospective client decided to utilize the strategy, DGI was to be fairly compensated. See id.

1. The Engagement Agreement

In November 1996, Daugerdas and A & G were engaged by Haber to represent DGI as its attorneys in connection with "certain commercial, corporate and federal income tax issues" associated with DGI's Alternative Long-Term Financing Strategy ("ALFS"). See 11/15/96 Engagement Agreement, Ex. 13 to McConnell Aff.*fn4 Pursuant to this agreement, Daugerdas was required to "maintain the confidentiality of information" provided by DGI, except to the extent DGI consented to the contrary, or as "necessary to carry out [its] representation or as required by the ethical rules governing lawyers or by applicable law." Id. DGI was free to terminate the relationship at any time, whereupon DGI's "papers and property [would] be returned . . . promptly after [A & G's] receipt of payment of all fees and expenses." Id.

While Daugerdas was required to keep confidential the information DGI provided him, he was permitted to introduce the ALFS to other entities. In fact, because Daugerdas' fees were calculated in accordance with the extent of his involvement in a particular ALFS transaction, there was an incentive for Daugerdas to do so. For example, if Daugerdas merely rendered a tax opinion for an ALFS transaction introduced to him by DGI, he was entitled to a commission of .5% of the size of that transaction. See id. On the other hand, if Daugerdas introduced a prospective client to the ALFS transaction, he was entitled to 50% of DGI's net profit on the transaction. See id.

2. The Oral Contract

DGI also alleges that its relationship with Daugerdas "represented a valid contractual understanding between the parties." DGI Compl. ¶ 31. Pursuant to this contractual understanding, once Daugerdas agreed to help DGI evaluate and develop one of its tax strategies, he was prohibited from marketing that strategy to prospective clients or participating in transactions involving that strategy without fairly compensating or obtaining DGI's consent. See Haber Dep. at 33-37, 47, 122; Haber Aff. ¶ 22. Any profits Daugerdas earned from participating in such transactions were to be shared equally with DGI. See Haber Dep. at 111-113; Haber Aff. ¶ 21. In return, DGI promised to make all of its clients aware that Daugerdas' firm was willing to render an opinion letter on the correct tax treatment of their transaction. See Haber Dep. at 37. According to Haber, the parties' obligations under this oral contract were reiterated each time a new strategy was developed by the parties. See id. at 32.

C. The Tax Strategies: The OPS and Short-Sale Strategy

1. The OPS

A tax strategy is defined as a technique used in a business or investment transaction designed to achieve a particular tax result predicated on particular economic and tax principles. See Tilevitz Aff. ¶ 5; Affidavit of R.J. Ruble in Opposition to the Motions for Summary Judgment ("Ruble Aff."), Attorney for Brown & Wood LLP, Ex. 7 to McConnell Aff., ¶ 3; Affidavit of Ira Akselrad, Attorney for Proskauer Rose LLP, Ex. 8 to McConnell Aff., ¶ 3. In a letter submitted to opposing counsel, as well as to the Court, DGI defined the OPS as follows:

The option partnership strategy is a tax-saving strategy wherein a taxpayer purchases and writes options and transfers these option positions to a partnership so as to create substantial increased basis in the partnership interest. As a result of these trades and transfer, the taxpayer claims that the basis of the taxpayer's partnership interest is increased by the cost of purchased call options, but is not reduced as a result of the partnership's assumption of the taxpayer's obligation with respect to the written call options.

8/24/00 Letter, Ex. 1 to Daugerdas Mot. During Haber's deposition, this definition was modified to incorporate the use of European-style digital options. See Haber's Dep. at 22. According to DGI, while European-style digital options "in and of themselves are not unique," see id. at 73, the use of European-style digital options is essential to the OPS because it "permit[s] significant leverage to be obtained by the option purchaser, as required by the [OPS], at relatively modest cost and minimum risk." Haber Aff. ¶ 37.

2. The Short-Sale Strategy

From 1991 until October 1999, Daugerdas was marketing a tax strategy known as the short-sale strategy. See Haber Dep. at 29, 63-64, 73, 213-215. Generally speaking, when utilizing this strategy, a prospective client borrows a treasury security, sells the security short, and then contributes the proceeds to a partnership in exchange for a partnership interest. See id. at 75-76. According to Haber, the short-sale strategy had the same "technical [tax] result" as the OPS. See Haber Dep. at 63, 76. Prior to 1994, Daugerdas discussed the idea of substituting options in place of the short-sale of securities with Emil Pesiri, a personal acquaintance and business associate. See Declaration of Emil Pesiri, Managing Director of Intercontinental Capital Associates, Ex. 12 to Daugerdas Mot.; Daugerdas Dep. at 190-91. Sometime in 1995 or 1996, Daugerdas began informing his clients that they could substitute options for the short-sale of securities and achieve the same tax result. See Daugerdas Aff. ΒΆ 10; Daugerdas Dep. at 252-54. In December 1996, Daugerdas ...

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