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United States District Court, S.D. New York

August 25, 2004.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge



This case arises out of tax and consulting services offered by several professional law, financial services and accounting firms. Plaintiffs, William and Sharon Seippel, filed this suit on September 10, 2003, alleging that defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, and are liable for damages and other relief arising from breach of fiduciary duty, inducing breach of fiduciary duty, fraud, negligent misrepresentation, breach of contract, malpractice, "unethical, excessive, illegal and unreasonable fees," and unjust enrichment.*fn1 The Seippels allege both federal question jurisdiction pursuant to 28 U.S.C. § 1331 and diversity jurisdiction pursuant to 28 U.S.C. § 1332. The Sidley Defendants and Deutsche Bank Defendants now move to dismiss.*fn2 The Sidley Defendants move in the alternative to strike the Seippels' prayer for damages to the extent it seeks recovery for back taxes, interest, and certain professional fees.


  A. Defendants' Alleged Conspiracy

  The following facts are drawn from the allegations in the Amended Complaint and the RICO Statement.*fn3 For the purpose of this motion, these allegations are assumed to be true.

  Between 1996 and 2003, the Sidley Defendants, in concert with the Jenkens Defendants, were engaged in the development and promotion of a variety of tax shelters, including one labelled "Currency Options Bring Reward Alternatives," or "COBRA."*fn4 In late 1997 and 1998, the Sidley Defendants entered into an alliance to operate, market and promote these tax shelters with a number of other accounting and financial services firms, including, among others, the Deutsche Bank Defendants and Ernst & Young LLP.*fn5

  Pursuant to this alliance, each of the defendants authorized these firms to represent that the shelters were developed by the accounting firm soliciting the taxpayer, and that they had been independently "vetted" and determined to be "legitimate" and "conservative" by the Lawyer Defendants.*fn6 In fact, the shelters were developed by the Lawyer Defendants themselves.*fn7 The soliciting firms promised the taxpayers that the Lawyer Defendants would provide opinion letters attesting to the legitimacy of the shelters, and that these letters would "protect any participant from the imposition of penalties by tax authorities."*fn8

  Though these letters were "canned" and required little additional work, the Lawyer Defendants charged substantial fees, calculated as a percentage of the capital losses each client would claim on its tax returns.*fn9 The defendants agreed that on some transactions, the Jenkens Defendants would provide the first opinion letter and take the "lion's share" of the fees, and the Sidley Defendants would provide a secondary letter and receive a smaller fee, while on other transactions the positions would be reversed.*fn10

  The Lawyer Defendants' undisclosed role in marketing and promoting the shelters both compromised their objectivity, and "presented a risk that the [tax authorities] would and could claim that the opinion letters . . . would not shield them from the assessment of penalties."*fn11 The defendants agreed that "the firms soliciting prospective participants . . . would overstate what those opinion letters would conclude regarding the legitimacy of the tax scheme being promoted and would understate its risks and the likelihood of an audit."*fn12 The defendants further agreed that the taxpayer would not receive the opinion letters until after it had engaged in the promoted transactions.*fn13 Finally, defendants agreed that the accounting firms soliciting taxpayers would represent that the tax shelter "was a `proprietary' product of that firm so . . . prospective participants could not take it to their own attorney or accountant for an opinion as to its legitimacy."*fn14

  The Seippels contend that "defendants either knew or should have known from the outset that the COBRA tax shelter would not pass muster with the IRS or the Virginia tax authorities."*fn15 In support of this allegation, the Seippels point to two Internal Revenue Service rulings, IRS Notice 1999-59 and Notice 2000-44, and to a decision of the Third Circuit Court of Appeals, ACM Partnership v. Commissioner.*fn16 Notice 1999-59, released in December 27, 1999, stated that "certain types of transactions . . . that are being marketed to taxpayers for the purpose of generating . . . artificial losses are not allowable for federal income tax purposes."*fn17 Notice 2000-44, released on September 5, 2000, "specified [that] the precise transaction marketed . . . as the COBRA transaction" was not properly allowable for tax purposes.*fn18 Nevertheless, defendants continued to market the transactions.*fn19

  B. The Seippels' COBRA Transaction

  William Seippel was approached by Ernst & Young in late 1999 in connection with one of the defendants' tax shelters. Mr. Seippel, a senior executive at a Virginia company, was planning to change his employment, exercise his stock options and sell the resulting stock. Ernst & Young was Mr. Seippel's employer's auditor, and provided "tax advice, and other financial services" to Mr. Seippel and other senior executives of the company.*fn20 Through this relationship, Ernst & Young "knew of Mr. Seippel's plans and the substantial gains that the Seippels would have to recognize upon engaging in the Stock Options Transaction and the resulting tax liability."*fn21 Acting on this knowledge, Charles Paul of Ernst & Young approached the Seippels, pursuant to the defendants' scheme, to "advis[e] them that a lawful strategy named [COBRA] could drastically reduce the tax liability that would otherwise result from Mr. Seippel's engaging in the Stock Options Transaction."*fn22 The Seippels had a series of meetings and telephone and email conversations with Paul in late 1999, during which Paul represented that "COBRA was 100 percent legitimate, and backed by two blue chip law firms (Jenkens & Gilchrist and Brown & Wood) [and] was not only completely legal and based on `loopholes' created by the IRS, but actually was `conservative.'"*fn23 Paul represented that the COBRA shelter had been developed by Ernst & Young, not by the Lawyer Defendants. Paul told the Seippels that the Lawyer Defendants would provide opinion letters confirming the propriety of the COBRA transaction, and represented that these letters would "in the event of any IRS audit . . . enable the Seippels to satisfy the IRS auditors as to the propriety of the tax returns [and] would serve as a protection against the imposition of tax penalties."*fn24

  At some point in late 1999, after being contacted by Ernst & Young, Mr. Seippel sold his stock and realized a large gain.*fn25 During the same period, the Seippels agreed to participate in the COBRA transaction to reduce their tax liability for that gain. Mr. Seippel formed various entities, including an S corporation, WSWP Virginia Investors, Inc. ("WSWP"), a limited laibility company, WHS LLC ("WHS") and a partnership, WSWP Partners, to engage in the transaction. On December 1, 1999, WHS entered into the currency options transaction described above, purchasing long options and selling short options on foreign currency exchanges. WHS used Deutsche Bank to conduct the transactions. The options had an expiration date of December 23, 1999. On December 2, 1999, Mr. Seippel, through WHS, contributed his currency options to WSWP Partners. On December 12, 1999, WSWP Partners made a purchase of Canadian dollars. On December 27, 1999, Mr. Sieppel contributed his interest in WSWP Partners to WSWP. WSWP Partners was liquidated, and the Canadian dollars were distributed to WSWP. On December 29, WSWP sold all of its investment in the Canadian dollars.*fn26

  In February 2000, Mr. Seippel received an opinion letter from Jenkens and Gilchrist "stating that the Seippels could properly and legally claim losses totaling $12,000,000 on their tax returns as a result of the COBRA transaction."*fn27 In March 2000, Mr. Seippel received a similar opinion from Brown & Wood, stating that "the IRS should not be successful were it to assert a penalty. . . for positions taken in [the Seippels'] U.S. Federal income tax [returns] with respect to the [COBRA] transactions."*fn28 The Jenkens & Gilchrist opinion letter stated that IRS Notice 1999-59, released on December 27, 1999, did not apply to COBRA. The Brown & Wood opinion letter did not mention the Notice, nor did any other communication from defendants to the Seippels apart from the Jenkens & Gilchrist opinion letter. The defendants never informed the Seippels about IRS Notice 2000-44, released on September 5, 2000.*fn29

  The Seippels paid the Jenkens Defendants $338,880 for their opinion letter, legal advice and assistance in establishing the entities required to carry out the COBRA transaction. This fee was calculated as a percentage of the $12,000,000 in losses created by the transaction.*fn30 The Seippels paid Brown & Wood $21,180 for the second opinion letter.*fn31 The Seippels contend that both payments were "unethically excessive," because the letters were "canned" and the lawyers "expended little, if any, time or effort" in creating them.*fn32 Ernst & Young prepared the Seippels' 1999 and 2000 tax returns. These returns used the COBRA losses to offset and reduce the Seippels' tax liability.*fn33

  In March 2002, Ernst & Young informed Mr. Seippel that it had received subpoenas in an IRS investigation of COBRA.*fn34 In July 2002, the Seippels retained new tax and legal advisors, and discovered the alleged fraud for the first time.*fn35 The Seippels allege that they have paid and will continue to incur substantial damages in the form of fees paid to these new advisors retained to "rectify . . . Defendants' wrongdoing."*fn36 The Seippels' 1999 and 2000 tax returns have been audited by the IRS and Virginia tax authorities, and the Seippels have "had to make tax payments in an amount exceeding $5 million they were promised they would not have to make" and "have paid interest and/or penalties . . . totaling over $1 million and owe additional such amounts."*fn37 The Seippels also allege various other injuries, including losses caused by having liquidated assets at fire sale prices to meet their tax obligations, and the loss of alternative legitimate tax savings.*fn38


  A motion to dismiss should be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief."*fn39 At the motion to dismiss stage, the issue "is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed, it may appear on the face of the pleading that a recovery is very remote and unlikely, but that is not the test."*fn40

  A complaint need not state the legal theory, facts, or elements underlying the claim except in certain instances. Pursuant to the simplified pleading standard of Rule 8(a) of the Federal Rules of Civil Procedure, "a complaint must include only `a short and plain statement of the claim showing that the pleader is entitled to relief.'"*fn41 In contrast, the heightened pleading standard of Rule 9(b) requires that in claims of fraud or mistake "the circumstances constituting fraud or mistake shall be stated with particularity."*fn42

  The task of the court in ruling on a motion to dismiss is "merely to assess the legal feasibility of the complaint, not to assay the weight of evidence which might be offered in support thereof."*fn43 When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor.*fn44


  A. Ripeness

  The Deutsche Bank Defendants argue that the Seippels' claims are not ripe, because there has been no final resolution of the Seippels' dispute with the IRS and Virginia tax authorities.*fn45 This argument is unavailing. The fact that the Seippels may not ultimately owe the tax authorities additional taxes does not mean that their action is not ripe. The Seippels allege that they have been damaged, and continue to be damaged, as a result of defendants' conduct. Their damages include the fees paid to defendants, losses incurred in the COBRA transactions, expenses paid to accountants and attorneys that are assisting the Seippels in defending the audits, losses caused as a result of being forced to sell assets at distressed prices to meet tax obligations, and tax penalties already assessed and paid.*fn46 These injuries are immediate and definite, and therefore satisfy the case or controversy requirement contained in Article III of the Constitution.*fn47 Moreover, those damages which remain contingent — penalties, taxes and interest that may be assessed in the future, and professional fees that may be incurred — are the appropriate subject of the Seippels' claim for declaratory relief.*fn48

  B. RICO Claims

  The Seippels assert RICO claims against all defendants. RICO provides for civil and criminal liability for entities engaged in "a pattern of racketeering activity."*fn49 A person who suffers injury as a result of a RICO violation may sue an entity pursuant to 18 U.S.C. § 1964. To demonstrate a "pattern" of racketeering activity, a plaintiff must show at least two predicate acts of racketeering activity occurring within a ten-year period.*fn50

  Defendants contend that Section 107 of the Private Securities Litigation Reform Act ("PSLRA") of 1995,*fn51 bars the Seippels' RICO claim because the alleged predicate acts describe conduct that would have been actionable as securities fraud. The PSLRA amended RICO to provide that "no person may rely upon conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962."*fn52 "In amending RICO, Congress was clear in stating that the PSLRA `was meant to eliminate the possibility that litigants might frame their securities claims under a mail or wire fraud claim.'"*fn53

  Here, the predicate acts alleged are "transmitting fraudulent information and materials through the interstate mails and wires, as well as otherwise using the interstate mails and wires in furtherance of a common plan to commit racketeering activity."*fn54 The Seippels characterize the defendants' and Ernst & Young's telephone, internet and mail communications with them and other "victims," and their communications amongst themselves to organize their alliance, as predicate acts of mail and wire fraud.*fn55

  Section 10(b) of the Securities Exchange Act makes it "unlawful for any person . . . to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe."*fn56 The Supreme Court has recently explained that the phrase `in connection with' in section 10(b) should be "construed `not technically and restrictively, but flexibly to effectuate [the statute's] remedial purposes.'"*fn57

  Defendants do not argue that the Seippels' currency option trades constitute the purchase or sale of securities.*fn58 Rather, the Deutsche Bank Defendants argue that the conduct alleged by the Seippels would have been actionable as securities fraud because "Plaintiffs assert that they were defrauded in connection with the exercise of Plaintiff William Seippel's stock options and subsequent stock sales."*fn59 As the Deutsche Bank Defendants characterize the Seippels' allegations,

(i) Ernst & Young learned of Plaintiff's plans to leave his company and desire to `exercise his valuable stock options before leaving and then sell the resulting stock,' (ii) Ernst & Young exploited this knowledge and persuaded Plaintiffs to implement the COBRA strategy that `could drastically reduce the tax liability that would otherwise result from Mr. Seippel's engaging in the Stock Options Transaction,' and (iii) they engaged in the stock options transaction while relying upon the tax benefits of COBRA, as purportedly misrepresented by Ernst & Young.*fn60
  The Seippels argue that this conduct would not have been actionable as securities fraud because they have not alleged that any defendant made any misrepresentations as to the value of Mr. Seippel's stock options. While it is true that "[i]n general, the `in connection with' element is met when the fraud alleged is that the plaintiff bought or sold a security in reliance on misrepresentations as to its value,"*fn61 it is not a requirement. In SEC v. Zandford, the Supreme Court held that "neither the SEC nor this Court has ever held that there must be a misrepresentation about the value of a particular security in order to run afoul of the Act."*fn62 Instead, Zandford held that it is "enough that the scheme to defraud and the sale of securities coincide."*fn63

  The Seippels also argue that the alleged conduct would not be actionable as securities fraud because they have not claimed that Mr. Seippel decided to exercise his stock options in reliance on defendants' representations. Properly read, however, the Amended Complaint describes a single fraudulent scheme `in connection with' the sale of Mr. Seippel's stock. The Seippels allege that each of the steps in the COBRA transaction was part of a single fraudulent scheme. The sale of that stock was an integral part of the scheme, as without it there would have been no gain for the COBRA transaction to offset. Indeed, the Seippels have alleged that defendants only approached Mr. Seippel because they knew of the planned sale of stock.*fn64 Having alleged in their Amended Complaint that defendants' acts were part of a single fraudulent scheme, the Seippels cannot now divide the scheme into its various component acts. "Allowing such surgical presentation of the cause of action here would undermine the congressional intent behind the RICO Amendment."*fn65

  Under Zandford, all that is required for a section 10(b) violation is that the scheme to defraud and the sale of securities coincide. In the Zandford opinion, the Supreme Court circumscribed the breadth of its holding by providing examples of cases in which the fraud and the sale of securities would not coincide: where "after a lawful transaction had been consummated, a broker decided to steal the proceeds [or] a case in which a thief simply invested the proceeds of a routine conversion in the stock market."*fn66 The Court described those examples as cases in which the sale of securities and the fraud were "independent events."*fn67 The obvious implication is that where the fraud and the sale of securities are "less tangentially related," or more closely dependent on each other, the `in connection with' requirement is satisfied.*fn68

  There is no question here that defendants' alleged scheme, which dates back to 1996, coincided temporally with the sale of Mr. Seippel's stock. The Seippels have alleged that defendants were engaged in a fraudulent scheme before, during and after the stock transaction. The stock transaction was integrally related to the fraudulent scheme. Defendants contacted the Seippels, as part of their scheme, precisely because of his sale of stock, and took advantage of their knowledge of Mr. Seippel's planned securities transaction to induce him to take part in the COBRA transaction. As in Zandford, "[t]he securities sales and [defendants'] fraudulent practices were not independent events."*fn69 Because these allegations are actionable as a securities fraud, the Seippels cannot rely on them as the basis for a RICO claim. The Seippels' RICO claims are therefore dismissed.*fn70

  C. The State Law Claims Against the Sidley Defendants

  1. Malpractice

  The Seippels assert malpractice claims (styled as "negligent misrepresentation/professional malpractice" and "breach of contract/professional malpractice") against the Sidley Defendants. The Sidley Defendants argue that these claims are time-barred.

  "Where jurisdiction rests upon diversity of citizenship, a federal court sitting in New York must apply New York choice-of-law rules and statutes of limitations."*fn71 Under New York's borrowing statute, where a plaintiff who is not a resident of New York sues based upon a cause of action that accrued outside New York, the court must apply the shorter limitations period of either New York or the state where the cause of action accrued.*fn72 New York courts interpreting the borrowing statute hold that the cause of action accrues in the place of the injury, and "[w]here an injury is purely economic, the place of injury is usually where the plaintiff resides and sustains the economic impact of the loss."*fn73 The Seippels were residents of Virginia when their claims arose. The Virginia statute of limitations for legal malpractice is five years when there is a written contract.*fn74 The Seippels have clearly brought their action within Virginia's limitations period. The issue here is whether the action is timely within New York's shorter period of limitations.

  New York's statute of limitations for legal malpractice is three years, regardless of whether the underlying theory is based in contract or tort.*fn75 The claim accrues "when all the facts necessary to the cause of action have occured and an injured party can obtain relief in court."*fn76 The claim accrues "even if the aggrieved party is then ignorant of the wrong or injury."*fn77

  The Seippels argue that their malpractice claim accrued, at the earliest, in July 2002, when they hired new counsel and accountants to investigate the propriety of their 1999 tax returns. Prior to that time, the Seippels argue, they had suffered no damages and so had no cause of action for malpractice.*fn78

  The Seippels' argument is at odds with the holding of Ackerman v. Price Waterhouse. The Ackerman court held that a claim against accountants for malpractice in the preparation of tax returns accrues when plaintiffs first receive and rely on the defendant's work product and "as a consequence of such reliance, can become liable for tax deficiencies."*fn79 The court rejected the argument that the claim could only accrue if and when the IRS assesses a deficiency, in favor of a "precise accrual date that can be uniformly applied."*fn80 The Ackerman rule has been applied to malpractice claims against attorneys.*fn81 The Seippels' malpractice claims against the Sidley Defendants thus accrued "on or about March 9, 2000," when they received and relied on Brown & Wood's opinion letter.

  The Seippels offer two arguments for tolling the statute of limitations on their malpractice claims. First, they argue that the Lawyer Defendants should be estopped from asserting the statute of limitations defense because of their attempt to "wrongfully induce the plaintiff to refrain from timely commencing an action by deception [and] concealment."*fn82 But "New York courts have rejected the proposition that fraudulent concealment tolls the statute of limitations in non-medical malpractice cases."*fn83

  Second, the Seippels argue that the statute should be tolled because the Lawyer Defendants' "Failure To Fulfill Their Duty To Correct Their Advice To Plaintiffs Created A Continuous Wrong."*fn84 This argument also fails. The theory that a malpractice claim based on false tax advice given in 2000 does not accrue so long as it remains uncorrected is clearly incompatible with the theory of Ackerman.*fn85 Indeed, in McCoy v. Fineman, applying Ackerman, the New York Court of Appeals explicitly held that a continuing failure to correct malpractice could not toll the statute: "our law cannot permit a limitations period to depend on a continuing omission that can go on for decades."*fn86

  The Seippels' malpractice claim is time-barred, and the statute of limitations cannot be tolled. The claim must therefore be dismissed.

  2. Negligent Misrepresentation, Breach of Contract, and Breach of Fiduciary Duty Claims

  The Sidley Defendants contend that because all of the Seippels' state law claims "merge" into the malpractice claim, they too are time-barred. The Seippels appear to contest this argument only with regard to their claim of fraud. For the reasons given below, all of the Seippels' state law claims other than their fraud claim merge into the malpractice claim and are time-barred.

  The Seippels' breach of fiduciary duty claim against the Sidley Defendants is duplicative of their legal malpractice claim. The claim arises from the same conduct — the Sidley Defendants' breach, "as Plaintiffs' attorneys [of] the duties of honesty, loyalty, care and compliance with the applicable codes of professional responsibility"*fn87 — and involves no distinct damages. Accordingly, the claim cannot be separately maintained.*fn88 To the extent the Seippels assert "negligent misrepresentation" as a separate claim from "malpractice," that claim must also be dismissed as duplicative, for the same reason.

  An action for breach of contract in an attorney-client relationship may be maintained separately from a malpractice action only where the attorney has undertaken to perform a specific task and failed to do so: "a breach of contract claim premised on the attorney's failure to exercise due care or to abide by general professional standards is nothing but a redundant pleading of the malpractice claim."*fn89 Here, the Seippels allege only that the Sidley Defendants entered into a contract to provide professionally competent services and to exercise applicable standards of care, loyalty and honesty, and "instead provided the Seippels with advice that [they] either knew or should have known to be wrong."*fn90 The breach of contract claim is redundant and therefore must be dismissed.

  3. Fraud

  As a threshold matter, the Sidley Defendants contend that the Seippels' fraud claims against them also merge into the malpractice claims (and so are time-barred). The Sidley Defendants characterize the fraud and malpractice claims as "virtually identical, relying upon exactly the same allegedly false statements."*fn91

  As noted earlier, a court must construe the complaint liberally on a motion to dismiss. Insofar as the Seippels' claim of fraud rests on misrepresentations in the Sidley Defendants' opinion letter, made in the course of an attorney-client relationship, it might be considered duplicative of the malpractice claim. But that is not the only basis for the Seippels' fraud claim. The Amended Complaint alleges that the Sidley Defendants caused Ernst & Young to make fraudulent misrepresentations to the Seippels in November 1999 in order to induce the Seippels to engage in a COBRA transaction. The Seippels did not retain the Sidley Defendants until March 2000, by which time they had already completed, and suffered losses on, the COBRA transaction.*fn92 The Seippels do not allege that an attorney-client relationship existed prior to that point. The Amended Complaint thus states a claim for fraud based on distinct conduct from that on which the Seippels' malpractice claim is based.

  Under New York choice of law rules, the locus of a fraud is the place where the injury was inflicted.*fn93 The injury in this case was inflicted in Virginia, where the Seippels reside. Under New York's borrowing statute, the shorter of the limitations periods of Virginia and New York must be applied. Under the shorter limitations period, that of Virginia, an action for fraud is timely if filed within two years of discovery.*fn94 Because the Seippels allege that they discovered the fraud in 2002, their action is timely.

  To resolve choice of law issues in tort cases, New York applies an "interest analysis" to identify the state that has the greatest interest in the litigation.*fn95 When a choice of law issue relates to laws regulating conduct, such as fraud, the locus of the tort determines the applicable law.*fn96 Because the Seippels' injuries occured in Virginia, Virginia law applies to their fraud claim. Under Virginia law, in an action to recover damages for fraud, "the plaintiff must prove a false representation, of a material fact, made intentionally and knowingly, with intent to mislead, reliance by the party misled, and resulting damage."*fn97

  Moreover, fraud actions are subject to the heightened pleading requirements of Rule 9(b). "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally."*fn98 A complaint alleging fraud must: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."*fn99 "Where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud."*fn100 Rule 9(b) is intended "to provide a defendant with fair notice of plaintiff's claim, to safeguard a defendant's reputation from improvident charges of wrongdoing, and to protect a defendant against the institution of a strike suit."*fn101 Accordingly, a plaintiff must allege facts that give rise to a strong inference of fraudulent intent.*fn102 Allegations of fraud may not be based upon information and belief, except as to matters peculiarly within the opposing party's knowledge; in such a case, the allegations must be accompanied by a statement of the facts upon which the belief is founded.*fn103

  The Amended Complaint and the RICO Statement offer a number of examples of misrepresentations or omissions of material fact by Charles Paul of Ernst & Young. The Seippels have specified the alleged fraudulent statements in sufficient detail. They have identified Paul as the speaker of each statement, and stated where and when each statement was made.*fn104

  Some of the representations the Seippels cite may not constitute actionable fraud. For example, Paul's representation that "engaging in COBRA would not subject the Seippels to tax penalties" may be a statement of opinion as to future events, which is not actionable.*fn105 The Seippels have failed to explain why other statements are fraudulent. It is not at all clear, for instance, why Paul's statement that "COBRA had been developed for a `select audience' of individuals who had generated significant gains or income" is characterized as a "misrepresentation."*fn106 Even without these statements, however, the Seippels have clearly provided sufficient examples of misrepresentations or material omissions from which to infer fraudulent intent.

  For example, Paul allegedly informed the Seippels that COBRA was developed by Ernst & Young, and failed to disclose the role of the Lawyer Defendants in developing and promoting COBRA, in order to give the impression that the Lawyer Defendants were exercising independent judgment.*fn107 Paul did not disclose that the Lawyer Defendants' role in developing and promoting COBRA might limit the Seippels' ability to use their opinion letters to protect against tax penalties.*fn108 Additionally, Paul represented that COBRA was "100 percent legitimate," while failing to disclose authority to the contrary.*fn109 This statement might be considered a false representation as to existing facts, i.e. the failure to disclose existing authority holding COBRA to be illegitimate.*fn110 The Seippels have alleged that Paul's statements were false when made, and that defendants knew of their falsity when they caused Paul to make them.*fn111

  The Sidley Defendants point out that these statements were not made by Brown & Wood or its employees. Paul's statements, however, are imputed to the Sidley Defendants because the Seippels allege that Paul made these statements "acting at the behest and with the knowledge and authority of" the Sidley Defendants.*fn112 The Seippels have adequately alleged the nature of the relationship between the Sidley Defendants and Ernst & Young and Paul, and have described the role played by the Sidley Defendants in the alleged scheme.*fn113 The Seippels' allegations are sufficient, given that the details of the scheme are peculiarly within defendants' knowledge.*fn114 The Sidley Defendants also argue that the Seippels could not reasonably rely on Paul's oral representations because the Lawyer Defendants' opinion letters cautioned them that their contents were not binding on the IRS or the courts, and stated only that there was a "greater than 50% likelihood" that the transactions would be upheld if challenged.*fn115 But whether or not the letter clearly contradicted Paul's statements, it was not delivered until after the Seippels had entered into and suffered losses on the COBRA transactions in reliance on Paul's statements. Even if the letter clearly contradicted Paul's statements, the Seippels would still have a claim for the losses incurred in participating in COBRA.

  Moreover, it is not clear that the opinion letter does contradict Paul's statements. It is not obvious that the cautious, ambiguous phrasing of the opinion letter (which precedes virtually all of its conclusions with "it is more likely than not that . . .") contradicts Paul's representations as to the legitimacy of the shelter. It is also not clear that the opinion letter contradicts Paul's representations that the Seippels could rely on the letter to protect against penalties. The letter states that it is "not binding upon the IRS or a court of law,"*fn116 but that is hardly a clear contradiction of Paul's statement. In any case, "whether or not reliance was reasonable is ordinarily a question of fact,"*fn117 and it is not appropriate to decide this question on a motion to dismiss. The motion to dismiss the Seippels' fraud claim against the Sidley Defendants is therefore denied.

  4. Rescission and Restitution of Fees

  The Seippels also seek rescission of their fee agreement with the Sidley Defendants and "restitution or recoupment" of the fees paid under it.*fn118 Insofar as this claim is based on the Sidley Defendants' alleged "violat[ion of] the applicable rules of professional conduct and standard of care,"*fn119 it merges into the malpractice claim and is time-barred.*fn120 However, the Amended Complaint also bases this claim on the allegation that "[i]rrespective of the merits of the Opinion Letter that [the Sidley Defendants] rendered to the Seippels, the $21,180 fee that [the Sidley Defendants] charged the Seippels . . . is unethically excessive in violation of, and invalid and unenforceable under [New York and Virginia rules of professional conduct]."*fn121 This claim is distinct from the malpractice claim, as it does not require any finding of malpractice on the part of the Sidley Defendants.*fn122

  New York choice of law rules require that the law of the jurisdiction having the greatest interest in the litigation be applied.*fn123 With regard to this claim, that jurisdiction is New York. Brown & Wood was a New York firm, and Ruble is licensed to practice in New York.*fn124 New York's interest in regulating the conduct of its attorneys gives it the predominant interest in this matter.*fn125 "Under New York law, a client has an affirmative cause of action for rescission of [a fee agreement that is invalid under the Code of Professional Responsibility] and restitution or recoupment of legal fees paid in excess of the reasonable amount due to the attorney for services actually rendered."*fn126 The Seippels have alleged that the Sidley Defendants' fee violated New York's Code of Professional Responsibility Disciplinary Rule 2-106, which forbids excessive fees.*fn127 Whether a fee is excessive is a question of fact, and cannot be determined on a motion to dismiss.*fn128 The Seippels have stated a valid claim for rescission and restitution.

  Moreover, even if the fee agreement between the Seippels and the Sidley Defendants did not violate the Code of Professional Responsibility, the Seippels may still have a claim for rescission and restitution. "The existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter."*fn129 Here, however, the Seippels have alleged that the contract is not enforceable, because of various material omissions by the Sidley Defendants.*fn130 The Seippels have also alleged affirmative misrepresentations made by the Sidley Defendants, through Paul, to induce them to participate in the COBRA transaction.*fn131 As discussed above, these allegations are specific enough to pass muster under Rule 9(b). If the Seippels are able to show that the agreement with the Sidley Defendants is unenforceable, because fraudulently induced, then they may recover under a theory of unjust enrichment.*fn132 The motion to dismiss this claim is therefore denied.

  D. The State Law Claims Against the Deutsche Bank Defendants

  1. Breach of Fiduciary Duty

  The agreements between the Deutsche Bank Defendants and the Seippels contained New York choice of law clauses.*fn133 New York requires that courts enforce the parties' selection of New York law in commercial contracts of $250,000 or more.*fn134 New York law therefore applies to the analysis of whether a fiduciary duty arose from the relationship. The agreements explicitly stated that Deutsche Bank was not acting as a fiduciary to the Seippels.*fn135 Because contractual disclaimers of fiduciary duty are effective in New York, no fiduciary duty can arise from the relationship between the Seippels and Deutsche Bank.*fn136

  2. Inducing Breach of Fiduciary Duty

  The Seippels allege that the Deutsche Bank Defendants knowingly induced and participated in breaches of the fiduciary duties the Sidley and Jenkens Defendants owed to the Seippels as their attorneys. The elements of a claim for inducing breach of fiduciary duty are "(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that the plaintiff suffered damages as a result of the breach."*fn137

  This claim must be dismissed because the underlying claim of breach of fiduciary duty is time-barred.*fn138 "Where the primary [breach of fiduciary duty] is barred by the applicable statute of limitations, a claim for aiding and abetting this primary [breach of fiduciary duty] fails to state a claim."*fn139

  3. Fraud

  The Deutsche Bank Defendants' contention that "the fraud claim [against Deutsche Bank] is based solely on alleged omissions," and that the complaint does not allege reliance on any representation by Deutsche Bank in deciding to enter into the COBRA transaction, is simply not true.*fn140 The Seippels allege that they relied on Paul's misrepresentations, and that those misrepresentations were made "at the behest of" defendants, including the Deutsche Bank Defendants.*fn141 The Seippels have adequately alleged the nature of Deutsche Bank's involvement in the fraudulent scheme.*fn142 The fraud claim against the Deutsche Bank Defendants is adequate for the same reason that the claim against the Sidley Defendants was found to be adequate.

  4. Rescission and Restitution of Fees

  The Seippels claim that Deutsche Bank "was unjustly enriched by their receipt of . . . fees that were excessive, unreasonable and improper. Equity and good conscience demand the return of those fees. Accordingly, Plaintiffs are entitled to rescind the agreement to pay Deutsche Bank $600,000 and are entitled to restitution or recoupment of that amount."*fn143 The Deutsche Bank Defendants argue that this claim must be dismissed because "Plaintiffs acknowledge that they have an express contract with Deutsche Bank."*fn144 For the reasons discussed earlier in analyzing the Seippels' claim for restitution of fees from the Sidley Defendants, this argument is not persuasive. Because the Seippels have adequately alleged that Deutsche Bank fraudulently induced them to enter into the contract, there is an issue of fact as to whether the contract is enforceable.*fn145 The motion to dismiss this claim is denied.

  E. Declaratory Judgment

  The Seippels seek a declaratory judgment, pursuant to 28 U.S.C. § 2201, that defendants are liable for interest and penalties that may be assessed by the IRS or Virginia tax authorities as a result of ongoing audits, and for professional fees that may be incurred in connection with those audits. "[A] declaratory judgment is available to resolve a real question of conflicting legal interests. That the liability may be contingent does not necessarily defeat jurisdiction of a declaratory judgment action. Rather, courts should focus on the practical likelihood that the contingencies will occur."*fn146 The Seippels have alleged a practical likelihood that these contingencies will occur.*fn147 Because the Seippels have stated a valid claim of fraud that could, if proved, render defendants liable for these damages, the motion to dismiss the Seippels' claim for a declaratory judgment is denied.

  F. The Sidley Defendants' Motion to Strike Damages Allegations Relating to Back Taxes, Interest and Professional Fees

  As an alternative to their motion to dismiss, the Sidley Defendants move pursuant to Rule 12(f) to strike the Seippels' prayer for damages "to the extent it seeks recovery . . . of back taxes, interest and professional fees."*fn148 The Sidley Defendants argue that these damages are not recoverable as a matter of law.

  Under Rule 12(f), a court may strike from any pleading an insufficient defense or any other "redundant, immaterial, impertinent, or scandalous matter."*fn149 A demand for damages that are not recoverable as a matter of law may be stricken.*fn150 Motions to strike are generally disfavored and will be denied unless it is clear that under no circumstances could the demand succeed.*fn151 "Moreover, even when the facts are not disputed, several courts have noted that a motion to strike for insufficiency was never intended to furnish an opportunity for the determination of disputed and substantial questions of law."*fn152

  The Sidley Defendants contend that "taxes . . . allegedly paid to the government and the interest on those taxes . . . are not recoverable as a matter of law."*fn153 In support of their motion, the Sidley Defendants cite Alpert v. Shea Gould Climenko & Casey,*fn154 in which the court held that a victim of a fraudulent tax shelter could not recover back taxes or interest paid to the government. The Seippels argue that they are entitled to recover back taxes paid to the government because "they lost legitimate tax savings and deductions by following the Defendants' advice."*fn155 The Alpert court rejected that argument, holding that "the victim of fraud may not recover the benefit of an alternative agreement overlooked in favor of the fraudulent one."*fn156 The Alpert court held that recovery of interest would be a windfall, because "such interest was not damages suffered by plaintiff but rather was a payment to the IRS for his use of the money during the period of time when he was not entitled to it."*fn157

  Under Alpert, the Seippels could not recover back taxes or interest. However, as noted earlier, Virginia law applies to the Seippels' fraud claim.*fn158 Other jurisdictions have taken a contrary view to that of Alpert, holding that back taxes, interest, or both are recoverable in fraud or malpractice cases.*fn159 Under Virginia law, a plaintiff may recover for gains prevented by defendant's fraud, so long as those gains can be "ascertained with reasonable certainty or definiteness."*fn160 Because it is possible that the Seippels will be able to prove the extent to which defendants' alleged fraud caused them to forego alternative tax shelters with sufficient certainty, the motion to strike the prayer for back taxes is denied.

  Virginia courts have not directly addressed the issue of recovery of interest payments. However, Virginia's approach to the `benefits rule' may be analogous. Under the benefits rule, "[w]hen the Defendant's tortious conduct has caused harm to the plaintiff . . . and in so doing has conferred a special benefit [on the plaintiff], the value of the benefit conferred is considered in mitigation of damages, to the extent that this is equitable."*fn161 In this case, defendants argue that the Seippels' recovery should be reduced to reflect the benefit of having had the use of the tax money during the relevant period. Virginia courts, applying the benefits rule, have held that defendants have the burden of proving the extent to which plaintiffs were benefitted by their tortious act.*fn162 A blanket prohibition against the recovery of IRS interest . . . permits the tortfeasor to benefit from the presumption that a harmed taxpayer has been or should have been ingenious enough to (1) maintain a sum of money that he would have otherwise had to pay over to the IRS and (2) invest that money in a manner in which he earned interest in an amount comparable to the interest rate charged by the IRS.*fn163

  Under Virginia law, defendants are not entitled to such a presumption. The extent to which the Seippels can recover the interest on back taxes they paid to the tax authorities is therefore a question of fact.

  Moreover, because this presents a disputed and substantial question of law, it is not appropriately decided on a motion to strike. Such "questions quite properly are viewed as determinable only after discovery and a hearing on the merits. To do otherwise would be to run the risk of offering an advisory opinion on an abstract and hypothetical set of facts."*fn164 Here, not only has there been no development of the facts on this issue, but the parties have not had the opportunity to brief the issue under the applicable law.

  The Sidley Defendants' motion to strike the prayer for "professional fees" appears to refer only to the fees "allegedly paid [to] advisors . . . to address the ongoing IRS audits."*fn165 The Sidley Defendants argue that these fees are not recoverable as a matter of law, because "[p]laintiffs themselves admit, and the Brown & Wood Opinion Letter makes clear, that the COBRA transaction contemplated the possibility that Plaintiffs would incur such audit-related expenses."*fn166 The Seippels have alleged that they engaged in the COBRA transaction in reliance on deliberate misrepresentations as to the risk of audits. Whether that reliance was reasonable, given the statements in the opinion letters, is a question of fact.

  It is impossible to say at this stage that the Seippels cannot, as a matter of law, recover back taxes, interest or professional fees to some extent. The motion to strike is therefore denied.

  G. Leave to Amend

  The Seippels have requested leave to amend their complaint. In particular, they have requested leave to amend to state a claim for securities fraud, in the event that their RICO claims are found to be barred by the PSLRA.*fn167

  Rule 15(a) provides that the court should grant leave to amend "freely . . . when justice so requires."*fn168 The Second Circuit has noted that "[w]hen a motion to dismiss is granted, the usual practice is to grant leave to amend. Although the decision to grant leave to amend is within the discretion of the court, refusal to grant leave must be based on a valid ground."*fn169 Where the possibility exists that the defect can be cured and there is no prejudice to the defendant, leave to amend at least once should normally be granted.*fn170

  For reasons discussed above, it appears that the Seippels will be able to amend their complaint to plead securities fraud. They are therefore granted leave to do so. It does not appear possible that the Seippels can amend to plead malpractice (or related claims) in this Court, because those claims are time-barred, and the Seippels have already had one chance to amend. However, the Seippels have requested leave to refile those claims in another jurisdiction in which they would not be time-barred. The claims barred by operation of New York's statute of limitations are therefore dismissed with leave to refile elsewhere. It does not appear, however, that the Seippels can amend their pleadings to state a claim for breach of fiduciary duty against Deutsche Bank. That claim is therefore dismissed with prejudice.


  For the foregoing reasons, the Sidley and Deutsche Bank Defendants' motions to dismiss are granted in part and denied in part. The Seippels' RICO claims are dismissed with prejudice. The Seippels' malpractice, negligent misrepresentation, breach of contract, and inducing breach of fiduciary duty claims are dismissed with leave to refile elsewhere. The Seippels' breach of fiduciary duty claim against the Sidley Defendants is dismissed with leave to refile elsewhere. The Seippels' breach of fiduciary duty claim against the Deutsche Bank Defendants is dismissed with prejudice. The Seippels are granted leave to amend to state a complaint for securities fraud. The Sidley Defendants' motion to strike is denied. The Clerk of the Court is directed to close these motions (docket # 56, 63). A conference is scheduled for September 13 at 4:30.


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