Decision subjects law firm to class action RICO claim
Third parties relied on tax letters from Edwards Wildman
David E. Frank
Posted: 2:39 pm Wed, January 16, 2013
TAGS: Dec. 31 2012 issue
Civil litigators say a 6th U.S. Circuit Court of Appeals ruling allowing a class action racketeering suit to proceed against a Boston-based law firm sends a dangerous message to tax attorneys. In Ouwinga, et al. v. Benistar 419 Plan Services, Inc., et al., the court held that a group of Michigan-based investors could pursue a civil claim against Edwards, Wildman, Palmer over a series of legal opinion letters the firm wrote to client John Hancock Life Insurance.
The firm unsuccessfully argued that it had no way of knowing that the plaintiffs, who were not its clients, would review or act on the advice in the letters.
Former Massachusetts Board of Bar Overseers Vice Chairman Thomas E. Peisch, though not involved in the case, said he was “horrified” by the decision.
“Edwards Wildman is a highly regarded national law firm that appears to me to have gone out of its way to consider the tax implications carefully. This is a terribly unfortunate opinion that ought to give pause to every lawyer who ever advises a client on an investment matter,” said Peisch, a partner at Conn, Kavanaugh, Rosenthal, Peisch & Ford in Boston.
Before Ouwinga, a law firm generally could be held liable to non-clients only if it were reasonably foreseeable that a third party would rely on its opinions, Peisch said.
“What lawyer is going to issue any kind of tax opinion now if he or she knows they could find themselves seated at a defendant’s table in the event the IRS has a change of heart?” he asked. “I can’t think of anything that really can be done to limit the lawyer’s exposure if this kind of lawsuit can be brought — other than the lawyer directing the client not to communicate the opinion letter to third parties, and that defeats the whole point of the exercise.”
But W. Ralph Canada Jr., who represents the plaintiffs, said that the letters went beyond straightforward legal opinion and that it was “simply incredible” for the 625-lawyer firm to believe they were not going to be reviewed by third parties.
The Texas litigator said the letters were included in marketing materials Edwards Wildman knew would be distributed to the public as part of an effort to sell a tax shelter.
“It boggles the mind that a law firm this big and people this sophisticated didn’t know that’s what was going on here, if that is in fact going to be their position,” Canada said. “[Edwards Wildman] knew these materials were going to be used. They were part of the conspiracy to market them.”
RICO claims include treble damages and provisions for attorneys’ fees. A judgment against the firm could easily exceed seven-figures, though Canada declined to specify the amount of damages the plaintiffs will seek.
John R. Oostema of Grand Rapids, Mich., represents Edwards Wildman. Oostema declined to comment through an Edwards Wildman spokesman.
Thomas W. Evans of Zelle, McDonough & Cohen said it is extremely rare for a RICO claim against a lawyer to survive a motion to dismiss, particularly when no attorney-client relationship exists, as was the case with Edwards Wildman and the plaintiffs.
“I think a lot of lawyers that issue opinion letters would be very interested to hear that a large firm with a presence in Boston is facing class action RICO claims as a result of a tax opinion letter,” said Evans, whose firm is involved in an unrelated suit against one of the defendants. “This case is especially of note because it isn’t just a complaint being filed; it now involves claims that have been reinstated by a federal circuit court.”
The Boston lawyer said the 6th Circuit decision should make those in management at large law firms “extremely cautious” about issuing tax opinions.
Even if attorneys have reason to believe an opinion letter will be shown to third parties, they cannot control what a client will do with the opinion or who ends up relying on it, Evans said.
“That creates a troubling situation, like the one here,” he said. “Lawyers and law firms can get sued by large numbers of plaintiffs who they’ve never met or represented.”
Three of the four opinion letters Edwards & Angell issued to its client contained disclaimers stating that no one else could or should rely on them, he said. But the 6th Circuit found that was not enough to justify dismissal.
“Perhaps most threatening of all to the firm and its lawyers is the fact that, if they are found liable for RICO, it is very unlikely that their liability will be covered by their malpractice liability insurance,” Evans said. “Such insurance does not cover intentional or fraudulent acts. So if a jury finds that the lawyer acted intentionally, there could be an enormous judgment against the lawyer and the firm for which there may be no liability insurance.”
Susan E. Cohen of Boston’s Peabody & Arnold said the ruling subjects lawyers to legal claims in circumstances never before imagined.
A similar problem arose with accountants, she said, which led to the passage of statutes across the country that limit liability for advice given in tax settings.
“Those statutes were a reaction to the concern about whether it was really fair to hold accountants liable to exposure to huge damages if they give good-faith advice to clients, which turns out to be wrong for some reason,” she said. “I know of no such statute limiting liability for lawyers, but it stands to reason that the same type of protection might make sense.”
Difference of opinion
The suit involves a group of plaintiffs who met with co-defendant John Hancock in 2001 about purchasing financial products. One of the products was the Benistar 419 Plan, which John Hancock allegedly marketed and sold as a tax-deductible welfare plan.
During meetings, a tax attorney for John Hancock participated in a phone conference and provided legal assurances to the plaintiffs about the plan’s tax benefits. John Hancock reportedly also presented tax advisory letters from Edwards Wildman to the plaintiffs.
The letters, which were written by Edwards Wildman partner John H. Reid III, allegedly stated that the plan was legal and would not have any negative tax implications. Based on those representations, the plaintiffs claim, they agreed to participate in the plan.
In 2006, the plaintiffs decided to leave the plan.
The following year, the IRS notified them that the plan was an “abusive tax shelter” and imposed back taxes, interest and other penalties.
The plaintiffs responded with a federal class action RICO suit against John Hancock, Edwards Wildman and other entities. When a U.S. District Court judge dismissed the case in 2010, the plaintiffs appealed to the 6th Circuit.
Reid is retired from Edwards Wildman. He could not be reached for comment prior to deadline.
On to discovery
In reversing the lower court’s ruling, Judge Jane B. Stranch, writing for the three-judge panel, said the plaintiffs’ complaint alleged sufficient participation in a RICO conspiracy to survive a Rule 12(b)(6) dismissal.
According to the plaintiffs’ complaint, the defendants were aware that the legality of the plan was in question, the judge said.
“Even if the Benistar Plan was designed by the Benistar entities, the Agent and Lawyer Defendants carried out the directions of the Benistar entities by marketing the Plan directly to investors and providing allegedly incomplete and misleading legal opinions,” Stranch wrote. “Importantly, the [plaintiffs] allege the Defendants carried out these directions, all the while knowing that contributions to the Plan were not likely to be allowed as deductions by the IRS.”
The judge said the complaint laid out a pattern of activity that adequately delineated the specific roles each defendant, including Edwards Wildman, played in promoting a fraudulent welfare benefit plan that was aimed at generating commissions and fees.
“We recognize that although this analysis applies to all Defendants, the various Defendants acted in different capacities and those differences may ultimately impact the determination of whether a particular Defendant only participated in his own affairs,” she said. “But that is a matter to be fleshed out in discovery and to be resolved through motion practice or by the jury.”