Sixth Circuit Resurrects Civil RICO Claim Against Firm That Furnished Tax Opinions

The ABA/BNA Lawyers’ Manual on Professional Conduct™ is a trusted resource that helps attorneys understand cases and decisions that directly impacts their work, practice ethically, and...

By Joan C. Rogers  


The U.S. Court of Appeals for the Third Circuit Sept. 19 reinstated racketeering and misrepresentation claims against a law firm that allegedly provided incomplete and misleading opinion letters about the tax consequences of a welfare benefit plan ultimately found to be an abusive tax shelter (Ouwinga v. Benistar 419 Plan Services Inc., 6th Cir., No. 10-2531, 9/19/12).

The complaint plausibly alleged civil claims against the firm under the Racketeer Influenced and Corrupt Organizations Act--which authorizes treble damage awards to victorious plaintiffs, the court decided in an opinion by Judge Jane B. Stranch. It also found that the plaintiffs plausibly alleged the plaintiffs' reliance on the opinion letters as needed for them to pursue their misrepresentation claim.

'Abusive Tax Shelter.'

Stephen Ouwinga and others filed a class action against various parties in connection with the nationwide marketing and selling of the Benistar 419 Plan, a purported tax-deductible welfare benefit plan.

The plaintiffs allege that the lawyers created opinion letters falsely promoting an investment scheme as a tax-saving device.

Two of the defendants are Edwards Angell Palmer & Dodge LLP and attorney John H. Reid III. The plaintiffs assert that their decisions about the plan were partly based on a legal opinion that Reid issued in 1998, which was included in the marketing materials for the plan, and three opinions that Reid issued in 2003.

The plaintiffs terminated the plan in 2006. The IRS ultimately disallowed deductions related to the plan, which it held to be an “abusive tax shelter,” and assessed taxes, interest, and penalties.

The complaint alleges racketeering claims based on mail and wire fraud under 18 U.S.C. §1962(c), which makes it unlawful to conduct or participate in the affairs of an enterprise through a pattern of racketeering activity, and a RICO conspiracy (18 U.S.C. 1962(d)). It also alleges the tort of misrepresentation against all the defendants, along with an assortment of other state law claims against various defendants besides Edwards Angell and Reid.

The trial court dismissed the entire complaint. It found that the plaintiffs failed to sufficiently plead certain elements of a valid RICO claim, and that various disclosures and disclaimers doomed the plaintiffs' state law claims.

Construing the complaint in the light most favorable to the plaintiffs, the court determined that it stated viable RICO and misrepresentation claims against Edwards Angell and Reid.

Not the End of RICO.

Regarding the RICO claims against Edwards Angell and Reid, the district court viewed the complaint as alleging that they merely rendered traditional legal services and did not participate in any affairs beyond the operation of their own business.

The appeals court didn't see it that way. The complaint alleged that the lawyer defendants carried out the directions of the Benistar entities by providing allegedly incomplete and misleading legal opinions, all the while knowing that contributions to the plan were not likely to be allowed as deductions, the court said.

Although the lawyer defendants provided the opinion letters to their client Benistar, the court said, the plaintiffs alleged the lawyers knew the purpose of the plan was to falsely represent tax benefits, knew of IRS warnings that these types of plans would not qualify for deductions, and created their opinion letters for the purpose of falsely promoting the plan as a tax-saving device to potential investors.

The complaint plausibly alleged that the lawyer defendants participated in the enterprise's affairs and not merely their own, the court concluded.

It also found that the complaint adequately alleged a pattern of racketeering activity sufficient to withstand a motion to dismiss. The similarity of the opinion issued in 1998 and those issued in 2003 can plausibly indicate, the court said, that the lawyer defendants participated in the fraudulent enterprise over that entire period.

Legal Stamp of Approval?

On the plaintiff's state law claim for misrepresentation, the district court found that the lawyer defendants could not be liable because they only issued opinions, which are not actionable as misrepresentations. The court cited a 1986 Michigan appellate case for that proposition, but the court of appeals said that case distinguished its facts from the situation in which an ordinary person deals in reliance on an attorney's opinion on a point of law.

The plaintiffs alleged, the appeals court said, that the purpose of the opinion letters was to add a legal stamp of approval to the fraudulent tax plan and to give potential clients the peace of mind to participate in the plan. “Thus, they allege the Lawyer Defendants were giving legal tax advice not only to Benistar, its direct client, but also to the intended recipients, taxpayers evaluating the Plan,” the court stated.

The Supreme Court has recognized that “'[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice,'” the court pointed out, quoting United States v. Boyle, 469 U.S. 241, 250 (1985). “Therefore, it is plausible that the [plaintiffs] could show reliance on the opinion letters,” the court said.

The district court also found that the misrepresentation claim against the lawyer defendants should be dismissed because the opinion letters stated they were not to be relied on by anyone other than Benistar. The plaintiffs challenged the validity of the disclaimers, and also emphasized that the 1998 letter did not contain any reliance disclaimer.

The court of appeals ruled that the district court should not have considered the disclaimers for purposes of the motion to dismiss when their validity was directly in question based on the full context of their presentation to the plaintiffs.

W. Ralph Canada Jr. of Canada Ridley, Grapevine, Tex., argued for the plaintiffs. John R. Oostema of Smith Haughey Rice & Roegge, Grand Rapids, Mich., argued for the lawyer defendants.

Full text at

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

Copyright 2012, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.