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BDO Seidman, LLP v. Morgan, Lewis & Bockius LLP

Court of Appeals of Columbia District

April 24, 2014


Argued September 26, 2013.

Page 493

Appeal from the Superior Court of the District of Columbia. (CA-9640-09). (Hon. A. Franklin Burgess, Jr. and Hon. Brook Hedge, Motions Judges).

Benjamin S. Boyd, with whom Lucinda J. Bach, Charles B. Wayne, and Michelle L. Schaefer were on the brief, for appellant.

James P. Fogelman, with whom Natalie O. Ludaway was on the brief, for appellee.

Before FISHER and MCLEESE, Associate Judges, and PRYOR, Senior Judge.


Page 494

McLeese, Associate Judge:

Appellant BDO Seidman, LLP (" BDO" ) provides tax and financial advice. In 1999, BDO turned its Tax Solutions Group (" TSG" ), which promoted " tax products," into a separate limited-liability corporation. Three BDO partners who were also members of TSG retained appellee Morgan, Lewis & Bockius LLP (" MLB" ) to represent them personally in negotiating compensation and indemnification agreements in connection with the transaction. MLB also represented BDO on various matters, including matters related to TSG products. The government subsequently concluded that some TSG products were unlawful, and several BDO partners were convicted of crimes in connection with TSG's activities. BDO clients sued BDO in connection with TSG products, and BDO settled that suit for over $21 million in 2005. In 2009, BDO sued MLB, alleging legal malpractice, breach of fiduciary duty, and fraud. The trial court granted summary judgment to MLB on the ground that BDO's suit was barred by the statute of limitations. BDO seeks review of that ruling. We affirm.


The following facts are either alleged by BDO or not disputed by BDO. In 1999, BDO created a limited-liability corporation called TSG, owned by BDO but exclusively managed by three BDO senior partners (collectively, the " Individuals" ). The Individuals repeatedly assured others at BDO that TSG's activities were " strictly legitimate" and would " more likely than not" be upheld if challenged by the Internal Revenue Service.

The Individuals retained MLB to represent them personally in negotiating with BDO the terms of their compensation and indemnification agreements in connection with the creation of TSG. MLB was already representing BDO on a matter, but BDO signed an agreement waiving any conflict of interest arising from BDO's representation of the Individuals.

Despite their assurances to others at BDO, the Individuals became concerned about the risks of potential criminal and civil liability to themselves and BDO arising from TSG's activities. In February 2000, without informing others at BDO, the Individuals hired MLB -- on behalf of BDO -- to analyze those potential risks. MLB sent BDO an engagement letter in March 2000 that included a general conflict waiver. The engagement letter did not refer to an analysis of the risks posed by TSG's activities. BDO signed the waiver.

While working on the risk-analysis project, MLB identified several risks associated with TSG products, including investigation by the IRS, class-action lawsuits by disappointed clients, personal civil and criminal liability for the Individuals, and possible conflicts of interests between BDO and the Individuals. MLB disclosed those risks only to the Individuals. The Individuals and MLB took steps to prevent others at BDO from discovering the risks, including by arranging that the bills associated with MLB's risk assessment be paid without the usual review and oversight by BDO's legal department.

Page 495

In June 2000, BDO approved compensation agreements for the Individuals, which provided among other things that BDO would indemnify the Individuals for all liabilities incurred on behalf of BDO for TSG activities. Soon thereafter, MLB prepared a supplemental engagement letter indicating that BDO had engaged MLB to prepare a written memorandum about whether TSG's tax products would be subject to criminal penalties. The parties dispute whether anyone at BDO other than the Individuals saw that engagement letter. When two of the MLB attorneys working on the risk analysis moved to the law firm of Hogan & Hartson, LLP, they continued working on the memorandum. MLB also continued to work on the matter.

In August 2000, the IRS issued a notice indicating that transactions arguably similar to one marketed by TSG were subject to reporting requirements and that persons marketing them might be subject to civil and criminal penalties. The Individuals were concerned that the notice raised the possibility of criminal liability. An MLB partner also had that concern. MLB did not express that concern in the final version of the written memorandum, which was not seen by anyone at BDO other than the Individuals until February 2002. The written memorandum did not rule out the possibility of criminal prosecution but concluded that any prosecution of BDO would be " insurmountably difficult" with " an extremely low chance of success on the merits." The written memorandum was not delivered to BDO, but rather was kept at MLB's offices. Drafts of the memorandum were circulated to two people at BDO other than the Individuals.

In December 2000, the IRS sent BDO a letter stating that the IRS believed that BDO had promoted abusive tax shelters and asking BDO to identify its clients. The Individuals retained the law firm of White & Case to represent BDO in connection with the response to the IRS letter. The general counsel of BDO did not learn of the letter until months later. BDO responded to the IRS by indicating that it did not believe that TSG's activities were substantially similar to those addressed in the IRS notice.

In the spring of 2002, the IRS served summonses on BDO, seeking production of documents with respect to TSG's activities. The law firms of White & Case and Jenner & Block initially represented BDO in connection with the summonses, but MLB began representing BDO on the matter in the fall of 2002. MLB and the Individuals failed to disclose the written memorandum prepared by attorneys from Hogan & Hartson and MLB, even though the written memorandum was responsive to the summonses. The Individuals led other BDO partners to believe that BDO was appropriately attempting to resist the summonses. Despite being asked to brief the question whether the crime-fraud exception might vitiate any privilege between BDO and its ...

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