Date: 06-13-2018

Case Style:

Case Number: 17-2988

Judge: Manion

Court: United States Court of Appeals for the Seventh Circuit on appeal from the Northern District of Illinois (Cook County)

Plaintiff's Attorney: Sheldon J. Aberman and Jonathan Paul Novoselsky

Defendant's Attorney: Jonathan B. Amarilio, Keith E Blackman, J. Timothy Eaton, Thomas F. Falkenberg, Lynne M Fischman Uniman, Kirstin Beth Ives, Kirstin Beth Ives, Allan N Taffet, Anju Uchima

Description: In 2001, John McMahan and his
wholly owned corporation, Northwestern Nasal and Sinus
Associates, S.C.,1 participated in a tax shelter known as “Son
of BOSS.” The shelter “is a variation of a slightly older al‐
1 For ease of reference, and because the parties have not indicated a
material distinction between McMahan and his corporation, we will refer
to McMahan and his corporation collectively as “McMahan.”
2 No. 17‐2988
leged tax shelter known as BOSS, an acronym for ‘bond and
options sales strategy.’” Kligfeld Holdings v. Comm’r, 128 T.C.
192, 194 (2007). It “was aggressively marketed by law and
accounting firms in the late 1990s and early 2000s” and involves
engaging in a series of transactions to create an “artificial
loss [that] may offset actual—and otherwise taxable—
gains, thereby sheltering them from Uncle Sam.” Am. Boat
Co., LLC v. United States, 583 F.3d 471, 474 (7th Cir. 2009). Unfortunately
for McMahan, the Internal Revenue Service (IRS)
considers the use of this shelter abusive. See I.R.S. Ann. 2004‐
21 I.R.B. 964 (“The Service has determined that Son of Boss
transactions are abusive and were designed, marketed, and
undertaken solely to create tax benefits unintended by any
reasonable interpretation of the tax laws.”). The IRS initiated
an audit of McMahan’s 2001 tax return in 2005. In 2010, the
IRS notified McMahan it was increasing his taxable income
for 2001 by approximately $2 million.
In 2012, McMahan filed this lawsuit in Illinois state court
against Robert Goldstein (his accountant), American Express
Tax and Business Services (Amex) (the firm that prepared
his tax return), and Deutsche Bank AG and Deutsche Bank
Securities Inc. (collectively, Deutsche Bank) (the entities that
facilitated the transactions necessary to perpetrate the shelter).
McMahan claims these defendants harmed him by convincing
him to participate in the shelter. Deutsche Bank removed
the case to the district court, citing the diversity jurisdiction
statute, 28 U.S.C. § 1332. After a series of procedural
steps described below, the district court dismissed
McMahan’s claims against Goldstein and Amex for lack of
prosecution and granted summary judgment to Deutsche
Bank on statute of limitations grounds. McMahan appeals.
We affirm.
No. 17‐2988 3
I.
A. Background2
In June 2000, McMahan met with Goldstein, who encouraged
McMahan to participate in a Son of BOSS tax shelter.
He indicated to McMahan that the shelter was legal and legitimate.
To implement the shelter, the law firm of Jenkens &
Gilchrist was to draft a letter confirming the probable legality
of the shelter, and Goldstein told McMahan Deutsche
Bank would facilitate the necessary transactions and Amex
would prepare McMahan’s tax returns. McMahan participated
in the shelter in 2000 and 2001. In 2001, McMahan paid
fees to Goldstein, Amex, Jenkens & Gilchrist, and Deutsche
Bank for their roles in the scheme. He claimed the losses he
generated on his 2001 tax returns.
At some point in 2002, Goldstein told McMahan Son of
BOSS was no longer legitimate. This was McMahan’s first
indication that all was not well with Son of BOSS. But it was
not the last.
In 2003 and 2004, the IRS published notices stating its position
that Son of BOSS was illegitimate. See I.R.S. CCN CC‐
2 In the proceedings below, Deutsche Bank submitted a statement of
facts in support of its motion for summary judgment, but McMahan did
not submit one in opposition, so the district court took the facts stated in
Deutsche Bank’s statement as admitted. See N.D. Ill. Local Rule
56.1(a)(3), (b)(3) (requiring parties to submit a statement of material facts
and response when filing and responding to a summary judgment motion,
respectively); Smith v. Lamz, 321 F.3d 680, 683 (7th Cir. 2003) (“We
have consistently held that a failure to respond by the nonmovant as
mandated by the local rules results in an admission.”). Accordingly,
“[w]e recount the narrative that follows with that in mind.” Rao v. BP
Prods. N. Am., Inc., 589 F.3d 389, 393 (7th Cir. 2009).
4 No. 17‐2988
2003‐020 (noting the IRS had listed Son of BOSS “as an abusive
tax shelter” since September 5, 2000); I.R.S. Ann. 2004‐21
I.R.B. 964 (announcing a settlement initiative for taxpayers
who had participated in Son of BOSS shelters). McMahan’s
tax counsel, Chuhak & Tecson, P.C., forwarded the 2004 notice
concerning an IRS settlement initiative to McMahan. In
January 2005, McMahan’s tax counsel informed him Illinois
was offering a compliance program to avoid penalties for
participating in abusive tax shelters, including Son of BOSS.
Despite these notices, McMahan did not participate in any
amnesty, settlement, or compliance program. He claims the
defendants told him those programs did not apply to his situation.
However, McMahan’s counsel did send a letter to
Deutsche Bank asking it not to disclose McMahan’s name to
the IRS.
In February 2005, McMahan’s counsel sent him a letter
concerning the settlement of a class action against Jenkens &
Gilchrist. The lawsuit, filed in the Southern District of New
York in 2003, alleged that Jenkens & Gilchrist breached fiduciary
duties by issuing incorrect opinions concerning tax
shelters. It also alleged that Deutsche Bank had promoted
the shelter and failed to advise about the inaccuracy of
Jenkens & Gilchrist’s opinions. Jenkens & Gilchrist had
agreed to settle the suit against it for $81.5 million. The letter
from his counsel informed McMahan that he “should expect
to receive an official notification and claim form in the near
future.”3
3 Letter from Albert Grasso to Dr. John and Lynn McMahan, R. 143‐
10.
No. 17‐2988 5
On the same day McMahan’s counsel sent him that letter,
the IRS sent McMahan notice that it was initiating an audit
of his 2001 tax returns. Five years later, in October 2010, the
IRS issued a deficiency notice to McMahan announcing the
IRS was adjusting his taxable income for 2001 upward by
approximately $2 million. McMahan ultimately settled with
the IRS in May 2012.
On March 26, 2012, McMahan filed this lawsuit against
Deutsche Bank, Goldstein, and Amex in the Circuit Court of
Cook County. McMahan alleged a multitude of malfeasance
connected with his participation in the shelter: breach of contract,
accounting malpractice, breach of fiduciary duty, and
more. On June 5, 2012, Deutsche Bank removed the case to
the district court.
B. Dismissal for Lack of Prosecution
On December 12, 2013, the district court ordered
McMahan to arbitrate his claims against Amex and Goldstein
pursuant to a term of their engagement letter. The parties
then communicated about arbitration in February 2014,
the last communication from McMahan’s counsel being an
email sent on February 27. From that point, Amex and Goldstein
heard nothing from McMahan for nearly sixteen
months. In May 2014, Goldstein died.
On June 11, 2015, McMahan’s counsel sent an email to
counsel for Amex and Goldstein announcing McMahan was
ready to proceed with arbitration. The parties had some further
communication, but on June 25, 2015, counsel for Amex
and Goldstein informed McMahan’s counsel that they
would be filing a motion to dismiss for failure to prosecute.
They filed the motion the same day.
6 No. 17‐2988
McMahan filed a response to the motion and included affidavits
from himself and counsel. The affidavits recount
that McMahan had spent most of the sixteen months of silence
between communications with Amex and Goldstein’s
counsel trying to find an expert witness and trying to get the
money together to pay such an expert.
On September 1, 2015, the district court made an oral ruling
granting the motion and dismissing McMahan’s claims
against Goldstein and Amex. The court concluded
McMahan’s conduct was dilatory and constituted “effective
abandonment of [his] claim.”4 It also noted that “the case
centers on [McMahan’s] discussions with Goldstein,” who
had died.5 The district court concluded that, “in the context
of this particular case, every passing day increases…the defendants’
difficulty in mounting an adequate defense as witnesses
become more difficult to locate.”6 Over a year later,
McMahan filed a motion to reconsider, which the district
court denied on September 5, 2017.
C. Summary Judgment
In 2012, Deutsche Bank moved to dismiss the case against
it as time barred, arguing that McMahan, whose injuries accrued
over ten years earlier, filed his complaint well outside
the five‐year statute of limitations. The district court, however,
relying on the Illinois Supreme Court’s decision in
Khan v. Deutsche Bank AG, 978 N.E.2d 1020 (Ill. 2012), denied
the motion. The district court interpreted Khan as imposing a
4 Transcript of Proceedings at 6, R. 148‐1.
5 Id.
6 Id.
No. 17‐2988 7
bright‐line rule that a taxpayer wronged in the ways that
McMahan alleges is not sufficiently aware of his claim, and
thus the statute of limitations does not begin to run, until he
receives his deficiency notice from the IRS. Because
McMahan did not receive his deficiency notice until 2010,
the district court held his 2012 complaint was timely.
In 2015, the Illinois Appellate Court decided Lane v.
Deutsche Bank, AG, 44 N.E.3d 548 (Ill. App. Ct. 2015), expressly
negating the bright‐line interpretation of Khan. Id. at
554; see also Lane v. Deutsche Bank, 48 N.E.3d 1093 (Ill. 2016)
(denying petition for leave to appeal). In light of Lane, the
district court allowed the parties to pursue discovery concerning
the statute of limitations and submit summary
judgment briefing on that issue. On September 5, 2017, the
district court concluded it was undisputable McMahan was
on notice of his claims at least by February 2005 when he received
notice that the IRS was performing an audit. As that
meant he filed his complaint outside the statute of limitations,
the court granted summary judgment to Deutsche
Bank.
II.
McMahan appeals both the dismissal for lack of prosecution
and the grant of summary judgment. These are two distinct
rulings, so we address each individually.
A. Dismissal for Lack of Prosecution
We begin with the dismissal for lack of prosecution. Federal
Rule of Civil Procedure 41(b) provides that “[i]f the
plaintiff fails to prosecute or to comply with these rules or a
court order, a defendant may move to dismiss the action or
any claim against it.” We review a district court’s decision to
8 No. 17‐2988
dismiss pursuant to Rule 41(b) for abuse of discretion. Webber
v. Eye Corp., 721 F.2d 1067, 1068 (7th Cir. 1983). “So long
as the district judge’s analysis was not tainted by a legal error
or the failure to consider an essential factor, we will reverse
only…if the decision strikes us as fundamentally
wrong.” Moffitt v. Ill. State Bd. of Educ., 236 F.3d 868, 873 (7th
Cir. 2001) (citations omitted).
“The sanction of dismissal is the most severe sanction
that a court may apply, and its use must be tempered by a
careful exercise of judicial discretion.” Webber, 721 F.2d at
1069 (quoting Durgin v. Graham, 372 F.2d 130, 131 (5th Cir.
1967)). Accordingly, we have directed district courts ideally
to consider the following factors when entertaining a Rule
41(b) motion:
[T]he frequency and magnitude of the plaintiff’s
failure to comply with deadlines for the
prosecution of the suit, the apportionment of
responsibility for those failures between the
plaintiff and his counsel, the effect of those
failures on the judge’s calendar and time, the
prejudice if any to the defendant caused by the
plaintiffʹs dilatory conduct, the probable merits
of the suit, and the consequences of dismissal
for the social objectives of the type of litigation
that the suit represents.
Aura Lamp & Lighting Inc. v. Int’l Trading Corp., 325 F.3d 903,
908 (7th Cir. 2003). Ultimately, the decision to dismiss “depends
on all the circumstances of the case.” Kasalo v. Harris
& Harris, Ltd., 656 F.3d 557, 561 (7th Cir. 2011).
No. 17‐2988 9
Considering all the circumstances of this case, we conclude
the district court did not abuse its discretion. True,
McMahan can confidently argue that he did not miss any
deadlines, because the court imposed none. But looming
larger is the simple fact of McMahan’s delay—the sixteen
months of silence. McMahan claims he was actively pursuing
the case by trying to arrange for an expert witness for the
arbitration, but he never communicated that to his opponents.
Additionally, McMahan’s own evidence shows that a
primary reason for the delay was McMahan’s difficulty trying
to get the money together to pay an expert. Particularly
given the lack of communication, it was not an abuse of discretion
for the district court to discount that excuse. Cf. James
v. McDonald’s Corp., 417 F.3d 672, 681 (7th Cir. 2005) (affirming
dismissal where plaintiff claimed “she ‘very much wanted
to pursue her cause,’ but could not because the district
court compelled her to arbitrate her claims, which she could
not afford to do”).
In addition, the district court reasonably concluded the
delay prejudiced Goldstein and Amex. An unreasonable delay
gives rise to a presumption of prejudice. Washington v.
Walker, 734 F.2d 1237, 1239 (7th Cir. 1984). Such a presumption
is particularly apt in this case, where the events at issue
took place over a decade before McMahan filed the lawsuit
and where a key witness, Goldstein, has died.7 In this situa‐
7 It should be noted that Goldstein’s death, on its own, would not be
enough to show prejudice in this case. Goldstein died in May 2014, a
mere three months after the last communication from McMahan. There is
no indication that McMahan delayed in anticipation of Goldstein’s death
or that Goldstein would not have died prior to the arbitration even if
McMahan had more actively pursued his suit. However, Goldstein’s
death exacerbates the difficulty of finding witnesses to events that oc10
No. 17‐2988
tion, it was entirely reasonable for the district court to conclude
that “every passing day…increases the defendant’s
difficulty in mounting an adequate defense.” The district
court took all these circumstances into account and concluded
that failing even to communicate with opposing counsel
for sixteen months was an unreasonable delay that caused
prejudice. That was not an abuse of discretion.
McMahan’s arguments that the district court did not consider
a lesser sanction first and that the district court did not
warn him that dismissal was coming do not convince us
otherwise. There is no requirement to enter lesser sanctions
before dismissing a case for lack of prosecution. Ball v. City of
Chicago, 2 F.3d 752, 756 (7th Cir. 1993). Neither is a warning
required in every case. “[T]he warning requirement is not a
‘rigid rule…. It was intended rather as a useful guideline to
district judges—a safe harbor to minimize the likelihood of
appeal and reversal.’” Kasalo, 656 F.3d at 562 (alteration in
original) (citation omitted) (quoting Fischer v. Cingular Wireless,
LLC, 446 F.3d 663, 665 (7th Cir. 2006)). Those opinions
admonishing a district court for dismissing a case without
warning involve sua sponte dismissals. See, e.g., In re Bluestein
& Co., 68 F.3d 1022, 1027 (7th Cir. 1995). There is no need to
warn that dismissal is coming when, as here, the defendant
files a motion with notice to the plaintiff asking for dismissal.
Morris v. Morgan Stanley & Co., 942 F.2d 648, 652 (9th Cir.
1991). In such a situation, the plaintiff has an opportunity to
explain itself by responding to the motion, as McMahan did
here. If, after hearing from both sides, the district court believes
dismissal is appropriate, no purpose would be served
curred so far in the past and is properly considered among the totality of
the circumstances.
No. 17‐2988 11
by issuing a warning: the motion itself was the warning. Cf.
Johnson v. Kamminga, 34 F.3d 466, 468 (7th Cir. 1994) (rejecting
a warning requirement that “would in effect be granting
each litigant one opportunity to disregard the court’s schedule
without fear of penalty”). There was no abuse here.
B. Summary Judgment
We turn to the grant of summary judgment for Deutsche
Bank on statute of limitations grounds. “The standard for
summary judgment is well established: with the court drawing
all inferences in the light most favorable to the nonmoving
party, the moving party must discharge its burden
of showing that there are no genuine questions of material
fact and that [it] is entitled to judgment as a matter of law.”
Spierer v. Rossman, 798 F.3d 502, 507 (7th Cir. 2015). Once the
movant has carried this burden, it passes to the non‐movant
“to come forward with specific facts showing that there is a
genuine issue for trial.” Id. “The existence of merely a scintilla
of evidence in support of the non‐moving party’s position
is insufficient; there must be evidence on which the jury
could reasonably find for the non‐moving party.” Madison v.
Frazier, 539 F.3d 646, 652 (7th Cir. 2008).
Because this case comes to us under the diversity statute,
“we apply state substantive law.” Austin v. Walgreen Co., 885
F.3d 1085, 1088 (7th Cir. 2018) (internal quotation marks
omitted) (quoting Gasperini v. Ctr. for Humanities, Inc., 518
U.S. 415, 427 (1996)). Substantive law includes statutes of
limitations and “rules that are an ‘integral part of the statute
of limitations,’ such as tolling and equitable estoppel.” Hollander
v. Brown, 457 F.3d 688, 694 (7th Cir. 2006) (quoting
Walker v. Armco Steel Corp., 446 U.S. 740, 748 (1980)). The parties
do not dispute that Illinois law applies to this case.
12 No. 17‐2988
By the time the district court entered summary judgment
against McMahan, only one of his claims against Deutsche
Bank was still live: that Deutsche Bank aided and abetted
Jenkens & Gilchrist in misrepresenting the legitimacy of the
shelter. That claim was subject to a five‐year statute of limitations.
735 ILCS 5/13‐205. There is no dispute that
McMahan’s claim accrued in 2001 when he paid fees to
Deutsche Bank for its role in facilitating the shelter‐related
transfers. Therefore, removing all other considerations, the
limitations period on McMahan’s claim would have expired
in 2006. McMahan filed his complaint in 2012. He relies on
the “discovery rule” to overcome that six‐year gap.
Under Illinois law, the discovery rule “postpone[s] the
start of the period of limitations until the injured party
knows or reasonably should know of the injury and knows
or reasonably should know that the injury was wrongfully
caused.” Khan, 978 N.E.2d at 1028–29; accord Feltmeier v.
Feltmeier, 798 N.E.2d 75, 89 (Ill. 2003). It is only at that point
“the statute begins to run and the party is under an obligation
to inquire further to determine whether an actionable
wrong was committed.” Khan, 978 N.E.2d at 1029 (quoting
Nolan v. Johns‐Manville Asbestos, 421 N.E.2d 864, 868 (Ill.
1981)).
The parties direct us primarily to two Illinois cases, Khan
and Lane, both of which apply the discovery rule in suits
against Deutsche Bank by taxpayers who participated in a
tax shelter. In Khan, the Illinois Supreme Court held the
plaintiffs did not “discover” their claims against the defendant
bank until they received the notice of deficiency from the
IRS. 978 N.E.2d at 1036.
No. 17‐2988 13
Three years later, the plaintiff in Lane argued the supreme
court’s holding in Khan established a bright‐line rule:
he did not have notice of his claims against the bank until
the IRS notified him of his tax deficiency. Lane, 44 N.E.3d at
554. The Illinois Appellate Court explicitly rejected that argument.
Id. Instead, the court concluded that particular
events occurring after the cause of action accrued served to
put the plaintiff on notice that he had claims against the
bank. Id. at 555–56. Specifically, the court noted the plaintiff
learned of a memo circulated by his contact at his accounting
firm that the tax shelter in which he had participated was
illegitimate; the plaintiff learned the IRS was auditing “the
entity through which [his] losses flowed”; and the attorney
who prepared the letter indicating the tax shelter was legally
acceptable “[pleaded] guilty to defrauding the IRS by authoring
false opinion letters and entering into a phony consulting
agreement.” Id. at 555. The court reasoned that these
events should have put the plaintiff on notice that something
was amiss with the tax shelter. Id. The IRS’s issuance of the
deficiency notice in 2013 simply made him aware of all his
potential damages. Id.
In this case, McMahan participated in a tax shelter in
2001 and did not receive a deficiency notice until 2010. But,
similar to the plaintiff in Lane, events in the interim should
have put him on notice that he may have had claims against
Deutsche Bank. Most notably, in 2005 McMahan became
aware of a class action involving claims of breach of fiduciary
duty against Jenkens & Gilchrist relating to its role in
promoting tax shelters. The letter informing him of the class
action also indicated McMahan’s entitlement to recover in
the settlement of that suit. The very same day he received
that letter, the IRS notified McMahan it was auditing his
14 No. 17‐2988
2001 tax returns. By at least that point, as the district court
concluded, McMahan had sufficient notice that something
was not right to put the impetus on him to investigate further
whether he had claims against Deutsche Bank. Cf. Marvel
Eng’g Co. v. Matson, Driscoll & D’Amico, 501 N.E.2d 948,
952 (Ill. App. Ct. 1986) (“[P]laintiff’s lack of diligence precludes
application of the discovery rule in its favor.”). Because
the undisputed facts show McMahan was on notice no
later than 2005, he should have filed his complaint no later
than 2010. He waited until 2012, so summary judgment was
appropriate.

Outcome: In accordance with the foregoing, we AFFIRM the district
court in all respects.

Plaintiff's Experts:

Defendant's Experts:

Comments: