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Ablah v. Cahill

United States District Court, D. Kansas

March 26, 2019

THOMAS B. CAHILL, Defendant.


          Daniel D. Crabtree United States District Judge

         This matter is before the court on defendant Thomas B. Cahill's Motion to Dismiss (Doc. 45). This case originally involved seven plaintiffs and two defendants. But now, only the claims that plaintiff Christian Ablah has asserted against defendant Cahill remain. The other litigants have settled their claims and memorialized those outcomes in appropriate dismissal filings. See Docs. 78 & 85. Plaintiff Ablah, along with other plaintiffs who since have settled their claims, filed a Memorandum in Opposition to defendant's Motion (Doc. 63). Defendant has not filed a reply. For reasons explained below, the court denies defendant's Motion.

         I. Background

         When considering a motion to dismiss, the court accepts facts asserted by the Amended Complaint (Doc. 30) as true and views them in the light most favorable to plaintiff. Burnett v. Mortg. Elec. Registration Sys., Inc., 706 F.3d 1231, 1235 (10th Cir. 2013) (citing Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009)). Given this requirement, the court provides the following factual background.

         Plaintiff Ablah was a shareholder of Plaza Speedway Development, Inc. (“PSDI”). Defendant Cahill is a practicing attorney in Naperville, Illinois. Their dispute with each other emerges from a maze of limited liability companies and convoluted business relationships. They produce a sizable collection of acronyms and other abbreviations which, regrettably, are needed to recite the facts[1] governing this Motion.

         In 2005, two groups of investors and real estate professionals-one group from Chicago (“the Chicago Group”) and one from Kansas City (“the KC Group”)-agreed to form an entity to acquire land in Wyandotte County, Kansas (“the Plaza Speedway Property”), and develop that land (“the Speedway Project”) by using tax increment financing (“TIF”). In 2005, a corporation known as Midwest Acquisitions, Inc., which the Chicago Group owned, contracted with landowners to buy the land that ultimately became the Speedway Project. The project depended on TIF and Transportation Development District (“TDD”) proceeds to defer costs.

         The Chicago Group, the Amended Complaint alleges, was responsible for designing the transaction structure and drafting documents for the Chicago and KC Groups' development of the Speedway Project. Defendant Cahill was one of the legal professionals tasked with designing and structuring the Speedway Project transactions so that TIF and TDD proceeds would be excluded from taxation under Internal Revenue Code Section 118.

         On July 11, 2006, the Chicago Group created Plaza Speedway, LLC: an Illinois limited liability company that registered to do business in Kansas in November 2008. Midstates Investments, LLC-another Illinois limited liability company owned by the Chicago Group- owned 85% of Plaza Speedway, LLC. BCD Speedway, LLC-a Missouri limited liability company owned by the KC Group-owned the remaining 15% of Plaza Speedway, LLC. The Complaint alleges, on information and belief, that defendant Cahill partially was responsible for structuring the transaction in a fashion that made Plaza Speedway, LLC, the developer and owner of the Plaza Speedway Property. Christos Komissopoulos-a former defendant who since has settled with all plaintiffs-prepared the original operating agreement for Plaza Speedway, LLC, the Complaint alleges on information and belief.

         On December 21, 2006, the Unified Government of Wyandotte County (“the UG”) adopted the Speedway Development Plan that named Plaza Speedway, LLC, as the developer. The Complaint alleges that defendant reviewed and approved the agreement between the UG and Plaza Speedway, LLC.

         Then, on July 31, 2007, the Chicago Group, acting in part through defendant Cahill, created PSDI, a Kansas corporation also owned by Midstates Investments, LLC, and BCD Speedway, LLC. In September 2007, Midwest Acquisitions, Inc., assigned its contract rights with the landowners of the development site to Plaza Speedway, LLC. That same month, Plaza Speedway, LLC, assigned its rights in its agreement with the UG to PSDI. This assignment made PSDI the developer of the project. Plaza Speedway, LLC, also changed its ownership structure in September 2007. After the change, Midstates Investments, LLC, owned 60% of Plaza Speedway, LLC, and BCD Speedway, LLC, owned 40%. Plaza Speedway, LLC, purchased real estate comprising the development property and secured a mortgage for that property by executing a promissory note with VT, Inc., a lender.

         In November 2007, plaintiffs David Block and Becky Barber-both have settled their claims against all defendants-sent an email to Komissopoulos. They expressed concern that a corporation needed to control the entire project for the TIF and TDD proceeds to qualify as non-taxable. Komissopoulos responded that he was aware of the issue and that he had worked with defendant Cahill and others to structure the property ownership so that the TIF and TDD proceeds would qualify as exclusions from taxable income.

         In April 2008, Plaza Speedway, LLC, and PSDI entered into several agreements. They included: (1) an agreement where PSDI assumed Plaza Speedway, LLC's debt to VT, Inc.; (2) a “Development Agreement” between PSDI and Plaza Speedway, LLC; (3) Plaza Speedway, LLC, conveyed the Plaza Speedway Property to PSDI; (4) PSDI conveyed the property back to Plaza Speedway, LLC; (5) PSDI, as the project's developer, assigned the TIF and TDD proceeds to Mission Bank as a lender; (6) Mission Bank paid off the debt owed to VT, Inc., and VT, Inc., assigned the mortgage it held to Mission Bank; and (7) Plaza Speedway, LLC, signed a special warranty deed to Wal-Mart as a buyer of part of the property. The Amended Complaint alleges that defendant Cahill and Komissopoulos made the decision to convey the Plaza Speedway Property from PSDI to Plaza Speedway, LLC.

         Between 2008 and 2010, parts of the Plaza Speedway Property were sold, and the sales were reported on Plaza Speedway, LLC's tax returns. And the proceeds of these sales were used to pay the loan owed to Mission Bank. In 2008, Plaza Speedway, LLC, and PSDI began spending substantial amounts of money to improve the property. PSDI submitted certificates of expenditure to the UG. These certificates certified expenses eligible for reimbursement. TIF and TDD proceeds from 2009 to 2012 were paid to Mission Bank to apply to its outstanding loan. Between 2010 and 2012, PSDI received $9, 252, 233 in TIF and TDD proceeds, which were excluded from taxable income.

         Plaza Speedway, LLC, liquidated in January 2013, and the LLC's members contributed the entity's assets-including the title to property-to PSDI. While defendant Cahill and Komissopoulos acted as counsel, PSDI elected Subchapter S status. Electing Subchapter S status meant that the shareholders of PSDI (and not PSDI itself) would be taxed on the corporation's income. When PSDI elected Subchapter S status, plaintiff Ablah-along with the other plaintiffs who since have settled their claims-and members of Midstates Investments, LLC, owned all of PSDI's shares.

         On January 31, 2013, PSDI received $36, 416, 197 in TIF and TDD proceeds from the UG. The entire amount was excluded from taxable income on PSDI's 2013 tax return. But sometime after 2013, the Internal Revenue Service (“IRS”) audited Plaza Speedway, LLC, and PSDI. Based on this audit, the IRS concluded that the TIF and TDD proceeds were taxable because PSDI was not the property's owner or developer. In 2016, the IRS issued a notice of proposed adjustment that included the following: (1) $9, 252, 233 would be added to PSDI's taxable income for the years 2010 to 2012; and (2) $36, 416, 197 would be added to the taxable income of PSDI's shareholders for 2013. Given PSDI's Subchapter S status, more than $36 million in additional taxable income was assessed on a pro-rata basis to PSDI's shareholders- i.e., proportionally to each shareholder's ownership percentage in PSDI.

         The Amended Complaint alleges that the KC Group asked for and received legal advice from defendant Cahill and Komissopoulos frequently during the Speedway Project's development. Komissopoulos corresponded with the KC Group and third parties, representing that defendant Cahill was the lawyer for the project. Defendant billed and collected at least $650, 000 in attorney's fees between 2006 and 2013 for legal services provided to Plaza Speedway, LLC, and PSDI. Defendant's billing statements reflect time devoted to a number of client conferences with the KC Group and other legal services. The Amended Complaint also alleges that a member of the KC Group complained ...

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