Antitrust Law Daily Wrap Up, RICO—SDIll: Prior Conviction for Willful Tax Evasion Estopped Tax Evader’s RICO Claim Against Attorney, (Feb 26, 2013)

By Tobias J. Gillett, J.D., LLM.

An individual convicted of tax evasion could not state a Racketeer Influenced and Corrupt Organizations (RICO) Act claim against an attorney who filed his tax return and his law firm because the individual’s prior conviction for willful tax evasion collaterally estopped him from claiming that the attorney had caused his injuries, the federal district court in East St. Louis, Illinois has ruled (Hassebrock v. Bernhoft, February 25, 2013, Stiehl, W.). In addition, the individual’s claim did not satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b).

On May 6, 2005, the IRS raided the home of Orvil Duane Hassebrock, and took his financial records. On August 25, 2005, Hassebrock retained attorney Robert G. Bernhoft to file his 2004 income taxes and paid a $100,000 retainer. Bernhoft hired accountant John Noggle to prepare the returns, but Hassebrock claimed they missed so many deductions that he sent them back to be corrected. Bernhoft then hired accountant Tim Brewer to work on them, but Hassebrock claimed they were still “grossly wrong,” and returned them.

Bernhoft later mistakenly filed the returns in O’Fallon, Illinois, rather than Kansas City, and Noggle did not sign them. On June 17, 2009, Hassebrock was indicted for willfully attempting to evade and defeat the payment of taxes, and willfully failing to file a 2004 income tax return. On April 29, 2010, Hassebrock was convicted on all charges. Hassebrock later discovered Bernhoft had been sued in 1997 for his involvement in a company that sold “The De-Taxing America Program,” which encouraged people to evade their federal income taxes.

Hassebrock sued Bernhoft and his law firm, alleging that Berhoft’s actions led to his conviction, and that Bernhoft deliberately got him indicted in order to drive up his legal fees. Hassebrock asserted claims for fraud, legal malpractice, and violations of the RICO Act.

Hassebrock alleged that Bernhoft committed fraud by claiming he was a “tax expert,” and by failing to reveal his involvement in the “De-Taxing America Program,” and that Bernhoft’s capacity as an attorney gave rise to a duty to disclose. He claimed Bernhoft and his law firm committed a predicate act for RICO purposes each time they talked to him on the telephone or mailed him “anything.”

To state a RICO claim, a plaintiff must allege “(1) conduct (2) of an enterprise (3) through a pattern of racketeering activity,” but that such a claim could be asserted “only if the alleged RICO violation was the proximate cause of the plaintiff’s injury.” The court raised the issue of collateral estoppel, observing that Hassebrock had been convicted for “willfully” evading and failing to file his income taxes.

Illinois collateral estoppel law applied and stated that the “res judicata effect of a judgment from another jurisdiction is determined by the law of that jurisdiction.” As Hassebrock had been convicted in the district court, the law of the Seventh Circuit applied. That law required that “(1) the issue must be the same as that involved in the prior action, (2) the issue must have been actually litigated in the prior action, (3) its determination must have been necessary to the final judgment in the prior action, and (4) the party against whom estoppel is invoked must have been fully represented in the prior action.”

In this case, Hassebrock’s willfulness had been litigated in the criminal action, it was necessary to the final judgment, and Hassebrock had been fully represented. Therefore, the previous finding regarding his willfulness precluded him from claiming that Bernhoft’s actions had caused his injuries.

Moreover, the court observed that RICO claims based on mail or wire fraud must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). Hassebrock’s allegations that Bernhoft and his law firm committed predicate acts “every time” they talked to him on the phone or mailed him anything “fail[ed] to state the time, place, or content of the alleged communications and [did] not mention any misrepresentations.” Therefore, the court dismissed his RICO claim.

The court also dismissed Hassebrock’s claims for fraud and legal malpractice, noting the same causation issue present in his RICO claim. The court did grant him leave to amend, but noted that any amendments of his claims based on his previous criminal conviction would be futile.

The case is No. 10-CV-00679-WDS.

Attorneys: D. Craig Hughes for Orvil Duane Hassebrock. Daniel J. Treuden (The Bernhoft Law Firm) for Robert G. Bernhoft.

Companies: The Bernhoft Law Firm, S.C.

Cases: RICO IllinoisNews