- Lester Munson, Legal Analyst
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No, that isn't the technical term for what's happening in the legal life of one NFL quarterback. (C'mon, you know Courtside Seat better than that!) But it's a pretty apt description, both of the investment he made and the fallout from the transaction. We'll get to the latest maneuvering in the Jerry Sandusky case eventually; but today, we start with ...
Adventures in garbage gas
It probably seemed like a good idea at the time, but that will be of scant comfort to Kansas City Chiefs quarterback Kyle Orton.
His investment, now mired in litigation and tax complications, was in methane, the odiferous gas that percolates out of garbage dumps. The plan was to convert the methane into energy and tax shelters. As part of an attempt to clean up the environment, federal tax laws provide benefits for anyone who, using post-modern alchemy and cutting-edge technology, can convert the noxious gas into electricity.
The reward for this bit of magic is a tax credit. That's credit. It's better than a tax deduction, which merely reduces the amount of income that is to be taxed. A credit is a direct reduction in the amount of tax to be paid. A tax credit is the ultimate tax shelter, a device highly prized by wealthy taxpayers. Some who derive pleasure from money matters such as these might say that a tax credit is one of the top five delights not related to sex in the entire world.
So Orton bought in.
Orton and many other high net-worth investors thought, of course, they were investing in a sure thing. (Doesn't it always seem like a sure thing?) An investment syndicate in Chicago (yes, that already sounds bad) told them they'd be buying into a partnership that sells "biomass gas produced from landfills" -- language designed to be a polite description of the gases that ooze from garbage dumps.
The syndicate included Michael Horrell, Leon Greenblatt and Karen Brenner, all of them real estate operators who were also buying into foreclosed office buildings in fringe Chicago neighborhoods, a practice known as vulture investing.
The syndicate used a Chicago law firm, Chuhak & Tecson, to create the structures necessary to gather the investment funds, lease the dumps and sell the gas. They created partnerships and other organizations known as Green Gas, Red Gas, Ciao Gas, Buon Giorno Gas, Methane Blue and Methane Green.
According to the lawsuit Orton has filed against the law firm, the lawyers wrote opinions confirming the legality of the deal and prepared the myriad tax returns necessary to obtain the tax credits.
Neither Orton nor his lawyer, Daniel Konicek of Geneva, Ill., responded to calls from ESPN.com, but it's apparent from court papers in their lawsuit and in other litigation over the methane maneuvering that it all fell apart rather quickly.
The promoters organized their methane enterprise in 2005 and sold it for a couple of years. (Orton was selected by the Chicago Bears out of Purdue in the fourth round of the 2005 NFL draft.) The IRS quickly intervened in the attempted tax shelter, beginning an audit of the 2005 tax returns after they were filed in 2006. The IRS poured over the tax returns, the claimed tax credits, supporting documents, accounting records and the 23 leases on landfills. The audits, according to a letter from the law firm to the investors, resulted in the disqualification of "90 to 95 percent" of the tax credits, a significant and expensive problem for investors such as Orton who claimed them. The IRS is now demanding tax payments as well as interest and penalties.
That was bad enough, but it turned worse when the IRS began an investigation to determine whether crimes were committed. Was the deal a fraud in its inception? Were the tax returns fraudulent and evasive? IRS agents demanded to know, adding additional burdens in accounting and legal fees to the investors.
Orton and the other investors are not likely to be charged with tax crimes, but they could face fraud penalties on their taxes that can quickly double the amount they must pay.
Facing a long series of questions from the IRS, the lawyer who prepared the scheme's tax returns, Gary Stern, took the Fifth Amendment, refusing to answer to protect himself against self-incrimination. In a document filed in the U.S. Tax Court, a forum specializing in tax disputes, an IRS attorney said the agency expected that "other witnesses may similarly invoke their Fifth Amendment privileges."
In the early stages of the IRS investigation, the Chuhak law firm represented all the investors, including Orton. But according to a lawsuit filed by 21 of those investors (not including Orton, who filed a separate suit), the firm "abandoned" the investors and "abruptly withdrew from their representation," claiming that the firm was caught in a conflict of interest in its representation of both sides of the deal.
It's difficult to tell at this point in the litigation how exactly the venture went wrong, but it appears that some leases of landfills were defective, that some of the gas was burned off when it was supposed to be captured, and that there were significant accounting irregularities.
For Orton and other investors, it has become an embarrassing and expensive nightmare. Orton has sued the law firm, Stern and three other individual lawyers in an effort to recapture his lost investment and his tax credits. He and attorney Konicek want to lead a class action on behalf of all other investors in the scheme.
Orton seems to have a powerful case against the lawyers who helped lead him into the methane mess, but he will have to wait until the IRS completes its criminal probe, a process that could take as long as a year or more.
Let the Jerry Sandusky claim games begin
Anyone who has made a claim against an insurance company likely knows that the process moves very gradually at first and then slows even further to a pace that redefines the word "glacial." If you're experience is anything like Courtside Seat's has been, you know that insurance companies seem to be very proficient with delays, denials and demands -- delays in returning phone calls and responding to emails, denials of responsibility and demands for duplicative documentation.
They often seem to want to avoid paying claims as long as possible, keeping the money and adding to the companies' bottom lines.
It was a bit of a surprise, then, when the insurance company that protects Second Mile Foundation, the charity Sandusky founded and led for more than 20 years, acted quickly and decisively late last month. Facing the possibility of defending Sandusky in the lawsuits that are coming from his accusers, the company challenged Sandusky in a lawsuit of its own only 23 days after an accuser filed the first demand for money damages.
In an action filed in federal court in Harrisburg, Pa., Federal Insurance Company, a division of the mammoth Chubb Group of insurance carriers, asked for a ruling that it is under no obligation to provide lawyers for Sandusky and under no obligation to pay any judgments entered against Sandusky.
The insurance carrier and its Pittsburgh lawyers, in what is known as a "declaratory judgment" action, want to separate themselves from Sandusky rapidly and totally. They know that the first accuser's lawsuit, filed under the name "John Doe A," is one of what could be more than a dozen suits from Sandusky's alleged victims.
The insurance policy that Federal sold to Second Mile is supposed to protect the charity organization against claims for injury or damage that result from foundation activities. The protection includes paying lawyers to defend any lawsuit and paying judgments or settlements to anyone harmed by the foundation and its employees. If a foundation employee is sued, the carrier is under the same obligations to provide defense counsel and to pay settlements.
Sandusky and his lawyers also know the lawsuits are coming. They know that Sandusky faces enormous legal expenses in hiring lawyers to defend the lawsuits and in paying settlements and judgments to his accusers. And they know that his only hope for avoiding insolvency from the civil cases is to force Federal Insurance Company to defend him. Hoping to protect Sandusky's net worth, they will fight the Federal Insurance lawsuit; but most likely, they will lose. They will learn quickly in the Federal Insurance litigation that Sandusky has no hope for help from the insurance carrier.
If Sandusky were accused of routine negligence (carelessness) in, say, an auto accident while doing something for Second Mile, the Federal Insurance policy would protect him with lawyers and with the payment of any settlement before trial or judgment after trial.
The allegations from John Doe A, however, are not routine and are not claims of negligence. They are charges of deliberate, criminal attacks against children. It is, the Federal Insurance lawyers argue in their lawsuit, "contrary to defined and dominant Pennsylvania public policy" to defend and to indemnify anyone accused of these crimes.
In unusually clear and direct language that (if you'll allow Courtside Seat this generalization) is uncharacteristic of lawyers who do insurance work, the Federal Insurance attorneys state that under Pennsylvania law, "there is a well-defined, universal sentiment which repudiates the notion of an insurer defending and indemnifying an individual, such as Sandusky, for damages resulting from sexual intercourse with and assault, abuse, and/or corruption of young boys."
There is little doubt that the lawyers are correct in their assertion. Which means Sandusky will find himself overwhelmed with the expense of hiring and paying lawyers to defend these cases.
But even when Federal Insurance obtains a ruling against Sandusky, as it likely will, the insurance company will face the challenge of defending Second Mile Foundation. The John Doe A lawsuit offers a preview of what the accusers and their lawyers will try to do as they seek large settlements for their suffering.
In recognition of the fact that their best hope of collecting for the accusers is to pin Sandusky's behavior on the foundation and on Penn State University, the Doe lawsuit suggests that the two institutions "conspired to endanger the children."
The foundation and the university "enabled" Sandusky and "ratified" his actions, according to the lawsuit. Instead of stopping Sandusky when they first knew of his behavior in the late '90s, they "maintained silence so as to enable Sandusky to continue to act on his sexual interest in children."
The allegations from John Doe A are serious, of course; and if his lawyers can begin to prove them, they will lead to enormous verdicts against the foundation and the university.
The phrase that will dominate the early stages of this litigation is "policy limit." What is the liability limit in the Federal Insurance policy? Is there a second layer of insurance beyond the Federal policy?
Jeffrey R. Anderson, the St. Paul, Minn., attorney who represents John Doe A, and the lawyers who will be filing suits for other alleged victims will demand to know the amount of insurance that covers liabilities for Second Mile. They will then demand payment of the limits in settlement.
If there is no settlement, they will try the cases against the foundation and the university secure in the knowledge that the university's vast array of assets will be sufficient to pay whatever a jury awards to the accusers.
There is the possibility of quick and early settlements. But it is more likely that the only quick and conclusive action will be the Federal Insurance challenge to Sandusky. With that exception, it should be another of those familiar insurance stories of denial and delay. In other words, another ordeal for Sandusky's accusers.
Lester Munson, a Chicago lawyer and journalist who reports on investigative and legal issues in the sports industry, is a senior writer for ESPN.com.
It was always going to smell bad. (It's methane gas, after all.) But Kyle Orton apparently had no idea how malodorous his investment would be. Plus, insuring Jerry Sandusky.