Lawyer Turns In Client with Swiss Bank Account (4/30/11)

The Tax Court recently decided Estate of Saunders v. Commissioner, 136 T.C. No. 18 (2011) which establishes important precedent for valuing contingent claims against the estate for purposes of calculating the estate tax. That holding is not relevant to the subject of this blog, but the nature of the claim being valued is relevant.

The decedent (Mrs. Saunders) was the surviving spouse of a lawyer (Mr. Saunders) who represented a client who had a Swiss bank account. Mr. Saunders reported that fact to the IRS, apparently without the permission of and in violation of his duty to the client, a Mr. Stonehill. The client then suffered an investigation, the precise scope of which is not stated, but apparently involved the IRS, the FBI, the State Department and DOJ. Extensive tax litigation then resulted. In that litigation, the client was represented by another lawyer. In the litigation (which included FOIA litigation), the client's lawyer

obtained numerous previously classified documents from the Internal Revenue Service (IRS), Federal Bureau of Investigation, State Department, and Department of Justice. Among the documents Heggestad received during the FOIA litigation was an April 27, 1960, memorandum by IRS agent James H. Griffin (the Griffin memo). The Griffin memo suggested that Saunders had acted as a secret IRS informer against the interest of his client, Stonehill.

The client then made a demand on the Estate of Mr. Saunders. The Tax Court describes the demand as follows:

The demand on the Estate of William Saunders, Sr. (the Saunders estate) by the Stonehill estate was based on the claim that Saunders, while Stonehill's attorney, had informed the IRS that Stonehill maintained a Swiss bank account. Allegedly as a result of this disclosure, the IRS investigated Stonehill for tax fraud, leading to jeopardy assessments for 1958-62 and a 1975 suit to reduce the assessment to judgment and to foreclose liens. The claimed consequence of these actions was loss of business interests and property from the collection of taxes.

 In the ensuing suit, the client (by then an estate) demanded "over $90 million in compensatory damages, plus additional punitive damages." After much pre-trial thrashing about, the case went to trial. The results were:

The jury found that Saunders had breached his fiduciary duty of confidentiality and his duty of undivided loyalty to Stonehill but also found that neither breach was a legal cause of injury or damage to Stonehill or to his estate. Judgment was entered by the State court on October 23, 2007. Costs of $289,000 were awarded to the Saunders estate in the final judgment.

The Stonehill estate appealed the judgment, but the litigation was ultimately resolved by a settlement agreement and mutual release. The Saunders estate paid $250,000 in attorney's fees to the Stonehill estate's attorney and waived its right to the $289,000 costs awarded in the State court judgment.