The Illinois Supreme Court smashed the profit motive behind a pattern of tax false claims lawsuits by a prolific Chicago plaintiff attorney, ruling the “king of qui tam” can’t serve as both the whistleblower and counsel for the whistleblower in such actions.
In a 6-0 opinion, the high court upheld a June 2017 ruling from the Illinois Appellate Court that denied attorney’s fees to Stephen B. Diamond in an action under the Illinois False Claims Act. In so ruling, the court stripped Diamond of more than $600,000 in attorney’s fees awarded in a 2014 case he won against the retailer My Pillow Inc.
The Sept. 20 ruling could have substantial implications for Diamond, regarded as the most prolific tax whistleblower in the U.S., and his law firm Stephen B. Diamond P.C.
Critics have accused Diamond of building a cottage industry in Cook County Circuit Court over 17 years, filing FCA actions over narrow infractions of the tax code against hundreds of retailers. A prior Bloomberg Tax investigation revealed that Diamond had earned nearly $12 million, filing more than 1,000 tax fraud lawsuits. A critical feature of Diamond’s business model assumes paychecks for his tax recoveries as the whistleblower, or relator, in a qui tam action, and paychecks for his frequent trips to circuit court.
The Supreme Court agreed that Diamond was entitled to a bounty as the relator in the My Pillow action, noting that he had brought a viable case questioning the company’s application of Illinois’ sales and use tax code. Diamond’s bounty was previously pegged at $266,891. But the court said Diamond couldn’t collect both a bounty and attorney’s fees of $600,960 as counsel for the relator.
No Attorney-Client Relationship
The court didn’t express an overarching view on whether a relator could “ever” claim both a bounty and attorney’s fees under a fee-shifting statute. Rather, the court ruled that Diamond wasn’t entitled to such fees because there was no attorney-client relationship from which attorney’s fees might arise.
“[T]here was no factual or legal distinction between Diamond the relator and Diamond the law firm,” Chief Justice Lloyd Karmeier wrote on behalf of the court. “They were one and the same. Their interests in the litigation were identical, and their contributions to the case were indistinguishable. When Diamond the law firm made a legal decision, it was not counseling a client. It was talking to itself.”
In addition, Karmeier acknowledged the potential for “abusive fee generation” in scenarios where attorneys might represent themselves in litigation under a fee-shifting statute.
The court pointed to the analysis in the Supreme Court’s 1989 decision in Hamer v. Lentz, which held that an attorney proceeding pro se in a claim under the Illinois Freedom of Information Act wasn’t entitled to fees based on concerns of abusive fee generation, despite a fee-shifting provision in the law.
Quoting from Hamer, Karmeier wrote, “allowing attorneys to collect fees for representing themselves may engender abusive fee generation practices. The most effective way to deter such potential fee generation, we have held, ‘is to deny fees to lawyers representing themselves.’ ”
‘One and the Same’
Catherine A. Battin, a partner with McDermott Will & Emery in Chicago and counsel to My Pillow, said her client was “thrilled” with the ruling.
“The court relied on case law in Hamer and some other cases holding that a pro se litigant can’t recover on behalf of themselves,” Battin told Bloomberg Tax. “They didn’t find any of Diamond’s argument compelling. The record was clear the attorney and the relator were one and the same.”
Diamond, through his counsel Tony Kim, declined to comment on the ruling.
In his oral argument before the Supreme Court last May, Diamond said the appeals ruling in My Pillow endangers important features of the FCA. He emphasized that relators bring incidents of fraud to the attention of the attorney general, capture revenue lost to the state due to fraud, and remedy fraudulent conduct on a going-forward basis. In the context of his own litigation, Diamond said he had recovered more than $25 million for the state’s coffers.
Karmeier acknowledged such benefits to the state, but added, “they are not, however, justification for paying Diamond twice for the same work.”
Active Cases in Circuit Court
Battin said it remains unclear what impact the My Pillow decision would have on the broader pattern of litigation engineered by Diamond, who has dozens of active cases in circuit court. Approximately 65 cases allege that custom tailoring businesses, located primarily in Hong Kong and London, fraudulently fail to collect and remit taxes on millions of dollars of transactions involving customers in Illinois.
Adjusting to last year’s appeals ruling, Diamond now asserts he is represented by Kim & Burns LLP, which was formed by two of Diamond’s associates, Tony Kim and Matthew Burns.
Battin, however, said it isn’t clear a viable attorney-client relationship exists.
“I’m hoping this ruling will encourage the circuit court judges to at a minimum allow some discovery surrounding the business arrangement he has with this new law firm, that were formerly his associates,” Battin said. “There is no apparent separation between him and the law firm of Kim & Burns.”
The case is Illinois ex rel. Schad, Diamond & Shedden PC v. My Pillow, Inc., Ill., No. 122487, 9/20/18.
To read more from Daily Tax Report: State pleaseOR Request Trial