Fiduciary Duty

Cox as Trustee for Estate of Central Illinois Energy Cooperative v. Evans, 2018 WL 6706666

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A group of farmers formed a coop to construct and operate an ethanol facility.  Michael Evans (“Evans”) an attorney at Froehling, Weber, Evans & Schell, LLP (“FWES”), prepared the articles of incorporation.  He and his wife, Ginger, became shareholders in the coop, and Evans served as the it’s attorney and registered agent.  When the coop had trouble paying for construction, Evans and his partner, Nancy Schell (“Schell”) informed the coop board that Green Lion Bio-Fuels, L.L.C. (“Green Lion”) wanted to invest in the project.  Evans disclosed that Green Lion was one of FWES’ other clients and that various FWES employees and their family members had equity stakes in it.  However, he did not disclose that his wife’s stake in Green Lion was nearly 96%.

The chairman of the coop board signed a conflict waiver which referred to Ginger as a “minority” shareholder, and Green Lion loaned the coop $5 million to complete its project.  Id. at 2.  Pursuant to the loan, Green Lion would also purchase the coop’s grain handling facility, which the coop would still manage and eventually buy back.  Evans drafted the corresponding purchase and buyback agreements.  He gave copies of the agreements to Kenneth Eathington (“Eathington”), an attorney at Husch Blackwell, to review.  Eathington returned the agreements with his edits.  Schell circulated various revised agreements over the next week, until the coop finally executed the sale.  Six months later, the coop filed for bankruptcy.  Clay Cox (“Cox”), trustee for the coop, sued Evans, Schell, and FWES (collectively “Defendants”) for legal malpractice and breach of fiduciary duty through self-dealing.  Defendants moved for summary judgment.

Defendants allege that there was no attorney-client relationship between themselves and the coop such that they could be held liable for malpractice.  They argue that the coop’s general manger had retained Eathington as separate counsel for the coop.  Cox countered, and the Court agreed, that Eathington was merely additional counsel consulted by Evans.  Indeed, the coop’s general manager testified that he sent his questions about the agreements to FWES, not Eathington.  As for Cox’s breach of fiduciary duty claim, the Court agreed that there were genuine disputes of material fact.  For example, Defendants argued that they had made a full and frank disclosure of their interests in the sale of the holding facility, but the conflict waiver signed in this matter listed Ginger as a “minority” shareholder despite her 96% interest in Green Lion.  The court also held that there was a genuine dispute as to the adequacy of the consideration given for the grain handling facility and whether the coop received independent advice on its sale.  Evans argued that the coop had engaged Eathington for his independent advice, while the coop maintained that Eathington was only supplemental counsel, not separate.  With all of the above issues in dispute, the question of proximate causation was likewise in dispute.  Summary judgment was therefore denied.

Cox as Trustee for Estate of Central Illinois Energy Cooperative v. Evans, 2018 WL 6706666

(This is for informational purposes and is not legal advice.)

Zombro v. Jones, 2018 IL App (4th) 170442-U

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The third-party plaintiff, Vicky Jones, sued the third-party defendant, attorney Kevin Hammer, for legal malpractice in a real estate transaction where Hammer had represented her.

Jones alleged that Hammer had grossly understated the price of her land in the contract he drafted, threw the contract at Jones during a meeting, and lambasted the deal in front of the buyers, thereby inducing Jones to sell her land for one eighth its supposed market value. Conversely, Hammer and the buyer alleged that Hammer had correctly stated the agreed-upon price in the contract, and that Hammer didn’t throw anything at Jones. Hammer also said Jones had read the final contract and asked him questions before signing.

The Trial Court granted summary judgment in Hammer’s favor. When Jones appealed, Hammer argued that he had not breached any duty to Jones, because he had technically performed the two tasks she had hired him to do. The Appellate Court rejected this “scope-of-engagement” argument, holding that Hammer, as Jones’ attorney and therefore his agent, was not merely obligated to perform certain tasks, but also owed Jones a fiduciary duty “to treat his principal with the utmost candor, rectitude, care, loyalty, and good faith—in fact to treat the principal as well as the agent would treat himself.” Id. at ¶41. This fiduciary duty extended to all tasks he was hired to perform and “all matters connected” with those tasks. Id.

Nevertheless, the Appellate Court found that there was no genuine issue of material fact with respect to one critical element of Jones’ claim: damages. Specifically, the deal Hammer allegedly ruined didn’t actually exist, since the deal Jones claimed she had hired Hammer to pursue differed from the deal the buyers believed they were entering into. In fact, the buyers swore that they could not have afforded the land at the price to which Jones believed they had agreed. Moreover, the Court explained that even if it were to assume “for the sake of argument, that Hammer did indeed bully Jones into selling the land for only $5,000, it appears she suffered no resulting harm, because […] Jones presented no admissible evidence that the land was worth more” and “the arm’s-length transaction […] is evidence of the highest rank to determine the true value of property.” Id. at ¶55. Summary judgment was therefore affirmed.

Zombro v. Jones, 2018 IL App (4th) 170442-U

(This is for informational purposes and is not legal advice.)

 

 

Alonso v. Weiss, 301 F. Supp. 3d 885 (N.D. Ill. 2018)

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Limited partners in investment funds filed suit on their own behalf and derivatively on behalf of their funds against a court-appointed receiver, alleging she had violated the Investment Advisers Act and Securities and Exchange Commission Rules, breached her fiduciary duties and engaged in legal malpractice. Among other things, the plaintiffs asserted that the receiver had failed to pursue certain litigation opportunities or needlessly pursued others, all to the detriment of the receivership estate.

The primary issue in the case was whether the receiver had intentionally tried to harm the estate. In the Seventh Circuit, “an injured party can only ‘recover from the receiver when the receiver intentionally acts in clear contravention of duty,’ and the receiver will not be held liable for ‘exercise of poor judgment.’” Id. at 894, citing In re Kids Creek Partners, L.P., 248 B.R. 554, 560-561 (Bankr. N.D. Ill. 2000). With that in mind, the plaintiffs alleged that the receiver was motivated in part by malice toward a former manager of the funds’ general partner. They also claimed that she breached her duties in order to ingratiate herself with the SEC so it would give her more receivership work in the future.

The Northern District of Illinois granted summary judgment in favor of the court-appointed receiver. The court held that the plaintiffs failed to demonstrate that any of the receiver’s allegedly improper actions had been intended to harm the receivership estate.

Alonso v. Weiss, 301 F. Supp. 3d 885 (N.D. Ill. 2018)

(This is for informational purposes and is not legal advice.)

Daily v. Greensfelder, Hemker & Gale, P.C. 2018 IL App (5th) 150384, appeal denied sub nom. Daily v. Greensfelder, Hember & Gale, P.C., 98 N.E.3d 39 (Ill. 2018):

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This case came to the Fifth District on a “friendly contempt” for failure to comply with a discovery order.  The Fifth District held that a breach of fiduciary duty claim put “at issue” a client’s communications with its attorneys because those communications were necessary to determine who contributed to the alleged breach of fiduciary duty and the relative contribution of each.

Daily v. Greensfelder, Hemker & Gale, P.C.

(This is for informational purposes and is not legal advice.)

Barefoot Architect , Inc. v. Sabo & Zahn, 2017 IL App (1st) 162616-U

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In this unpublished opinion, the First District affirmed the dismissal of a legal malpractice claim on statute of limitations grounds and a breach of fiduciary duty claim resulting from a bankruptcy case where the plaintiff had hired attorneys other than the defendants to represent in those proceedings. The court held that, ordinarily, a cause of action for malpractice accrues when a court enters an adverse judgment against a malpractice plaintiff. Here, the statute of limitations had run even using the date the appellate court entered an adverse judgment against the plaintiff. The court held that the lawyers’ statements that the court had erred did not establish were insufficient to preclude application of the statute of limitations under theories of fraudulent concealment or equitable estoppel.

Barefoot Architect , Inc. v. Sabo & Zahn, 2017 IL App (1st) 162616-U

(This is for informational purposes and is not legal advice.)

Mareskas-Palcek v. Schwartz, Wolf & Bernstein, LLP

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The First District affirmed the dismissal of conversion and breach of fiduciary duty claims against a lawyer and law firm that allegedly closed a real estate sale the day after their client died. The court held that the executor of the estate of the client was the proper party to bring the claim and that the plaintiffs, who were beneficiaries of trusts that were to receive the sale proceeds, did not have standing to bring suit. The court also held that the plaintiffs were not the lawyer’s clients and were not owed a duty by the lawyer because the primary purpose for the lawyer’s retention was not to benefit plaintiffs.

Mareskas-Palcek v. Schwartz, Wolf & Bernstein, LLP

(This is for informational purposes and is not legal advice.)

Hilton v. Foley & Lardner, LLP

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In this unpublished opinion, the First District affirmed the dismissal of conversion and breach of fiduciary duty claims brought by an individual and affirmed the grant of summary judgment with respect to legal malpractice claims brought by an LLC.

As to the individual’s claims, the court affirmed the dismissal on statute of limitations grounds.  The plaintiff should have known of the defendant lawyer’s conflicted representation of the plaintiff when his lawyer wrote a letter to defendant’s lawyer on the issue.  Moreover, the court noted that the two-year statute of limitations applies to any claim against a lawyer (even if it is not a legal malpractice claim) sounding in tort, contract or otherwise and arising out of professional services, even if the claim is brought by a non-client.

As to the LLC’s claim, the court held that there was no evidence that the lawyer’s conduct proximately caused any loss.   There was no evidence that another lawyer representing the LLC would have acted differently and the plaintiff did not depose managing member of the LLC to try to adduce that evidence.

Hilton v. Foley & Lardner, LLP, 2017 IL App (1st) 162450-U

(This is for informational purposes and is not legal advice.)