Fiduciary Duty

Attorney Aiding and Abetting and Assignment of Malpractice Claims

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Rabbi Stanley Kroll (“Kroll”) had a thirty-year employment contract with his Synagogue. The contract included a deferred compensation plan (the “Plan”) to fund Kroll’s retirement.  The Synagogue was allowed to amend the Plan unilaterally, but not in any way that divested credits to the account or rights to which Kroll would be entitled if the Plan were terminated before an amendment took effect.  Id. at 1.  The Synagogue asked Kroll to retire six years early. Kroll agreed, but on his last day, a Synagogue officer told him that a tax issue had arisen, promising it would be resolved.  Kroll found out later that the issue had not been resolved, thereby subjecting his deferred compensation to heavy taxes and penalties.  Moreover, the Synagogue did not have sufficient funds to pay Kroll, and had amended the Plan to eliminate benefits to which Kroll would otherwise be entitled. Kroll sued the Synagogue, which settled and assigned to him all causes of action related to the Plan that it might have against the law firm it used to amend it: Cozen O’Connor (“Cozen”). Kroll then sued Cozen on multiple counts, but Cozen moved to dismiss. The motion was granted in part and denied in part.

To begin, the Court noted that legal malpractice claims may not be assigned in Illinois except under three exceptions.  However, none of these exceptions applied. It explained that “Kroll is a stranger to [the Synagogue] and Cozen’s attorney-client relationship and was owed no duty by Cozen.”  Id. at 4.  The Court also granted dismissal of Kroll’s aiding and abetting breach of fiduciary duty claim.  It said that no fiduciary duty existed between Kroll and the Synagogue, so Cozen could not have aided a breach of that duty. Id. at 7.  The Court dismissed Kroll’s fraudulent concealment claim as well, since Kroll did not allege facts sufficient to explain how a Cozen attorney used his position of superiority and legal knowledge to take advantage of Kroll’s trust and confidence in him, “especially given that [the attorney] represented the opposing party.”  Id. at 8, emphasis in original.

Conversely, the Court rejected Cozen’s argument that Kroll’s claims were barred by Illinois’ two-year statute of limitations for claims arising out of an attorney’s performance of professional services.  Here, it held that Kroll had demonstrated possible equitable tolling or estoppel when he asserted that a Synagogue officer misled him about resolving the tax issue and that a Cozen attorney misrepresented the enforceability of the Plan’s amendment.  Id. at 5.  Kroll’s claim that Cozen aided and abetted the Synagogue’s fraud was allowed to stand as well.  The Court, quoting an Illinois case, saw “no reason to impose a per se bar that prevents imposing liability upon attorneys who knowingly and substantially assist their clients in causing another party’s injury.”  Id. at 6. Here, the Court agreed that Kroll had pleaded facts sufficient to assert the Synagogue’s fraud and Cozen’s assistance therein.

Rabbi Stanley Kroll, Plaintiff, v. Cozen O’Connor, 2020 WL 919005

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

Breach of Contract May Be Plead in the Alternative to Legal Malpractice, but Punitive Damages are not an Option

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Signal Financial Holdings LLC and Signal Funding LLC (together “Signal”) accused a former Signal executive, Farya Jafri (“Jafri”), of misappropriating trade secrets while separating from Signal and using them to compete against Signal.  Signal sued Jafri as well as the law firm Sugar Felsenthal Grais & Helsinger LLP (“Sugar”) for allegedly aiding Jafri in this scheme.  Sugar moved to dismiss the various counts against it.  The United States District Court for the Northern District of Illinois granted the motion in part, and denied in part.  It denied the motion with respect to legal malpractice, explaining that “Signal alleges two clear incidents where a conflict was present” and “plausibly demonstrates that the Firm’s conflict of interest caused Signal’s injuries.”  Id. at 5.  It also allowed a breach of contract claim to stand exclusively in the alternative to the count for legal malpractice as “a complaint against a lawyer for professional malpractice may be couched in either contract or tort and… recovery may be sought in the alternative.”  Id. at 6.  Conversely, the Northern District granted dismissal of the count for breach of fiduciary duty, which was duplicative since “Illinois law prohibits claiming legal malpractice and breach of fiduciary duty based on the same facts.”  Id.  Lastly, the Court struck all claims for punitive damages because under Illinois law, “in all cases whether in tort, contract, or otherwise, in which the plaintiff seeks damages by reason of legal… malpractice, no punitive, exemplary, vindictive or aggravated damages should be allowed.”  Id. at 8, 735 ILCS 5/2-1115.

Signal Fin. Holdings LLC v. Looking Glass Fin. LLC, No. 17 C 8816, 2019 WL 6467323 (N.D. Ill. Dec. 2, 2019)

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

Willful-and-Deliberate Standard Applies to Court-Appointed Receivers

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Nutmeg Group, LLC (“Nutmeg”) was the investment advisor and sole general partner for several investment funds.  Each fund was either an Illinois or Minnesota limited partnership.  In 2009, the SEC brought an enforcement action against Nutmeg and others for misappropriation of client assets and failure to maintain proper records.  The Northern District of Illinois appointed Leslie Weiss (“Weiss”) as receiver for Nutmeg.  Nutmeg’s former manager and limited partners from certain funds sued her and others for breach of fiduciary duties.  Weiss moved successfully to dismiss some claims, and then won summary judgment on the rest.

The Seventh Circuit affirmed, applying Illinois law.  It explained that because Illinois and Minnesota had both adopted the Uniform Limited Partnership Act and the plaintiffs had not identified any conflicts in those states’ interpretation thereof, “we would reach the same conclusions under Minnesota law.”  Id. at 1001.  However, the Seventh Circuit found no Illinois case addressing the standard of care applicable to a court-appointed receiver, and so had to discern what standard the Illinois Supreme Court would adopt if presented with the issue.  In so doing, the Court chose to apply the “willful and deliberate” standard.  It reasoned that, “if a receiver is burdened with having to defend against suits by litigants disappointed by his actions on the court’s behalf, his work for the court will be impeded.”  Id. at 1003.  This standard reflects “the reality that receivers are often appointed to take charge of entities with which they have had no prior involvement: imposing personal liability for mistakes in business judgment could discourage competent individuals from acting as receivers.”  Id. at 1003-1004.  Applying that standard, the Seventh Circuit held that “our ultimate conclusion—that no reasonable jury could find that Weiss engaged in a willful, deliberate, or even grossly negligent breach of a fiduciary duty—applies with equal force to the totality of the plaintiffs’ claims on appeal.”  Id. at 1007.  It highlighted at various points that, “the plaintiffs […] did not bring forth evidence to show that a jury could find that those decisions reflected a willful, deliberate, or grossly negligent breach of her fiduciary duties,” and that “a poor business decision falls well short of demonstrating either a willful and deliberate or even a grossly negligent breach.”  Id. at 1006.

Alonso v. Weiss, 932 F.3d 995 (7th Cir. 2019)

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

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.)