393 F.3d 727 (7th Cir. 2004), 04-1599, Fogel v. Gordon & Glickson, P.C.

Docket Nº:04-1599, 04-2353.
Citation:393 F.3d 727
Party Name:Richard L. FOGEL, Plaintiff-Appellant, Cross-Appellee, v. GORDON & GLICKSON, P.C., et al., Defendants-Appellees, Cross-Appellants.
Case Date:December 29, 2004
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 727

393 F.3d 727 (7th Cir. 2004)

Richard L. FOGEL, Plaintiff-Appellant, Cross-Appellee,

v.

GORDON & GLICKSON, P.C., et al., Defendants-Appellees, Cross-Appellants.

Nos. 04-1599, 04-2353.

United States Court of Appeals, Seventh Circuit

December 29, 2004

Argued Oct. 25, 2004

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Mark S. Grotefeld (argued), Grotefeld & Denenberg, Chicago, IL, for Plaintiff-Appellant.

Alan S. Rutkoff (argued), McDermott, Will & Emery, Chicago, IL, for Defendants-Appellees.

Before POSNER, KANNE, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

The cross-appeals in this diversity suit present issues of fraud (under the common law of Illinois) and arbitrability and a request by the defendants for sanctions for

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the filing of a frivolous suit, along with jurisdictional issues. The district court dismissed the suit for failure to state a claim, enjoined arbitration, but denied sanctions. The only sources of facts are the complaint and contracts appended to it.

Fogel is a former member of the Chicago law firm of Gordon & Glickson, a professional corporation until 1999 when it was converted for tax reasons to a limited liability company. At that point Fogel, an employee and shareholder of the PC, became an employee and member of the LLC. Despite the conversion, the PC was not dissolved. It had bought stock and stock options with money that would otherwise have been income to its shareholders, and it retained a portion of those assets after the conversion in order to provide deferred compensation to the shareholders.

Fogel continued to work for the law firm until September 1999, when he announced his resignation and hence, pursuant to contracts that he had signed at the time of the conversion, from the PC as well as the LLC. Pursuant to still another contract, governing the disposition of the assets retained by the PC, he became a creditor of the PC for his share of those assets, some $463,000, which was to be paid to him over a three-year period beginning in 2001. Oddly, given his charge of fraud, had he not--at the firm's suggestion--postponed his resignation to the beginning of the following year, he would have had a smaller entitlement because the PC's assets were revalued upward at the end of 1999.

The firm decided to sell some of the PC's assets and distribute the proceeds to the shareholders in the form of cash. Since Fogel was no longer a shareholder, he was not entitled to share in the proceeds of the sale. The firm, however, offered to treat him as if he were still a shareholder and thus to let him share in the proceeds of the sale--further paradoxical behavior for a defrauder. He declined, preferring to remain a general creditor. The sale took place and was profitable, and despite the distribution of the proceeds the PC's remaining assets had sufficient value to cover the debt to Fogel. But shortly afterwards, and before the payments to him were due to begin, the dot-com bubble burst, the PC's remaining securities tanked, and the value of the PC's assets fell to a level at which it was able to pay Fogel only 60 percent of what it owed him, precipitating this lawsuit.

Fogel alleges that when the firm gave him a choice whether to be treated as a shareholder of the PC and thus participate in the sale of some of its assets, it failed to warn him that if he didn't go along but instead stood on his rights as a creditor there mightn't be enough assets left to pay him the full amount of the PC's debt to him. But it isn't fraud even for a fiduciary to fail to tell his principal something that is obvious. "A party cannot close its eyes to obvious facts and then charge that it has been deceived." Modern Track Machinery, Inc. v. Bry-Lon, Ltd., 197 Ill.App.3d 560, 144 Ill.Dec. 65, 554 N.E.2d 1104, 1107-08 (1990); see also Costello v. Liberty Mutual Ins. Co., 38 Ill.App.3d 503, 348 N.E.2d 254, 257 (1976); Vigortone AG Products, Inc. v. PM AG Products, Inc., 316 F.3d 641, 645 (7th Cir. 2002) (Illinois law); AMPAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1041-42 (7th Cir. 1990) (ditto). Fogel knew that he might not be paid in full if the PC's assets declined in value because of the vicissitudes of the stock market. He also knew that if assets were sold and the proceeds distributed to the PC's shareholders, of whom he was no longer one, the diminished pool of assets remaining would

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be even less likely to cover what the PC owed him.

A sale of a corporation's assets followed by the distribution of the proceeds to the owners might be a fraud against the corporation's creditors, such as Fogel (apparently the PC's only creditor). 740 ILCS 160/5(a), 6(a); Cannon v. Whitman...

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