Carmel v. Clapp & Eisenberg, P.C.

• Decision Date: 06 April 1992
• Docket Number: No. 89-1587,89-1587
• Citation: 960 F.2d 698
• Parties: James CARMEL, Trustee for the Bankruptcy Estate of Emil Stavriotis and Judith Stavriotis, Plaintiffs-Appellants, v. CLAPP & EISENBERG, P.C., and Gerald Litwin, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 698

960 F.2d 698

James CARMEL, Trustee for the Bankruptcy Estate of Emil

Stavriotis and Judith Stavriotis, Plaintiffs-Appellants, v. CLAPP & EISENBERG, P.C., and Gerald Litwin, Defendants-Appellees.

No. 89-1587.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 10, 1992.

Decided April 6, 1992.

Arthur P. Sanderman, Ronald M. Brown, Brown & Shinitzky, Chicago, Ill., Daniel C. Meenan, Jr., George S. Feiwell, Michael J. Kralovec, Feiwell, Galper & Lasky, Chicago, Ill., for plaintiffs.

Ronald M. Wawrzyn (argued), Foley & Lardner, Milwaukee, Wis., George P. McAndrews, John J. Held, Jr., McAndrews, Held & Malloy, Chicago, Ill., for defendants-appellees.

Philip J. Nathanson (argued), Chicago, Ill., for appellant.

Before KANNE, Circuit Judge, WOOD, Jr., Senior Circuit Judge, and SHARP, ^* District Judge.

I.

ALLEN SHARP, District Judge.

The complaint in this case was filed in the United States District Court for the Northern District of Illinois on the basis of diversity of citizenship, 28 U.S.C. § 1332, and the substantive law of New Jersey applies. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The appellants sought to recover damages alleged to be suffered as a result of the appellees' legal malpractice in the course of the representation of appellant Emil Stavriotis in regard to certain coal investment ventures during the years 1979 and 1980. The case went to trial before a jury between November 15 and December 7, 1988.

After deliberating for approximately eight hours, the jury answered special interrogatories under Rule 49 of the Federal Rules of Civil Procedure, in which it expressly found that the appellees had acted negligently and that their negligence proximately caused the damages to appellant Stavriotis. However, the jury made a determination under the N.J.S.A. 2A:15-5.1 et seq., that 51% of the total negligence was attributable to appellant Emil Stavriotis and 49% was attributable to the appellees. Under the substantive law of New Jersey, a plaintiff is not entitled to recover if that plaintiff's negligence is found to cause more than 50% of the damages. ¹ Judgment was therefore entered by the district court for the appellees on the jury verdict. The appellant filed a post-trial motion for judgment notwithstanding the verdict and for a new trial, which was denied by the district court. The appellant appeals only from the jury's verdict. This court has jurisdiction pursuant to 28 U.S.C. § 1291.

There are three issues here presented. They are:

1. Whether substantial evidence exists to support the jury's verdict that the appellant was comparatively more negligent than the appellees.

2. Whether defense counsel's remark in closing argument constituted reversible error.

3. Whether a client's complicity in and knowledge of fraud in a transaction, which is not reported to his attorney, bars the client from recovery against the lawyer for negligence in the transaction.

II.

The factual setting of this case demands a full and careful summary. This appellant, Emil Stavriotis, first retained the appellees, Gerald Litwin and the law firm in which he was a partner, namely Clapp & Eisenberg, in June of 1979, when Stavriotis was a resident of Tennessee and Litwin was a resident of New Jersey. There was no prior relationship between either Stavriotis, Litwin or C & E. Appellant was introduced to Litwin by a social friend and business associate, one Louis Santi. Appellant had traded in commodities for Santi and had worked on coal ventures with Santi before he approached Litwin.

Stavriotis had very considerable experience as a commodities trader, and traded in nearly 3,000 trades, many of which took the form of a sophisticated tax avoidance device called a "straddle." His initial trading for Santi involved a fund of $350,000, which was depleted within ten weeks. However, he was later successful in generating a profit for Santi.

While Stavriotis was a sophisticated commodities trader, he knew very little about the coal mining business. He was first introduced to coal mining by Santi in 1978, when Santi asked him to consider the task of raising money for his, Santi's, coal mining venture. In 1978, a year before Stavriotis had talked with Litwin for the first time, Santi attempted an educational process for Stavriotis in regard to the coal-mining business by putting him in touch with Henry Nelson. Stavriotis characterized this exposure to Nelson as "an incredibly useful exercise for my future efforts in understanding the coal industry." During these experiences between Stavriotis and Nelson in 1978, negative impressions of Nelson arose. Stavriotis learned that Nelson was unethical and was a man who had to be watched very carefully with respect to his conduct in coal properties in Kentucky. He discussed Nelson in a report which he prepared for Santi and was stunned when Santi showed apparent indifference to the fact that the report indicated that Nelson was both a "liar and/or potential thief." Nevertheless, Stavriotis decided to accept the assignment of raising money for Santi's coal ventures, but only on the condition that Nelson was excluded from management. Stavriotis knew, however, that Nelson would be instrumental in procuring coal mining property and in obtaining the leases to coal mining reserves from land owners that would be the basis for the coal ventures.

In this factual landscape, Stavriotis approached Litwin for the first time in 1979 for the purpose of securing professional legal services. Litwin was a specialist in taxation, and in mid-1979, Stavriotis approached Litwin to draft the private placement memoranda ("PPM") and other documents in connection with Santi's coal transactions. These syndications were to be sold to investors on the theory that the investors could deduct a substantial portion of their investment. The coal transaction documents were structured by Litwin with tax concepts in mind. The investor money was to be spent for coal development, which was deductible under 26 U.S.C. § 613 of the Internal Revenue Code. The IRS sent agents to the coal property and spent two years concluding its audit. This IRS audit scrutinized the subleases, contracts, and mining and development agreements drafted by Litwin, with a critical eye to determine whether or not the deductions were legitimate, ultimately allowing those deductions.

Litwin sent Stavriotis a draft of a coal PPM which notified Stavriotis of the speculative nature of the coal business and informed him that neither he nor the appellee law firm, Clapp & Eisenberg (C & E), would attempt to verify the accuracy of facts and representations in the PPM. After reviewing the initial coal offering, Stavriotis was concerned about the scope of his duties as general partner in the yet-to-be syndicated coal partnership. Litwin told him that he would have to hire professionals to assist him in his duty as a general partner, and Stavriotis retained a geologist in July of 1979 by the name of Russ Chittendon. Stavriotis told Chittenden that if any questions arose pertaining to his review of the geology reports, only he and/or Mr. Garten, a colleague of Santi, should be notified. Stavriotis also hired another geologist, a Mr. Conaway, to perform geology services. Conaway had been referred to Stavriotis by Santi's company, Minerals Development Company. Stavriotis was also using in common with his friend Santi, a local Memphis attorney, Roy Keathley, of whom Stavriotis had referred to as his "attorney for virtually all aspects of my business."

There was no written retainer agreement between Stavriotis and Litwin, nor was there a general retainer of Litwin by Stavriotis. Litwin testified that Stavriotis requested that he draft PPM in connection with his task of raising money for Santi's coal transactions. Litwin further testified that he understood Attorney Keathley was representing Santi and Stavriotis, both personally and in their general corporate matters. A total of five Stavriotis-Santi coal syndications were put together between December, 1979 and August, 1980. Stavriotis received in excess of $2 million in up-front commission in connection with these transactions and moved from Memphis, Tennessee to Palm Beach, Florida when the last coal deal was closed!

Stavriotis knew that Santi's colleague, Nelson, had engaged in unethical and illegal practices prior to the time that he met Litwin, yet he did not tell Litwin about Nelson's misdeeds until well after the syndications had been completed and after he had received the $2 million in commission. In March of 1980, after two of the syndications had been completed, Stavriotis began getting more information about fraud and other wrongdoing in connection with the coal transactions. In March, 1980, Stavriotis met with Santi to discuss the progress of the two coal transactions that had closed and learned that Nelson had committed fraud in connection with the coal transaction by "lying, stealing and through the use of kickbacks." Stavriotis was understandably deeply concerned since he had learned from yet another Santi associate, Jerry Wells, that Santi was allowing certain amounts of money from the MDC budget "for Henry Nelson to steal." However, Stavriotis did nothing at this point to stop the yet-to-be syndications from going forward. He talked to Litwin about the progress of the prior four transactions and told Litwin that everything was going smoothly.

In 1984, shortly after Stavriotis had been sued by some of the coal investors, he wrote to Litwin: "At no time have I ever personally felt that you or your law firm were ever at fault...." See Transcript, p. 342, Appellees' Appendix p. 32. Rather, he believed that the blame was with Santi and his scheme to defraud not only the investors but him as well. He thereupon sought to have Santi criminally prosecuted.

During the trial of this case, Mr. James Brennan, a partner in the Securities Department at...