Blue Water Partners, Inc. v. Edwin D. Mason, Foley & Lardner

• Decision Date: 23 August 2012
• Docket Number: No. 1–10–2165.,1–10–2165.
• Citation: 2012 IL App (1st) 102165,363 Ill.Dec. 482,975 N.E.2d 284
• Parties: BLUE WATER PARTNERS, INC., and Fane Lozman, Plaintiffs–Appellants, v. EDWIN D. MASON, FOLEY AND LARDNER, a General Partnership, and Foley and Lardner, LLP, a Limited Liability Partnership as Successor to Foley and Lardner, a General Partnership, Defendants–Appellees.
• Court: United States Appellate Court of Illinois

2012 IL App (1st) 102165

975 N.E.2d 284

363 Ill.Dec. 482

BLUE WATER PARTNERS, INC., and Fane Lozman, Plaintiffs–Appellants,

v.EDWIN D. MASON, FOLEY AND LARDNER, a General Partnership, and Foley and Lardner, LLP, a Limited Liability Partnership as Successor to Foley and Lardner, a General Partnership, Defendants–Appellees.

No. 1–10–2165.

Appellate Court of Illinois, First District, Sixth Division.

July 13, 2012.

Rehearing Denied Aug. 23, 2012.

Philip J. Nathanson, Nathanson Law Firm, Chicago, and Barry D. Goldberg, Goldberg & Goldberg, Chicago, for appellants.

William T. Cahill and Jade R. Lambert, Perkins Coie, LLP, Chicago, for appellees.

OPINION

Justice GARCIA delivered the judgment of the court, with opinion.

[363 Ill.Dec. 485]¶ 1 This appeal is related to an appeal by plaintiffs Blue Water Partners, Inc. (BWP), and Fane Lozman in an earlier lawsuit against Gerald Putnam and other individuals and entities, which we decided in Lozman v. Putnam, 379 Ill.App.3d 807, 318 Ill.Dec. 788, 884 N.E.2d 756 (2008) (the Putnam suit). This appeal concerns the plaintiffs' professional negligence claims against defendants Foley & Lardner ¹ and Edwin D. Mason, a partner with the law firm (the Putnam attorneys), as counsel for BWP, grounded on the same events that were the basis of the Putnam suit. The attorney-client relationship between BWP and its former counsel ended in 1995. The Putnam attorneys were not named as defendants in the Putnam suit, which ended in a judgment in favor of Putnam in 2005 that we affirmed. In this appeal, the circuit court ruled Fane Lozman, as a BWP shareholder, had no standing to sue the Putnam attorneys for legal malpractice as no attorney-client relationship ever existed between the Putnam attorneys and Lozman. The court also ruled that BWP's lawsuit against the Putnam attorneys, filed in 2006, was barred by the two-year statute of limitations. Both plaintiffs challenge the lawsuit's dismissal. The plaintiffs contend their malpractice suit against defendant attorneys did not accrue until the verdict issued on July 25, 2005, in the Putnam suit, which was filed in 1999. The circuit court rejected this contention. We do as well and affirm.

¶ 2 BACKGROUND

¶ 3 We detailed the relationship between Putnam and Lozman, including how they met, and their eventual fallout, in our 2008 decision. Lozman, 379 Ill.App.3d 807, 318 Ill.Dec. 788, 884 N.E.2d 756. In that case, the circuit court ruled the plaintiffs' equitable claim of usurpation of corporate opportunities was barred by both the doctrine of laches and an October 1995 release executed by the parties. Id. at 809, 318 Ill.Dec. 788, 884 N.E.2d 756. We affirmed on the basis of laches. Id. at 821, 318 Ill.Dec. 788, 884 N.E.2d 756. We add to the facts set out in our 2008 decision those additional facts that are germane to the issues before us.

¶ 4 On March 28, 1994, Putnam formed BWP with the legal assistance of the defendants. Putnam advised the defendants that he was severing his relationship with his then employer and desired to broker trades for his customers through a new company, BWP. Shortly after BWP's incorporation, the defendants applied for an employer identification number with the Internal Revenue Service (IRS) in which they listed BWP's principal business activity as “broker-dealer services.” In May 1994, Putnam and Lozman decided to implement a computer software product called ScanShift, invented by Lozman, into the business activity of BWP. Their plan was to operate BWP as a “soft dollar” brokerage firm, which we understand to mean that BWP would earn commissions based on its customers' use of ScanShift in conducting trades.

¶ 5 On August 2, 1994, Putnam and Lozman met with Mason to discuss the business plan to develop ScanShift through BWP. Putnam was the principal contact for BWP in interacting with the defendant attorneys. In fact, defendant Mason communicated with Lozman only once or twice during the time the defendant attorneys represented BWP. According to Mason's deposition testimony, he relied on Putnam to keep Lozman abreast of their communications.

¶ 6 In the fall of 1994, Putnam and Mason discussed whether the Securities and Exchange Commission (SEC) would allow BWP to receive “soft dollar” revenue from trades conducted through ScanShift without registering BWP with the SEC as a broker-dealer. In early 1995, Mason advised Putnam that whether BWP was required to register with the SEC to lawfully receive soft dollar revenue from trades conducted through ScanShift was “unsettled.” Mason indicated that BWP might have to be a “test” case to resolve the question. An application to register BWP as a broker-dealer with the SEC was never filed.

¶ 7 In November 1994, Putnam informed the defendant attorneys that he terminated his employment with BWP and decided to go into business for himself to trade for his institutional clients. At Putnam's direction, defendant Mason incorporated Terra Nova Trading, LLC (Terra Nova), wholly owned by Putnam, and another Putnam-owned company, GDP, Inc., on November 14, 1994. Lozman testified that he was aware of the formation of Terra Nova from the outset. Lozman's knowledge included that Terra Nova was established to be an SEC-registered, active trading broker-dealer. Lozman testified that Terra Nova was created to allay the fears of Stuart and Marrgwen Townsend, who operated Townsend Analytics (all defendants in the Putnam suit), which worked to integrate ScanShift with software that Townsend Analytics had developed. Lozman testified he would not have consented to the formation of Terra Nova had Putnam not orally promised that Lozman would own 50% of Terra Nova.

¶ 8 In January 1995, Putnam agreed to extend trading privileges to Lozman at Terra Nova as an “affiliated” person. Additionally, by early 1995, Lozman and Putnam were aware that BWP could not receive soft dollar revenue earned through ScanShift without BWP being a registered broker-dealer with the SEC. Hence, on April 17, 1995, Lozman and Putnam agreed in writing to route all soft dollar revenue generated by BWP's ScanShift customers to Terra Nova, as an SEC-registered broker-dealer. Lozman and Putnam agreed to split the profits from this revenue. The defendant attorneys had no involvement in the preparation of this agreement.

¶ 9 On June 30, 1995, Putnam ordered Lozman out of Terra Nova's offices and told him never to return. Putnam made clear he would have no further dealings with Lozman. The defendants had no involvement in the severance of the Lozman and Putnam relationship. Lozman testified that in 1995 following his ejection from Terra Nova's offices, he consulted with attorneys to discuss “all of the facts” regardingany potential claims he or BWP had against Putnam and those acting on Putnam's behalf.

¶ 10 In July 1995, Lozman, acting on behalf of BWP, terminated the attorney-client relationship with the defendants. Soon thereafter, Mason delivered all BWP corporate records to Lozman, along with a letter confirming that the defendants were no longer BWP's counsel. During the entire time the defendants served as counsel, BWP did not engage in any business and did not employ any persons.

¶ 11 In October 1995, Lozman and Putnam, without the assistance of any attorney, agreed to settle all claims arising from their business relationship, including the ownership of BWP. Lozman and Putnam negotiated, drafted, and executed a series of documents releasing any and all claims each had against the other, including those involving BWP and Terra Nova. As part of the October 1995 settlement agreement, Lozman became the sole owner of BWP. Since then, BWP has never engaged in business of any sort, and it was never registered with the SEC as a broker-dealer.

¶ 12 Lozman claimed he discovered that defendant Mason assisted Terra Nova in obtaining registration as a broker-dealer during the Putnam suit. According to Lozman, “[T]he first time I personally heard a lawyer from Foley & Lardner explain what they had done or not done regarding Blue Water Partners and Terra Nova Trading was when Mr. Mason testified at the trial of the Lozman and Putnam lawsuit in the fall of 2004.” Lozman also stated that the first time he ever saw the books and corporate records of Terra Nova was during the Putnam suit's discovery phase.

¶ 13 During his deposition in the instant case, Lozman answered questions during cross-examination regarding his relationship with Foley & Lardner:

“Q. * * * Did you at any time ever retain Foley & Lardner as your attorney, personally, you, Fane Lozman?

A. No.

Q. Did anyone from Foley & Lardner ever say anything to you that indicated to you that they believed you were being personally represented by Foley & Lardner?

A. No.

Q. You never made any payments to Foley & Lardner personally for any services. Correct?

A. Foley & Lardner were Blue Water Partners' corporate attorney. They weren't my personal attorney.” (Emphasis added.)

¶ 14 After the filing of the Putnam suit, the plaintiffs and the defendants entered into a series of written agreements tolling the time for BWP to file suit on its possible claims against the defendant attorneys. The first tolling agreement was dated September 6, 2000, and provided:

“WHEREAS, BWP maintains that they have certain claims against F & L, including but not necessarily limited to those described in Exhibit A;

WHEREAS, BWP and F & L wish to avoid the need to either commence or prosecute a lawsuit regarding those claims at this time; and

WHEREAS, BWP is currently involved in other litigation pending in the Circuit Court of Cook County, entitled Fane Lozman, et al., vs. Gerald Putnam, et al. Case No. 99 CH 11347 * * * [the Putnam suit].

* * *

The running of all statutes of limitations or repose and any other time bars of any nature whatsoever that may apply to any claim, cause of action or legal proceedings that BWP may have against F & L are tolled as of the date of this agreement and will remain...