Bonhiver v. Rotenberg, Schwartzman & Richards

• Decision Date: 12 May 1972
• Docket Number: No. 71-1258.,71-1258.
• Citation: 461 F.2d 925
• Parties: Homer A. BONHIVER, as Receiver American Allied Insurance Company and Allied Realty of St. Paul, Inc., a Minnesota corporation, Plaintiff-Appellee, v. ROTENBERG, SCHWARTZMAN & RICHARDS, a partnership, Mark L. Schwartzman, individually, and Jerome Rotenberg, individually, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

461 F.2d 925 (1972)

Homer A. BONHIVER, as Receiver American Allied Insurance Company and Allied Realty of St. Paul, Inc., a Minnesota corporation, Plaintiff-Appellee, v. ROTENBERG, SCHWARTZMAN & RICHARDS, a partnership, Mark L. Schwartzman, individually, and Jerome Rotenberg, individually, Defendants-Appellants.

No. 71-1258.

United States Court of Appeals, Seventh Circuit.

Argued February 15, 1971.

Decided May 12, 1972.

Richard E. Mueller, Lord, Bissell & Brook, Chicago, Ill., for defendants-appellants; Don W. Fowler, Chicago, Ill., of counsel.

James B. O'Shaughnessy, Robert J. Vollen, Chicago, Ill., for plaintiff-appellee; Schiff, Hardin, Waite, Dorschel & Britton, Chicago, Ill., of counsel.

Before SWYGERT, Chief Judge, DUFFY, Senior Circuit Judge, and GRANT, District Judge.^*

SWYGERT, Chief Judge.

This is an appeal from a judgment for plaintiff following a bench trial in an action for damages sounding in negligence brought by the receiver of a defunct insurance company against the attorneys who served as its general counsel. Jurisdiction was founded on diversity of citizenship. The district court found that defendants were liable to plaintiff in the amount of $28,672.19, apparently on the theory that defendants were guilty of "malpractice and conflict of interest misconduct." We reverse.

The facts pertinent to this appeal are as follows. American Allied Insurance Company was organized pursuant to the laws of Minnesota with its principal place of business also being in Minnesota. The sole shareholder of American Allied at all times pertinent hereto was Philip Kitzer, Sr., who was also its president and a corporate director. Philip Kitzer, Jr. was vice president, treasurer and a corporate director of American Allied. The law firm of Rotenberg, Schwartzman & Richards was general counsel to American Allied, and the Kitzers were also clients of the law firm individually. Kitzer, Sr. purchased a building at 275 East Fourth Street, St. Paul, Minnesota, on September 25, 1963 from Herman Griesdorf, giving in partial payment therefor three promissory notes in the amount of $50,000 each of which were executed by the Kitzers, Sr. and Jr., and their wives. Thereafter, the building and land were conveyed by Kitzer, Sr. to Allied Realty of St. Paul, Inc., a wholly-owned subsidiary of American Allied, in return for $250,000 par value stock of Allied Realty.

Griesdorf, the seller of the building, gave one of the Kitzer notes as collateral security on a loan to him by Colonial Bank and Trust Company of Chicago. After Griesdorf defaulted on the note, Colonial Bank obtained a judgment in the amount of $46,703.56 against the Kitzers and their wives on the collateral note. The Kitzers retained James Daniels and Rotenberg, Schwartzman & Richards as counsel to vacate the Colonial Bank judgment. After negotiation, agreement was reached to settle the judgment with Colonial Bank for the amount owed by Griesdorf of $31,997.49.

Obtaining the funds to purchase the judgment was arranged by Kitzer, Jr. with Max Gary, president of The Upper Midwest Agency, Inc., an agent in Minnesota for the sale of American Allied insurance policies. Gary agreed with Kitzer, Jr. that he and Upper Midwest would loan the Kitzers, individually, $31,997.49 in return for the assignment to him and Upper Midwest of the $46,703.56 Colonial Bank judgment as security for the loan. In addition to the assignment, Kitzer, Jr. agreed to give Gary a letter in which Kitzer, Jr., as American Allied's vice president, would authorize Upper Midwest to apply in payment of the loan any premium funds held by it which were due American Allied in the event that the loan was not paid within sixty days from the date of the letter.

On October 22, 1964 Gary brought with him to Chicago a check drawn on the Upper Midwest Agency account in the amount of $31,997.49 dated October 21, 1964 which he gave to Colonial Bank, and, in return, he received the assignment of the judgment. On the same day, Kitzer, Jr. gave defendant Schwartzman a written draft of a letter drawn for Schwartzman's signature which provided that, if the loan was not paid by the Kitzers within sixty days of the letter's date, Upper Midwest could use American Allied premium funds to repay the loan. Kitzer, Jr. requested of Schwartzman that he put the draft letter in final form. After several minor revisions by Schwartzman, he sent the final draft bearing his signature under date of October 27, 1964 to Norman Cohen, an attorney in Minneapolis who was counsel for Upper Midwest.

The arrangement between American Allied and Upper Midwest with regard to the remittance of premium funds for American Allied policies sold by Upper Midwest was that the net premium (gross premium less commission) was remitted approximately at the end of the second month following sale of the policy. Upper Midwest would notify American Allied of the sale of each policy contemporaneously with the sale, and after the end of each month American Allied would bill Upper Midwest for the net premium due. Customarily, therefore, the premium due American Allied for August policy sales would be remitted at the end of October. During the postsale, pre-remittance interim, the amounts collected were premium trust funds, although Upper Midwest simply commingled such funds in the agency's general account.

The Kitzers never repaid the loan of $31,997.49. When American Allied collapsed and the receiver filed suit against Upper Midwest for a large amount claimed as premiums due, Gary claimed that $28,672.19 of the $31,997.49 loan check to Colonial Bank dated October 21, 1964 and drawn on the Upper Midwest account represented the American Allied premium trust funds for policies sold in August. Ultimately, all other monthly premium payments owed by Upper Midwest to American Allied were shown to have been remitted for the period June 1964 through May 1965 except those for August 1964.

Finally, it is apparent that the district court found that the August 1964 premium funds were part of the October 21 Upper Midwest check to Colonial Bank by the court's statement: "It is true that Gary and Upper Midwest apparently did not wait the sixty days before recapturing from American Allied all but $3,000 of the money they lent the Kitzers."

I

The district court did not find that Schwartzman's conduct was a cause in fact of the loss to American Allied of the $28,672.19 in August premiums due it from Upper Midwest. Indeed, the language of the district court's opinion seemingly foreswears the necessity of finding causation in fact, for the district judge, after having noted that the Schwartzman letter authorized diverting...