Fogel v. Gordon & Glickson, P.C.

• Decision Date: 29 December 2004
• Docket Number: No. 04-2353.,No. 04-1599.,04-1599.,04-2353.
• Citation: 393 F.3d 727
• Parties: Richard L. FOGEL, Plaintiff-Appellant, Cross-Appellee, v. GORDON & GLICKSON, P.C., et al., Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

393 F.3d 727

Richard L. FOGEL, Plaintiff-Appellant, Cross-Appellee, v. GORDON & GLICKSON, P.C., et al., Defendants-Appellees, Cross-Appellants.

No. 04-1599.

No. 04-2353.

United States Court of Appeals, Seventh Circuit.

Argued October 25, 2004.

Decided December 29, 2004.

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 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 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 Corp., 212 Ill.App.3d 79, 155 Ill.Dec. 503, 569 N.E.2d 1114, 1116-17 (1991); Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir.1995) (Illinois law); Pierce v. United States, 255 U.S. 398, 403, 41 S.Ct. 365, 65 L.Ed. 697 (1921); William T. Vukowich, "Civil Remedies in Bankruptcy for Corporate Fraud," 6 Am. Bankr.Inst. L.Rev. 439, 444-47 (1998). Maybe a concern with the possibility of being accused of such a fraud was what led the firm to offer Fogel a chance to participate in the sale of assets as if he were still a shareholder. By declining, he placed himself at risk that the assets might be dissipated to the point at which his claim as a creditor would be endangered. For not only did he know that some of them were about to be sold and the proceeds distributed to the shareholders; he also knew exactly which ones would be sold and what would be left in the PC.

He is left to argue only that the firm falsely assured him that there would be value enough remaining in the PC to pay his claim in full. But he could not have believed any such assurance. He knew what the remaining assets were; he knew they were stocks and stock options rather than Treasury bills; he knew the law firm did not control the stock market; and so he knew that the firm's representation to him concerning the future value of the PC's remaining assets was a prediction, rather than a promise on which a reasonable person could rely. Lidecker v. Kendall College, 194 Ill.App.3d 309, 141 Ill.Dec. 75, 550 N.E.2d 1121, 1125 (1990); Madison Associates v. Bass, 158 Ill.App.3d 526, 110 Ill.Dec. 513, 511 N.E.2d 690, 699 (1987); Hofner v. Glenn Ingram & Co., 140 Ill.App.3d 874, 95 Ill.Dec. 90, 489 N.E.2d 311, 317 (1985); Continental Bank, N.A. v. Meyer, 10 F.3d 1293, 1298-99 (7th Cir.1993) (Illinois law). Often what sounds like a "promise" is actually "a hope or possibly a prediction rather than a commitment to do something within the `promisor's' power to do (`I promise it will rain tomorrow'); and the `promisee' would, if sensible, understand this. He would rely or not as he chose but he would know that he would have to bear the cost of any disappointment." Garwood Packaging, Inc. v. Allen & Co., 378 F.3d 698, 703-04 (7th Cir.2004).

If Fogel wanted to minimize the risk to him of stock market fluctuations, he should either have accepted the offer to be treated as a participant in the sale of assets, and thus received a portion of the proceeds (and therefore advance payment of a part of his entitlement), which were in cash, or have objected to the distribution of the proceeds, which reduced the assets available to pay the PC's debt to him. He did neither. He gave knowing consent to the chain of events that resulted in the PC's inability to honor its debt to him. So the claim of fraud was rightly dismissed, although we do not think the claim was so frivolous that the district judge can be said to have abused her discretion in declining to award sanctions.

After filing his suit in the district court, Fogel served a demand for arbitration on the LLC, contending that it had violated a contractual obligation to pay him, when he withdrew from the firm, both deferred compensation and the value of his equity interest in the firm. His contracts with the PC and the LLC contain an identical, broadly worded, "mandatory arbitration" clause, which provides that "any dispute, claim, question or disagreement aris[ing] as a result of or in connection with this Agreement, or the breach thereof, ... shall be resolved through arbitration." Although the clause was broad enough to encompass Fogel's fraud claim against the PC, Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); Matthews v. Rollins Hudig Hall Co., 72 F.3d 50, 54 (7th Cir.1995); Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 338 (7th Cir.1984), Fogel had disregarded it in suing in the district court; and the PC, content to litigate the fraud case there, had not invoked the arbitration clause either. When the firm learned of Fogel's demand for arbitration of his breach of contract claim against the LLC, it asked the district court to rule that Fogel was splitting his claim, that res judicata forbade him to do so, and therefore that he should be enjoined from arbitrating. The district court agreed and enjoined the arbitration. Fogel as part of his appeal asks us to vacate the injunction.

There is a jurisdictional hiccup. The district court dismissed the fraud suit while the motion to enjoin arbitration was pending. When Fogel filed his notice of appeal from that dismissal we ordered the appeal stayed pending disposition of the motion to enjoin, which would end the proceedings in the district court, thus enabling us to exercise jurisdiction under 28 U.S.C. § 1291 (appeal from final decision). When we received notice that the district court had amended its judgment to include the injunction, we set a briefing schedule for the appeal, but Fogel failed to file a new notice of appeal.

Had we dismissed the appeal, back when the notice of appeal was filed, for want of appellate jurisdiction, on the ground that there was then no final judgment in the district court and the appeal was therefore premature, Katerinos v. United States Department of the Treasury, 368 F.3d 733, 737-38 (7th Cir.2004) ...