Schmidt v. Hinshaw, Culbertson, Moelmann, Hoban & Fuller

• Decision Date: 14 August 1979
• Docket Number: No. 78-1058,78-1058
• Citation: Schmidt v. Hinshaw, Culbertson, Moelmann, Hoban & Fuller, 394 N.E.2d 559, 75 Ill.App.3d 516, 31 Ill.Dec. 357 (Ill. App. 1979)
• Parties: , 31 Ill.Dec. 357 John P. SCHMIDT, Plaintiff-Appellant, v. HINSHAW, CULBERTSON, MOELMANN, HOBAN & FULLER et al., Defendants-Appellees.
• Court: Appellate Court of Illinois

Page 559

394 N.E.2d 559

75 Ill.App.3d 516, 31 Ill.Dec. 357

John P. SCHMIDT, Plaintiff-Appellant, v. HINSHAW, CULBERTSON, MOELMANN, HOBAN & FULLER et al Defendants-Appellees.

No. 78-1058.

Appellate Court of Illinois, First District, Second Division.

Aug. 14, 1979.

Richard S. Jalovec, Mathew K. Szygowski, Chicago, for plaintiff-appellant.

Philip F. Purcell, Michael I. Miller, Paul F. Hanzlik and Paul Lembesis, Chicago (Isham, Lincoln & Beale, Chicago, of counsel), for defendants-appellees.

STAMOS, Presiding Justice:

Plaintiff, John P. Schmidt, brought this action against defendants, Hinshaw, Culbertson, Moelmann, Hoban & Fuller (Hinshaw), a law firm, and the partners therein, seeking to recover for damages allegedly arising from Hinsahaw's representation of plaintiff in and subsequent to the sale of plaintiff's business. Plaintiff essentially alleged that Hinshaw was guilty of malpractice in failing to exercise the requisite care and skill and in representing conflicting interests.

Following extensive discovery, the circuit court of Cook County granted Hinshaw's motion for summary judgment. Plaintiff appeals, contending Inter alia : (1) that the trial court erred in holding expert testimony was required to support plaintiff's case; and (2) that the existence of issues of material fact rendered summary judgment inappropriate. The relevant facts follow.

In 1967, plaintiff asked George S. Hoban, a partner of Hinshaw and an attorney who had previously represented plaintiff, to represent him in the sale of plaintiff's business, Chicago Tabulating Service (CTS), to Data Processing Development Corporation (DPDC). Plaintiff was the principal owner of CTS and a businessman with experience in similar prior transactions. The principal owner of DPDC was Valerie Mills, a woman of substantial independent wealth. Her husband, H. Jefferson Mills, was DPDC's chief executive officer. At this time, Nathaniel Bedford, a New York attorney, represented Mrs. Mills, her husband, and DPDC. Hinshaw, through Hoban, represented Plaintiff in the contract negotiations with Bedford, and Hoban participated with Bedford in the drafting of the documents which, after several months, finally set forth the rights and obligations of the parties to the transaction.

In his complaint, plaintiff alleged that he had two primary goals with respect to the sale of his company: first, that he receive "a million dollars"; and second, that the entire million dollars be personally guaranteed. However, in his deposition, plaintiff revealed that he had several other aims: (1) to minimize his federal income tax liability; (2) to obtain a substantial amount of cash immediately; and (3) to have the option to participate in any appreciation in the value of DPDC that might occur after it purchased CTS.

These considerations in part determined the ultimate structure of the transaction. The actual sale of the company essentially took the form of a stock-for-stock transaction, whereby under the Plan and Agreement of Reorganization, plaintiff would exchange his stock in CTS and eventually receive 295 shares of DPDC stock. Because a stock-for-stock exchange is generally a non-taxable event under federal tax law, this had the effect of minimizing plaintiff's income tax liability.

Plaintiff's desire for immediate cash resulted in the extension of a loan by Mrs. Mills to plaintiff in the amount of $200,000. In exchange, plaintiff executed a note which stated that if plaintiff defaulted on the loan, the holder of the note could only look for recourse to a portion of the DPDC stock which plaintiff was to receive for his CTS stock, such that plaintiff would not be personally liable for repayment of the loan.

Under the Stock Retirement Agreement, plaintiff had the option of tendering to DPDC up to 25% Of his DPDC stock each year beginning October 1, 1969. Stock not tendered in any year could be tendered in a successive year at a higher price, or plaintiff could elect not to tender any DPDC stock at all. Thus, plaintiff had the opportunity to participate in any rise in value in DPDC.

With regard to plaintiff's wish to receive a million dollars for his business, the Stock Retirement Agreement provided that he could tender his 295 shares of DPDC as follows:

10/1/69  73 shares at $2970 per share  =  $216,810
                10/1/70  74 shares at $3240 per share  =  $239,760
                10/1/71  74 shares at $3510 per share  =  $259,740
                10/1/72  74 shares at $3780 per share  =  $279,720
                                                          --------
                                                total  =  $996,030
                

Plaintiff had conceded that this came so close as to meet his goal of receiving a million dollars.

Finally, plaintiff desired that the million dollars he was supposed to receive from DPDC be personally guaranteed. Plaintiff wanted Mrs. Mills to guarantee DPDC's obligation to purchase all four tenders of stock, and Hoban negotiated for just such a complete guarantee. However, Mrs. Mills and her attorney, Bedford, would agree to guarantee payment for only the first three tenders of stock to DPDC. This resulted in a guarantee in an amount which would range from $716,310, if plaintiff made each tender as soon as he could under the agreement, up to $775,710, if he accumulated all the shares until the third tender date. The reason Mrs. Mills and Bedford refused to guarantee more than the first three tenders was because Mrs. Mills had already agreed to advance plaintiff $200,000 on a non-recourse basis, in a loan secured solely by 74 shares, or one fourth, of plaintiff's DPDC stock, and thus she had already in effect paid plaintiff $200,000 for the last quarter of his stock. As Bedford explained in his deposition, since plaintiff was guaranteed to receive up to $775,710 "and since Mrs. Mills had already advanced him $200,000, that would make close to the million dollar guarantee, within a very few thousand dollars of it. And if Mrs. Mills had been obliged to purchase the last 25 percent of (plaintiff's) stock, he would have gotten considerably over the million, and I think approximately $280,000 ($279,720), * * *, and he'd simply have turned around and paid her $200,000 and made $80,000 right out of her pocket.

"So I drew the Stock Purchase Agreement on the basis that she would not agree to purchase the last 25 percent, and thereby increase her liability, and at that point, she put her foot down."

Bedford further stated that this was thoroughly discussed among all the parties. The resulting guarantee agreement accordingly only extended to September 1, 1972, and therefore did not cover the last tender, such that if DPDC defaulted, Mrs. Mills' personal liability was effectively limited to $200,000 of the final tender price of $279,720.

Mrs. Mills' guarantee specifically stated that part of the consideration for the agreement was plaintiff's agreement to work to enhance the development of DPDC and CTS. To that end, plaintiff continued to work for CTS as president after it became a wholly owned subsidiary of DPDC.

Subsequent to 1967, Hinshaw acted as legal counsel to DPDC and CTS in Chicago. Hinshaw represented DPDC in two matters: (1) the purchase of a leasing company, Computerpax, in 1968 or 1969; and (2) the filing of a lawsuit, in 1972, to recover a fraudulently endorsed CTS stock certificate (the McIntosh litigation). Plaintiff had admitted that he knew of and had no objection to Hinshaw's representation of DPDC and CTS in these matters, and that to his knowledge, the representation in no way affected him. It is also apparent from the record that the representation was partially for plaintiff's benefit, as a holder of substantial stock in DPDC, as an officer of CTS, and as a named defendant in a lawsuit that comprised part of the McIntosh litigation.

Meanwhile, the financial position of DPDC had begun to deteriorate. Relations between plaintiff and Mr. and Mrs. Mills became increasingly strained, and plaintiff's performance as an officer of CTS began to be criticized by the Mills. In October of 1969, DPDC refused to repurchase plaintiff's first tender of stock in accordance with the Stock Retirement Agreement, and thereafter, Mrs. Mills refused to honor her guarantee obligation. Both DPDC and Mrs. Mills refused to honor their agreements after every subsequent tender of stock. Hinshaw, through Hoban, thereupon represented plaintiff in negotiations with attorneys for DPDC and Mrs. Mills.

These negotiations extended over several years. Although he vacillated to some extent, plaintiff generally wanted to file a lawsuit against DPDC and Mrs. Mills, but Hoban always dissuaded him. Hoban advised plaintiff that if he brought suit, there might well be a counter-claim against him for breach of his employment agreement. Moreover, plaintiff admitted that there remained the persistent hope that DPDC would be sold, thereby salvaging everyone's original expectations.

During the negotiations, plaintiff consulted formally or informally with several other attorneys. All were of the opinion that a suit should be filed; all also advised plaintiff that Hoban had done a good job in drawing up the documents. Plaintiff was admittedly aware that he could file suit and that he had the option at any time of retaining another law firm to file suit. In fact, in early 1973, plaintiff even drafted a letter to Hoban, which appears in the record and concludes as follows:

"It is apparent now that after all these years you and your company cannot negotiate a fair settlement for me, and that we will have to sue.

"I therefor (sic) have made the decision to turn this case over to (another law firm) to handle the suit."

However, plaintiff did not send the letter, and the next day he decided to settle and did settle his dispute with DPDC and Mrs. Mills. Later in 1973, plaintiff filed the instant action. Plaintiff's second amended complaint essentially alleged that Hinshaw, through Hoban, was guilty of professional malpractice in...