UFT Commercial Fin., LLC v. Fisher

• Decision Date: 23 March 2021
• Docket Number: No. 20-2012,20-2012
• Citation: 991 F.3d 854
• Parties: UFT COMMERCIAL FINANCE, LLC, and Joanne M. Noren, also known as Joanne Marlowe, individually, Plaintiffs-Appellants, v. Richard A. FISHER, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

991 F.3d 854

UFT COMMERCIAL FINANCE, LLC, and Joanne M. Noren, also known as Joanne Marlowe, individually, Plaintiffs-Appellants,

v.Richard A. FISHER, Defendant-Appellee.

No. 20-2012

United States Court of Appeals, Seventh Circuit.

Argued January 15, 2021

Decided March 23, 2021

Kristi L. Browne, Attorney, Jefferey Ogden Katz, Attorney, Sarah Dunkley, Attorney, Ryan Zeller, Attorney, Patterson Law Firm, Chicago, IL, for Plaintiffs-Appellants.

Nicole Marie Strickler, Attorney, Messer Strickler, Ltd., Chicago, IL, for Defendant-Appellee.

Before Sykes, Chief Judge, and Wood and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

This is a legal malpractice case. Plaintiffs are a start-up company and its founder. They have sued the company's former chief legal officer, Richard Fisher, to recover losses from an arbitration award that held them liable for years of unpaid wages owed to Fisher himself. The plaintiffs’ core allegation is that they would not have been found liable to Fisher if he had not advised them to enter into what they now say was an illegal agreement to defer Fisher's own compensation until the company was able to secure more funding. The district court granted Fisher's motion to dismiss for a variety of reasons that together foreclosed the plaintiffs’ malpractice claims. On appeal, the plaintiffs challenge only two of the district court's reasons. We affirm. Even if the plaintiffs were correct on both issues, their claims still could not survive the motion to dismiss.

I. Factual and Procedural Background

Since this appeal is from a grant of a motion to dismiss for failure to state a claim, we present the following facts as they are pled in the complaint. Plaintiff UFT is a commercial finance company founded by plaintiff Joanne Marlowe in 2008. Defendant Richard Fisher worked as a consultant with UFT from February 2013 to September 2013 and then became employed by UFT as its chief legal officer in October 2013.

Throughout his employment, Fisher was the sole source of legal counsel to UFT and Marlowe regarding the company's operations. Among other duties, Fisher drafted the employment agreements between UFT and its employees, including both Marlowe's and his own. These employment agreements included mandatory arbitration clauses.

During Fisher's time at UFT, the company's revenues were inconsistent, coming in "fits and starts," so that the company failed to pay Marlowe, Fisher, and all other employees their agreed salaries when they were due. Fisher and other employees continued to work at the company because they believed in its potential. Still, at various times, Fisher recommended and drafted "supplemental agreements" allowing for the accrual of wages owed to various employees who could not be paid on schedule due to UFT's revenue patterns. Following Fisher's advice, even Marlowe herself entered into one of these supplemental agreements with UFT in 2014. And Fisher signed one in January 2016. Fisher's supplemental agreement said he was owed $330,000, which was to "be paid in full from any subsequent first closing of any permanent equity/debt placement by [UFT] in an amount greater than US $1,000,000, if not paid earlier from any other source." Fisher did not advise UFT to consult independent counsel when negotiating his own supplemental and employment agreements. Plaintiffs also allege that when UFT was considering buying Directors and Officers (D&O) liability insurance in 2014, Fisher advised Marlowe against it and did not fully inform Marlowe or UFT of the liability protections afforded by D&O insurance.

In August 2016, Fisher left UFT on bad terms after negotiations with Marlowe over his contract renewal broke down. In January 2018, to recover his unpaid wages from his years at UFT, Fisher demanded arbitration before the American Arbitration Association. On January 2, 2019, an arbitrator found that Fisher's wages had been illegally withheld throughout his employment because the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq., "imposes strict time limits on when wages ... must be paid." Dkt. 7-1, 8. The arbitrator held UFT and Marlowe jointly and severally liable to Fisher for unpaid wages and statutory penalties totaling $864,976. The arbitrator also held UFT liable for an additional $366,460 because Fisher did not receive written notice of his contract nonrenewal, which entitled Fisher to be paid for another three-year contract term, whether earned or not.

Plaintiffs have not paid the arbitration award. Instead, in an attempt to avoid these losses, the plaintiffs now point the finger back at Fisher in this highly unusual lawsuit. Plaintiffs sued Fisher in an Illinois state court alleging that Fisher's own legal malpractice caused them to take the actions that triggered their liability to him under the arbitration award. More specifically, the plaintiffs allege that Fisher negligently failed to advise them on (1) the legality and consequences of their employment and supplemental agreements, and the mandatory arbitration clauses therein; (2) Fisher's conflict of interest in executing his own supplemental agreement; (3) the benefits of independent counsel when negotiating Fisher's own agreements; and (4) the benefits of purchasing D&O insurance.¹

Fisher removed the case to federal court under 28 U.S.C. § 1441(b) based on diversity of citizenship. (Fisher is a Georgia citizen; plaintiffs are Illinois citizens.) The district court granted Fisher's Rule 12(b)(6) motion to dismiss, finding that: (1) any malpractice related to Fisher's original employment agreement was barred by Illinois’ statute of repose; (2) Fisher owed no duty to plaintiff Marlowe because he formed no attorney-client relationship with her individually; (3) plaintiffs did not sufficiently plead that Fisher's legal advice proximately caused them to use the supplemental agreements, refuse independent counsel, or forgo D&O insurance; and (4) plaintiffs have not alleged any damages stemming from contracts with any employees other than Fisher. See UFT Commercial Finance, LLC v. Fisher , 2020 WL 2513097 (N.D. Ill. May 15, 2020). Together, these findings foreclosed all of plaintiffs’ malpractice claims.

II. Discussion

Plaintiffs’ appeal targets only two of the district court's findings. First, plaintiffs argue that Fisher owed a duty to Marlowe, both as an individual client and as an intended beneficiary of his services to UFT. Second, plaintiffs argue that they did not need to plead proximate cause as to the supplemental agreements because Fisher's advice to use such agreements was "in itself improper." See Metrick v. Chatz , 266 Ill. App. 3d 649, 654–55, 203 Ill.Dec. 159, 163, 639 N.E.2d 198, 202 (1994). Even if the plaintiffs were correct on both issues, their claims still fail.

A. Duty to Marlowe

We review de novo, meaning without deference, the district court's dismissal under Rule 12(b)(6), accepting the plaintiffs’ factual allegations as true and asking only whether they present "a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In this diversity case, Illinois’ substantive law governing legal malpractice applies. Great West Cas. Co. v. Robbins , 833 F.3d 711, 715 (7th Cir. 2016), citing Erie R.R. v. Tompkins , 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

The elements of legal malpractice in Illinois are "(1) the existence of an attorney-client relationship that establishes a duty on the part of the attorney; (2) a negligent act or omission constituting a breach of that duty; (3) proximate cause; and (4) damages." TIG Ins. Co. v. Giffin Winning Cohen & Bodewes, P.C. , 444 F.3d 587, 590–91 (7th Cir. 2006), citing Lopez v. Clifford Law Offices , 362 Ill. App. 3d 969, 974–75, 299 Ill.Dec. 53, 58–59, 841 N.E.2d 465, 470–71 (2005) (collecting Illinois cases). The client's reasonable belief rather than the attorney's words or actions ultimately controls whether an attorney-client relationship has been formed. See Morris v. Margulis , 307 Ill. App. 3d 1024, 1037, 241 Ill.Dec. 138, 148, 718 N.E.2d 709, 719 (1999), rev'd on other grounds , 197 Ill. 2d 28, 257 Ill.Dec. 656, 754 N.E.2d 314 (2001) ; Restatement (Third) of the Law Governing Lawyers § 14 (Am. L. Inst. 2000). An attorney's duty normally extends only to the client, but "if a nonclient is an intended third-party beneficiary of the relationship between the client and the attorney, the attorney's duty to the client may extend to the nonclient as well." In re Estate of Powell , 382 Ill.Dec. 14, 12 N.E.3d 14, 20 (2014). The third party "must prove that the primary purpose and intent of the attorney-client relationship itself was to benefit or influence the third party." Id. , quoting Pelham v. Griesheimer , 92 Ill. 2d 13, 21, 64 Ill.Dec. 544, 548, 440 N.E.2d 96, 100 (1982).

Plaintiffs argue that Marlowe was in fact Fisher's client on certain matters where he advised her personally and that he otherwise owed her a duty as an intended beneficiary of his attorney-client relationship with the company, UFT. Plaintiffs argue that Marlowe reasonably believed that Fisher was her lawyer when he personally drafted and advised her on her own supplemental agreement with UFT and when he advised her to forgo D&O insurance. Plaintiffs further claim that Fisher owed Marlowe a duty when drafting his own supplemental agreement with UFT because Marlowe was the intended third-party beneficiary of Fisher's agreement.

Even if we assume for purposes of argument that Marlowe was Fisher's client regarding her own supplemental agreement and the D&O insurance decision, plaintiffs have failed to plead any plausible malpractice claims arising from those matters. On appeal, the plaintiffs have not challenged the district court's separate finding that the complaint failed to plead that forgoing D&O insurance proximately caused any loss from the arbitration award. See UFT Commercial Finance , 2020 WL 2513097, at...