Chicago Business Litigation Lawyer Blog

As Chicago business, shareholder rights and commercial law litigators, we frequently handle cases involving allegations of business fraud or financial mismanagement, often as part of complex business dispute, that require significant expertise in financial issues. When handling a divorce involving a family business or other closely held company, we also sometimes find we need an expert's help properly valuing the business, so we can help our clients get the most equitable possible distribution of marital property.

Our Chicago and Naperville business litigation attorneys have handled many complex business and commecial law litigation matters which have involved presenting or cross-examining accounting witnesses.

While we're confident in our legal skills, these situations call for specialized financial skills. To give our clients the best possible representation in business, shareholder and other commercial disputes, we sometimes retain a forensic accountant or fraud examiner. Both of these jobs are twofold: They help attorneys and their clients understand the complex financial aspects of their cases, and they may also be called to testify as expert witnesses. A forensic accountant's job is to examine a person or corporation's accounts "cold," from the outside; the subject isn’t generally expected to cooperate. Similarly, a fraud examiner delves deep into a company's finances, looking for the source of anything that seems inconsistent or suspicious. Both can serve as expert witnesses who help establish the value of a business or testify to the existence of fraud.

The goal for both forensic accountants and fraud examiners is to make sure the other side of the case is being completely truthful about its income and accounting practices. As you might imagine, this is a frequent concern in divorces involving a spouse who’s part of a small or closely held business, which may need to be properly valued for the divorce. The company may also need to be investigated when the owning spouse is believed to be hiding assets. However, this concern also comes up in business disputes, such as breach of fiduciary duty lawsuits. When minority shareholders believe the majority is withholding important financial information, using a forensic accountant or fraud examiner may be the most reliable way to discover and prove the truth.

This practice is relatively recent but growing; a simple Web search turns up many accountants and examiners who regularly serve as expert witnesses. Two legal journals serving our Midwestern neighbors, The Wisconsin Law Journal and Michigan Lawyers Weekly, offer online articles on the subject for lawyers who want to learn more.

In a shareholder and breach of fiduciary duty dispute arising from a probate case involving a closely held corporation with two shareholders, the Illinois Third District Court of Appeal has ruled that a shareholder agreement made by a decedent does not allow the remaining shareholder to execute the decedent's will in bad faith. In re Estate of Talty, No. 3–06–0669 (Oct. 29, 2007).

Thomas Talty owned 50% of a closely held corporation (an auto dealership in Morris, Illinois), with his brother William Talty. They each also owned half of the land the dealership was built on, and had an interest in half of an adjoining parcel of land owned by a land trust. Thomas wrote a will in 2000 naming William as executor and naming Thomas's wife, Helen Talty, as sole residual beneficiary of the estate.

The will gave William the right to purchase Thomas's shares of the dealership from his estate, but required that the purchase price be determined by an independent appraiser appointed by the probate court. Similarly, it gave William the right to purchase Thomas's half of the land, but at fair market value set by an independent appraiser approved by the probate court. Separately, in 2001, William and Thomas made a corporate agreement allowing their company to buy the shares of any deceased shareholder. It specified that the fair market value of the shares should be determined by an accountant agreed on by the company and the decedent's representative, or, if they couldn't agree, appointed by the probate court.

After Thomas's death in 2001, William, acting as executor, agreed with the company that Robert Gordon would be the accountant to value the stock. Gordon was already the corporation's accountant, Thomas and Helen Talty's personal accountant, and Thomas and William Talty's cousin. A non-relative recommended by William's lawyer appraised the land. In neither case was Helen or the probate court consulted. Both assessed their respective properties considerably less than what they were later revealed to be worth. The closing date for the sales was set for six days from the day Helen's attorney received a letter notifying him; he filed an emergency motion with the probate court to stop the closing as soon as he read the letter. The probate court denied Helen's motion and proceeded with the sales.

Four months later, Helen filed a petition to set those sales aside and remove William as executor. At that trial, the court found that Thomas had waived William's clear conflict of interests, but William acted in bad faith and abused his discretion. Thus, the trial court removed William as executor, set aside the sales, appointed independent appraisers and awarded Helen attorney fees and other costs. The total of the balance of the sales, rents from the land, and fees and costs due to Helen totaled nearly $2 million.

William appealed on a variety of grounds, but the appellate court affirmed. In its analysis, the court noted that the stock agreement may well have superseded Thomas's will, but it was irrelevant -- William breached his fiduciary duty as executor when he failed to make complete disclosures to Helen. Because William admitted to not disclosing important information and their attorneys had minimal contact, the appeals court declined to overturn the trial court's determination of bad faith.

A minority shareholder may withdraw his complaint under the Illinois Business Corporation Act of 1983, because the majority shareholder failed to meet requirements of that law, the Illinois Third District Court of Appeal ruled in an Illinois shareholder dispute lawsuit. Lohr v. Havens, 3-06-0930 (Nov. 11, 2007).

Charles Lohr owned a large minority of the stock in Phoenix Paper Products, Inc., a closely held private corporation in Illinois. He and another shareholder, James Durham, became concerned about possible financial mismanagement by the majority shareholder and president, Terry Havens, and their accountant, Samuel Morris. In months of correspondence, they accused Havens and Morris of taking unspecified inappropriate actions without shareholder approval.

This culminated in a 2003 lawsuit by Lohr alleging that Havens and Morris were misusing the company’s resources and acting illegally. Count I of the suit asked the court to either order a buyout of all Lohr’s stock or dissolve the company. Havens filed a timely election to buy Lohr’s shares, but Lohr accused Havens of illegally doing this without shareholder approval. After two years of discovery, Lohr asked to withdraw Count I and its associated demands, but Havens objected. The trial court found that because Havens hadn’t notified shareholders about the election, it was invalid, allowing Lohr to dismiss Count I of his complaint. Havens appealed.

The Illinois Third District Court of Appeal ruled that because Havens did not notify other shareholders of the election, the election was invalid, leaving Lohr free to drop his claim. In its analysis, the court noted that a proper election would stop a shareholder in Lohr’s position from dismissing a petition -- but the plain language and the intent of the law both require notice of an election to shareholders within ten days. For the same reasons, the court also disagreed with Havens’s contention that the trial court was required to hold a hearing to assess equities before allowing Lohr to dismiss his petition.

As Chicago, Oak Brook and Naperville business and shareholder rights litigators with a substantial practice in business and shareholder disputes we’re always pleased to see clarifications of Illinois business law from the courts.

Only managers in manager-operated limited liability corporations have a fiduciary duty to the company or to other members, the First District Court of Appeal ruled in a usurpation of corporate opportunity lawsuit involving a closely held LLC. Katris v. Carroll, No. 1-04-3639 (Dec. 23, 2005).

Peter Katris was one of four members/officers and two managers of an Illinois limited liability corporation, Viper Execution Systems LLC. Viper LLC was formed to market a type of options-related software, also called Viper, written by LLC member Stephen Doherty for member Lester Szlendak. Its articles of organization specified that management was vested in Katris and the other manager, William Hamburg.

Defendant Patrick Carroll employed Doherty before and during the organization, and defendant Ernst & Company later hired Doherty to work with Carroll. Their work included the writing of another software program, WWOW, which Katris believed was functionally similar to Viper. Five years after the organization, Katris sued Carroll and Ernst for collusion and usurpation of corporate opportunity because of WWOW’s similarity to Viper. (He also sued Doherty for collusion and breach of fiduciary duty, claims they later settled.)

Carroll and Ernst moved for summary judgment, arguing that collusion didn’t exist because it depended on Doherty’s fiduciary duty to Viper LLC. As a non-manager of the manager-managed Viper LLC, they argued, he had no such duty. Katris argued that Doherty’s written agreement to form Viper LLC and officer role left him subject to a manager’s duties. The trial court disagreed, granting summary judgment, and the appeals court upheld that decision.

In its analysis, the court noted that Article 15 of the Illinois Limited Liability Company Act explicitly says that a member of a manager-managed LLC in Illinois "who is not also a manager owes no duties to the company or to the other members solely by reason of being a member." Katris agreed with the law, but asserted that different language in the law gave Doherty managerial status because he fulfilled some of the duties of a manager as director of technology:

In a manager‑managed company:
...
(3) a member who pursuant to the operating agreement exercises some or all of the authority of a manager in the management and conduct of the company's business is held to the standards of conduct in subsections (b), (c), (d), and (e) of this Section [manager’s duties of loyalty and care] to the extent that the member exercises the managerial authority vested in a manager by this Act...

The appeals court found that the plain language of the statute giving no liability to non-managers was clear and perfectly adequate for determining the intent of the Illinois legislature in enacting the law, so it declined to reverse the trial court. Furthermore, it said, Doherty’s position as director of technology didn’t elevate him to a manager because the two managers, Katris and Hamburg, didn’t have a majority vote when they gave Doherty that role, meaning they couldn’t amend the operating agreement to make Doherty a manager. And furthermore, the court argued, Katris and Hamburg signed that agreement as “all the managers” of Viper LLC, undermining Katris’s argument that Doherty was given a managerial role:

The undisputed facts of this case show that Doherty was a member of a manager-managed LLC and exercised no managerial authority pursuant to the LLC's operating agreement. Accordingly, the undisputed facts show that Doherty owed no fiduciary duties to Katris or the LLC pursuant to the Act and Katris' collusion claim against Carroll and Ernst fails as a matter of law.

Experienced Illinois business litigators probably recognize Professor Charles W. Murdock of the Loyola University Chicago School of Law as a former Illinois Deputy Attorney General, former Loyola Dean and expert on Illinois business law. Given his status, it was with great interest that we read some of his scholarship on the concept of fairness in conflicts between shareholders or other parties interested in a business, especially in situations where the majority is using its greater power against a minority. These papers are a few years old, but they directly address some of the issues that are important to our firm and our clients in corporate freeze-out or squeeze-out litigation, breach of fiduciary duty and other internal business disputes in closely held companies.

In Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, 36 Loy.U.Chi. L.J. 551 (2005), Murdock addresses the fiduciary duty of good faith and fairness that controlling interests of a business owe to minority interests. Noting that this internal duty is a fairly recent legal phenomenon, he surveys caselaw on the subject from around the country that applies to closely held corporations, public corporations and LLCs. Noting that the Uniform Limited Liability Company Act (ULLCA), a model law adopted by several states, doesn't include language that gives members of an LLC fiduciary duties to one another, he praises Illinois for modifying that language to protect members in the updated Limited Liability Company Act.

Another of Murdock's articles that directly addresses issues important to us is 2004's Squeeze-outs, Freeze-outs and Discounts: Why Is Illinois in the Minority in Protecting Shareholder Interests?, 35 Loyola Chicago L.J.737 (2004). As you might expect from the title, Murdock argues in the article that Illinois business law, despite its "pro-shareholder" reputation, fails to protect minority shareholders in "fair value" proceedings. (Fair value proceedings are intended to resolve conflicts when majority shareholders want to do something that would harm the minority shareholders.) Until recently, those proceedings often led to marketability and liquidity discounts imposed on minorities, and the courts usually allowed it -- giving rise to Murdock's criticism. However, amendments to the Illinois Business Corporation Act in 2007 prohibited these discounts "absent extraordinary circumstances." While the article is now out of date, fortunately for minority shareholders in Illinois, it still provides good arguments for the change and a survey of common circumstances under which fair value proceedings might arise.

The doctrine of laches bars a plaintiff from bringing a stolen corporate opportunities lawsuit, the Illinois First District Court of Appeal has ruled. Lozman v. Putnam, No. 1- 06-0861 (February 18, 2008).

Plaintiff Fane Lozman and defendant Gerald Putnam met in 1986 as employees of the same Chicago securities firm. Eight years later, Lozman came up with an idea for a new type of software for traders, and hired another defendant, Townsend Analytics Inc., to program it. To market the software, Lozman and Putnam formed Blue Water Partners, Inc., an Illinois corporation, in 1994. Each was a 50% shareholder and a director. The plan was to barter the software for a share of a brokerage firm’s commissions on trades. Townsend Analytics and its owners, Stuart and Marrgwen Townsend, were offered 15% equity in Blue Water but no director or officer positions.

Later that year, Putnam formed Terra Nova Trading, LLC, with himself as 100% shareholder, to route profits from Blue Water. Another company, Analytic Services, LLC, was formed to sell the software, with Samuel Long as president. In April of 1995, Putnam and Lozman signed an agreement to share commissions generated through or paid by Townsend and its software. For a variety of personal and professional reasons, the relationship between Lozman and Putnam went sour, and they voluntarily dissolved the agreement six months later. A later termination agreement, back-dated to the day of the dissolution, preserved any legal claims. Putnam went on to form three more companies that used the same office and brokerage license as Blue Water, subcontracted with the Townsends and/or competed with Blue Water.

In 1999, Lozman sued for usurpation of corporate opportunity, breach of joint venture, unjust enrichment and fraudulent conveyance of assets. In court, the two men disagreed on the meanings of a variety of their agreements. After a tortuous procedural history including two previous appeals and a dual bench and advisory-only jury trial in the instant action, the court found for the remaining defendants. Among its findings was that the usurpation of corporate opportunities claims by Lozman and Blue Water were barred by laches -- they had waited four years to file their claims. They appealed on that and other grounds, but the appeals court affirmed.

In its opinion, the court noted that plaintiffs claimed Putnam fraudulently breached a fiduciary duty to disclose certain facts, so the running of the laches claim should have started only after Lozman discovered the alleged breach. Prueter v. Bork, 105 Ill. App. 3d 1003, 1007 (1981). However, the court wrote, plaintiffs failed to explain what facts Putnam failed to disclose or when they learned of them, nor did they cite cases that supported their position. Furthermore, the change of circumstances during Illinois’ five-year statute of limitations for a breach of fiduciary duty precluded arguments that laches shouldn’t apply. Thus, the laches finding was upheld, as were the rest of the trial court’s findings.

Over at the Illinois Appellate Lawyer Blog, our colleague Steven R. Merican recently called our attention to an appeals court decision related to insurance coverage for “junk fax” class actions -- an important practice for our firm. Eclipse Manufacturing v. United States Compliance, Nos. 2-06-0825, 2-06-0889 (11/30/07).

In the underlying case, Eclipse Manufacturing Co. filed a class-action lawsuit against United States Compliance for sending Eclipse unsolicited “blast faxes” in violation of the federal Telephone Consumer Protection Act and the Illinois Consumer Fraud and Deceptive Practices Act. Compliance’s insurer, Hartford Casualty Insurance Co., declined to cover the defense. Compliance later settled with Eclipse by simply assigning its right to the full limits of its coverage under the policy. In order to collect this settlement, Eclipse then filed a third-party citation against Hartford.

In part because Hartford hadn’t sought a declaratory judgment on its obligation to defend Compliance, estopping it from raising policy defenses, the trial court sided with Eclipse. Hartford later filed for declaratory judgment in Minnesota, where Compliance is based, but its claim was dismissed for lack of jurisdiction. Hartford appealed, arguing that it was not estopped because the trial court should have applied Minnesota law, which it argued conflicts with Illinois law on estoppel. Furthermore, Hartford argued, its policy doesn’t cover the underlying lawsuit under either state’s law. The Illinois Second District Court of Appeal affirmed the trial court, saying there was no conflict in outcomes between Illinois and Minnesota laws of estoppel. Thus, Hartford was estopped from raising policy arguments -- making them irrelevant.

As Merican points out, the appeals court also addressed its jurisdiction -- important because Hartford’s “protective” notice of appeal might have been dismissed for lack of jurisdiction until recently. It was filed before a recent change in Illinois Supreme Court Rule 303(a)(1), which previously said a party must file its notice of appeal within 30 days of a final judgment. When Hartford filed its appeal, there had been no final judgment -- merely a notice from the trial court that it intended to rule for Eclipse. That would mean the appeal should be dismissed for lack of jurisdiction.

While the appeal was pending, however, Rule 303(a)(1) was changed to address this situation, treating appeals like Hartford’s as if they were filed on the date of the final judgment, making it a legitimate appeal. Because the appeals court had recently ruled in In Re Marriage of Duggan No. 2--06--0061, (October 16, 2007) that a similar rule change applied retroactively to pending appeals, it allowed Hartford’s appeal “[i]n the interest of consistency.” Nonetheless, the appeals court eventually ruled against Hartford.

Our firm has sucessfully certified class actions involving junk faxes and obtained substantial class wide settlements from the defendants and their insurance carriers. If you want to contact one of our Chicago consumer attorneys to pursue a junk fax case click here.

A former shareholder, officer and director did not breach his fiduciary duty to a corporation when he started a competing company, and a former employee did not breach his duty of loyalty by joining, the First District Court of Appeal has ruled. Cooper Linse Hallman v. Hallman, No. 1-05-0597 (2006).

Plaintiff Cooper Linse Capital Management, a closely held financial services company, brought on Thomas Hallman in 1994 as a shareholder with 20% of stock shares. The remainder were divided evenly between Lori Cooper and Don Linse. Hallman served as vice president and CFO as well as an employee. Two years later, the company hired James McQuinn as an employee only. Neither man signed a written confidentiality agreement, and both disputed Cooper Linse's contention that they entered into an oral confidentiality agreement. All parties agreed that Linse and Cooper made all of the business decisions.

In 2000, the company that held Cooper Linse's clients' accounts in trust got into financial trouble and had its assets frozen, leaving clients unable to access their accounts and Cooper Linse unable to pay its employees. Linse began negotiations to take over that company's trust business; McQuinn and Hallman quietly began planning to start a business competing with Cooper Linse.

Five months after the assets were frozen, Hallman and McQuinn left for their new firm, taking client lists with them. They had used Cooper Linse computers to plan some aspects of the business, and negotiated to use a soliciting firm that Cooper Linse had previously used. Cooper Linse filed suit against Hallman and McQuinn for seven counts of corporate misconduct, including breach of fiduciary duty against Hallman and breach of duty of loyalty against McQuinn. The trial court found for Hallman and McQuinn on those two counts, and Cooper Linse appealed.

The appeals court affirmed, saying Hallman and McQuinn didn't breach even the strictest duties they had to Cooper Linse. Under Illinois caselaw, the court wrote, former employees like McQuinn may compete with their former employers and even plan their businesses while they're still employed, as long as they don't start competing until they have terminated their employment.

By contrast, the court pointed out that directors and officers like Hallman have a fiduciary duty not to exploit their positions for personal gain, including starting a competing business without telling other officers. But in this case, the justices found no evidence for the breaches alleged by Cooper Linse. One of its allegations was that the two men had asked the soliciting firm for business before leaving Cooper Linse, which indeed could have been a breach. But because Linse himself was involved in some of the meetings and the men testified that they never solicited the business, the trial court found there was no breach and the appeals court agreed. Other arguments fell similarly flat; in particular, the court noted that there was no written confidentiality agreement. Thus, "their conduct did not rise to the level of a breach of their fiduciary duties because they neither exploited their positions for their personal benefit and to the detriment of plaintiff nor impeded plaintiff’s ability to do business.... To hold that Hallman’s and McQuinn’s actions were a breach of their fiduciary duties would be to virtually prevent all officers and directors from seeking new employment prior to resigning from their current positions."

In an issue of first impression in Illinois, the Third District Court of Appeal ruled in a divorce business dispute that retained earnings from a closely held corporation are non-marital property. In re Marriage of Joynt, No. 3-06-0919 (Aug. 16, 2007).

Michael Joynt was president of Mississippi Valley Stihl, Inc. (MVS), a family-owned subchapter S corporation in Illinois, when his former wife, Theresa, filed for divorce. He also owned 33% of the stock; his father and sister were the remaining shareholders. During the divorce trial, both spouses stipulated that Michael's stock was non-marital property. However, the company's accountant testified that MVS had $3.75 million in retained earnings that year, which were set aside for future expenses and not paid as dividends to shareholders. If they had been paid during the trial, Michael would have had an additional $1.25 million in income. The trial court concluded that Michael's interest in the retained earnings were non-marital property. Theresa appealed, contending that the retained earnings were income available to her former husband.

The appeals court affirmed the trial court's decision, noting that the company, not the spouses, paid taxes on retained earnings. Noting that Illinois courts hadn’t addressed the issue before, the judges surveyed decisions from several other states ruling that retained earnings are non-marital property. However, they wrote, that's not always true when the shareholder spouse has full power to decide whether to pay dividends, or substantial influence over that decision. Furthermore, Michael was fairly compensated for his role as president of MVS, and there was no evidence showing that Michael was using MVS to hide marital assets.

Thus, because Michael did not have full control over the decision to distribute dividends, the justices wrote, retained earnings are not a marital asset. Theresa also claimed the trial court made an inequitable distribution of their marital assets; the justices rejected this as well, noting substantial evidence that the trial court had taken Michael's assets into account when making its orders.

If you're facing a similar business division dispute in a divorce, it's essential to get help from an experienced business attorney to protect your hard-earned business and sort out the legally and personally difficult questions you face. Contact the Chicago business litigation firm of DiTommaso-Lubin for assistance in resolving business related issues in a divorce.

In an Illinois business contract lawsuit, the Third District Court of Appeal has ruled that a company's president may not hold his financer and business partner liable for the company's debts as an alter ego. Semade v. Estes, 05--CH--31 (June 29, 2007).

Charles Semade and Nicholas Estes formed a private corporation, Heartland Pottery Company, in 1995. Estes provided financing; Semade served as president and CEO. Unfortunately, the company did not succeed. Semade filed a lawsuit against Heartland in 1998 for unpaid salary and expense reimbursements. In that case, he won a judgment of more than $294,000, only to discover that Heartland had no assets.

Semade then filed a complaint against Estes himself, contending that Estes should be liable for the judgment because he was the company's alter ego. Under the law, that means he alleged that Estes and Heartland were the same person for all practical purposes, allowing Semade to "pierce the corporate veil" of limited liability. Semade alleged that Estes controlled all parts of the company and put income and assets in his personal accounts. However, Estes moved for summary judgment, saying Semade lacked standing because he was a director and officer of the company. The trial court agreed, and on appeal, the Third District Court of Appeal agreed.

In its analysis, the court relied on the Illinois Supreme Court ruling in In re Rehabilitation of Centaur Insurance Co., 158 Ill. 2d (1994). That case does leave corporate officers liable, the court noted, but only to third parties who were defrauded by an officer conducting his or her personal business through the corporation. The court declined to create a new rule allowing directors to pierce the corporate veil, pointing out that such a rule would allow directors to abuse the doctrine, discarding and taking up the veil as it suits them. Furthermore, the majority argued, directors have broad rights (and a fiduciary duty) to inspect a corporation's books.

Justice Holdridge, dissenting, pointed out that the majority relied on corporate documents to determine Semade's status -- not the de facto arrangement to which both parties testified. For that reason, the justice wrote, the facts were not sufficient to support a dismissal.

As business dispute litigators in Illinois, we believe this issue is one to watch.

In a business fraud lawsuit pitting a bank against its security vendor, the Illinois Appellate Court for the 1st District ruled May 1 that an attachment order must be voided under the Illinois Attachment Act if plaintiffs fail to file an attachment bond beforehand. In ABN Amro Services Company, Inc. v. Navarrete Industries, Inc., No. 1-07-0089 (Ill. App. 2008), the appeals court voided such an order and remanded it to the trial court.

The case arose from alleged fraud by INS, which provided security for multiple Chicago-area La Salle Bank branches. A fraud investigator discovered that Armando Navarrete of INS was fraudulently overbilling the banks by an alleged $15.9 million, then paying kickbacks to the banks’ vice president for security, George Konjuch. The bank filed a lawsuit in September of 2006 against INS, Konjuch, Navarrete and another INS employee, alleging fraud, civil conspiracy and constructive trust, plus breach of fiduciary duty against Konjuch. (Konjuch and Navarrete have since been indicted by a federal grand jury for the scheme.)

At the same time, plaintiffs asked for a temporary restraining order, a preliminary injunction and an order of statutory prejudgment attachment, all of which were attempts to keep the alleged conspirators from absconding with the money. Upon receiving notice of these filings, defendants immediately filed motions to void the restraining order and the prejudgment attachment. After hearings, the trial court dissolved the restraining order and denied the preliminary injunction, but declined to vacate the attachment order. Both sides appealed.

On appeal, the First District considered only Konjuch’s motion to vacate the attachment order. Using the plain language of the Illinois Attachment Act, the court concluded that plaintiffs are absolutely required to file a bond before they may be granted an attachment order:

Unfortunately, the result of declaring the order void results in a waste of resources in this case. While plaintiffs clearly attempted to comply with the statute, they failed to do so. This issue could not be resolved by simple amendment because of the absolute mandatory command of the statute, therefore the mootness and aider by verdict doctrines do not apply. The order is simply void. A liberal construction of the Act cannot cure this defect and the order must be dismissed.

Thus, the three-judge majority reversed and remanded the case to the Circuit Court of Cook County.

The Illinois Appellate Court for the 1st District ruled May 7 that a legal malpractice class action against the law firm DLA Piper Rudnick Gray Cary could not go on because it was filed well after a tolling agreement ended. In Joyce v. DLA Piper Rudnick Gray Cary LLP, 1-07-1966 (Ill.App. May 7, 2008), the court upheld the dismissal of a purported class action by stockholders of 21st Century Telecom Group, a Chicago telephone company, pursuant to a tolling agreement between 21st Century and DLA Piper.

The underlying dispute started in 1999, when 21st Century agreed to merge with competitor RCN. DLA Piper attorneys drafted a merger agreement with a mistake that lowered the price of the stock 21st Century shareholders were to receive by $19 million. In response, Edward Joyce, the stockholders’ representative, made a tolling agreement with DLA Piper, in which the statute of limitations was tolled unless a stockholder lawsuit was filed against the firm on or before December 31, 2002. The firm agreed not to avail itself of any statute of limitations defense until after that day. This agreement was amended four times, each time altering only the date. The last agreement set that date at August 21, 2005.

Joyce filed a legal malpractice class action in Cook County against DLA Piper on August 30, 2006. After some procedural disputes, including a finding by the trial court that the filing was timely, the firm won a motion to dismiss based on plaintiff’s lack of standing as a non-client. The plaintiffs appealed and the defendant cross-appealed on the trial court’s decision that the suit was timely.

The appeals court upheld that cross-appeal, finding that the plaintiffs were barred because they filed nearly a year after the last agreement expired. The court rejected the defendants’ contention that it was timely because each amended tolling agreement constituted a new contract that extended the statute of limitations.

Writing for the three-judge majority, Justice Grieman found the tolling agreement unambiguous in setting an end date of August 31, 2005. “Indeed, to accept plaintiff’s argument would require this court to allow plaintiff the benefits of the first four amendments without fulfilling the requirement of filing suit by the specified dates imposed by any of the amendments.”

The majority declined to take up the issue of whether the 21st Century shareholders could be considered clients of DLA Piper.