Chicago Business Litigation Lawyer Blog

Our Chicago, Naperville, Wheaton and Oak Brook business trial lawyers won an important procedural victory in a business dispute involving a closely held business. In short, we were able to convince an Illinois trial court that an attorney's appearance should be stricken after being added to a case, we argued, because it appeared the new attorney could have been added to force the recusal of the judge, the attorney's former law partner.

The underlying case was a high-stakes financial dispute in a closely held business. It had been litigated for six years, but was delayed when the defendants added a new lawyer to their team. This lawyer was the former law partner of the judge assigned to the case, who had already put substantial time and effort into the matter. However, to avoid any appearance of impropriety, the judge immediately recused himself when the new lawyer, the former partner, was added. Our position was that it could appear that this was precisely what the defense had intended. In fact, the new lawyer was added two days after three rulings on motions that the new judge called "hotly contested," including rulings unfavorable to the defense.

Another attorney for the defense was a recognized expert in legal ethics, we argued, so the defense clearly must have known that the judge might recuse himself. Furthermore, the defense admitted that it had discussed the possibility of recusal with the client. And finally, the new lawyer had chosen what we alleged was a non-standard way to notify the court of his addition. Rather than asking for leave of court to move for the addition, which would have allowed the parties to discuss the addition in open court, he simply sent his appearance directly to the judge. The trial court held this was contrary to both the rules of court and the usual practice. All of this showed that it appeared that the attorney might have been added to force a change of judges, we argued. For those reasons, we moved to disqualify the new attorney.

In response to our motion, the Presiding Judge of the Cook County Chancery Division struck the new attorneys appearance in a detailed decision explaining that it was important to protect the Cook County Chancery Court from the stain of even the appearance of improriety. The Judge wrote:

The fact remains that [the new lawyer's] filing of his appearance for the defendants two days after rulings on three hotly contested motions (including significant rulings adverse to defendants), the filing of that appearance without leave of court and without prior notice to the plaintiffs, and the sending of the appearance by messenger directly to [the first judge] when the next court date was scheduled within a few weeks, with the result being the immediate recusal of the judge, just simply looks bad.

You can view the full opinion by clicking here.

As business trial attorneys in Naperville, Oak Brook, Wheaton and throughout the Chicago area, we have found that Illinois judges have a low tolerance for even the appearance of impropriety. If you are part of a business dispute where you feel "pushed around" by the other side's discovery violations or other behavior that appears intended to slow justice, DiTommaso * Lubin can help. Please contact us to learn more about your rights.

To see more about our firm and the cases we have handled click here.

A recent case of ours includes a motion to disqualify attorneys for the defense under Rule 3.7 of the Illinois Rules of Professional Conduct. Part (b) of that rule states that a lawyer may not represent a client in a case where he or she may be called as a witness to give testimony prejudicial to the client. We moved for an evidentiary hearing on this subject, because our underlying contentions included the contention that the lawyers for the defense witnessed the intentional torts that underlay the case.

Illinois law takes a motion to disqualify an attorney very seriously. Disqualifying a lawyer is considered drastic under state law, because it touches on basic rights by destroying the client's relationship with the lawyer of his or her choosing. Schwartz v. Cortelloni, 177 Ill.2d 166 (1997). For that reason, an evidentiary hearing to determine what evidence is relevant and admissible is generally either necessary or wise. City of Kalamazoo v. Michigan Disposal Service, 125 FSupp2d 219 (WD Mich 2000). In fact, some appeals courts have found that a lack of an evidentiary hearing is sufficient to allow them to question a trial court's decision.

However, Illinois and federal courts have held that an evidentiary hearing is unnecessary when the facts are not disputed, or when investigation is unlikely to provoke an admission that one side has ulterior motives. Robinson v. Boeing Co., 79 F3d 1053 (11th Cir 1996). The Eleventh Circuit's decision in In Re BellSouth Corp., 334 F3d 941, 962 (11th Cir 2003), supporting Robinson, laid down factors for judges to consider when considering disqualifying an attorney for alleged "judge shopping." These include "the fundamental right to counsel, the court’s docket, the injury to the plaintiff, the delay in reaching decision, the judicial time invested, the expense to the parties objecting and the potential for manipulation or impropriety."

The underlying case is related to a shareholder freeze-out lawsuit, in which we represented a 50% shareholder in a closely held corporation.

Our Chicago, Oak Brook and Naperville commercial trial attorneys, DiTommaso * Lubin, represent clients in greater Chicago and throughout Illinois involved in commercial disputes. In addition to shareholder freeze-out and squeeze-out litigation, we handle a variety of business, commercial and corporate litigation for both large corporations and closely held companies. If you have a similar dispute and you would like to discuss it with us confidentially, please contact us through our Web site or by phone.

Our Chicago business litigation firm recently handled a case in which one 50% shareholder allegedly tried to freeze out the other using lawyers hired by the companies owned equally by both. When our clients filed a shareholder freeze-out and breach of fiduciary duty claim and began discovery, the defendants balked, citing the attorney-client privilege to explain why they should not be required to turn over important and incriminating information.

As experienced business litigators know, this is no defense at all. Because our clients were equal shareholders in the business, we argued they were entitled to access to certain attorney communications. Furthermore, there is well-established law showing that the attorney-client privilege cannot be misused to deny discovery when the company or its officer is accused of breaching its fiduciary duty to stockholders. In other words, fiduciary duty trumps the privilege. Caselaw says a corporation may not use the privilege to shield relevant communications from discovery in an action by its own stockholders, unless there is good cause. The multipart test for good cause developed by the courts takes into account the nature of the communication, the seriousness of the allegations and other factors. Garner v. Wolfinbarger, 430 F2d 1093 (5th Cir. 1970).

The attorney-client privilege also cannot be raised when the disputed communications were made after the date the attorney and client began a fraudulent or criminal scheme that was part of the lawsuit. That is, communications about crime, fraud or torts are excepted from the attorney-client privilege. Cleveland Hair Clinic, Inc. v. Puig, 968 FSupp 1227, 1241 (ND Ill 1996). Unfortunately, we believed this to be the situation in our case.

Other exceptions to the privilege include:
• Communications to multiple clients who hired the same attorney, but who later have a legal dispute on the same matter
• Cases of legal malpractice
• Certain cases where a lawyer acts as a witness
• Cases where multiple parties make claims through the same deceased client

Of course, "piercing the veil" of corporate attorney-client privilege is not always easy; those attempting it will likely have to fight for their discovery rights. But in a freeze-out case, in which one shareholder or group of shareholders is unfairly trying to control another, this fight is essential to proving the case. DiTommaso * Lubin handles shareholder freeze-outs and squeeze-out lawsuits for both plaintiffs and defendants in Chicago, Naperville, Wheaton, Oak Brook and throughout Illinois. If you would like to discuss how we can help you, please contact us today.

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, Oak Brook, Wheaton and Naperville business trial 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.

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.