The U.S. Court of Appeals for the Seventh Circuit recently held that client victims of a lawyer’s fraud take precedence over a commercial lender in being paid out of funds owed to the lawyer’s firm. Attorney William C. of Indiana-based Conour Law Firm, LLC is serving a 10-year prison term for stealing $4.5 million from clients’ trust funds. His victims obtained a judgment against him in 2014. Timothy D., an attorney at Conour, had previously left to join the Ladendorf Firm, bringing 21 Conour clients with him who eventually generated over $2 million in fees. William’s victims, as well as the Conour Firm’s lender, ACF 2000 Corp., claimed the right to a portion of those funds. Writing for the Seventh Circuit in ACF 2006 Corp v. Devereux, No. 15-3037 (7th Cir. 2016), Judge Easterbrook summed up the ensuing battle: “This appeal presents a three-corner fight about who gets how much of that money.”
At issue was how much of the $2 million belonged to the Conour Firm for the services it performed before Timothy D. left, and how those funds should be divided between the victims and ACF 2000. At trial, the federal district court concluded that the Conour Firm was entitled to some $775,000 under principles of quantum meruit, and that ACF had priority of payment over the victims.
Under the doctrine of quantum meruit, if an attorney takes over a case from another attorney and pursues it to a successful conclusion, the original attorney is entitled to be paid for the work he did on the case. The district court found that the Conour Firm had engaged in discovery, depositions, and other legal work on two products liability cases that were eventually litigated by the Ladendorf Firm, which entitled Conour to a significant share of the settlements that resulted. On appeal, the Seventh Circuit substantially reduced Conour’s share of proceeds from one of the cases. The appellate court concluded that Timothy D. and the Ladendorf Firm owed the Conour Firm less than the value of Conour’s indebtedness to ACF, and “substantially” less than what William C. owed to the client victims. Therefore, the lender and victims could not both receive the funds.
The trial court had reasoned that ACF, Conour’s lender, had priority of payment under the Uniform Commercial Code because it had made its loan to the firm in 2008, while William’s victims did not obtain a judgment until 2014. The Seventh Circuit disagreed, on the basis that William C. had converted the victims’ trust funds before ACF made its loan, so, under Indiana statute, the victims’ lien supersedes the lender’s interest. Also, under Indiana Code §23‑1.5‑2‑7, a client of a professional services provider employed by a corporation has the same rights against the corporation that it would have if the provider were a solo practitioner, including recompense for breach of trust.
“The norm that victims of a lawyer’s breach of trust have a remedy notwithstanding the later grant of a security interest to a commercial lender is one of long standing and is reflected in Indiana” by statute, Easterbrook wrote. Because the use of a corporate form to hold assets of a legal practice does not affect that, the court reversed the judgment of the district court and held that the client-victims took priority over ACF in receiving funds owed to the Conour Firm.
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