Tower Investors, LLC v. 111 East Chestnut Consultants, Inc., 864 N.E. 2d 927 (Ill.App.3d 2007)

Brief Summary
The court upheld the distinction, as separate entities, between the law firm and an investment company comprised of attorneys from the law firm. The court therefore allowed the law firm to sue the defendant-client for damages even though the investment company had signed a forbearance agreement.

Complete Summary
Tower Investors, LLC (“Tower”) was an investment company formed by certain partners at the law firm of Sonnenschein, Nath & Rosenthal (“Sonnenschein”) to enable them to make profitable investments. At the time of this case, Tower had approximately 80 members and had its own management committee. Sonnenschein provided no direction to the management of Tower. Id. at 931.

Invsco Group, Ltd. (“Invsco”), a privately owned real estate developer, formed 111 East Chestnut Consultants, Inc. (“Consultants”) to convert an apartment building at that location into condominiums. Id. at 932. Mark Goldstein, the CEO of Invsco, approached long-time Sonnenschein partner and Tower member Wayne Hannah to handle the conversion. Mr. Goldstein specifically told Mr. Hannah that he knew Sonnenschein could not handle the purchase of the building because the firm had represented the seller of the building and that the seller would not provide a waiver. He only wanted Mr. Hannah and Sonnenschein to handle the post-acquisition conversion of the apartments. Mr. Goldstein also asked Mr. Hannah if he would submit a memorandum to Tower management to see if it might be interested in investing in this project. Tower had previously invested in five other Invsco projects. Id. at 934. By the time of this transaction, Sonnenschein had represented Invsco and related entities for more than 15 years.

Tower invested $350,000 with Consultants for this project. Subsequently, Consultants requested that all investors sign a one-year forbearance agreement written by Invsco’s general counsel in exchange for a promise by Invsco and Consultant to pay a $350,000 promissory note. The agreement provided that Tower would not “Prosecute any claims” against Consultants, Invsco and others “including, without limitation, . . . not initiating any litigation prior to December 18, 2001, arising from or in connection with their Principal Investment or the Project.” Id. at 933. No one from Consultants or Invsco ever asserted at the time, however, that the forbearance agreement applied to legal fees owed to Sonnenschein. Id. at 934.

When Invsco and Consultants failed to pay off the promissory note, Tower sued. In defense, Invsco and Consultants asserted that Tower and Sonnenschein were alter egos and that Sonnenschein’s prior filing of a claim for fees constituted a breach of the forebearance agreement which was a defense to the duty to pay the note. After a bench trial, the trial court found that Sonnenschein was not an alter ego of Tower and was not bound by the forbearance agreement. For this and other reasons outside of the scope of this Alert, Tower was held entitled to prevail on its action on the note. Id. at 936. In the defendants’ subsequent motion to vacate the judgment, they added the argument that they had been fraudulently induced to enter the forbearance agreement based on the conflict of interest between Sonnenschein and Tower. The lower court denied the motion and this appeal followed. Id. at 936.

With regard to the relationship between the law firm, its clients and Tower, the appellate court noted that the record made clear that Invsco had invited Tower to invest in Consultants and was very knowledgeable about lawyer conflicts. In addition, Tower had previously invested in Invsco projects, and the forebearance agreement was drafted by counsel for Invsco, not Sonnenschein. Id. at 939-940. The court next addressed whether there had been an anticipatory breach when Sonnenschein sued Invsco and Consultants for unpaid fees. The court noted that this theory “depends on treating Tower and Sonnenschein as one and the same entity.” Id. at 940. The court stated that even if it had been inclined to apply the doctrine of “piercing the corporate veil,” the circumstances did not warrant doing so. Id. at 941. The court noted that “[W]here there is no evidence of any misrepresentation, no attempt to conceal any facts, and the parties possess a total understanding of all the transactions involved, Illinois courts will not pierce the corporate veil in a breach of contract situation.” Id. at 942, citing Main Bank of Chicago v. Baker, 427 N.E.2d 94 (1981). The court concluded that the defendants had created the situation for their own benefit, with “full knowledge of the relationship between Tower, its members, and Sonnenschein.” Id. at 942.

The court also stated that under Illinois law, attorney-client transactions are not automatically void and that the presumption of fraud can be overcome. See Monco v. Janus, 583 N.E.2d 575 (1991). The facts in this case established that the defendants knew what they were doing and were not unfairly or unduly disadvantaged. Among other things, the lack of unfair advantage was clear from the fact that the defendants had their own general counsel draft the forbearance agreement, a “very compelling means of rebutting a presumption of undue influence.” Tower at 944, citing In re Schuyler, 434 N.E.2d 1137 (1982).

The court further stated that the conflict of interest provisions of Illinois RPC 1.8 did not require a different result because Invsco and Consultants were not seeking attorney discipline and because, “although Mr. Hannah himself did not make any affirmative disclosure of the conflict, Invsco and Mr. Hannah had transacted business in this manner in the past, and Invsco had to be fully aware of the duality of Mr. Hannah's position and the potential problems involved therewith.” 364 N.E.2d at 944.

Significance of Case
This is a fact-specific distinction. The combination of clear and longstanding distinctions between Tower and Sonnenschein, clients who were highly sophisticated in the subject of attorney conflicts and separate counsel for the clients at the most critical point in time allowed Tower and Sonnenschein to succeed where others might well have failed.

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