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Schmidt v. Hinshaw Et Al.





APPEAL from the Circuit Court of Cook County; the Hon. PAUL F. ELWARD, Judge, presiding.


Plaintiff, John P. Schmidt, brought this action against defendants, Hinshaw, Culbertson, Moelmann, Hoban & Fuller (Hinshaw), a law firm, and the partners therein, seeking to recover for damages allegedly arising from Hinshaw's representation of plaintiff in and subsequent to the sale of plaintiff's business. Plaintiff essentially alleged that Hinshaw was guilty of malpractice in failing to exercise the requisite care and skill and in representing conflicting interests.

Following extensive discovery, the circuit court of Cook County granted Hinshaw's motion for summary judgment. Plaintiff appeals, contending inter alia (1) that the trial court erred in holding expert testimony was required to support plaintiff's case; and (2) that the existence of issues of material fact rendered summary judgment inappropriate. The relevant facts follow.

In 1967, plaintiff asked George S. Hoban, a partner of Hinshaw and an attorney who had previously represented plaintiff, to represent him in the sale of plaintiff's business, Chicago Tabulating Service (CTS), to Data Processing Development Corporation (DPDC). Plaintiff was the principal owner of CTS and a businessman with experience in similar prior transactions. The principal owner of DPDC was Valerie Mills, a woman of substantial independent wealth. Her husband, H. Jefferson Mills, was DPDC's chief executive officer. At this time, Nathaniel Bedford, a New York attorney, represented Mrs. Mills, her husband, and DPDC. Hinshaw, through Hoban, represented plaintiff in the contract negotiations with Bedford, and Hoban participated with Bedford in the drafting of the documents which, after several months, finally set forth the rights and obligations of the parties to the transaction.

In his complaint, plaintiff alleged that he had two primary goals with respect to the sale of his company: first, that he receive "a million dollars"; and second, that the entire million dollars be personally guaranteed. However, in his deposition, plaintiff revealed that he had several other aims: (1) to minimize his Federal income tax liability; (2) to obtain a substantial amount of cash immediately; and (3) to have the option to participate in any appreciation in the value of DPDC that might occur after it purchased CTS.

These considerations in part determined the ultimate structure of the transaction. The actual sale of the company essentially took the form of a stock-for-stock transaction, whereby under the plan and agreement of reorganization, plaintiff would exchange his stock in CTS and eventually receive 295 shares of DPDC stock. Because a stock-for-stock exchange is generally a non-taxable event under Federal tax law, this had the effect of minimizing plaintiff's income tax liability.

Plaintiff's desire for immediate cash resulted in the extension of a loan by Mrs. Mills to plaintiff in the amount of $200,000. In exchange, plaintiff executed a note which stated that if plaintiff defaulted on the loan, the holder of the note could only look for recourse to a portion of the DPDC stock which plaintiff was to receive for his CTS stock, such that plaintiff would not be personally liable for repayment of the loan.

Under the stock retirement agreement, plaintiff had the option of tendering to DPDC up to 25% of his DPDC stock each year beginning October 1, 1969. Stock not tendered in any year could be tendered in a successive year at a higher price, or plaintiff could elect not to tender any DPDC stock at all. Thus, plaintiff had the opportunity to participate in any rise in value in DPDC.

With regard to plaintiff's wish to receive a million dollars for his business, the stock retirement agreement provided that he could tender his 295 shares of DPDC as follows:

10/1/69 73 shares at $2970 per share = $216,810 10/1/70 74 shares at $3240 per share = $239,760 10/1/71 74 shares at $3510 per share = $259,740 10/1/72 74 shares at $3780 per share = $279,720 ________ total = $996,030

Plaintiff had conceded that this came so close as to meet his goal of receiving a million dollars.

Finally, plaintiff desired that the million dollars he was supposed to receive from DPDC be personally guaranteed. Plaintiff wanted Mrs. Mills to guarantee DPDC's obligation to purchase all four tenders of stock, and Hoban negotiated for just such a complete guarantee. However, Mrs. Mills and her attorney, Bedford, would agree to guarantee payment for only the first three tenders of stock to DPDC. This resulted in a guarantee in an amount which would range from $716,310, if plaintiff made each tender as soon as he could under the agreement, up to $775,710, if he accumulated all the shares until the third tender date. The reason Mrs. Mills and Bedford refused to guarantee more than the first three tenders was because Mrs. Mills had already agreed to advance plaintiff $200,000 on a non-recourse basis, in a loan secured solely by 74 shares, or one fourth, of plaintiff's DPDC stock, and thus she had already in effect paid plaintiff $200,000 for the last quarter of his stock. As Bedford explained in his deposition, since plaintiff was guaranteed to receive up to $775,710,

"* * * and since Mrs. Mills had already advanced him $200,000, that would make close to the million dollar guarantee, within a very few thousand dollars of it. And if Mrs. Mills had been obliged to purchase the last 25 percent of [plaintiff's] stock, he would have gotten considerably over the million, and I think approximately $280,000 [$279,720], * * *, and he'd simply have turned around and paid her $200,000 and made $80,000 right out of her pocket.

So I drew the Stock Purchase Agreement on the basis that she would not agree to purchase the last 25 percent, and thereby increase her liability, and ...

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