Appeal from the Appellate Court for the Third District; heard
in that court on appeal from the Circuit Court of Peoria County,
the Hon. Charles M. Wilson, Judge, presiding.
JUSTICE WARD DELIVERED THE OPINION OF THE COURT:
Rehearing denied January 27, 1984.
This appeal is from a judgment of the appellate court that reversed judgments of the circuit court of Peoria County in favor of the plaintiffs, James York, Janis M. York and Donna J. LaCroix, in a legal malpractice action they had brought against John C. Stiefel, an attorney. (109 Ill. App.3d 342.) Donna LaCroix' husband, Lawrence LaCroix, was also a plaintiff, but because the jury did not reach a verdict on his claim, the court declared a mistrial as to his action. The court later allowed his motion for a voluntary dismissal of his claim. We granted the plaintiffs' petition for leave to appeal under Rule 315 (87 Ill.2d R. 315).
The claim of legal malpractice was based upon advice the defendant gave to James York and Lawrence LaCroix on February 6, 1976. James York and Lawrence LaCroix were officers in a corporation operating an auto dealership in Peoria, which the defendant had formed for them. The advice complained of was that they personally guarantee, by executing second mortgages on their homes, a debt the corporation owed to a Peoria bank.
York and LaCroix first consulted the defendant relative to purchasing the dealership, which was for Porsche and Audi automobiles, in 1974. York had met the defendant two years earlier, when York was a salesman at a Porsche-Audi dealership in Winnetka. York suggested to LaCroix that the defendant serve as the attorney to organize their new business. Only York and LaCroix consulted the defendant in regard to the business. Janis York and Donna LaCroix, their wives, did not at any time confer professionally with the defendant.
The defendant suggested a subchapter S corporate arrangement and incorporated Countryside Porsche-Audi, Inc. (Countryside), with LaCroix as president, York as vice-president, and the defendant as assistant secretary and registered agent. Janis York and Donna LaCroix were not officers or employees of the corporation. To provide capital for the corporation, LaCroix and York each purchased 500 shares of Countryside's stock at a dollar a share, and York's father made a capital loan to the corporation of $50,000.
The Jefferson Bank in Peoria also made a capital loan of $75,000 to Countryside, which was guaranteed by the Small Business Administration. The SBA obtained the personal guarantees of all of the plaintiffs to reimburse the SBA for any payment the SBA might be required to make in the event Countryside defaulted on the loan.
The defendant did not participate in the negotiating of these loans, but he did participate in negotiating a "floor plan" agreement with the Jefferson Bank to provide inventory for Countryside. Under this agreement, entered into in 1974, Countryside would order automobiles and the bank would pay the manufacturer or distributor for the cars. The bank, in turn, took a security interest in each of the cars, and Countryside, for each car it sold, was obligated to remit to the bank the amount of the bank's secured interest. The limit to which the bank would provide this financing was set at $275,000.
The defendant, though he assisted in the negotiations as to this loan, was not present when the final form of the agreement was signed, although there was testimony by LaCroix that he had read the final documents to the defendant on the telephone and obtained his approval before he and York signed them. LaCroix testified that he believed that he had also sent the defendant a copy of the documents. Unlike the case of the bank loan guaranteed by the SBA, the floor-plan loan was not personally guaranteed by the plaintiffs. The legal advice to personally assume this obligation formed the ground for the malpractice action.
In January 1976 the bank learned that Countryside was violating the floor-plan agreement by selling automobiles secured under the agreement and failing to remit to the bank the amount of its secured interest. There was testimony that this is commonly referred to as selling cars "out of trust." (LaCroix and York did not deny that they were doing this, and said that the funds obtained from the sales were used to meet operating expenses of the business.) The bank froze the personal savings accounts of the plaintiffs, and a representative of the bank appeared at the dealership on Monday, February 6, 1976, and gave an ultimatum. The representative said that the bank intended to close the dealership at the end of the day unless it received personal assurances to secure the floor-plan loan and a debt created when the bank had allowed Countryside to overdraw on its corporate bank account. The personal assurances as security were second mortgages on the houses of the LaCroixs and the Yorks.
LaCroix phoned the defendant for advice, and that day drove to Chicago and conferred with him for about eight hours. The defendant conducted various telephone conferences with a bank officer and the bank attorney. He advised LaCroix in person, and York by telephone, to execute second mortgages and to release their personal savings accounts to the bank. He told LaCroix that a corporate bankruptcy would be useless. Following this advice, the Yorks and LaCroixs executed the second mortgages a few days later for a total of $54,500, which represented the amount that Countryside was "out of trust" and the amount the bank had allowed Countryside to overdraw on its corporate bank account.
York and LaCroix testified that in advising them to execute the second mortgages, the defendant told them that they had already personally guaranteed the floor-plan loan and, therefore, had nothing to lose in complying with the bank's demand. When he gave this advice, the defendant did not have the floor-plan agreement before him, but according to LaCroix' testimony, he told LaCroix that he recalled that it contained a personal guarantee. York and LaCroix testified that their decision to execute the second mortgages was based upon the defendant's statement that they were already personally liable on the floor-plan loan. As stated above, the floor-plan agreement did not contain a personal guarantee by York and LaCroix.
The defendant testified that, when LaCroix consulted him on February 6, he searched his file for the floor-plan agreement but did not find it. He stated that the bank officer with whom he spoke (the defendant did not recall the officer's name), told him twice that there was a personal guarantee on the floor-plan indebtedness. The defendant said too that Charles Young, the bank attorney, "corroborated" that there was this personal guarantee. Young also "corroborated," the defendant testified, that the bank wished to have LaCroix and York prosecuted for violating section 9-306.01 of the Uniform Commercial Code (Ill. Rev. Stat. 1975, ch. 26, par. 9-306.01), which makes it a felony for a debtor, who has a right of sale of collateral under a ...