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04/07/89 Robert H. Michel, v. Mishael O. Gard Et Al.

April 7, 1989

ROBERT H. MICHEL, PLAINTIFF-APPELLANT

v.

MISHAEL O. GARD ET AL., DEFENDANTS-APPELLEES



Before proceeding to further analysis, it seems appropriate to first review the standards to be applied by the trial court, as well as the standard of review in this case.

APPELLATE COURT OF ILLINOIS, THIRD DISTRICT

536 N.E.2d 1375, 181 Ill. App. 3d 630, 130 Ill. Dec. 164 1989.IL.490

Appeal from the Circuit Court of Peoria County; the Hon. Thomas G. Ebel, Judge, presiding.

APPELLATE Judges:

JUSTICE SPITZ delivered the opinion of the court. McCULLOUGH, P.J., and KNECHT, J., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SPITZ

This appeal involves a legal malpractice action in the circuit court of Peoria County by plaintiff Robert H. Michel, against defendants Mishael O. Gard, individually, and Swain, Johnson, and Gard, a law partnership. Defendants filed a motion to dismiss plaintiff's amended complaint pursuant to section 2-619 of the Code of Civil Procedure (Code) (Ill. Rev. Stat. 1987, ch. 110, par. 2-619). After a hearing, the amended complaint was dismissed, with prejudice, on April 22, 1988.

On April 28, 1988, plaintiff filed a motion to reconsider. On June 17, 1988, the motion to reconsider was denied. Thereafter, plaintiff appealed.

Plaintiff's amended complaint is in two counts. The first count is an action in negligence against defendants to recover $14,480, plus costs. Count II is to recover the same damages under a third-party beneficiary theory. The facts alleged in plaintiff's amended complaint follow.

At all times relevant to this litigation, Gard is a licensed attorney practicing as a partner in the law firm of Swain, Johnson, and Gard in Peoria, Illinois. At some unspecified time in 1971, Phil C. Hauter sought legal counsel from defendants. It is alleged Hauter was acting for himself and as agent for the "potential" shareholders of a corporation, including plaintiff, which defendants were retained to set up. The corporation, known as Morton Towne House Inn, Inc., was to operate a motel and restaurant.

It is alleged that by virtue of performing the legal services pertaining to incorporation and issuance of shares of stock, defendants "assumed legal responsibility for properly creating said corporation, including all legal and reasonable protection of the shareholders, expressly including Plaintiff." It is further alleged that defendants negligently deviated from recognized standards for the practice of law relevant to formation of corporations, as practiced in Peoria, Illinois, and similar localities, by failing to qualify the corporate shares as section 1244 stock within the meaning of Internal Revenue Code section 1244 (26 U.S.C. § 1244 (1982)).

In 1985, the corporation became insolvent and the shares worthless. As a direct and proximate result of defendants' negligence, plaintiff was required to take a capital loss rather than an ordinary loss on his 1985 Federal and Illinois income tax returns, causing him to lose $14,480 which plaintiff would otherwise have been able to deduct. Plaintiff states he had no knowledge of the advantages of section 1244 until the corporation became insolvent in 1985.

In count II, plaintiff alleges that at the time of being retained to set up the corporation, defendants knew the shareholders would be Hauter, plaintiff, Joyce Lee Mueller, n/k/a Joyce Lee Jennings, Gerald C. Mueller, and Fred Novotny. Plaintiff alleges the retention of defendants was to act as attorneys not only for Hauter, but also for the named shareholders as third-party beneficiaries. It is further alleged the defendants owed a duty to said third-party beneficiary shareholders to see to it "that the corporation was organized properly, and that any stock issued by the corporation provided a reasonably advantageous means of distributing income and losses." In this, plaintiff relied on the professional legal knowledge, prowess, and skills of defendants to protect plaintiff's interests.

Defendants filed a section 2-619 motion (Ill. Rev. Stat. 1985, ch. 110, par. 2-619) to dismiss the amended complaint. In the motion, the defendants contend (1) defendants owed no duty to plaintiff, (2) the statute of limitations has run, or (3) the case is not yet ripe for litigation. Attached to the motion were the affidavits of Gard and James H. Bunce, a partner in defendant law firm. Both affidavits indicated Hauter was a regular client of the firm. Bunce indicated the firm had formed corporations for Hauter previously. Gard's affidavit stated Hauter, by letter dated May 3, 1971, requested Gard to organize Morton Towne House Inn, Inc. Gard states neither he nor any member of defendant firm had any contact with plaintiff, or had an attorney-client relationship with plaintiff, or was ever asked by Hauter to act as attorney for or on behalf of investors or potential investors in Morton Towne House Inn, Inc. Bunce's affidavit adds that all contacts were with Hauter and there were no conversations whatsoever with plaintiff. According to Bunce, Hauter never indicated an intent for defendant firm to act as attorneys for or on behalf of investors in the corporation, nor did Hauter or Hauter's accountants request qualification of the stock as section 1244 stock. From the outset, Gard assigned the formation of the corporation and subsequent representation of the corporation to Bunce.

The May 3, 1971, letter from Hauter was incorporated by reference into each of these affidavits. Because of its significance, the letter is quoted here in its entirety:

"May 3, 1971

Mr. Mike Gard

Savings Center Tower

Peoria, Illinois

Dear Mike:

Will you please set up for us a Delaware Corporation, TOWNE HOUSE INN, INC., with ...


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