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Melrose v. Shearson/American Express

decided: December 29, 1989.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 1469 -- Hubert L. Will, Judge. Substituted Opinion Reported at,.

Cudahy and Posner, Circuit Judges, and Robert A. Grant, Senior District Judge.*fn**

Author: Grant

ROBERT A. GRANT, Senior District Judge.

Appellant, the law firm of Willkie, Farr & Gallagher, was trial counsel for the defendant, Shearson Lehman Hutton, Inc., formerly Shearson Lehman Brothers, Inc. and Shearson/American Express Inc., in the above-captioned action. The firm challenges the imposition of sanctions by the district court in accordance with Fed.R.Civ.P. 11 for filing what the court referred to as a "baseless" motion for summary judgment. We affirm.


This suit arises out of Richard Melrose's efforts to obtain the purchase price and working capital for an ongoing, though unprofitable, business known as 800 Bat-Tery. To assist him in his efforts, Melrose contacted A. Loretta Asta, the wife of a fellow employee, and an employee of Shearson Lehman/American Express. As a cash manager in the Corporate Services Group of Shearson's Investment Banking Division, holding the title of "Vice President Investments," and as a registered representative on the New York Stock Exchange, Asta had direct access to clients' accounts, and the ability to withdraw funds from those accounts without prior approval from a supervisor, subject only to the clients' instructions. When Asta was first approached by Melrose in January 1982, she informed him that the proposed investment was too small to be of interest to Shearson clients.

In May 1982, Melrose hired the law firm of Gottlieb & Schwartz to oversee a private placement offering for a limited partnership which would acquire and operate 800 Bat-Tery, and to prepare the necessary documents for the offering. The partnership was to be known as Phone Bat-Tery, Ltd. ("PBL"). The private offering, however, failed to attract any investors, and in May 1982 Melrose once again sought Asta's assistance. Despite her earlier representation that the investment was too small to be of interest to any of Shearson's clients, Asta suggested that she present Melrose's proposal to a man named Irving Mazer, a Shearson client. Asta, however, neither requested nor received a fee or commission for her services, and there was no indication that Shearson was aware of her business dealing with Melrose until the latter part of 1982.

In July 1982, Asta advised Melrose that Mazer wished to invest $1 million in PBL. Contrary to her representation, however, Mazer had not authorized the transaction.

On August 7, 1982, Melrose presented Asta with subscription materials for Mazer's signature. Acting as Mazer's representative, Asta completed a purchaser's representative questionnaire in which she identified Mazer as her "personal client" rather than a client of Shearson Lehman Hutton.

On August 11, 1982, Asta wire transferred $1 million from Mazer's account at Shearson to PBL's subscription account at the American National Bank of Chicago. The instructions which accompanied the wire transfer, however, identified Irving Mazer as the account holder and directed the Bank to credit the funds to him. Bank officers contacted Herbert Stem, Jr., an attorney at Gottlieb & Schwartz, concerning the discrepancy in the wire transfer instructions, and were advised that Mazer was a PBL investor and that no conflict existed. Apparently satisfied with this explanation, the Bank accepted the transfer and deposited the funds into PBL's account. Melrose thereafter transferred $500,000 from PBL's subscription account to its partnership account; and, on August 12, 1982, used approximately $380,000 of the money in the partnership account to purchase the assets of 800 Bat-Tery.

Melrose claims that in late August 1982, Asta informed him that Mazer had decided to invest only $500,000, and that it would not be necessary to refund the balance of Mazer's initial investment because she had personally reimbursed his account at Shearson. ale Melrose retained possession of the $500,000 remaining in the PBL subscription account, Asta claimed to be the beneficial owner of those funds.

In mid-September 1982, Melrose received subscription documents purportedly executed by Mazer. Norman Shapiro, one of Melrose's attorneys at Gottlieb & Schwartz, advised Melrose that the signature on the documents appeared to have been photocopied from another document, and was not original. Both Melrose and his attorneys thereafter made limited and unsuccessful efforts to contact Mazer and to obtain originally executed subscription agreements from him. They also sought and received a written statement from Asta verifying her representation that the original documents had merely been lost in the mails and that she would secure another set from Mazer upon his return from a trip abroad. No further efforts to contact Mazer appear to have been made, however, after September 1982; and originally executed subscription documents were never obtained.

At some point in September, Melrose advised his attorneys at Gottlieb & Schwartz that Mazer had decided to invest only $500,000 of the $1 million which was transferred from his account at Shearson. Contrary to their advice, Melrose retained the remaining $500,000 and transferred the funds from the PBL subscription account into its partnership account.

Having purportedly advised Melrose that she wished to make a personal investment in PBL, Asta tendered a blank, undated check to Melrose's wife as payment for her subscription. On September 17, 1982, Asta met with Melrose and executed PBL subscription documents in her name. Melrose claimed that Asta told him to transfer the $500,000 from the PBL subscription account in which she claimed a beneficial interest to her personal checking account to cover the check which she had tendered earlier. Melrose declined, claiming that the transaction was unnecessarily circular, but retained the check. On October 15, 1982, Melrose executed and filed a "Report of Sale" as required by the Illinois Securities Law, reflecting the sale on September 30, 1982 of a $500,000 limited partnership interest in PBL to Asta.

Asta subsequently told Melrose that she had located another potential investor, Edward S. Elba; and in October 1982, Melrose received subscription documents purportedly executed by Elba and evidencing a $500,000 investment. Elba was not a Shearson client, although there is some question as to whether Melrose was aware of that fact at the time.

On November 10, 1982, Asta wire transferred $500,000 to the PBL subscription account at American National Bank as payment for Elba's subscription The funds, however, were not Elba's, but belonged to another Shearson client, the Burger King Limited Partnership I. Once again the instructions accompanying the wire transfer contained incorrect information which identified Burger King, rather than PBL, as the account holder and beneficiary of the funds. Although the Bank advised Melrose of the discrepancy in the instructions, it accepted the transfer and deposited the funds into PBL's subscription account. Melrose ...

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