Hernandez further claims that he did not learn of Childers's failure to obtain a legal review until 1986 and he did not know Childers received a commission until his attorney investigated this lawsuit. Hernandez also claims he only learned in 1986 that he faced $ 800,000 in back taxes, penalties, and interest.
The evidence therefore establishes that it was not until March 20, 1984, when the IRS notified TSI that the deduction was actually disallowed, that Hernandez could be aware he suffered any harm. Although it is unclear when Hernandez learned of the completion of the audit and disallowance of the deduction, March 20, 1984 is the earliest he could have been aware of a breach or injury based on the evidence presented in support and opposition to the motion for summary judgment. Also, Hernandez was not advised until October 1, 1984 to pay his tax liability in order to avoid interest. The lawsuit, filed February 21, 1989, is accordingly within the five-year statute of limitations.
The court now turns to the merits of Hernandez's claims. Under Illinois law, a fiduciary must treat his principal with the utmost candor, rectitude, care, loyalty, and good faith. Burdett v. Miller, 957 F.2d 1375, 1381 (7th Cir. 1992). Further, a person is liable for fraud where he or she makes a false statement of material fact knowing of the falsity of the statement and with the intent to induce reliance, where the other party justifiably relies upon the statement to his or her detriment. Craig v. First Am. Capital Resources, Inc., 740 F. Supp. 530, 539 (N.D. Ill. 1990).
The court finds no need to delineate each specific allegation of fraud or breach of fiduciary duty and the facts supporting or refuting it. But many of the facts on which Childers and TSI rely in claiming that they are not liable as a matter of law are disputed by Hernandez. Thus, summary judgment is inappropriate.
Briefly, Hernandez claims Childers made numerous misrepresentations and material omissions for the purpose of Hernandez's investment and claims Childers concealed his resultant commission. Childers supposedly misrepresented the "speculative project" as a safe financial investment that could produce long term results even though Childers knew it was a risky tax shelter which in no way was designed to yield profit. Childers supposedly told Hernandez that he could reap millions if the venture was successful.
In response to Hernandez's claims that Childers and TSI made misleading representations regarding the soundness of the investment and the review given it by other attorneys, Childers and TSI assert that they did not state any misleading information and claim that the reviews were conducted. As a result, they claim the statements regarding the review were not false and they discharged their duty to provide an independent review of the investment. The information Hernandez recalls Childers providing regarding the soundness of the investment and regarding the chance of success of the investment is in dispute and is such that, if believed, a reasonable jury could return a verdict for Hernandez.
Childers and TSI assert that, at a June 1980 meeting, Hernandez met with Shefsky for two and one-half hours to familiarize himself with the investment and to discuss the risks involved with the investment. Thus, they claim, Hernandez was well informed of the nature of the investment. Nonetheless, Hernandez claims that the meeting was very short, merely for him to be introduced to Shefsky, pointing out that Shefsky's one-page notes from the meeting only evidence brief discussions regarding Sealock, Hernandez's divorce, and the formation of a subchapter "S" corporation for an unrelated matter. Hernandez does not recall ever discussing Sealock or reviewing any written materials on this date, and states that no written materials were available until September 15, 1980 when Hernandez signed the subscription documents for Sealock at Shefsky's office. Further, Hernandez was not highly educated or experienced in investment or tax matters and therefore relied solely on the trust and confidence he placed with Childers.
Also, Childers claims he explained to Hernandez orally and in a letter that he was to receive a fee for Hernandez's investment in Sealock. Hernandez, on the other hand, claims he did not receive any letter and claims Childers failed to orally disclose his own commission. Hernandez also states Childers failed to inform him that Shefsky as well was to receive a significant portion of the funds from the investment. This may have created a conflict of interest in Shefsky's representation of Hernandez before the IRS which Childers knew about but failed to tell Hernandez about. Not only would this establish Childers failed to inform Hernandez about the possible conflict, it would establish that he actually suggested using Shefsky knowing of the possible conflict.
More importantly, Hernandez maintains Childers failed to obtain a review of Sealock and exceeded the scope of his authority when he commenced the investment by taking the documents out of escrow without receiving an accounting or legal review. Childers claims Blonder reviewed Sealock and that he stated Sealock would achieve the purpose of reducing taxes for Hernandez. Hernandez, on the other hand, claims that Blonder never reviewed or recommended the investment, pointing to the absence a bill or notes from Blonder's office regarding the Sealock review. Further, Hernandez claims Petzall never completed his legal review and never approved the deal, pointing to Petzall's deposition. Petzall states that he made no recommendation of Sealock nor provided any opinion of the "bona fides" of the investment. He says he told Childers that no one at his firm reviewed the investment and that no one at the firm saw any of the documents referred to in the prospectus, thus necessitating abstention from any opinion on Sealock.
Accordingly, in light of the above discussion, summary judgment is not appropriate. Because of the disputed facts, the court is not convinced Childers and TSI are entitled to judgment in their favor as a matter of law.
Hernandez's contract claim involves his contract with TSI to receive competent financial advice. TSI agreed to provide legally qualified personnel to review Sealock. In light of the above discussion, there exists factual dispute as to whether this promise was fulfilled.
In sum, the earliest Hernandez could have become aware of the problem with his investment was March 20, 1984, making his suit filed February 21, 1989 within the five year statute of limitations. Further, Hernandez has shown that there are genuine issues of material fact on whether Childers revealed material elements of the risks and liabilities and other material facts relevant to the security of the project precluding a judgment as a matter of law. Moreover, a dispute over the facts exists regarding Childers's self-dealing and whether he discharged his duty improperly by proceeding with the transaction without a proper review of the research and development project. Last, a dispute over material facts exists in regards to Hernandez's contract claim against TSI.
For reasons stated above, the court denies Childers's and TSI's motion for summary judgment.
IT IS SO ORDERED.
CHARLES RONALD NORGLE, SR., Judge
United States District Court