as the Receiver states, the law is clear that receivers in general have standing to assert state law claims on behalf of entities in receivership, such claims must involve damages which actually belong to the entities, rather than to the investors. Johnson v. Chilcott, 590 F. Supp. 204, 208 (D. Colo. 1984). This, of course, is the crux of the claims presented and requires some discussion. If the funds deposited by the investors into the Receivership Entities became funds belonging to the entities, then a claim of legal malpractice or breach of fiduciary duty resulting in the loss of those funds would sufficiently allege damage to the entities. However, if the funds never actually belonged to the entities or the entities were never otherwise entitled to these funds, the entities could not have been damaged by their wrongful dissipation. Merely because the assets which were lost are labelled "investor funds", however, and originally came from investors does not settle the issue, which defendants seem to argue. The parties cite various case law in support of their positions.
First, the situation at bar is legally distinct from the situation in Johnson v. Miller, 596 F. Supp. 768 (D. Colo. 1984), on which Scholes relies. Johnson, which was decided under Colorado law, arose out of the illegal financial activities conducted by Thomas D. Chilcott ("Chilcott"). Chilcott conducted most of his investment schemes through an entity known as the Chilcott Futures Fund. The plaintiff, Johnson, was appointed receiver for the Fund, and brought suit against defendant Miller, an attorney, and his law firm for their representation of the Chilcott Futures Fund. Johnson's claims alleged negligence, legal malpractice and breach of fiduciary duty against the defendants in their representation of the Fund. The defendant moved to dismiss arguing, in part, that the receiver's alleged damages were too speculative to warrant any recovery.
As here, the defendant attorney argued that the receiver was really asserting claims of the investors and not of the Fund.
The Johnson court decided that the wrongs the receiver alleged were committed against the Fund as an entity distinct from the individual investors, and therefore the receiver had standing to assert the claims. Johnson, 596 F. Supp. at 772. However, in support of the motion, the defendant attorney argued that he represented only Chilcott and not the Fund itself, and therefore owed no duty to the receivership entity. As such, the defendant did not argue that the Fund itself did not incur damages distinct from the investors' damages. The central issue before the court, then, was whether the defendant owed a duty to the entity or to the investors or both. The court determined that the defendant owed a duty to both Chilcott and the Fund. The court also found that the alleged damages were not too speculative and on these grounds denied summary judgment for the defendant. Johnson, 596 F. Supp. at 773. Thus, the court did not decide, because neither party argued, that the damages alleged were exclusively those of the investors.
A similar situation is set forth in Holland v. Arthur Andersen & Co., 212 Ill. App. 3d 645, 571 N.E.2d 777, 156 Ill. Dec. 797 (1st Dist. 1991), relied on by Scholes, and is similarly inapposite. In Holland, a trustee for a bankrupt holding company brought suit against the company's accountants alleging that misleading financial statements and unqualified opinions by the defendant accounting firm had damaged the company. In an answer to an Interrogatory, the plaintiff receiver conceded that the only damages he asserted were damages of the creditors of the entity in receivership and that he failed to specify any damages suffered by the entities. As such, the court granted summary judgment for the defendant. Thus, this case does not speak to the issue of whether dissipation of funds contributed for partnership interests damaged the partnership entities or the investors in those entities.
Lastly, Scholes' reliance on FDIC v. O'Melveny & Meyers, 969 F.2d 744 (9th Cir. 1992) and Wooten v. Loshbough, 951 F.2d 768 (7th Cir. 1991) is misplaced. Neither of these cases speaks directly to the issue at bar. First, the Ninth Circuit reversed the district court's grant of summary judgment in FDIC v. O'Melveny & Meyers because it found a genuine dispute of material fact as to whether the defendant law firm had discharged its duty of care to its client. Furthermore, it should be noted that in O'Melveny, there was no discussion as to why the lower court actually granted summary judgment -- contrary to the Plaintiff's assertion that the lower court granted summary judgment based on the receiver's lack of standing. See Plaintiff's Memorandum in Opposition, at p. 9. Additionally, Wooten is inapposite because that case involved priority rankings in bankruptcy and has no relevance to the case at bar.
However, of the above cited cases, both Johnson and O'Melveny may provide some guidance to the court. Without actually deciding this issue, the O'Melveny court noted that "if [the receiver] is successful in this case, the appropriate measure of damages would be the out of pocket costs to the client properly attributable to the fraudulent transactions." O'Melveny, 969 F.2d at 752. Having been directed to no clearly applicable case law on the issue, this lends the court some guidance in this case. Furthermore, although the Johnson defendant did not argue that no damage to the entity was alleged, the court assumed that some damages had been sufficiently alleged by the receiver plaintiff. The court thus denied the defendant's motion for summary judgment because:
Colorado law provides that uncertainty as to the amount of damages does not bar recovery so long as the existence of damage is factually established.
Johnson, 596 F. Supp. at 773 (emphasis added). Although the court did not elaborate on the existence of damages, it assumed that, under circumstances very similar to the instant case, at least some damages had been alleged by the entity in receivership.
Based on the foregoing and the Receiver's claims of damages, we find that a genuine issue of material fact exists as to the damages sustained by the Receivership Entities as a result of the actions of the defendants alleged in Counts V and VI of the Receiver's Amendment To Complaint. Once invested in the purported partnership entities, the entities had some claim to the investor funds. Partnerships arise as a result of the intent of the parties. See Sajdak v. Sajdak, 586 N.E.2d 716, 720-21, 224 Ill. App. 3d 481, 487, 166 Ill. Dec. 758 (1st Dist. 1992). Here, the parties intended to form and invest in limited partnerships. Douglas' subsequent fraud does not negate the existence of the entities. Thus, any wrongful actions of the defendants resulting in the loss of the funds invested in the Receivership Entities damaged the entities to the extent the loss is attributable to the wrongful acts. Merely because the losses alleged include funds contributed by the investors does not negate this fact. Therefore, defendants' Motion for Summary Judgment is denied.
DATE: MAY 12 1993
JAMES H. ALESIA
United States District Judge