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Morris v. Margulis

September 30, 1999


Appeal from the St. Clair County. No. 97-L-294 Honorable John Goodwin, Judge, presiding.

The opinion of the court was delivered by: Justice Maag

JUSTICE MAAG delivered the opinion of the court:

Plaintiff Edward Morris appeals an order of the circuit court of St. Clair County granting summary judgment against him and in favor of defendants Bryan Cave, LLP (Bryan Cave), John Goebel, Daniel O'Neill, J. Thomas Archer, and Alan J. Dixon. The individual defendants are all partners in the Bryan Cave firm. For the reasons that follow, we reverse and remand.

This action grows out of the failure of the former Germania Bank (Germania), a St. Louis, Missouri-based savings and loan. Various civil and criminal actions flowed from Germania's failure, including actions against some officers and directors of Germania. The plaintiff in this action, Morris, was sued civilly and prosecuted criminally. Morris was convicted of various criminal charges. His conviction was affirmed on appeal. In this action, Morris alleges an attorney-client relationship existed between himself and the defendants. Morris claims that the defendants breached the fiduciary duties owing from them to him and that he was damaged as a result. With this general background, we will now address the issues raised in this case.

I. Facts

A detailed description of the complex facts underlying this case is necessary to an understanding of the plaintiff's claims against Bryan Cave and its partners. Plaintiff Edward Morris is a former officer and director of Germania Bank. In this decision we will refer to certain persons as either an "outside" or "inside" director of Germania because that is how the parties referred to them in the trial court. An outside director is a director who served on the board of Germania but was not a full-time employee of the bank. An inside director was both a member of the board of directors and a full-time employee. Morris was an inside director.

Bryan Cave is a St. Louis-based law firm. Attorneys from Bryan Cave represented Morris personally in several matters and served as corporate counsel for Germania. John Goebel, Daniel O'Neill, J. Thomas Archer, and Alan J. Dixon are attorneys and partners at Bryan Cave. John Goebel was an outside director of Germania Bank and advised Germania and its officers as corporate counsel. Bryan Cave represented John Goebel and other outside directors in the civil suits resulting from the Germania collapse. Daniel O'Neill represented John Goebel during the criminal investigation of the Germania collapse. Edward Morris, the plaintiff, is married to Peggy Morris, an attorney who was employed at Bryan Cave during the events at issue in this case. A. Bryan Cave's Acknowledged Attorney-Client Relationship With Edward Morris

Bryan Cave began representing Morris prior to Morris joining Germania. In 1983, Kathleen Sherby, a partner at Bryan Cave, wrote a will for Morris. The will prepared by Sherby for Edward Morris names Sherby as successor executor of his estate. David Slavkin, a partner at Bryan Cave, represented Morris in domestic relations matters in late 1989 and early 1990. Morris left Germania in 1988 and was then employed by Steifel Nicholas as an investment banker. In 1990, Edward Morris left Steifel Nicholas. E. Perry Johnson, a partner at Bryan Cave, reviewed a severance agreement for Morris related to his departure from Steifel Nicholas.

According to Peggy Morris, she also represented her husband during the time she was an attorney employed at Bryan Cave. In 1993, staff at Bryan Cave prepared living wills and durable powers of attorney for the parents of Edward Morris at the request of Peggy Morris. In the early 1990s, Peggy Morris supervised a Bryan Cave legal assistant in completing paperwork for the incorporation of the Fortune Group Financial Corporation. Edward Morris was a 50% shareholder in the corporation. John Goebel was the billing partner involved with that incorporation, according to Peggy Morris. In his deposition, Goebel testified that he was aware that Bryan Cave had an attorney-client relationship with Morris through the representation of Edward Morris by Peggy Morris, David Slavkin, E. Perry Johnson, and Kathleen Sherby. Peggy Morris further contends that Edward Morris frequently discussed a variety of legal matters with her and that she advised him as attorney.

B. The Disputed Attorney-Client Relationship

Morris became president and CEO of Germania in February 1986 and chairman in June 1986. While Edward Morris was employed at Germania, problems developed in the bank's loan portfolio, which led to the seizure of Germania by the Office of Thrift Supervision. Germania's seizure was followed by the filing of civil suits and criminal charges against various officers and directors of Germania. Morris and Goebel, along with other Germania directors, were sued civilly. Morris was indicted on federal mail and wire fraud charges on November 19, 1992. Goebel was notified by the United States Attorney's office that he was a "subject" of the criminal investigation.

The crux of the criminal charges is set out in United States v. Morris, 80 F.3d 1151 (7th Cir. 1996). We will first briefly describe the facts related to the charges. After the deregulation of the savings and loan industry in the early 1980s, Germania expanded its loan portfolio to include larger multifamily residential and commercial loans, in addition to the residential real estate loans it had previously made. In September 1987, an in-depth quarterly analysis (the September Analysis) of the bank's loan portfolio recommended that Germania approve an additional $9.3 million in loan loss reserves. The executive committee, including Edward Morris, did not approve additional loan loss reserves. They authorized only those reserves necessary to cover identified losses in the portfolio. Germania then proceeded to embark on a $10 million offering of subordinated capitol notes ("Schnotes"), using an offering circular describing the current loan loss reserves as "adequate." The failure to disclose the September Analysis in the offering circular led to the conviction of Morris for mail and wire fraud.

The facts concerning how and why Germania decided not to approve additional loan loss reserves or report the contents of the September Analysis are in controversy. Edward Morris contends that he discussed the September Analysis and loan loss reserves with John Goebel. Morris states that he showed the September Analysis to Goebel and discussed loan loss reserves with him during an hour and a half meeting on September 23, 1987. Morris further states that a few days after that meeting, he called John Goebel and asked him if the September Analysis information should be reported to shareholders.

Goebel admits consulting with Morris on September 23, 1987. He also admits speaking with Morris on the telephone in the days following that meeting. Both the consultation and the telephone conversations are recorded in the Bryan Cave billing records. He denies discussing the loan loss reserves or advising Morris not to report the September Analysis.

Approximately one year later, in late October 1988, Morris left Germania to return to work for Steifel Nicholas as an investment banker. Morris and Goebel agree that prior to his departure they discussed Morris's reasons for leaving Germania. Morris remained on the board of directors at Germania until June 1990.

In June 1990, the Office of Thrift Supervision seized Germania. The Resolution Trust Corporation (RTC) became the conservator for Germania. Shortly thereafter, a civil lawsuit (the Asbury case) was filed against the directors and Germania. This case was later consolidated with another civil suit. The combined suits were based on the conduct of Germania and its directors regarding "Schnotes." The suits named Germania and its directors, including Edward Morris and John Goebel, as defendants.

Morris asked Bryan Cave to represent him after Germania was seized. Bryan Cave declined, citing a conflict of interest. Bryan Cave then represented John Goebel and other directors of Germania in the Asbury case. Morris contends that Bryan Cave delayed in informing that they would not represent him.

The record does not show what Morris divulged to Bryan Cave when requesting representation. Nor does the record show how many conversations occurred between Morris and Bryan Cave attorneys before Bryan Cave communicated to Morris its refusal to represent him. Peggy Morris states that when Bryan Cave declined to represent her husband in the Asbury case, she was assured that Bryan Cave would lend friendly assistance and cooperation to Edward Morris.

Soon after the seizure of Germania and the filing of the Asbury case, Germania became the target of a Securities and Exchange Commission (S.E.C.) investigation and a criminal investigation. Morris retained other legal counsel to represent him in these matters. He contends, however, that he continued to discuss the matter with his wife and with John Goebel. For example, Morris states that in 1992 he discussed with John Goebel an asset freeze placed on Germania by RTC and the "general course of litigation." Peggy Morris states that she discussed the Germania matters with her husband and with Bryan Cave attorneys on several occasions. Peggy Morris contends that her conversations with Daniel O'Neill included Discussions of loan loss reserves and whether Morris had done anything criminal.

Dan O'Neill represented John Goebel in the Asbury case and the S.E.C. matter. O'Neill also represented Goebel during the criminal investigation that led to the indictment of Morris. O'Neill admits discussing the S.E.C. investigation with Peggy Morris on at least one occasion. During that Discussion, O'Neill advised Peggy Morris on how to file a "Wells" submission in an effort to stop the S.E.C. investigation. As part of that advice O'Neill provided her with citations and with samples of a "Wells" submission to assist in its filing. A "Wells" submission is a document filed with the S.E.C. in which a defendant presents the evidence and legal theories he believes the S.E.C. should consider in deciding whether to file an enforcement action. See Securities & Exchange Comm'n v. Sands, 902 F. Supp. 1149, 1167 (C.D. Cal. 1995), aff'd, 142 F.3d 1186 (9th Cir. 1998). He also advised Peggy that Edward might want to consider "talking with the government." O'Neill expressed some reservations about talking with Peggy during this consultation because, he stated, Bryan Cave was not representing Morris, but he provided legal assistance and advice nevertheless.

C. The Alleged Breach of Fiduciary Duties

During the criminal investigation, Bruce Reppert from the United States Attorney's office sought information from John Goebel. He informed Daniel O'Neill that Goebel was a "subject" of the criminal investigation. A "subject" of a federal criminal investigation is "a person whose conduct is within the scope of the grand jury's investigation." United States v. Myers, 123 F.3d 350, 354 (6th Cir. 1997), citing United States Department of Justice Manual §9-11.150 (1992-1 Supp.).

Goebel participated in interviews with the United States Attorney's office regarding Germania. The criminal investigators' interviews with Goebel focused on the marketing of "Schnotes," background on Germania, and the financing and raising of capital. O'Neill represented Goebel during these interviews. Following the interviews, Goebel was not indicted by the United States Attorney. Edward Morris and other Germania officers were indicted in the United States District Court for the Southern District of Illinois for their involvement in the "Schnotes" offering.

When the criminal case went to trial, Dan O'Neill and Thomas Archer attended opening statements. During opening statements, defense counsel for Edward Morris stated that Morris would rely on the assistance of counsel as a defense to the charge of mail fraud. Morris's attorney told the jury that Morris had relied on the advice of counsel in not authorizing the $9 million loan loss reserve and in not reporting the September Analysis in the "Schnotes" offering circular. After opening statements, O'Neill discussed Morris's opening statement with Archer and Goebel. O'Neill then drafted a highly detailed list of proposed cross-examination questions. These cross-examination questions contained detailed, specific information about the behavior of both Morris and Goebel. The questions were provided to the prosecutors.

Shortly after the questions were drafted, Peggy Morris discovered them on a computer at Bryan Cave. She copied the file to a computer disc and gave it to her husband's attorneys. At the request of Edward Morris's defense attorneys, a subpoena was issued on November 4, 1993, requiring Bryan Cave to produce any and all records regarding the proposed cross-examination ...

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