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Meyers v. Underwood

June 27, 2000

DAVID R. MEYERS AND FREDERICK C. MEYERS, PLAINTIFFS-APPELLANTS,
V.
HENRY J. UNDERWOOD, JR. AND DEFREES & FISKE, DEFENDANTS-APPELLEES.
DAVID R. MEYERS AND FREDERICK C. MEYERS, PLAINTIFFS-APPELLEES,
V.
VEDDER, PRICE, KAUFMAN & KAMMHOLZ, DEFENDANT-APPELLANT



The opinion of the court was delivered by: Justice Gordon

Nos. 1-98-4013 and 1-99-0504 (Consolidated)

Appeal from the Circuit Court of Cook County. Honorable Paddy McNamara, Judge Presiding.

Appeal from the Circuit Court of Cook County. Honorable Philip Bronstein, Judge Presiding.

In the first of these two consolidated legal malpractice cases, plaintiffs David R. Meyers and Frederick C. Meyers (the Meyers) appeal from orders of the Cook County circuit court granting summary judgment to defendants Henry J. Underwood, Jr., and Defrees & Fiske (Defrees), and denying the Meyers' motion to reconsider. In the second case, defendant Vedder, Price, Kaufman & Kammholz (Vedder) appeals from a Cook County circuit court order denying its motion to dismiss the Meyers' complaint. The Vedder case is being appealed pursuant to Supreme Court Rule 308(a) (155 Ill. 2d R. 308(a)) upon submission by the trial court of two certified questions.*fn1 For the reasons set forth below, we affirm the granting of summary judgment in favor of Underwood and Defrees. In the Vedder appeal, we answer the first of the two certified questions in the affirmative as to section 13-214.3 of the Code of Civil Procedure (735 ILCS 5/13-214.3 (West 1992)), and we therefore reverse the denial of Vedder's motion to dismiss the Meyers' complaint.

BACKGROUND

The first of these two consolidated actions, both of which are for legal malpractice, was filed on October 27, 1995. In that action, plaintiffs David R. Meyers and Frederick C. Meyers (the Meyers) brought a complaint against defendants Defrees & Fiske, a Chicago law partnership, and Henry J. Underwood, Jr., an attorney with Defrees. Defendants (hereinafter referred to collectively as Defrees) had been retained by the board of Joanna Western Mills (Joanna) allegedly to assist in the sale of Joanna, a closely held, family-owned company in Chicago that manufactured interior window coverings. Count I of the complaint sounds in negligence and count II sounds in tort. According to the complaint, defendants failed to properly draft sale documents and incorrectly advised the Meyers with respect to the 1986 sale of Joanna to Kenner & Company (Kenner). As a result, a judgment of $1,626,555 was entered (on September 7, 1994) against the Meyers in a 1987 shareholders suit arising from the 1983 sale of 600 shares of Joanna stock to the Meyers. That judgment amount was subsequently increased to $4,359,900 as a result of an appellate court opinion issued April 22, 1997, in Regnery v. Meyers, 287 Ill. App. 3d 354, 679 N.E.2d 74 (1997) [hereinafter Regnery II]. In the instant suit, which was filed prior to the decision in Regnery II, the Meyers, two brothers who were officers and directors of Joanna, sought damages in excess of $2 million.

The second of these consolidated actions was filed by the Meyers against defendant Vedder, Price, Kaufman and Kammholz (Vedder), a Chicago law firm that was Joanna's corporate counsel from 1981 through the fall of 1986. The complaint was filed on March 17, 1998, but because of a tolling agreement executed by the Meyers and Vedder on December 16, 1994, that earlier date (December 16, 1994) is the effective filing date. The complaint is brought against Vedder in connection with a 1981 voting trust and the previously mentioned 1983 sale of 600 shares of Joanna stock to the Meyers for $500 per share. The complaint, consisting of four counts, alleges that Vedder failed to draft properly the voting trust and failed to give proper advice as to the trust and the Meyers' 1983 purchase of Joanna stock. Counts I and III sound in negligence, and counts II and IV allege breach of contract. The Meyers claim damages in excess of $5,289,324.01, which is the amount they paid (on January 20, 1998) in satisfaction of the judgment entered in the previously mentioned shareholder litigation. That amount represents the $4,359,900 judgment resulting from the decision in Regnery II plus post-judgment interest and costs.

These two consolidated cases arise from the same facts, which are largely undisputed.*fn2 In 1981 Joanna was experiencing severe financial losses. Following a number of meetings in mid-August to discuss the situation, Joanna President William Regnery resigned. Shortly thereafter, Frederick Meyers was named president of Joanna and David Meyers was named vice president. The August 1981 meetings also led to creation of a voting trust agreement among certain of Joanna's shareholders. The agreement was drafted by Vedder attorney Robert J. Stucker*fn3 and other Vedder attorneys working under his supervision. Frederick Regnery, Henry Regnery and David Meyers were named the trustees of the voting trust, which included 3,745 shares, or slightly more than half the outstanding and issued shares of Joanna stock. Those shares were deposited into the trust by Verla Regnery, one of Joanna's majority shareholders. (Regnery II, 287 Ill. App. 3d at 357, 679 N.E.2d at 76.)

In 1983, Stucker suggested to Fred Meyers that it would be appropriate for Fred and his brother, David, to be allowed to purchase stock in Joanna for $500 per share, a price that Stucker said was consistent with recent sale and purchase transactions among shareholders. Stucker was directed by Joanna to advise the company on the structure and manner in which the proposed sale of shares to the Meyers would be presented, approved and implemented, and to draft the necessary documentation. On September 13, 1983, Joanna's board authorized the issuance of 600 shares of stock to be sold to the Meyers at $500 per share, and on September 26, 1983, the sale was approved by the stockholders. All of the shares in the voting trust were counted in favor of the sale, even though the voting trust proxy was executed by only two of the trustees, David Meyers and Henry Regnery. Frederick Regnery, the third trustee, did not approve the sale and did not execute the proxy. Stucker and other Vedder attorneys drafted all of the documentation used to propose and approve the sale of shares to the Meyers.

According to the Meyers, in 1986 negotiations began for the sale of Joanna. The Meyers allege that in March or April of 1986, Defrees was retained as special counsel to Joanna's board to assist in the sale. Separate proposals for the purchase of Joanna's stock were submitted by Kenner & Company (Kenner) and by a group that included Frederick Regnery, the voting trust trustee who did not approve the 1983 sale of shares to the Meyers. On September 3, 1986, Joanna Chairman Henry Regnery sent a letter to Joanna stockholders informing them that, on August 21, 1986, Joanna had entered into an acquisition agreement calling for the acquisition of all of Joanna's stock by Kenner for $58 million in cash. The letter stated that the stockholders would receive $7,766 for each share, of which $7,097 was to be paid to the stockholders at closing and $669.50 was to be held in escrow to pay undisclosed company obligations. Attached to the letter were transactional documents prepared by Defrees, including an agreement of merger, an escrow agreement, an agency agreement, and a consent agreement. On September 12, 1986, the majority of Joanna's shareholders executed the consent agreement, thereby approving the Kenner acquisition and (in accordance with the agency agreement) designating Alfred Regnery as the shareholders' agent in connection with the acquisition. The sale closed in October 1986.

In July 1987, certain former Joanna shareholders, including several Regnery family members (the Regnerys), sued the Meyers, alleging that the 1983 sale of 600 Joanna shares to David and Fred Meyer constituted a common law breach of trust and a breach of the express terms of the 1981 voting trust agreement. The Meyers contacted Alfred Regnery, the shareholders' agent, and requested that he release them from the shareholders' claims against them pursuant to the agency and consent agreements prepared by Defrees. Regnery II, 287 Ill. App. 3d at 359, 679 N.E.2d at 77. Alfred subsequently filed a declaratory judgment action in Cook County circuit court requesting authorization to release the Meyers from the shareholders' claims in the 1987 suit. Regnery II, 287 Ill. App. 3d at 359, 679 N.E.2d at 77. The shareholders' suit and Alfred's complaint were consolidated, and both Alfred and the shareholder plaintiffs filed cross-motions for summary judgment. The trial court granted Alfred's motion, thus allowing him to release the Meyers from the claims. On appeal, that decision was reversed. The appellate court found that the agency agreement did not authorize Alfred to release the Meyers from the shareholders' claims, and it remanded the case for "entry of judgment for the Regnerys on Alfred's declaratory judgment complaint and for further proceedings in the Regnerys' breach of trust action [against the Meyers]." Regnery v. Regnery, 211 Ill. App. 3d 607, 616, 570 N.E.2d 557, 563 (1991) [hereinafter Regnery I].

In its 1994 final judgment order in the 1987 shareholders' litigation (following a bench trial), the trial court found that the $500-per-share price the Meyers paid for the stock in 1983 was "substantially below its fair value" and that at the time they acquired the stock the Meyers knew it was worth substantially more. The court found that "[t]he Meyers did not disclose to the Joanna board of directors or the stockholders the full compensation they had been receiving[,] and the sale was represented to the stockholders as a sale at fair market value. The Meyers also did not disclose to the stockholders the projected income for Joanna in 1983." The trial court further found that David Meyers breached his fiduciary duty to Verla Regnery, a depositor in the voting trust, "by using his position as Trustee of the Voting Trust to effectuate the issuance of Joanna stock to himself and his brother at a price far below its actual value." David Meyers also was found to have breached his duty to Verla Regnery "when he failed to give her notice of his intended action and when he caused the Voting Trust to vote in favor of the sale to himself and his brother without a unanimous decision by the Trustees." The court also found that, since the voting trust was the majority stockholder in Joanna, David had breached the "separate and independent duties a majority stockholder owes to the minority stockholders." In addition, the court found that Fred Meyers induced his brother to breach his fiduciary duties, participated in those breaches, and knowingly accepted the benefits from them. The trial court found that the Meyers received $4,359,900 in profit from those breaches, plus $195,000 in dividends from September 1983 through October 1986 (when Joanna was sold) on the 600 shares of Joanna stock. Judgment was entered against the Meyers in the amount of $1,626,555, or 35.71 percent of the amounts obtained by them. The shareholder plaintiffs were 35.71-percent stockholders in Joanna at the time of the breach.

On appeal, the plaintiff shareholders argued that the trial court erred when it allowed the Meyers to retain the majority of the profits they obtained through their breach of fiduciary duties. Regnery II, 287 Ill. App. 3d at 359, 679 N.E.2d at 77. The Meyers cross-appealed the trial court's findings relating to liability, including the findings as to breach of fiduciary duties.

The appellate court upheld the trial court's findings as to the Meyers' misconduct but found that "the trial court erred in allowing [the Meyers] to retain all but 35.71% of the profits and dividends they received as a result of the breach." Regnery II, 287 Ill. App. 3d at 365, 679 N.E.2d at 81. The circuit court was instructed "to disgorge [the Meyers] of all profits and dividends obtained during the period September 1983, through October 1986, on the 600 shares of Joanna stock in question *** and award all plaintiffs, both those who are now parties and those allowed to intervene, their pro rata share of such profits and dividends." Regnery II, 287 Ill. App. 3d at 366, 679 N.E.2d at 81. On October 1, 1997, the Illinois Supreme Court denied leave to appeal. Regnery v. Meyers, 174 Ill. 2d 594, 686 N.E.2d 1173 (1997). On January 20, 1998, the Meyers satisfied the judgment against them by paying the Joanna shareholders' representative $5,289,324.01, which represents the judgment of the trial and appellate courts, plus post-judgment interest and costs.

A. The Defrees Lawsuit

As previously noted, the Meyers filed a suit for legal malpractice against Defrees on October 27, 1995, in connection with the 1986 sale of Joanna to Kenner. According to the complaint, Defrees negligently drafted documents accompanying the sale, including a consent agreement and an agency agreement, in such a way that they failed to release the Meyers from shareholder claims arising from the Meyers' 1983 purchase of Joanna stock. The complaint also alleges that defendants improperly and incorrectly advised the Meyers that all potential shareholder claims against them would be resolved and that they could consent to the Kenner sale without fear of suit. Attached to the complaint is a copy of a letter (dated September 3, 1986) from Joanna Chairman Henry Regnery to the stockholders regarding the proposed sale of Joanna's stock to Kenner. Also attached to the complaint are copies of documents prepared by defendants that accompanied the letter, including a summary outlining the main features of the Kenner transaction, an agreement of merger, an escrow agreement, an agency agreement, and a shareholder consent agreement. Defendants moved to dismiss the complaint, but the motion was denied. They then filed their answer and affirmative defenses.

On November 7, 1997, defendants filed a motion for summary judgment claiming that the Meyers' complaint was barred by the two-year statute of limitations and the six-year statute of repose included in section 13-214.3 of the Code of Civil Procedure (735 ILCS 5/13-214.3 (West 1992)). Defendants also alleged that the Meyers had come to court with unclean hands and that their complaint was barred by Illinois public policy stating that a court will not aid a party whose cause of action is founded on illegal, immoral or fraudulent acts to relieve himself of the consequences of those acts. In making that claim, defendants pointed to the previously mentioned final judgment order in the 1987 breach-of-trust suit brought by former Joanna shareholders against the Meyers. In that order (dated September 7, 1994), which is attached as an exhibit to defendants' motion, the trial court found that David Meyers breached fiduciary duties in connection with the Meyers' 1983 purchase of Joanna stock and that Fred Meyers induced those breaches, participated in them and knowingly accepted their benefits. Also attached to the summary judgment motion is a copy of the 1997 appellate court opinion affirming those findings. Regnery II, 287 Ill. App. 3d 354,679 N.E.2d 74 (1997). In addition, a copy of Regnery I, 211 Ill. App. 3d 607, 570 N.E.2d 557 (1991), is submitted with the motion.

On June 12, 1998, the trial court granted summary judgment for defendants, holding that the Meyers' suit was barred by the six-year statute of repose found in section 13-214.3 of the Code of Civil Procedure (735 ILCS 5/13-214.3(c) (West 1992)). The court found that since the alleged malpractice took place in 1986 (when the consent and agency agreements were drafted), the statute of repose barred any actions filed after 1992. The Meyers complaint here was not filed until October 27, 1995. On September 30, 1998, the trial court denied the Meyers' motion to reconsider.

B. The Vedder Lawsuit

As previously noted, the Meyers' legal malpractice complaint against Vedder was filed on March 17, 1998, but because of a tolling agreement between the parties, the effective filing date was December 16, 1994. Counts I and II of the complaint, which allege negligence and breach of contract, respectively, focus on the 1981 voting trust agreement. According to those counts, Vedder and Stucker failed to properly draft the voting trust to reflect clearly (1) when a unanimous vote of its trustees was required to approve a sale of Joanna stock, (2) when the trustees were required to give the beneficiaries advance notice of their intended action, and (3) when and under what circumstances a trustee could vote on a matter in which he had a personal interest. Counts I and II also allege that Vedder and Stucker failed to advise the voting trust beneficiaries and trustees as to those and other related matters. Counts III and IV also allege negligence and breach of contract, but they focus on the 1983 sale of 600 shares of Joanna stock to the Meyers. According to those counts, Vedder and Stucker failed to give proper advice regarding the appropriate procedures for valuing the 600 shares sold to the Meyers in 1983. Counts III and IV also allege that Vedder and Stucker failed to give proper advice (1) that the voting trust shares could not be counted in favor of the sale to the Meyers unless the trustees voted unanimously in favor of the sale, (2) that Joanna's board could have legally approved the 1983 sale without the consent of Joanna's shareholders, (3) that the sale of the shares to the Meyers, as structured by Vedder and Stucker, was subject to a shareholder challenge on the ground that it was unfair to Joanna's minority shareholders and the voting trust beneficiaries, and (4) that the sale was subject to challenge on the basis that the voting trust trustees failed to give the beneficiaries proper advance notice of their intent to approve the sale.

Attached to the complaint is a copy of the 1981 trust agreement naming David Meyers, Frederick Regnery and Henry Regnery as voting trustees of the trust (which represented slightly more than half of Joanna's shares). Section 4 of the trust agreement, which ...


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