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Morris v. Margulis

July 19, 2001


The opinion of the court was delivered by: Justice Fitzgerald


Docket No. 88685-Agenda 24-September 2000.

Following a federal jury trial, Edward Morris was convicted of mail fraud and wire fraud for his involvement in a public note offering by a now-defunct St. Louis savings and loan association. After his conviction was affirmed on appeal, Morris filed a breach of fiduciary duty complaint in the St. Clair County circuit court against, among others, a St. Louis law firm, which had represented Morris in several unrelated personal matters and served as the savings and loan association's corporate counsel, and four of the firm's partners. Morris alleged that these defendants breached their fiduciary duty to him when two of the partners drafted questions for the federal prosecutor to use in cross-examining Morris. The trial court granted summary judgment to the defendants, and the appellate court reversed. 307 Ill. App. 3d 1024. We allowed the defendants' petition for leave to appeal. Morris v. Margulis, 187 Ill. 2d 571 (2000); see 177 Ill. 2d R. 315(a). We now reverse the appellate court and affirm the trial court's award of summary judgment to the defendants.


After the savings and loan industry was deregulated in the 1980s, Germania Bank (Germania), a St. Louis savings and loan association, expanded its loan portfolio beyond traditional residential real estate loans into larger residential and commercial projects. These projects diluted the bank's loan loss reserves, its protection against loan defaults. In early 1987, as Germania responded to concerns from its independent auditors and federal regulators about the adequacy of its loan loss reserves, Morris, the bank's chief executive officer, proposed that the bank make a $10 million public offering of subordinated capital notes, or "Schnotes." Following a September 1987 internal review of Germania's loan portfolio, the bank management recommended that the bank's executive committee add $9.3 million in loan loss reserves. The executive committee rejected this recommendation and, instead, approved only an additional $1.2 million in reserves. This decision allowed the bank to show a quarterly profit immediately before the Schnote offering. Germania's Schnote offering circular, however, assured potential investors that the bank had made adequate provision for estimated loan losses. The Schnote sales began in October 1987 and proceeded into March 1988.

In a year-end audit for 1987, Germania's independent auditors recommended an additional $6.5 to $13 million in loan loss reserves. In February 1988, near the conclusion of the Schnote offering, the bank's board of directors ultimately approved $9.4 million in additional reserves. Germania's financial condition quickly deteriorated. In 1990, Germania was seized by the Office of Thrift Supervision, and the Resolution Trust Corporation became its conservator. The Schnotes became worthless.

The federal government then began civil and criminal investigations into the Schnote offering, which resulted in an indictment against Morris for mail fraud and wire fraud. The government charged that Morris, as Germania's chief executive officer, disseminated the Schnote offering circular without disclosing the need for additional loan loss reserves. Morris initially asked Bryan Cave, L.L.P. (Bryan Cave), a St. Louis law firm and Germania's corporate counsel, to represent him in the criminal case stemming from the Schnote offering. The firm previously had represented Morris in personal matters-estate planning, domestic relations, and employment compensation. Bryan Cave declined to represent Morris in the criminal case, however, because of a potential conflict of interest. John Goebel, a Bryan Cave partner, was an outside director of Germania and had been named as a defendant in civil litigation related to the Schnote offering. Goebel was represented by Bryan Cave partner Daniel O'Neill, who asserted that Goebel was also a subject in the government's criminal investigation. Morris' wife, a Bryan Cave contract attorney, did receive guidance from O'Neill in drafting Morris' response to an investigation by the Securities and Exchange Commission (SEC).

In October 1993, Morris' federal criminal trial began. Arthur Margulis, Morris' defense attorney, outlined an advice-of-counsel defense in his opening statement:

"Let's talk about what the evidence is going to show you about the concealment of this September [1987] analysis. First, I anticipate that Jimmy New [Germania's chief financial officer] is going to testify for the Government, and I think he is going to tell you that he said to Ed Morris after the meeting, don't you think we ought to talk to our lawyers and see if we're supposed to disclose this to anybody, and Ed Morris said yes, I do, I think we should, and he contacted John Goebel at Bryan Cave. That's the largest law firm in this area. He contacted him, told him the situation, and John Goebel said I don't think in view of what you told me, in view of the way it was prepared, I don't think there is any reason to disclose it. Jimmy New will tell you that Ed Morris came back to him and said we don't have to disclose it.

The Schnote sales go ahead, but as soon as the [independent auditor's] report came out with the analysis that they needed the nine million, it was Ed Morris who stopped the Schnote sales. Ed Morris again goes to Bryan Cave, John Goebel the lawyer and said should we offer the people who have bought this the right to rescind, and the advice is, the legal advice is, let's wait and see what happens, and six days later the sales resume and they sold out.

Throughout everything I am telling you, ladies and gentlemen, Ed Morris *** consulted the lawyers on a regular basis, not just about the offering circular but about the marketing to make sure they were in compliance with the law, and they were assured at every step of the way that they were."

O'Neill and Thomas Archer, another Bryan Cave partner representing Goebel, heard Margulis' opening statement. In response, O'Neill drafted and delivered to the federal prosecutor a three-page document entitled "Possible Areas of Inquiry" containing 15 multipart questions for use in cross-examining Morris. The proposed questions sought to show the lack of evidence that Morris relied upon Goebel's legal advice in failing to disclose Germania's inadequate loan loss reserves. Several days later, Morris' wife surreptitiously discovered the questions in a search she made of the law firm's computer system; she dictated them and gave an audio tape to Margulis' associate.

At trial, Morris did not testify that he had relied upon Goebel's legal advice. Asked whether he and Goebel discussed Germania's disclosing the recommended reserve increase, Morris replied, "[N]ot that I remember, I don't think we discussed it." The proposed questions were not used by the government. Morris was convicted on two counts of mail fraud and one count of wire fraud and was sentenced to 46 months' imprisonment. His convictions and sentence were affirmed on appeal (United States v. Morris, 80 F.3d 1151 (7th Cir. 1996)), and the United States Supreme Court denied his petition for a writ of certiorari (Morris v. United States, 519 U.S. 868, 136 L. Ed. 2d 120, 117 S. Ct. 181 (1996)).

While Morris' federal appeal was pending, he filed a breach of fiduciary duty complaint against, among others, defendants Bryan Cave and its partners Goebel, O'Neill, Archer, and Alan Dixon. *fn1 The defendants moved for summary judgment. Specifically, they contended that they did not breach any fiduciary duty which they may have owed to Morris by providing the federal prosecutor with the proposed cross-examination questions. According to the defendants, ethics rules allowed them to defend themselves against the accusation in defense counsel's opening statement that Goebel had advised Morris not to reveal the need for greater loan loss reserves. The defendants also contended that no attorney-client relationship existed between the parties with respect to Germania matters, that Morris could not recover damages for his conviction because the conviction was never overturned, that the proposed questions were ...

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