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Blue Water Partners, Inc., and Fane Lozman v. Edwin D. Mason

July 13, 2012


Appeal from the Circuit Court of Cook County. No. 06 L 9280 Honorable Thomas Hogan, Judge Presiding.

The opinion of the court was delivered by: Justice Garcia

JUSTICE GARCIA delivered the judgment of the court, with opinion. Justice Lampkin specially concurred, with opinion.

Presiding Justice R. Gordon dissented, with opinion.


¶ 1 This appeal is related to an appeal by plaintiffs Blue Water Partners, Inc. (BWP), and Fane Lozman in an earlier lawsuit against Gerald Putnam and other individuals and entities, which we decided in Lozman v. Putnam, 379 Ill. App. 3d 807 (2008) (the Putnam suit). This appeal concerns the plaintiffs' professional negligence claims against defendants Foley & Lardner*fn1 and Edwin D. Mason, a partner with the law firm (the Putnam attorneys), as counsel for BWP, grounded on the same events that were the basis of the Putnam suit. The attorney-client relationship between BWP and its former counsel ended in 1995. The Putnam attorneys were not named as defendants in the Putnam suit, which ended in a judgment in favor of Putnam in 2005 that we affirmed. In this appeal, the circuit court ruled Fane Lozman, as a BWP shareholder, had no standing to sue the Putnam attorneys for legal malpractice as no attorney-client relationship ever existed between the Putnam attorneys and Lozman. The court also ruled that BWP's lawsuit against the Putnam attorneys, filed in 2006, was barred by the two-year statute of limitations. Both plaintiffs challenge the lawsuit's dismissal. The plaintiffs contend their malpractice suit against defendant attorneys did not accrue until the verdict issued on July 25, 2005, in the Putnam suit, which was filed in 1999. The circuit court rejected this contention. We do as well and affirm.


¶ 3 We detailed the relationship between Putnam and Lozman, including how they met, and their eventual fallout, in our 2008 decision. Lozman, 379 Ill. App. 3d 807. In that case, the circuit court ruled the plaintiffs' equitable claim of usurpation of corporate opportunities was barred by both the doctrine of laches and an October 1995 release executed by the parties. Id. at 809. We affirmed on the basis of laches. Id. at 821. We add to the facts set out in our 2008 decision those additional facts that are germane to the issues before us.

¶ 4 On March 28, 1994, Putnam formed BWP with the legal assistance of the defendants. Putnam advised the defendants that he was severing his relationship with his then employer and desired to broker trades for his customers through a new company, BWP. Shortly after BWP's incorporation, the defendants applied for an employer identification number with the Internal Revenue Service (IRS) in which they listed BWP's principal business activity as "broker-dealer services." In May 1994, Putnam and Lozman decided to implement a computer software product called ScanShift, invented by Lozman, into the business activity of BWP. Their plan was to operate BWP as a "soft dollar" brokerage firm, which we understand to mean that BWP would earn commissions based on its customers' use of ScanShift in conducting trades.

¶ 5 On August 2, 1994, Putnam and Lozman met with Mason to discuss the business plan to develop ScanShift through BWP. Putnam was the principal contact for BWP in interacting with the defendant attorneys. In fact, defendant Mason communicated with Lozman only once or twice during the time the defendant attorneys represented BWP. According to Mason's deposition testimony, he relied on Putnam to keep Lozman abreast of their communications.

¶ 6 In the fall of 1994, Putnam and Mason discussed whether the Securities and Exchange Commission (SEC) would allow BWP to receive "soft dollar" revenue from trades conducted through ScanShift without registering BWP with the SEC as a broker-dealer. In early 1995, Mason advised Putnam that whether BWP was required to register with the SEC to lawfully receive soft dollar revenue from trades conducted through ScanShift was "unsettled." Mason indicated that BWP might have to be a "test" case to resolve the question. An application to register BWP as a broker-dealer with the SEC was never filed.

¶ 7 In November 1994, Putnam informed the defendant attorneys that he terminated his employment with BWP and decided to go into business for himself to trade for his institutional clients. At Putnam's direction, defendant Mason incorporated Terra Nova Trading, LLC (Terra Nova), wholly owned by Putnam, and another Putnam-owned company, GDP, Inc., on November 14, 1994. Lozman testified that he was aware of the formation of Terra Nova from the outset. Lozman's knowledge included that Terra Nova was established to be an SEC-registered, active trading broker-dealer. Lozman testified that Terra Nova was created to allay the fears of Stuart and Marrgwen Townsend, who operated Townsend Analytics (all defendants in the Putnam suit), which worked to integrate ScanShift with software that Townsend Analytics had developed. Lozman testified he would not have consented to the formation of Terra Nova had Putnam not orally promised that Lozman would own 50% of Terra Nova.

¶ 8 In January 1995, Putnam agreed to extend trading privileges to Lozman at Terra Nova as an "affiliated" person. Additionally, by early 1995, Lozman and Putnam were aware that BWP could not receive soft dollar revenue earned through ScanShift without BWP being a registered broker-dealer with the SEC. Hence, on April 17, 1995, Lozman and Putnam agreed in writing to route all soft dollar revenue generated by BWP's ScanShift customers to Terra Nova, as an SEC-registered broker-dealer. Lozman and Putnam agreed to split the profits from this revenue. The defendant attorneys had no involvement in the preparation of this agreement.

¶ 9 On June 30, 1995, Putnam ordered Lozman out of Terra Nova's offices and told him never to return. Putnam made clear he would have no further dealings with Lozman. The defendants had no involvement in the severance of the Lozman and Putnam relationship. Lozman testified that in 1995 following his ejection from Terra Nova's offices, he consulted with attorneys to discuss "all of the facts" regarding any potential claims he or BWP had against Putnam and those acting on Putnam's behalf.

¶ 10 In July 1995, Lozman, acting on behalf of BWP, terminated the attorney-client relationship with the defendants. Soon thereafter, Mason delivered all BWP corporate records to Lozman, along with a letter confirming that the defendants were no longer BWP's counsel. During the entire time the defendants served as counsel, BWP did not engage in any business and did not employ any persons.

¶ 11 In October 1995, Lozman and Putnam, without the assistance of any attorney, agreed to settle all claims arising from their business relationship, including the ownership of BWP. Lozman and Putnam negotiated, drafted, and executed a series of documents releasing any and all claims each had against the other, including those involving BWP and Terra Nova. As part of the October 1995 settlement agreement, Lozman became the sole owner of BWP. Since then, BWP has never engaged in business of any sort, and it was never registered with the SEC as a broker-dealer.

¶ 12 Lozman claimed he discovered that defendant Mason assisted Terra Nova in obtaining registration as a broker-dealer during the Putnam suit. According to Lozman, "[T]he first time I personally heard a lawyer from Foley & Lardner explain what they had done or not done regarding Blue Water Partners and Terra Nova Trading was when Mr. Mason testified at the trial of the Lozman and Putnam lawsuit in the fall of 2004." Lozman also stated that the first time he ever saw the books and corporate records of Terra Nova was during the Putnam suit's discovery phase.

¶ 13 During his deposition in the instant case, Lozman answered questions during cross-examination regarding his relationship with Foley & Lardner:

"Q. *** Did you at any time ever retain Foley & Lardner as your attorney, personally, you, Fane Lozman?

A. No.

Q. Did anyone from Foley & Lardner ever say anything to you that indicated to you that they believed you were being personally represented by Foley & Lardner?

A. No.

Q. You never made any payments to Foley & Lardner personally for any services. Correct?

A. Foley & Lardner were Blue Water Partners' corporate attorney. They weren't my personal attorney." (Emphasis added.)

¶ 14 After the filing of the Putnam suit, the plaintiffs and the defendants entered into a series of written agreements tolling the time for BWP to file suit on its possible claims against the defendant attorneys. The first tolling agreement was dated September 6, 2000, and provided:

"WHEREAS, BWP maintains that they have certain claims against F&L, including but not necessarily limited to those described in Exhibit A;

WHEREAS, BWP and F&L wish to avoid the need to either commence or prosecute a lawsuit regarding those claims at this time; and

WHEREAS, BWP is currently involved in other litigation pending in the Circuit Court of Cook County, entitled Fane Lozman, et al., v. Gerald Putnam, et al. Case No. 99 CH 11347 *** [the Putnam suit].

The running of all statutes of limitations or repose and any other time bars of any nature whatsoever that may apply to any claim, cause of action or legal proceedings that BWP may have against F&L are tolled as of the date of this agreement and will remain tolled until one year from the date of this agreement."

The agreement made clear that claims timed-barred as of September 6, 2000, remained time-barred: "This agreement does not affect and will not resurrect any claims that are time barred as of the date of this agreement." The last tolling agreements expired on September 6, 2006. The instant suit was filed on September 1, 2006.

¶ 15 The Putnam Suit

¶ 16 In 1999, the plaintiffs filed an action under Cook County Circuit Court No. 99 CH 11347, against Putnam, Terra Nova, and other individuals and entities, including Townsend Analytics, alleging, among other claims, wrongful diversion of BWP's business opportunities (an equitable claim) and breach of promise (a legal claim). A combined bench and jury trial ensued in 2004. We take the following facts from the Putnam suit detailed in our 2008 decision in which we affirmed the judgment for Putnam. Lozman, 379 Ill. App. 3d 807.

¶ 17 The plaintiffs alleged that Putnam and three other individuals conspired against them by improperly diverting assets of BWP into other businesses controlled by Putnam, including Terra Nova. Lozman claimed that he received from Putnam an oral promise to share in the ownership of Terra Nova, as well as an oral promise to share equally in its profits from future business. The jury found that Putnam and Terra Nova usurped BWP's corporate opportunities, but rejected the plaintiffs' claim of breach of the alleged oral agreement regarding the ownership of Terra Nova and the claim of breach of a written agreement. Additionally, in special interrogatories, the jury found that the October 1995 release signed by Putnam and Lozman was not conditional, was just and equitable, and was signed by Lozman with full disclosure of all material facts. The jury found that the release was supported by consideration and covered all potential claims between Putnam and Lozman, including those regarding the named entities, entitling Putnam to a verdict in his favor.

¶ 18 Regarding the equitable claims in the Putnam suit, on July 25, 2005, the circuit court issued a written opinion finding, among other things, that the October 9, 1995 release barred all of the plaintiffs' claims. The court found the release was valid, it settled any and all obligations arising from the plaintiffs' past associations with Putnam and Terra Nova, and it reflected the "full and complete disclosure of all material facts surrounding [Putnam and Lozman's] desire to be released from all obligations to the other party." The court noted that "Terra Nova Trading had already been established and operational for approximately one year" at the time of the release. The court further found that the release extinguished any claim that the plaintiffs had for usurpation of BWP's broker-dealer opportunity, reasoning that there was "no evidence *** in the Termination Agreement that Plaintiff Lozman wished to preserve any cause of action specifically regarding Terra Nova Trading for a usurpation of a broker-dealer claim." According to the court, the release placed the plaintiffs on notice "that Defendants planned to continue on with Terra Nova completely without Plaintiffs." As an alternative ground for finding in favor of Putnam, the court concluded that the plaintiffs' claims were barred by the doctrine of laches.

¶ 19 We affirmed the judgment of the circuit court on the basis of laches; we agreed that on the record evidence, the plaintiffs had sufficient knowledge of their claims grounded on Putnam's establishment of Terra Nova at the time the release was signed, and therefore the plaintiffs should have brought their claims sooner, as the circuit court ruled. Lozman, 379 Ill. App. 3d at 821.

¶ 20 During the trial on the Putnam suit, defendant Mason testified that he represented BWP, but did not represent Lozman or Putnam individually. He confirmed that Putnam was his principal contact for BWP. Mason testified that he met Lozman when he gave him BWP's corporate documents after he was discharged and he may have had one prior meeting with Lozman. Mason testified that he was not asked to draft any documents on Lozman's behalf and did not represent Lozman in connection with his fallout with Putnam. In fact, he "wouldn't have represented either of the individuals in connection with it. We represented Blue Water." Mason emphasized that he "did not represent Mr. Lozman."

¶ 21 During cross-examination, the following exchange occurred between Lozman's attorney and defendant Mason.

"Q. You were indirectly representing Mr. Lozman as a substantial interest holder in Blue Water Partners, weren't you?

A. We were representing the company, and to the extent he was a substantial interest holder, there would have been, in a manner of speaking, an indirect representation.

Q. And you were representing at some point in time Jerry Putnam, too, right?

A. Well, really Terra Nova Trading, of which Jerry Putnam owned substantially all ...

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