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Client Funding Solutions Corp. v. Clarke

United States District Court, N.D. Illinois, Eastern Division

March 31, 2014

CLIENT FUNDING SOLUTIONS CORP., Plaintiff,
v.
DEBBIE CRIM a/k/a DEBBIE CRIM CLARKE, Defendant/Third-Party Plaintiff,
v.
THE VRDOLYAK LAW GROUP, Third-Party Defendant.

MEMORANDUM OPINION AND ORDER INCORPORATING FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING BENCH TRIAL

ROBERT M. DOW, Jr., District Judge.

In this diversity case, Third-Party Plaintiff Debbie Crim ("Plaintiff" or "Crim") alleged that her former lawyers, Third-Party Defendant The Vrdolyak Law Group ("VLG" or, for simplicity and consistency with the trial presentation, "Defendant"), converted her settlement funds, breached their fiduciary duties to her, and intentionally inflicted emotional distress upon her. The conversion and intentional infliction of emotional distress claims proceeded to a six-day jury trial, during which the Court and the jury heard the testimony of several witnesses, including Crim, Crim's former attorney Peter Vrdolyak ("Vrdolyak"), and Crim's treating psychologist Dr. Patricia Merriman. The jury found in favor of VLG on both claims. See [291].[1] The equitable breach of fiduciary duty claim was later presented to the Court in a one-day bench trial, see [296], during which the Court heard additional testimony from two legal ethics experts, Mary Robinson (for Crim) and George Collins (for VLG).

The Court sets forth below its findings of fact and conclusions of law, as required under Federal Rule of Civil Procedure 52(a). The facts are drawn from the documentary record in the case, the evidence and testimony presented at both phases of trial, and the parties' annotated proposed findings of fact submitted after trial. [307]; [308]. The Court treats as binding any factual findings necessarily made by the jury in its resolution of Crim's conversion and intentional infliction of emotional distress claims. Int'l Fin. Servs. Corp. v. Chromas Techs. Canada, Inc., 356 F.3d 731, 738 n.1 (7th Cir. 2004). The Court makes all independent factual findings by the preponderance of the evidence. To the extent that any finding of fact may be more properly characterized as a conclusion of law, it should be so construed. Similarly, to the extent that any conclusion of law may be more properly characterized as a finding of fact, it should be so construed.

After considering the admissible evidence and assessing the credibility of the witnesses, the Court finds and concludes that VLG owed Crim fiduciary duties but did not breach them. Accordingly, VLG is entitled to judgment on Crim's breach of fiduciary duty claim. The Clerk is directed to enter Rule 58 judgment in favor of VLG and against Crim on all counts tried.

I. Findings of Fact

Crim is a citizen of Florida who formerly resided in the Chicago area. See [308] ¶ 1; Tr. 4, 30, June 25, 2013. In January 2001, Crim was injured when the Metra commuter train in which she was riding struck a car. [307] ¶ 1; [308] ¶ 3. Crim retained VLG on a contingency basis to represent her in a personal injury action against Metra, Burlington Northern Santa Fe Railroad, and Jennifer DeBoer, the owner of the car that the train struck. [307] ¶ 2; [308] ¶ 4; Tr. 16, June 25, 2013. VLG is an Illinois limited liability corporation with three principals, Vrdolyak and his brothers John and Eddie. [308] ¶ 2; Tr. 502-03, June 27, 2013. VLG has three offices, one of which is in the Chicago suburb of Tinley Park, Illinois. [308] ¶ 2. Vrdolyak was the partner in charge of the Tinley Park office. [308] ¶ 4; Tr. 575, June 27, 2013. Vrdolyak also was the VLG attorney primarily responsible for Crim's personal injury case. [308] ¶ 4.

Crim's injuries and subsequent medical and surgical procedures left her in significant pain, and she became unable to work in August 2002. See Tr. 18-19, 24, June 25, 2013; [308] ¶ 8. Crim borrowed approximately $160, 000 from her siblings to cover her medical and living expenses while her personal injury lawsuit remained pending. [308] ¶ 7. Crim's family members eventually became unable to provide further financial assistance, and her medical and other bills continued to mount. See [308] ¶ 8.

In early 2005, Crim approached Vrdolyak and told him that she needed money. [307] ¶ 3; [308] ¶ 9; Tr. 30-31, June 25, 2013. Vrdolyak was aware that Crim was not employed and that her husband's employment was only sporadic. [308] ¶ 10. Vrdolyak also was aware that Crim already had borrowed money from her siblings and was in a "tough financial spot." Id. Crim likewise acknowledged that she was not at that time "in a position to qualify for any types of loans." [308] ¶ 9. Vrdolyak told Crim that he would not be able to personally loan her funds. See [308] ¶11. Lawyers are not permitted to loan money to their clients. Tr. 6, July 12, 2013.

Although he had no duty to do so, see Tr. 6, 75, July 12, 2013, Vrdolyak referred Crim to a litigation lending company, Client Funding Solutions ("CFS"). [307] ¶ 4; [308] ¶ 11. Like all litigation lending companies, CFS made high-interest-rate loans available to litigants to whom regular sources of credit were not available. [308] ¶¶ 17-18, 20. CFS typically lent money at interest rates between 45% and 60%. [308] ¶ 36. These rates were competitive in the Chicago market. [308] ¶ 36; Tr. 817-18, June 28, 2013; Tr. 935, July 1, 2013. CFS was at all relevant times licensed and regulated by the State of Illinois. See [308] ¶ 21; Tr. 807-08, June 28, 2013. It did business with approximately 700-1000 law firms within the state. [308] ¶ 23.

Vrdolyak did not give Crim the names of any other litigation lenders, [307] ¶ 5, though he was aware of others in the Chicago area. Tr. 566, June 27, 2013; Tr. 934-35, July 1, 2013. Vrdolyak told Crim that his brother Eddie knew the principals of CFS, Miles Lustig and Wayne Cohen, and Eddie had told Vrdolyak that Lustig and Cohen were "good guys." [308] ¶ 12; Tr. 34, June 25, 2013; Tr. 566, June 27, 2013. Vrdolyak had limited personal knowledge of Lustig and Cohen, see Tr. 32, 34, June 25, 2013, but was familiar with them generally and had interacted socially with them at events like Christmas parties and basketball games. Tr. 568, 585, 605, June 27, 2013; Tr. 755, June 28, 2013. The standard of care for attorneys permits them to rely on the investigations and recommendations of their law partners. [308] ¶¶ 14-15. Vrdolyak personally referred 8-10 clients to CFS over the span of about eight years. [308] ¶ 24. One of those clients, Dean Perozzi, complained to Vrdolyak about CFS's interest rates in 2006, after Vrdolyak already had referred Crim there. [307] ¶ 10. Neither Vrdolyak nor VLG ever received any kind of remuneration from CFS for referring Crim or any other client to CFS. [308] ¶ 130.

Crim contacted CFS in late February 2005. Tr. 34, June 25, 2013; Tr. 748, June 28, 2013. After signing three loan documents, see VLG 31, Crim obtained a $25, 000 loan on February 28, 2005. See Crim 5, 6; VLG 8. The loan documents were a Demand Promissory Note, a Letter of Direction, and a document entitled "Representations, Warranties and Covenants from Borrower to Lender" ("Representations"). See VLG 31. The Note disclosed that the loan carried an annual percentage rate of 60% but did not disclose that the loan was non-recourse. See id.; Tr. 751, June 28, 2013. The Letter of Direction directed Vrdolyak or "any subsequent attorney who handles" Crim's case to repay CFS the principal plus any accrued interest upon receipt of any settlement check. VLG 31. The Representations "irrevocably authorize[d] Lender [CFS] to contact the attorney representing Borrower [Crim] representing Borrower in connection with the Claim in order for Lender to receive periodic status reports on the Claim and Lender shall be entitled to receive all documents and reports that the attorney may have that are not covered by any privilege recognized under Illinois law." VLG 31. Crim signed the loan documents without reading them carefully. Tr. 37, June 25, 2013; Tr. 312-13, June 26, 2013. She did not ask Vrdolyak to review the loan documents before she signed them. [308] ¶ 26. Nor did Crim ask Lustig to speak with Vrdolyak before she signed the documents. [308] ¶ 27.

CFS sent a copy of the executed loan documents to VLG, Crim 5, and later sent a letter advising Vrdolyak that Crim had obtained a $25, 000 loan. Crim 6; VLG 29. Vrdolyak did not see or review the loan documents until after Crim signed them. [308] ¶ 28. The loan documents were sent to him by Lustig, not Crim. Tr. 508-09, June 27, 2013. Vrdolyak never talked with Crim about representing her in connection with the loans. [308] ¶ 28.

Crim turned to Lustig several more times when she needed money. Crim negotiated her loans directly with CFS and received both the loan documents and the advances from CFS. [308] ¶ 29. Crim received the following cash disbursements on the following dates:

See [307] ¶ 13; [308] ¶ 25; Crim 37; VLG 8. CFS was the lender for all but the August 1, 2005 loan; for reasons that remain unclear even after trial, W&M Trading Corp., another entity owned by Lustig and Cohen, made the August 1, 2005 loan. See VLG 8; VLG 31; Tr. 855, June 28, 2013. All told, Crim received $108, 500 in cash from CFS (and W&M Trading). Both Lustig and Vrdolyak credibly testified that this was an unusually high amount. Tr. 812, 830 June 28, 2013; Tr. 967-68, July 1, 2013.

Each time that she needed money, Crim contacted CFS and executed loan documents. [308] ¶ 30; see VLG 31. As with the first loan, Crim signed all subsequent loan documents without reading them carefully and did not ask Vrdolyak or anyone else at VLG to review them before she signed them. Tr. 37, June 25, 2013; Tr. 312-13, June 26, 2013. Lustig sent copies of all of the executed loan documents to VLG. [308] ¶¶ 26, 28, 31. Vrdolyak was aware of the provisions of the Letters of Direction, which authorized and directed him to communicate with CFS regarding the progress and status of Crim's personal injury suit and to pay CFS once the lawsuit was resolved. [308] ¶ 34.

The Letter of Direction and Representations were substantially identical for each loan. See VLG 31; Tr. 813, June 28, 2013. The terms of the Note, however, varied slightly. Where the first Note had indicated that Crim had "financed" $25, 000 - the amount of cash she received - the second Note listed the "amount financed" as $39, 376.71. See VLG 31. This number comprised the $25, 000 first loan, plus the interest it had already accrued, plus the additional $8, 500 in cash Crim received upon signing and returning the loan documents. Tr. 800, 805-06, June 28, 2013; [308] ¶ 116. Essentially, CFS treated the second loan as a continuation of the first rather than as a separate loan, and so on with subsequent loans. Tr. 806, June 28, 2013. The first five loans had an interest rate of 60% and were treated as a single loan in this fashion. [308] ¶ 37; Tr. 805-06, June 28, 2013. The last six were treated as a second, single loan that had an interest rate of 45%; Crim negotiated the lower rate with Lustig herself. [308] ¶ 37; Joint 15; Tr. 824, 832, June 28, 2013. Crim did not ask Lustig to explain how CFS calculated its numbers or consolidated her loans. Tr. 311, June 26, 2013. Lustig testified credibly that he explained the rolling interest to her and answered all of the questions that she asked about the loans. Tr. 800-01, 807, June 28, 2013.

In late September 2009, Crim settled her personal injury claims against Jennifer DeBoer for $2, 400, 000. [308] ¶ 40; Tr. 46-47, June 26, 2013; Tr. 524-25, June 27, 2013; VLG 4. At the time that she agreed to the settlement, neither Crim nor Vrdolyak knew the precise amounts that Crim owed to CFS or her other creditors. Tr. 300, June 26, 2013; Tr. 574-75, June 27, 2013; see also Crim 40. Crim requested an advance from the settlement in late October 2009. [308] ¶ 41. After obtaining from Crim a power of attorney, Vrdolyak advanced Crim $9, 500. See id.; Joint 1; VLG 7. Approximately one month later, in November 2009, Crim requested and received a second advance of $6, 500. [308] ¶ 43.

VLG apprised CFS of the settlement at some point in November or December 2009, prior to VLG's receipt of the funds. Tr. 774, 821, June 28, 2013. On December 2, 2009, Lustig sent an e-mail to Vrdolyak outlining the total amount due to CFS as of December 21, 2009, a date by which Vrdolyak believed the settlement funds would be available for disbursement. See [308] ¶ 44; Tr. 822-24, June 28, 2013; Joint 3. This e-mail marked the first time that Vrdolyak was aware of Crim's precise loan balances with CFS. [308] ¶ 54. The first page of the attachment to the e-mail calculated that Crim owed $334, 881.13 on the group of loans taken out at 60% interest. Joint 3. It broke this number down into the "Balance On 1/8/2008, " $154, 177.11, and the "Interest Owing Thru 12/21/2009, " $180, 704.02. Id. The attachment was structured like a letter, and the date "Tuesday, January 08, 2008" - the same date as the "Balance On" date in the body of the document - was in the address block at the top. Id. At the bottom, however, were a URL and date stamp that Lustig credibly testified were placed there automatically by the computer program that he used to generate the document at the time that he generated the document. Id.; Tr. 825-27, June 28, 2013; [308] ¶ 47. This automatic date stamp read "12/2/2009, " the date of the email. Joint 3. The second page of the attachment also bore an automatic date stamp of "12/2/2009." Joint 3. Accordingly, the Court finds that both pages of the attachment were prepared on December 2, 2009 notwithstanding the address blocks at the top. The second page calculated that Crim owed $78, 617.08 on the second group of loans. Id. Like the number on the first page, this number was broken down into two parts: "Balance On 9/23/2009, " $70, 843.69, and "Interest Owing Thru 12/21/2009, " $7, 773.39. Id. The second page also was structured like a letter; the date "Wednesday, September 23, 2009" was in the address block at the top. Id. The total amount that Lustig believed that Crim owed was $413, 498.21. [308] ¶ 46.

Vrdolyak forwarded the e-mail and attachments from Lustig to Crim on the morning of December 3, 2009. [308] ¶ 48; Crim 40; Crim 43. That afternoon, Vrdolyak informed Crim that he had requested from Lustig copies of all of the loan documents Crim had signed. Crim 43. Vrdolyak told Crim that he would forward the documents to Crim for her review when he received them. Crim 43. Vrdolyak also told Crim that he would "have a CPA check the computations and get back" to her. Id.

Crim responded to Vrdolyak late that evening. Crim 40. Crim believed that the attachments to the December 2, 2009 e-mail were in fact letters that Lustig created on January 8, 2008 and September 23, 2009, and that Vrdolyak had concealed the letters and Lustig's calculations from her. See id.; Tr. 355, June 26, 2013. Crim informed Vrdolyak that she "object[ed]" to Lustig's calculations and claimed amount due. Crim 40. She also claimed to have questioned Vrdolyak repeatedly about the loans. [308] ¶ 51; Crim 40. The Court finds more credible Vrdolyak's testimony to the contrary, see [308] ¶ 52; Tr. 962-63, July 1, 2013, particularly in light of the absence from the trial record the purported e-mails in which these questions were raised. See Crim 40; [308] ¶ 50.

On or about December 15, 2009, VLG received three settlement checks dated December 9, 2009 from Safeco Insurance Company, DeBoer's insurer. [308] ¶ 56; Tr. 952-54, July 1, 2013; Crim 94; VLG 27. VLG deposited the checks in VLG's client trust fund account. Tr. 966, July 1, 2013. VLG prepared and issued to Crim a "settlement statement" listing the amount of the settlement, the various deductions that would be taken therefrom, and the net amount that she would receive. Crim 44. The settlement statement indicated that Crim owed CFS $411, 453.51. Crim 44; [308] ¶ 57. Crim and Lustig negotiated an approximately $25, 000 reduction in the amount due to CFS. Vrdolyak was not involved in these discussions. [308] ¶ 55. After the reduction, Crim orally agreed to pay CFS approximately $386, 000. Tr. 477-78, June 27, 2013; Crim 94. Crim advised Vrdolyak of the reduction on December 15, 2009, and directed him to pay CFS approximately $386, 000. [308] ¶ 57. At some point around this time Vrdolyak prepared an updated settlement statement reflecting the reduced amount owed to CFS. Crim 94.

On December 15, 2009, Vrdolyak wrote several checks on VLG's client fund account. See VLG 27; Tr. 966, July 1, 2013. The checks were payable to Crim's creditors in the amounts set forth on the updated settlement statement. See VLG 27; Crim 94. Among them were a check payable to CFS in the amount of $386, 453.51 and two checks payable to Crim in the amounts of $15, 000 and $980, 060.73. See VLG 27. Crim's funds were divided into two portions because Crim requested that Vrdolyak give her $15, 000 immediately and hold onto the remainder while she decided what she wanted to do with it. [308] ¶¶ 59-60; see also Joint 4; VLG 7.

That same day, after Vrdolyak prepared the checks, someone at VLG contacted Lustig to advise him that the check for CFS was ready. [308] ¶ 62. While Lustig was on his way to get the check, Crim began to have second thoughts about agreeing to pay CFS the agreed-upon $386, 453.51 without conducting a further audit of CFS's figures and calculations. Crim telephoned Vrdolyak and directed him not to release CFS's check until she was able to audit the figures and calculations. [308] ¶ 64. Crim authorized Vrdolyak to release the checks to all her other creditors, but rescinded his authorization to do anything else with regard to the settlement funds or the still-ongoing negotiations with Metra and BNSF. See Joint 4. Crim later sent Vrdolyak an e-mail confirming these oral directives. See Crim 45; Joint 4. Vrdolyak ...


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