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Driscoll v. Kins

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

September 18, 2017

KEVIN DRISCOLL, in his capacity as court-appointed receiver of AlphaMetrix Group, LLC, Plaintiff,



         Plaintiff Kevin Driscoll, the court-appointed receiver of AlphaMetrix Group, LLC (AMG), has sued AMG's former lawyers, Defendants Juris Kins and Davis McGrath, LLC (“Davis McGrath”), alleging that they committed legal malpractice against AMG. Defendants have moved to dismiss the complaint for lack of standing pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(1) and for failure to state a claim pursuant to Rule 12(b)(6). For the reasons set forth below, Defendants' motion to dismiss is denied.

         Procedural History

         Prior to this litigation, the U.S. Commodity Futures Trading Commission (CFTC) sued Alphametrix, LLC (AML), a CFTC-registered commodity pool operator and commodity trading advisor, and its parent company, AMG, for injunctive relief, disgorgement of misappropriated funds, and monetary penalties. See CFTC v. AlphaMetrix, LLC, No. 13-cv-7896 (N.D. Ill. filed Nov. 4, 2013) (“CFTC Action”). The Commission alleged that AML, rather than reinvesting approximately $2.8 million of rebates back into commodity pools as it was obligated to do under rebate agreements with commodity pool participants, misappropriated the funds by unlawfully transferring them to bank accounts of its parent company, AMG. See id., ECF No. 1, Compl. ¶¶ 15-16. In this way, the CFTC alleged that AMG, which had never been registered with the CFTC, received pool participant funds to which it had no legitimate interest or entitlement. Id. ¶ 16. In a letter to pool participants, Aleks Kins, [1] President and Chief Executive Officer of AML and Managing Member of AMG, admitted AML's failure to reinvest the rebates. Id. ¶ 19. The CFTC's lawsuit resulted in the appointment of a receiver. See CFTC Action, ECF Nos. 33, 257.

         The Receiver then filed a separate lawsuit against AML's and AMG's former officers for breach of fiduciary duty and for repayment of outstanding loans. See Driscoll v. Aleks Kins et al., No. 14-cv-2472 (N.D. Ill. filed Apr. 7, 2014) (“Officer Action”). The lawsuit against the officers was resolved by a settlement agreement whereby the officers agreed to pay $4 million to the receivership. See id., ECF No. 96.

         Factual Background

         In the instant case, the Receiver alleges that Aleks's father, Defendant Juris Kins, as well as Juris's law firm, Defendant Davis McGrath, committed legal malpractice as AMG's attorneys from 2005 through December 18, 2013.[2] Compl. ¶ 8, ECF No. 1. Juris, acting as general counsel, advised and represented AMG regarding financial contracts, a dispute with a former employee, and copyright infringement matters. Id. During 2012 and 2013, AMG paid Davis McGrath $39, 574.64 for services that were rendered to AMG. Id. ¶ 10. Davis McGrath also submitted an invoice to AMG dated October 30, 2013, in the amount of $1, 735 for work performed in 2013. Id.

         While Aleks was a Managing Member of AMG from 2005 through December 18, 2013, he appointed the following people as officers of both AMG and AlphaMetrix: (1) Aleks's best friend, Charley Penna, as Chief Risk Offer; (2) Aleks's brother-in-law, George Brown, as Chief Financial Officer; and (3) Aleks's wife's best friend, Geoff Marcus, as Chief Strategic Officer. Id. ¶ 7. AMG loaned money to Aleks, Penna, Brown, and Marcus during the course of their employment, and Juris represented AMG in connection with these transactions. Id.

         Aleks began borrowing money from AMG in January 2006, but the loans were not formally documented and did not have repayment deadlines, interest rates, or default protection for AMG. Id. ¶ 11. By March 2012, Aleks's total debt to AMG was at $1, 156, 877.37. Id. By that time, AMG's auditor had become increasingly concerned about the undocumented receivable and requested that the amount be memorialized. Id. ¶ 12. To allay the auditor's unease, Juris prepared a promissory note (“2012 Note”), dated and signed on March 15, 2012, that required Aleks to repay $1, 156, 877.37 in monthly installments of $7, 500 with a final balloon payment due on December 31, 2015. Id. Aleks began paying AMG $7, 500 each month as required by the 2012 Note. That said, however, Alek also took new, undocumented loans from AMG totaling $141, 666 during 2013. Id. ¶ 13.

         From 2011 through September 2013, AMG also made undocumented loans to other officers in the following amounts: (1) $50, 000 to Penna; (2) $41, 666.66 to Brown; and (3) $223, 422 to Marcus. Id. ¶¶ 14-15. These undocumented loans were payable on demand. Id. Juris was aware of these undocumented loans. Id.

         During the course of audits in 2011 and 2012, AMG's auditor expressed reservations about the value of AMG as a going concern, and by 2012, AMG was experiencing serious cash flow problems that continued to worsen. Id. ¶ 16. By February 2013, AMG and AlphaMetrix had almost $4.2 million in payables that were over ninety days past due. Id. At that point, AMG's primary lender, White Oak Global Advisors, LLC (“White Oak”), claimed AMG was in violation of certain financial covenants, and White Oak received additional guarantees from AMG and other AMG-related entities. Id.

         Juris knew about the auditor's apprehension regarding AMG's value as a going concern. Id. ¶ 17. Juris was also privy to AMG's worsening cash flow problems and White Oak's escalating demands. Id. By August 31, 2013, Juris was aware that AMG was insolvent. Id.

         Nonetheless, in September 2013, Juris prepared amended promissory notes (“Amended Notes”) with respect to AMG's previous loans to Aleks, Penna, Brown, and Marcus. These Amended Notes, among other things, eliminated the borrowers' obligations to make monthly payments to AMG and extended the due dates for the payment of the loans' balances from December 31, 2015, to December 31, 2023. Id. ¶¶ 19-20, 23. The Amended Notes also eliminated AMG's protection against default in the event that any of the officers were the subject of bankruptcy proceedings. Id. ¶¶ 21, 23. The Amended Notes were executed on September 30, 2013. Id. ¶¶ 19, 24.

         The Receiver alleges that Juris committed legal malpractice against AMG by preparing the Amended Notes without first advising AMG that the amendments stripped AMG of the ability to demand immediate payment of $1.4 million in loans and effectively transferred these assets from AMG's balance sheet to Juris's son, Aleks, and his friends. Id. ¶ 25. As a result of Defendants' malpractice, the Receiver contends that AMG has incurred damages in the amount of obligations under the Amended Notes. Id. ¶ 33.

         Legal ...

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