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Monco v. Zoltek Corp.

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

July 25, 2019

Dean A. Monco; John S. Mortimer; Wood, Phillips, Katz, Clark & Mortimer, Plaintiffs,
v.
Zoltek Corporation and Zsolt Rumy, Defendants.

          MEMORANDUM OPINION AND ORDER

          Honorable Thomas M. Durkin, United States District Judge.

         Plaintiffs Dean A. Monco, John S. Mortimer, and Wood, Phillips, Katz, Clark, & Mortimer (“Wood Phillips”) seek recovery of legal fees from defendants Zsolt Rumy and Zoltek Corporation under a quantum meruit theory for their representation of Zoltek in patent litigation spanning the course of 20 years. Currently before the Court are Rumy's motion to dismiss Plaintiffs' quantum meruit claim against him under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, R. 259, and Zoltek's motion for partial summary judgment on Plaintiffs Monco and Mortimer's quantum meruit claim against it for lack of standing and because they are not the real parties in interest under Federal Rule of Civil Procedure 17, R. 196. For the following reasons, the Court grants Rumy's motion to dismiss and denies Zoltek's motion for summary judgment.

         BACKGROUND[1]

         Defendant Zoltek is a carbon fiber manufacturer. Defendant Rumy was the founder and majority shareholder of Zoltek until Toray Industries, Inc., an international Japanese corporation, acquired Zoltek in 2014.[2] Plaintiff Wood Phillips is a law firm, and plaintiffs Monco and Mortimer are attorneys who were partners or of counsel with Wood Phillips at all times relevant to this lawsuit.

         In 1996, Zoltek hired Plaintiffs to represent it in litigation conducted in Washington, D.C. to enforce a Zoltek patent (“Stealth litigation”). That litigation lasted for 20 years. The work was done largely on a contingency basis under a series of agreements. The first retainer agreement was executed by Zoltek (through Rumy) and Wood Phillips in February 1996 (“February 1996 Agreement”). Then, in April 1996, Zoltek (through Rumy) executed a second retainer agreement directly with Wood Phillips attorneys Monco and Mortimer (“April 1996 Agreement”). Plaintiffs maintain that the April 1996 Agreement displaced the February 1996 Agreement. Finally, in 2011, Monco, Mortimer and Zoltek (again, through Rumy) signed a modification to the April 1996 Agreement (“2011 Modification”).

         The Stealth litigation proceeded in and out of various stages of litigation through the years. Ultimately, following a three-day trial, the Court of Federal Claims held in March 2014 that Zoltek's patent was invalid. Thereafter, Rumy told Monco and Mortimer that they would have to “handle the appeal on their own dime, ” because Zoltek would not pay. Monco and Mortimer went on to brief and argue the appeal before the Federal Circuit. R. ¶ 69.

         Meanwhile, Toray purchased Zoltek in late 2014, and Zoltek started operating as its wholly-owned subsidiary. Plaintiffs allege that Toray acquired “all rights to the Zoltek Patent and any recovery from the lawsuit” in conjunction with the purchase. Id. ¶ 71. Then, in February 2016, the Federal Circuit reversed the Court of Federal Claims, holding that Zoltek's patent was not invalid. But the relationship between Zoltek and Monco and Mortimer deteriorated. During a July 2016 meeting, Zoltek's other outside counsel told Monco and Mortimer that the April 1996 Agreement was being terminated and proposed paying them an hourly rate for their work going forward. Rumy also allegedly made false statements about Monco and Mortimer to a Toray representative, and suggested that Monco and Mortimer's actions had jeopardized the case. Id. ¶¶ 102, 115. After the meeting, Zoltek terminated Monco and Mortimer as counsel, refusing to pay overdue bills, and substituted another firm as lead counsel in the Stealth litigation. A few weeks later, the Stealth litigation settled for $20 million. Plaintiffs did not recover anything from the settlement.

         Plaintiffs filed this lawsuit in September 2017. R. 1. The Court entertained a variety of motions to dismiss, and twice allowed Plaintiffs to amend their complaint. Plaintiffs' operative complaint, the Second Amended Complaint (“SAC”), alleges that Zoltek accepted Plaintiffs' services throughout the difficult and lengthy Stealth litigation and that Plaintiffs deserve to recover for those services on a quantum meruit basis (Count I), Id. ¶¶ 88-97. The SAC also states a quantum meruit claim by all Plaintiffs against Rumy (Count II). Id. ¶¶ 98-109. There, Plaintiffs allege that while Rumy agreed to personally assume responsibility for directing the Stealth litigation on Zoltek's behalf and resolving Plaintiffs' claim for fees, he actually was motivated by his own interests, secured a substantial share of the settlement for himself, and has yet to pay Plaintiffs. Id. Monco also asserted a claim against Rumy for tortious interference with prospective economic advantage (Count III). Id. ¶¶ 110-120. For its part, Zoltek made counterclaims of professional negligence and breach of fiduciary duty, and seeking a declaratory judgment that the April 1996 Agreement and 2011 Modification between Monco, Mortimer and Zoltek are void. R. 243 at 45-46.

         On February 27, 2019, the Court rejected Monco's claim against Rumy for tortious interference with prospective economic advantage (Count III) and Zoltek's counterclaim for declaratory judgment that the April 1996 Agreement and 2011 Modification are void (Count I of the Counterclaim). Therefore, only Plaintiffs' quantum meruit claims against Zoltek (Count I of the SAC) and Rumy (Count II of the SAC), and Zoltek's counterclaims against Plaintiffs for breach of fiduciary duty and negligence (Counts II and III of the Counterclaim) remain. R 257. In denying Rumy's motion to dismiss the quantum meruit claim against him under Rule 12(b)(2), the Court cautioned Plaintiffs that the viability of their claim turned on whether a personal attorney-client relationship existed between Plaintiffs and Rumy, as opposed to Plaintiffs and Zoltek. Id. at 30-31. The Court invited Rumy to file a separate motion to dismiss under Rule 12(b)(6) on that basis if he believed he had a credible basis to do so, and Rumy did. Id. at 31; R. 259. The Court will address that motion first, and then turn to Zoltek's motion for partial summary judgment arguing that Monco and Mortimer lack standing to seek quantum meruit on an individual basis, and are not the real parties in interest for purposes of Federal Rule of Civil Procedure 17(a).

         ANALYSIS

         I. Rumy's Motion to Dismiss

         Rumy contends that the quantum meruit claim against him should be dismissed with prejudice because there has been no allegation that Rumy and Plaintiffs enjoyed a personal attorney-client relationship pursuant to which they may seek relief directly from him, as opposed to Zoltek. See generally R. 260; R. 280. In response, Plaintiffs argue that Rumy “made himself Plaintiffs' client for purposes of quantum meruit” when he “pressed Plaintiffs to take the [Stealth litigation] appeal on their own dime” to advance Rumy's “personal stake in the suit, ” which ultimately amounted to half of a $20 million judgment. R. 265.

         A. Standard

         A Rule 12(b)(6) motion challenges the “sufficiency of the complaint.” Berger v. Nat. Collegiate Athletic Assoc., 843 F.3d 285, 289 (7th Cir. 2016). A complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), sufficient to provide defendant with “fair notice” of the claim and the basis for it. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). This standard “demands more than an unadorned, the-defendant-unlawfully- harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While “detailed factual allegations” are not required, “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. The complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “‘A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'” Boucher v. Fin. Sys. of Green Bay, Inc., 880 F.3d 362, 366 (7th Cir. 2018) (quoting Iqbal, 556 U.S. at 678). In applying this standard, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the non-moving party. Tobey v. Chibucos, 890 F.3d 634, 646 (7th Cir. 2018).

         B. Analysis of Rumy's 12(b)(6) Motion

         To recover under a quantum meruit theory, Plaintiffs must prove that: (1) they performed a service to benefit Rumy, (2) they did not perform this service gratuitously, (3) Rumy accepted this service, and (4) no contract existed to prescribe payment for the service. Bernstein & Grazian, P.C. v. Grazian & Volpe, P.C., 931 N.E.2d 810, 825-26 (Ill.App.Ct. 2010). But “[t]he right to attorney fees based on quantum meruit does not exist unless there is an underlying attorney-client relationship where the client expressly or impliedly agrees to pay fees.” In re Chicago Flood Litigation, 682 N.E.2d 421, 427 (Ill.App.Ct. 1997); see also Wildman, Harrold, Allen & Dixon v. Gaylord, 740 N.E.2d 501, 509 (Ill.App.Ct. 2000) (prima facie case for attorney's fees based on quantum meruit “includes proof of . . . the existence of an attorney-client relationship”).

         Plaintiffs argue-with minimal citation to the SAC-that the SAC sets forth the following theory, through which they state a quantum meruit claim against Rumy. In February 2014, Rumy sold Zoltek to Toray, which Plaintiffs allege “changed [Rumy's] relationship to Plaintiffs and to Zoltek.” R. 265 at 1, 3. In negotiating that sale, Rumy represented to Toray that the Stealth litigation had zero value, which Plaintiffs allege was part of Rumy's plan to obtain personal ownership of all or a significant share of the litigation. Id. at 3 (citing R. 217 ¶ 102). Then, having lost the Stealth litigation and the Court of Federal Claims having invalidated Zoltek's patent in March 2014, Toray wanted Zoltek out of the litigation, and Rumy wanted the case “for himself.” Id. at 2, 3. Rumy needed an attorney to assist with the appeal “or he would certainly get nothing, ” since the stock sale to Toray divested Rumy's large stake in Zoltek, “separating him from any benefit Zoltek might get from the case.” Id. at 3, 4. But Plaintiffs contend that Rumy knew Toray would not pay for an appeal and that Monco and Mortimer would likely be hesitant to handle it because Zoltek had not paid recent invoices. Id. at 2, 4. According to Plaintiffs, Rumy also knew that if he personally hired a lawyer, he would personally be on the hook for payment. So in 2014 he convinced Plaintiffs to take the appeal “on their own dime” despite also informing Plaintiffs that “Zoltek would not honor its payment obligations” under the 2011 Modification. Id. at 2, 4 (citing R. 217 ¶ 103). The appeal was successful, and in December 2016 and with no further litigation, the parties tentatively agreed to a $20 million judgment. Id. at 2; R. 217 ¶ 86. That same month, Rumy signed an agreement with Zoltek formalizing an oral agreement they had reached in June 2016 pursuant to which Rumy recovered half of the judgment and would pay half of the fees. Id. at 2; R. 217 ¶¶ 105-07. Accordingly, Plaintiffs argue that Rumy owes quantum meruit because he “demanded that Plaintiffs pursue the successful appeal” in 2014 “in pursuit of [his] own personal stake in the suit” and acted in that capacity “separate from Zoltek, through 2016.” R. 265 at 2, 4.

         Rumy argues that not only do Plaintiffs fail to plead this theory in the SAC, but also that even if they had, it still would not state a quantum meruit claim. More specifically, Rumy contends that the SAC fails to plead, as it must, that there was a meeting of the minds between Plaintiffs and Rumy regarding any representation of Rumy individually, and in fact states the opposite, making clear Plaintiffs represent Zoltek, not Rumy. See generally R. 260; R. 280. Rumy argues further that Plaintiffs have not plead that there was a direct benefit to Rumy because of Plaintiffs' work. Id.

         The Court agrees that the SAC does not plead the theory Plaintiffs now allege, but that even if it did, it still would fail. Rumy is correct that Plaintiffs admit in the SAC that they represented Zoltek, not Rumy. R. 217 ¶ 76 (SAC alleging that Monco and Mortimer represented Zoltek at the July 2016 meeting and Rumy was represented by separate counsel). Other documents on the docket in this matter are in accord. See, e.g., R. 190 at 3 (Monco's discovery motion stating “While [Rumy] may have invited an attorney-client relationship with Plaintiffs, the subject matter posed a conflict with the interests of Plaintiffs' actual client, Zoltek”) (emphasis added); R. 213 at 4 (Magistrate Judge Cole's November 10, 2018 opinion on the same discovery motion noting that “as the plaintiffs concede, there was no dual representation” of Zoltek and Rumy). Plaintiffs statements prevent them from claiming a personal attorney-client relationship with Rumy. See Keller v. United States, 58 F.3d 1194, 1198 n. 8 (7th Cir. 1995) (“Judicial admissions are formal concessions in the pleadings, or stipulations by a party or its counsel, that are binding upon the party making them. They may not be controverted at trial or on appeal.”); see also Higgins v. Mississippi, 217 F.3d 951, 955 (7th Cir. 2000) (“a judicial admission is in the nature of a waiver”).

         Without a personal attorney-client relationship, Plaintiffs cannot state a plausible claim for quantum meruit relief against Rumy. See Rubin and Norris, LLC, v. Panzarella, 51 N.E.3d 879, 891 (Ill.App.Ct. 2016) (“The attorney-client relationship [including for purposes of a quantum meruit claim] is a voluntary, contractual relationship that requires the consent of both the attorney and client.” (quoting In re Chicago Flood Litigation, 289 Ill.App.3d at 941 (emphasis added))).

         And while Plaintiffs attempt to persuade the Court that Rumy benefitted personally from Plaintiffs' work and that they state a claim because of it, the Court is unconvinced. Just because Plaintiffs work benefited Rumy does not mean they did the work to benefit Rumy. Plaintiffs have neither alleged nor even argued that they performed services specifically for Rumy's benefit. Nor could they; Rumy's Stealth Litigation recovery was through his separate arrangement with Zoltek, not Plaintiffs. This indirect benefit to Rumy is not enough. See Friedman & Friedman, Ltd. v. Basic, 2012 WL 6962866, at *6 (Ill.App.Ct. Nov. 30, 2012) (discussing In re Chicago Flood Litigation, 289 Ill.App.3d 937 (Ill.App.Ct. 1997), holding class counsel was not entitled to attorney fees under quantum meruit theory in part because “class counsel did not argue that they did work solely for the benefit of the opt-out plaintiffs.”); see also In re Chicago Flood Lit., 289 Ill.App.3d at 945 (plaintiff could not recover under quantum meruit theory from opt-out plaintiffs who retained their own attorneys because there was no attorney-client relationship; that class counsel may have conferred some benefit on opt-out plaintiffs “does not automatically entitle counsel to fees.”); Bernstein and Grazian, P.C., 931 N.E.2d at 826 (“The mere fact that a person benefits another is not of itself sufficient to require the other to make restitution” when no personal attorney-client relationship exists (quoting Hayes Mech., Inc. v. First Indus., L.P., 812 N.E.2d 419 (Ill.App.Ct. 2004))).

         Plaintiffs contend that the unpublished opinion in Friedman & Friedman, Ltd. v. Basic, 2012 WL 6962866 (Ill.App.Ct. Nov. 30, 2012) is “the Illinois decision most analogous to the facts here, ” and compels the Court to deny Rumy's motion. R. 265 at 6. It is true that in Friedman, as here, a law firm plaintiff sought recovery under a quantum meruit theory from a corporate employer and corporate employee for patent work. 2012 WL 6962866, at *1. But the similarities end there. The law firm's work in Friedman consisted of filing and maintaining patents in the corporate employee's name, and that work continued after the corporate employee transferred his personal rights, title and interest in certain existing and future patents to another company as part of a consulting agreement he executed with it. While that company initially paid for plaintiff's continued work, it ultimately stopped. Id. The law firm filed suit to recover fees, naming the corporate employee and (original) corporate employer. Both defendants contended that any right to recovery plaintiff had was against the new company alone because there no longer existed an attorney-client relationship between them. But in affirming the award for plaintiff, the Illinois appellate court reasoned that the corporate employee continued to request work by the plaintiff law firm, not all of the patents fell within the reassignment he made through his consulting agreement, and he assigned neither his obligations nor his liabilities under even those patents that did. Id. at 8.

         While Rumy similarly directed Plaintiffs' work, unlike the employee-defendant in Friedman who had a direct interest in the patents filed in his name (and maintained his obligations and liabilities with respect to some patents, and all of his interests in others), Rumy had a mere hope of recovering from the Stealth litigation and Zoltek's patent through his separate arrangement with Zoltek unknowable to Plaintiffs. And more to the point, unlike Rumy, the corporate employee in Friedman had an attorney-client relationship with the plaintiff law firm-both personally, and through his company-and maintained that relationship throughout. Id. at *1, *2, *7. In contrast, Rumy's interest in the litigation was tied to his separate agreement with Zoltek, and his dealings with Plaintiffs originated solely from his role as a Zoltek officer. Indeed, Plaintiffs admit in their brief that Rumy “was never up front with Monco about his deal with Toray, ” “was not fully forthcoming about the details of his separate stake in the case, ” and that his “intentions were only partially disclosed to Monco.” R. 265 at 2, 4, 7. Friedman does not change the result here.

         Finally, Plaintiffs seek leave to amend should the Court grant Rumy's motion. But Plaintiffs fail to demonstrate that any amendment would cure the deficiencies apparent: there simply is no basis upon which to hold Rumy liable to Plaintiffs even if Plaintiffs' characterization of the SAC were correct. Accordingly, the Court grants Rumy's motion to dismiss-Rumy's third such motion-with prejudice.

         II. Zoltek's Motion for Partial Summary Judgment

         Zoltek argues that individual plaintiffs Monco and Mortimer lack standing as to their quantum meruit claim against it and are not the real parties in interest under Federal Rule of Civil Procedure 17(a). The gist of Zoltek's argument is that Monco and Mortimer's rights are only derivative of Wood Phillips' as attorneys of that firm, and they thus have no separate right to proceed against Zoltek individually. Only Monco disagrees; indeed, in Mortimer and Wood Phillips' joint response to Zoltek's motion, filed separately from Monco's response, they concede that Mortimer lacks standing and that Wood Phillips-not the individual plaintiffs-is the real party in interest.[3] See generally R. 225. At its core, Monco's argument to the contrary stems from the fact that the most recent client engagement agreement and subsequent modification thereto named him (and Mortimer) as the exclusive recipients of any contingency award, giving him (and Mortimer) the right to seek relief directly from Zoltek. See generally R. 230.

         A. Standard

         Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The Court considers the entire evidentiary record and must view all of the evidence and draw all reasonable inferences from that evidence in the light most favorable to the nonmovant. Horton v. Pobjecky, 883 F.3d 941, 948 (7th Cir. 2018). To defeat summary judgment, a nonmovant must produce more than a “mere scintilla of evidence” and come forward with “specific facts showing that there is a genuine issue for trial.” Johnson v. Advocate Health and Hosps. Corp., 892 F.3d 887, 894, 896 (7th Cir. 2018). Ultimately, summary judgment is warranted only if a reasonable jury could not return a verdict for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

         B. Relevant Facts

         Unless otherwise noted, the following facts are undisputed or uncontroverted for purposes of resolving Zoltek's motion.[4] Wood Phillips is a legal partnership, the operations of which are governed by a partnership agreement that is amended from time to time. ZSOF ¶¶ 11, 12.[5] At all times relevant to this lawsuit, Mortimer was a Wood Phillips ...


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