Judges: Easterbrook
Filed: Jun. 23, 2016
Latest Update: Mar. 02, 2020
Summary: In the United States Court of Appeals For the Seventh Circuit _ Nos. 15---3037 & 15---3048 ACF 2006 CORP., Plaintiff---Appellee, v. MARK C. LADENDORF, ATTORNEY AT LAW, P.C., and TIMOTHY F. DEVEREUX, Defendants---Appellants, and DAVID L. BEALS, SR., et al., Intervening Defendants---Appellants. _ Appeals from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:13---cv---01286---TWP---DML — Tanya Walton Pratt, Judge. _ ARGUED APRIL 13, 2016 —
Summary: In the United States Court of Appeals For the Seventh Circuit _ Nos. 15---3037 & 15---3048 ACF 2006 CORP., Plaintiff---Appellee, v. MARK C. LADENDORF, ATTORNEY AT LAW, P.C., and TIMOTHY F. DEVEREUX, Defendants---Appellants, and DAVID L. BEALS, SR., et al., Intervening Defendants---Appellants. _ Appeals from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:13---cv---01286---TWP---DML — Tanya Walton Pratt, Judge. _ ARGUED APRIL 13, 2016 — ..
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 15-‐‑3037 & 15-‐‑3048
ACF 2006 CORP.,
Plaintiff-‐‑Appellee,
v.
MARK C. LADENDORF, ATTORNEY AT LAW, P.C., and TIMOTHY
F. DEVEREUX,
Defendants-‐‑Appellants,
and
DAVID L. BEALS, SR., et al.,
Intervening Defendants-‐‑Appellants.
____________________
Appeals from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:13-‐‑cv-‐‑01286-‐‑TWP-‐‑DML — Tanya Walton Pratt, Judge.
____________________
ARGUED APRIL 13, 2016 — DECIDED JUNE 23, 2016
____________________
Before EASTERBROOK, MANION, and ROVNER, Circuit Judg-‐‑
es.
EASTERBROOK, Circuit Judge. Attorney William F. Conour
stole more than $4.5 million from clients’ trust funds, was
convicted of fraud, and is serving ten years in prison. Shortly
2 Nos. 15-‐‑3037 & 15-‐‑3048
before these crimes came to light, attorney Timothy Deve-‐‑
reux left Conour Law Firm, LLC, and took 21 clients with
him to Mark Ladendorf’s law firm. These clients ultimately
produced attorneys’ fees aggregating some $2 million. This
appeal presents a three-‐‑corner fight about who gets how
much of that money. The contestants are Devereux and the
Ladendorf Firm (collectively the Lawyers), several persons
from whom Conour stole (collectively the Victims), and ACF
2006 (the Lender), whose parent corporation Advocate Capi-‐‑
tal, Inc., made a loan to the Conour Firm to finance the legal
work and out-‐‑of-‐‑pocket expenses that a contingent-‐‑fee law
firm must bear while suits are in progress.
There are two principal questions. First, how much of the
$2 million goes to the Conour Firm for the services it per-‐‑
formed before Devereux left? Second, how are the funds to
which the Conour Firm is entitled to be divided between the
Victims and the Lender? After a bench trial, the district court
concluded that the Conour Firm is entitled to some $775,000
under principles of quantum meruit. 2015 U.S. Dist. LEXIS
112772 (S.D. Ind. Aug. 25, 2015). The judge also decided that
the Lender has priority over the Victims. 2015 U.S. Dist.
LEXIS 10942 (S.D. Ind. Jan. 30, 2015), reconsideration denied
2015 U.S. Dist. LEXIS 21709 (S.D. Ind. Feb. 24, 2015). We start
with the Lawyers’ appeal, because it determines how much
is available for division between the Victims and the Lender.
In Indiana, as in other states, clients may discharge their
lawyers for any reason. If newly hired counsel pursues the
case to a successful conclusion, the original lawyer is entitled
to be paid for the value of the work done. See Galanis v. Ly-‐‑
ons & Truitt, 715 N.E.2d 858, 861 (Ind. 1999). That’s the doc-‐‑
trine of quantum meruit. At the bench trial, the parties con-‐‑
Nos. 15-‐‑3037 & 15-‐‑3048 3
tested the value of the different lawyers’ contributions to 11
of the 21 cases that Devereux took from the Conour Firm to
the Ladendorf Firm. Only two cases remain in dispute. The
parties refer to them by initials: L.B. and R.S.
L.B. was a products-‐‑liability suit arising from the failure
of a gear puller and the severe injury that the failure caused.
Whether the gear puller was defective was the principal dis-‐‑
pute. If so, L.B. stood to receive a substantial award (with a
potential contest about how much); if not, L.B. would receive
nothing. The Conour Firm filed a complaint, served stand-‐‑
ard interrogatories, and hired an expert who examined the
location of the accident but could not perform scientific tests
on the gear puller until the defendant turned it over, which
happened at 5 p.m. on the day before Devereux moved from
the Conour Firm to the Ladendorf Firm. On the same day,
the defendant took two-‐‑hour depositions of two witnesses.
The real work of discovery began with testing, which oc-‐‑
curred on the Ladendorf Firm’s watch and revealed that the
gear puller’s metal was brittle because it had been exposed
to hydrogen during manufacture. That scientific analysis
(embodied in the expert’s report) was followed by more dis-‐‑
covery (including a deposition of the defense expert) and a
settlement for $3.550 million on the eve of trial. The Laden-‐‑
dorf Firm had prepared a detailed trial plan and had more
than 70 exhibits and 21 witnesses ready to go. The plaintiff’s
contingent-‐‑fee contract with the Ladendorf Firm entitled it to
almost $1.4 million in fees, plus about $40,000 in costs.
The district court concluded that the Conour Firm gets
40% of this $1.4 million, plus its own expenses of $3,000, for
a total of roughly $600,000. The court gave a one-‐‑sentence
explanation: “This is based upon the fact that the Conour
4 Nos. 15-‐‑3037 & 15-‐‑3048
Firm engaged in discovery, hired an investigator to inter-‐‑
view witnesses, took two depositions, inspected the facility,
obtained the defective part at issue, began developing the
destructive testing protocol, and prepared the settlement
statement and the demand letter.” 2015 U.S. Dist. LEXIS
112772 at *24. What the judge did not explain is why the
Conour Firm’s work, though valuable to the client, was any-‐‑
where close to 40% of either the effort expended or the value
provided. The bulk of the work—both the scientific analysis
and the legal time—was performed by the Ladendorf Firm
after the gear puller became available for testing.
Three witnesses at trial put the value of the Conour
Firm’s work at 10% of the total. No one testified differently.
If we use expenses as a proxy for work done, the Ladendorf
Firm could have claimed a larger share. (It incurred $40,000
of the $43,000 total expenses, or 93%.) Any estimate of the
value of legal work is bound to be imprecise. Still, the fact
that three witnesses chose 90% without contradiction (the
Lender did not present a legal expert’s analysis of the rela-‐‑
tive value of the two law firms’ work) provides a starting
point. Yet the district court did not mention that estimate or
justify the 40% ratio it chose. And the Lender does not de-‐‑
fend it substantively. Instead the Lender relies entirely on
the standard of appellate review.
Appellate review of findings in a bench trial is deferen-‐‑
tial, see Fed. R. Civ. P. 52(a)(6), and the answer to “who pro-‐‑
vided what part of the value?” is a proposition of fact. Still,
Rule 52(a) allows a court of appeals to reverse a finding
when the court has a definite and firm conviction that a mis-‐‑
take has been made. See Anderson v. Bessemer City, 470 U.S.
564, 573 (1985); United States v. United States Gypsum Co., 333
Nos. 15-‐‑3037 & 15-‐‑3048 5
U.S. 364, 395 (1948). We have such a conviction with respect
to the allocation of fees for the L.B. matter. The Lender has
not argued that it is entitled to a new trial if we disagree
with the district court’s findings. Because the Lender has not
attempted to justify any ratio other than 40%, we order the
award reduced to 10% (roughly $140,000 plus $3,000 in ex-‐‑
penses).
The R.S. case was another products-‐‑liability matter, set-‐‑
tled for a total of $520,000. One defendant paid $20,000 while
the Conour Firm was handling the case, and the remaining
defendants paid $500,000 after Devereux moved to the
Ladendorf Firm. The Ladendorf Firm received a contingent
fee of $200,000, or 40% of the $500,000 collected while it had
the case. The district court found that the Conour Firm is en-‐‑
titled to 60% of that $200,000, or $120,000. 2015 U.S. Dist.
LEXIS 112772 at *22–24.
That allocation seems generous to the Ladendorf Firm,
because the judge found that the Conour Firm did essential-‐‑
ly all of the work and that the case settled promptly after
Devereux moved to the Ladendorf Firm. Nonetheless the
Lawyers tell us that 60% is too high—that, indeed, the Con-‐‑
our Firm should get nothing. This is not because of any es-‐‑
timate of the amount of work done; the Lawyers concede
that almost all of the legal work occurred while Devereux
was at the Conour Firm. Instead the Lawyers insist that the
Conour Firm should be docked for damaging the plaintiff’s
prospects in two ways: (a) accepting only $20,000 from one
defendant, and (b) not paying all of the expert witness’s in-‐‑
voice. (The Conour Firm told R.S. that it was holding on to
the entire $20,000 to cover costs already incurred, but appar-‐‑
ently some of that money found its way to Conour’s pocket.)
6 Nos. 15-‐‑3037 & 15-‐‑3048
Although the Lawyers assert that settling with one de-‐‑
fendant for $20,000 decreased the total recoveries obtainable
from the case, they do not explain how. Damages would
have been joint and several; other defendants remained lia-‐‑
ble (if liable at all) for the full injury. As for the failure to pay
the expert’s entire bill: the Ladendorf Firm didn’t pay either,
and Devereux testified that he had decided that an expert
was unnecessary. Whether either or both firms stiffed the
expert would be important in a suit by the expert seeking
full compensation, or a demand by R.S. for some of the
$20,000 that the Conour Firm kept, but it does not affect how
the $200,000 fee should be divided between the two law
firms.
The Lawyers raise one more issue. The district court add-‐‑
ed 8% prejudgment interest to the award. 2015 U.S. Dist.
LEXIS 112772 at *31–32. The Lawyers maintain that this is in-‐‑
appropriate because all of the disputed fees had been held in
an IOLTA account pending the district court’s decision.
IOLTA stands for interest on lawyers’ trust account, and in
Indiana that interest must be paid to groups that will use the
money to secure legal representation for those who cannot
afford it. Ind. R. Prof. Conduct 1.15(f). The Lawyers contend
that they should not be required to pay prejudgment interest
when they did not receive any interest to begin with. Interest
is compensation for the time value of money and is therefore
part of complete compensation. See West Virginia v. United
States, 479 U.S. 305, 310 & n.2 (1987); In re Oil Spill by the
Amoco Cadiz off the Coast of France on March 16, 1978, 954 F.2d
1279, 1331–37 (7th Cir. 1992). But if a given pot of money has
no time value (at least to law firms), then there is nothing to
apportion between the parties—no reason why the Conour
Nos. 15-‐‑3037 & 15-‐‑3048 7
Firm should be compensated for delay in payment when the
Ladendorf Firm is not.
Indiana law appears to support the Lawyers’ position.
Kummerer v. Marshall, 971 N.E.2d 198, 202 (Ind. App. 2012).
Once again, the Lender has chosen not to engage on the mer-‐‑
its. Its brief does not discuss Kummerer or otherwise defend
the substance of the district court’s decision. Instead the
Lender contends that the Lawyers waived this point by not
calling it to the district judge’s attention.
The Lawyers have a good reason for this, however: The
Lender never asked for prejudgment interest. The court add-‐‑
ed interest unbidden (sua sponte as lawyers like to say). The
Lawyers might have filed a motion to amend the judgment
under Fed. R. Civ. P. 59(e), but the opportunity to file such a
motion is an option rather than a command. A litigant is
never required to remonstrate with the judge (to take an ex-‐‑
ception) once a decision has been made. Fed. R. Civ. P. 46. It
is enough to present one’s views on contested issues before
the decision is made. As neither the Lender nor the Victims
requested prejudgment interest, the Lawyers had no reason
to think that this was an open issue and therefore were not
obliged to address the subject before the judge issued her
decision. The award of prejudgment interest was a misstep
that must be undone on remand.
It follows from this discussion that the Lawyers owe the
Conour Firm less than the current value of the Conour
Firm’s indebtedness to the Lender—and substantially less
than what Conour owes to the Victims. The outcome thus
turns on priority between the Lender and the Victims; one or
the other will receive everything the Lawyers must disgorge.
8 Nos. 15-‐‑3037 & 15-‐‑3048
Advocate Capital made a loan in 2008 and filed a financ-‐‑
ing statement under the Uniform Commercial Code. Its lien
dates to that year. (The transfer from Advocate to ACF does
not affect priority.) The Victims did not get a judgment
against Conour, either directly or via the restitution awarded
in the criminal prosecution, until 2014. It follows, the district
court held, that the Lender has priority under the UCC. 2015
U.S. Dist. LEXIS 10942 at *14–30.
The Victims contend that Ind. Code §30-‐‑4-‐‑3-‐‑22 gives
them priority as the victims of a breach of trust. The district
court rejected this argument on the ground that neither the
legal theory nor the statute had been identified in the Vic-‐‑
tims’ complaint. 2015 U.S. Dist. LEXIS 10942 at *29–30; 2015
U.S. Dist. LEXIS 21709 at *5–6. That is not a satisfactory rea-‐‑
son. Complaints plead claims, which is to say grievances. The
Victims’ grievance was stated, as Fed. R. Civ. P. 8 contem-‐‑
plates, plainly and without unnecessary detail: Their trust
funds were plundered, and they want recompense. The rea-‐‑
sons why they believe that they have priority over the Lend-‐‑
ers need not be pleaded, because complaints need not cite
authority or set out a line of legal argument. See, e.g., Johnson
v. Shelby, 135 S. Ct. 346 (2014); Bartholet v. Reishauer A.G. (Zü-‐‑
rich), 953 F.2d 1073 (7th Cir. 1992). The Victims have a single
claim for relief; multiple legal theories in support of that
claim differ from multiple claims that must be separately
pleaded. See, e.g., Frank v. Walker, 819 F.3d 384, 387–88 (7th
Cir. 2016). Making legal arguments in support of one’s claim
comes after the pleadings. The Victims raised Ind. Code §30-‐‑
4-‐‑3-‐‑22 at the right time, and in the right way.
The district court concluded, in the alternative, that §30-‐‑
4-‐‑3-‐‑22 does not support the Victims to the extent they seek
Nos. 15-‐‑3037 & 15-‐‑3048 9
relief against funds held by the Conour Firm, as opposed to
Conour personally. 2015 U.S. Dist. LEXIS 21709 at *7–9. That
conclusion has more support.
If a trustee wrongfully removes money (or other proper-‐‑
ty) from a trust, Ind. Code §30-‐‑4-‐‑3-‐‑22(b) and (c)(1) provide
ways for the court to order the assets returned. But the Vic-‐‑
tims are not trying to retrieve what Conour took or funds
that can be traced to his theft. The money generated by the
Lawyers has never been held in trust for the Victims and is
unrelated to Conour’s crimes. The Victims therefore must
rely on §30-‐‑4-‐‑3-‐‑22(c)(2), which provides for situations in
which the trust’s assets “cannot be traced and identified”:
(A) In a case of commingling of funds or property, the benefi-‐‑
ciary is entitled to a lien against the trustee’s individual property
from the date and in the amount of the fund or the value of the
property at the time of the commingling.
(B) In a case of conversion of property, the beneficiary is entitled
to a lien against the trustee’s individual property from the date
and according to the value of the property at the time of the con-‐‑
version.
Conour converted the Victims’ trust funds before Advocate
Capital made its loan, so if the Victims have a lien under this
statute it comes ahead of the Lender’s interest. But the dis-‐‑
trict court thought that the Victims lose because subpara-‐‑
graphs (A) and (B) both say that the lien is “against the trus-‐‑
tee’s individual property”. Funds held by the Conour Firm,
or to which the Conour Firm becomes entitled, are not Wil-‐‑
liam Conour’s “individual property”. Nor was the Conour
Firm the trustee; William Conour was trustee of all client
funds held in trust, so “individual property” refers to Con-‐‑
our’s personal property.
10 Nos. 15-‐‑3037 & 15-‐‑3048
Conour had (and may still have) an interest in the Con-‐‑
our Firm as a member of the limited liability company, but
Conour and the LLC are distinct entities. (The Victims have
not argued that Indiana’s standards for veil-‐‑piercing are sat-‐‑
isfied.) It was the LLC, not Conour, that employed Devereux
and borrowed money from Advocate Capital. The Victims
have not asked the court to transfer to them the value of
Conour’s membership interest in the LLC, which does not
appear to have any monetary value (and, if it does, may
have been seized already to provide restitution in the crimi-‐‑
nal prosecution). Instead the Victims want the benefit of
funds that the Lawyers owe to the Conour Firm, and §30-‐‑4-‐‑
3-‐‑22(c)(2) does not create such a remedy. Not directly, any-‐‑
way. Not without the aid of another statute.
The Conour Firm is a professional-‐‑services business,
which in Indiana is subject to a rule that the use of a corpo-‐‑
rate form does not change the relation between lawyer (or
physician) and client. The Victims rely on Ind. Code §23-‐‑1.5-‐‑
2-‐‑7:
(a) The relationship between an individual performing profes-‐‑
sional services as an employee of a professional corporation and
a client or patient is the same as if the individual performed such
services as a sole practitioner.
(b) The relationship between a professional corporation perform-‐‑
ing professional services and the client or patient is the same as
between the client or patient and the individual performing the
services.
If William Conour had operated his law practice as a propri-‐‑
etorship or partnership, then under §30-‐‑4-‐‑3-‐‑22(c)(2) all of its
assets would be available to aggrieved clients, and a claim
based on a breach of trust would come ahead of a lender’s
interest if the breach predated the loan. Section 23-‐‑1.5-‐‑2-‐‑7
Nos. 15-‐‑3037 & 15-‐‑3048 11
tells us that the client has the same rights vis-‐‑à-‐‑vis a profes-‐‑
sional corporation as it does against a solo practitioner—and
one of those rights is to recompense for breach of trust.
As far as we can tell, Indiana’s judiciary has yet to con-‐‑
sider the effect of §23-‐‑1.5-‐‑2-‐‑7 in the 36 years since its enact-‐‑
ment, though it did say that the law’s predecessor was de-‐‑
signed to prevent the corporate form from changing the tra-‐‑
ditional relation between a professional and a client or pa-‐‑
tient. See Birt v. St. Mary Mercy Hospital of Gary, Inc., 175 Ind.
App. 32, 39–43 (1977). That seems to give the Victims the
upper hand in their contest with the Lender. We can imagine
some possible responses. Perhaps Indiana’s legislature
meant the word “corporation” literally, so that a lawyer who
arranges for his assets to come to an LLC avoids the applica-‐‑
tion of §23-‐‑1.5-‐‑2-‐‑7. Perhaps something about the relation be-‐‑
tween §30-‐‑4-‐‑3-‐‑22(c)(2) and §23-‐‑1.5-‐‑2-‐‑7 means that the former
trumps the latter. Neither of these possibilities seems likely.
But we don’t have to decide because, continuing a pattern of
refusing to engage on the merits, the Lender does not make
either argument. Indeed, the Lender’s brief does not cite §23-‐‑
1.5-‐‑2-‐‑7 or consider the possibility that assets of a professional
LLC are imputed to the lawyer (or the professional debts of
a lawyer imputed to the LLC) for the purpose of statutes
such as §30-‐‑4-‐‑3-‐‑22(c)(2).
The norm that victims of a lawyer’s breach of trust have a
remedy notwithstanding the later grant of a security interest
to a commercial lender is one of long standing and is reflect-‐‑
ed in Indiana by §30-‐‑4-‐‑3-‐‑22(c)(2). Section 23-‐‑1.5-‐‑2-‐‑7 tells us
that the use of the corporate form to hold assets of a legal
practice does not change that norm. It follows that the Vic-‐‑
12 Nos. 15-‐‑3037 & 15-‐‑3048
tims have priority over the Lender in the funds that the
Conour Firm is entitled to receive from the Lawyers.
The judgment of the district court is reversed, and the
case is remanded for the entry of judgment consistent with
this opinion.
