Brian Reynolds v. Henderson & Lyman

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 17-1999
BRIAN REYNOLDS,
Plaintiff-Appellant,
v.
HENDERSON & LYMAN and
DOUGLAS AREND,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 14 C 7995 — Robert M. Dow, Jr., Judge.
____________________
ARGUED FEBRUARY 6, 2018 — DECIDED SEPTEMBER 12, 2018
____________________
Before WOOD, Chief Judge, and KANNE and HAMILTON, Cir-
cuit Judges.
WOOD, Chief Judge. This appeal arises out of a malpractice
suit that Brian Reynolds brought against the law firm Hen-
derson & Lyman and one of its lawyers (collectively “H&L”),
alleging that H&L gave negligent advice to several LLCs that
Reynolds co-owned and managed. According to Reynolds,
H&L’s bad advice led him to violate federal disclosure laws
2 No. 17-1999
when he drafted the LLCs’ financial statements. The district
court granted summary judgment to H&L, explaining that
Reynolds could not bring a malpractice suit on his own behalf
because he did not have a personal attorney-client relation-
ship with H&L. We review that judgment de novo, construing
the record in the light most favorable to Reynolds, see Whit-
field v. Howard, 852 F.3d 656, 661 (7th Cir. 2017). We agree,
however, with the district court’s analysis and so we affirm.
I
Our jurisdiction over this case is premised on the parties’
diversity of citizenship: the plaintiff, Reynolds, is a citizen of
Colorado, and both defendants are citizens of Illinois. The re-
quirements of 28 U.S.C. § 1332(a)(1) are thus satisfied. A fed-
eral court sitting in diversity applies federal procedural law
and state substantive law. Erie R.R. Co. v. Tompkins, 304 U.S.
64, 78 (1938). Here, all parties agree that the governing state
law is that of Illinois. Under Illinois law, a plaintiff must prove
five elements to prevail on a claim for legal malpractice: “(1)
an attorney-client relationship; (2) a duty arising out of that
relationship; (3) a breach of that duty; (4) causation; and (5)
actual damages.” Wash. Grp. Int’l, Inc. v. Bell, Boyd & Lloyd,
LLC, 383 F.3d 633, 636 (7th Cir. 2004) (quoting Griffin v. Gold-
enhersh, 323 Ill. App. 3d 398, 404 (2001)).
The Illinois Supreme Court has described the attorney-cli-
ent relationship as “a voluntary, contractual relationship that
requires the consent of both the attorney and client.” People v.
Simms, 192 Ill. 2d 348, 382 (2000). Reynolds admits that he
never asked H&L to represent him and that H&L never said
anything that suggested it thought it was representing him. In
other words, the parties never entered into any agreement
No. 17-1999 3
that would have created an attorney-client relationship be-
tween them. H&L did have an attorney-client relationship
with the LLCs that Reynolds co-owned and managed, but that
is different. It was in his capacity as a managing member of
these LLCs that Reynolds communicated with, and was ad-
vised by, H&L. Reynolds’s primary argument on appeal is
that H&L owed him something akin to a third-party duty of
care arising out of its representation of the LLCs, because his
personal interests were so closely bound with the interests of
the LLCs as to be functionally indistinguishable. This theory
might sound plausible on its face, but unfortunately for Reyn-
olds it is foreclosed by decades of Illinois law.
Illinois courts consistently have held that neither shared
interests nor shared liability gives rise to third-party liability.
For third-party liability in Illinois, Reynolds must have been
a direct and intended beneficiary, and “[s]imply because the
[officers of a business entity] were at risk of personal liability
does not transform the incidental benefits of [the law firm’s]
representation of [the business entity] into direct and in-
tended benefits for [the officers].” Reddick v. Suits, 2011 IL App
(2d) 100480, ¶ 44. In fact, the only time an Illinois attorney
owes a duty of care to a third party is when the attorney was
hired for the primary purpose of benefitting that third party.
Schechter v. Blank, 254 Ill. App. 3d 560, 564 (1993). Illinois
courts have emphasized that the primary purpose of a re-
tainer agreement between a business entity and a lawyer is to
benefit the business entity, not to benefit that entity’s owners
or officers, however closely aligned their interests might be.
Reddick, 2011 IL App (2d) 100480 at ¶ 44; see also Schechter, 254
Ill. App. 3d at 564–66 (collecting cases); Hager-Freeman v.
Spircoff, 229 Ill. App. 3d 262, 277–78 (1992) (explaining that the
4 No. 17-1999
presumption against personal representation extends even to
closely held corporations).
Illinois’s courts are free to change the state’s law or to
carve out the exception that Reynolds seeks, but we are not.
In fact, even if it were up to us, we would not do so, because
the state’s current rule makes good sense. A contrary rule
would undermine the integrity of the attorney-client relation-
ship by forcing attorneys to assume competing duties of care
to non-clients. Cf. Schechter, 254 Ill. App. 3d at 564 (“Public
policy requires that an attorney, when acting in his profes-
sional capacity, be free to advise his client without fear of per-
sonal liability to third persons if the advice later proves to be
incorrect.”) (emphasis omitted) (internal quotation marks
omitted) (quoting Schott v. Glover, 109 Ill. App. 3d 230, 234–35
(1982)). In addition, the rule that Reynolds asks us to adopt
would chip away at the legal distinction between entities and
individuals—a distinction that serves as the basis for the ex-
istence of many business structures, including that of the LLC.
It would be bizarre indeed if a business’s owners or officers
could cloak themselves in the protections provided by the
limited-liability corporate structure when they enter contracts
or defend against a lawsuit, yet cast that structure aside when
seeking to recover as plaintiffs for injuries sustained by the
business. In law, as in life, double standards are frowned
upon.
II
The result in this case thus appears to be straightforward,
but Reynolds has two more arguments for us. Both are worth
addressing, although neither succeeds. First, Reynolds argues
that the district judge lacked the power to grant summary
judgment at all because (1) the allocation of duties between a
No. 17-1999 5
judge and jury is a procedural matter under the Erie doctrine,
and as he sees it, (2) federal procedural law requires that a
jury—not a judge—decide whether a duty is owed in profes-
sional negligence cases. Reynolds’s first point is correct, but
the second is not, and even if both were sound the conclusion
would not follow.
The Supreme Court held in Byrd v. Blue Ridge Rural Elec.
Co-op., Inc., 356 U.S. 525 (1958), that the question “who de-
cides a case?” is a procedural one, and thus a matter of federal
rather than state law. This is an uncontroversial proposition,
despite the fact that some of this circuit’s past tort cases have
not been as precise as they should have been, and so occasion-
ally we have cited state law in support of the proposition that
judges, rather than juries, decide whether a duty exists in neg-
ligence cases. See, e.g., Vesely v. Armslist LLC, 762 F.3d 661, 665
(7th Cir. 2014). Those citations, however, were far from hold-
ings in the cases where they appeared. Indeed, they were im-
material because the judge-jury allocation was not disputed
by the parties. Whenever we have directly confronted the is-
sue of how to divide responsibility between judges and juries,
we have followed the Supreme Court’s command in Byrd and
held that “[w]hether the trier of fact is a jury, a judge, or a
magistrate judge … is a subject for the forum’s own law.”
Mayer v. Gary Partners & Co., 29 F.3d 330, 333 (7th Cir. 1994)
(circulated to full court under Local Rule 40(e)); see also, e.g.,
Dunn v. Menard, Inc., 880 F.3d 899, 906 (7th Cir. 2018).
Even though Reynolds is thus correct that state law does
not dictate the allocation of tasks between the judge and the
jury in a federal court, this fact does not help his case. That is
because federal law treats the question whether a duty exists
as an issue of law to be decided by a judge. Dunn, 880 F.3d at
6 No. 17-1999
906. It does so for good reason. “Judges, not juries, decide
questions of law,” Gramercy Mills, Inc. v. Wolens, 63 F.3d 569,
571 (7th Cir. 1995), and—at the risk of stating the obvious—
the question whether Illinois law imposes a duty of care on
someone is a question about the scope of Illinois law. Federal
procedure usually requires judges to answer such “scope”
questions, id., as a quick look at the Supreme Court’s federal-
question jurisprudence reveals. E.g., Pacific Bell Tel. Co. v.
Linkline Communications, 555 U.S. 438, 444–49 (2009) (antitrust
law); Mitchell v. Trawler Racer, Inc., 362 U.S. 539, 549 (1960)
(admiralty); see also Animal Sci. Prods., Inc. v. Hebei Welcome
Pharm. Co., Ltd., 138 S. Ct. 1865, 1872–73 (2018) (content of for-
eign law is a question for the judge).
Even if the existence of a duty were a jury question under
federal law (and it is not), Reynolds still would not be able to
avoid summary judgment. Illinois substantive law would
govern any jury’s decision, and Illinois law is clear that an at-
torney for a business entity owes her duty of care to the entity
itself, not to its individual owners, officers, or directors. Ma-
jumdar v. Lurie, 274 Ill. App. 3d 267, 270 (1995). In other words,
no reasonable jury could have found in Reynolds’s favor
based on the facts he alleges—which means that summary
judgment against him is warranted, period. Mayer, 29 F.3d at
333 (“In some states juries are entitled to decide all questions
of fact and law, yet this does not compel a federal court to
disregard provisions for summary judgment.”).
The second argument by which Reynolds hopes to avoid
summary judgment relies on an alternate legal theory. He
contends that even if he cannot state a malpractice claim
against H&L, he does have a valid breach-of-contract claim
No. 17-1999 7
against the firm, because he was an intended third-party ben-
eficiary of H&L’s retainer agreement with the LLCs. As the
district court noted, this claim is duplicative of Reynolds’s
malpractice claim and it fails for the same reasons. There is no
suggestion in the record that H&L undertook its representa-
tion of the LLCs for the direct and manifest purpose of bene-
fiting Reynolds, as is required for third-party beneficiary sta-
tus in Illinois. Pelham v. Griesheimer, 92 Ill. 2d 13, 17–18 (1982).
III
Illinois courts have considered and rejected the theories of
liability on which Reynolds relies, and so we AFFIRM the judg-
ment of the district court dismissing his case.