UFT Commercial Finance, LLC v. Richard Fisher

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 20‐2012
UFT COMMERCIAL FINANCE, LLC, and JOANNE M. NOREN,
also known as Joanne Marlowe, individually,
Plaintiffs‐Appellants,
v.
RICHARD A. FISHER,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:19‐CV‐07669 — Charles P. Kocoras, Judge.
____________________
ARGUED JANUARY 15, 2021 — DECIDED MARCH 23, 2021
____________________
Before SYKES, Chief Judge, and WOOD and HAMILTON, Cir‐
cuit Judges.
HAMILTON, Circuit Judge. This is a legal malpractice case.
Plaintiffs are a start‐up company and its founder. They have
sued the company’s former chief legal officer, Richard Fisher,
to recover losses from an arbitration award that held them li‐
able for years of unpaid wages owed to Fisher himself. The
plaintiffs’ core allegation is that they would not have been
2 No. 20‐2012
found liable to Fisher if he had not advised them to enter into
what they now say was an illegal agreement to defer Fisher’s
own compensation until the company was able to secure more
funding. The district court granted Fisher’s motion to dismiss
for a variety of reasons that together foreclosed the plaintiffs’
malpractice claims. On appeal, the plaintiffs challenge only
two of the district court’s reasons. We affirm. Even if the plain‐
tiffs were correct on both issues, their claims still could not
survive the motion to dismiss.
I. Factual and Procedural Background
Since this appeal is from a grant of a motion to dismiss for
failure to state a claim, we present the following facts as they
are pled in the complaint. Plaintiff UFT is a commercial fi‐
nance company founded by plaintiff Joanne Marlowe in 2008.
Defendant Richard Fisher worked as a consultant with UFT
from February 2013 to September 2013 and then became em‐
ployed by UFT as its chief legal officer in October 2013.
Throughout his employment, Fisher was the sole source of
legal counsel to UFT and Marlowe regarding the company’s
operations. Among other duties, Fisher drafted the employ‐
ment agreements between UFT and its employees, including
both Marlowe’s and his own. These employment agreements
included mandatory arbitration clauses.
During Fisher’s time at UFT, the company’s revenues were
inconsistent, coming in “fits and starts,” so that the company
failed to pay Marlowe, Fisher, and all other employees their
agreed salaries when they were due. Fisher and other employ‐
ees continued to work at the company because they believed
in its potential. Still, at various times, Fisher recommended
and drafted “supplemental agreements” allowing for the
No. 20‐2012 3
accrual of wages owed to various employees who could not
be paid on schedule due to UFT’s revenue patterns. Following
Fisher’s advice, even Marlowe herself entered into one of
these supplemental agreements with UFT in 2014. And Fisher
signed one in January 2016. Fisher’s supplemental agreement
said he was owed $330,000, which was to “be paid in full from
any subsequent first closing of any permanent equity/debt
placement by [UFT] in an amount greater than US $1,000,000,
if not paid earlier from any other source.” Fisher did not ad‐
vise UFT to consult independent counsel when negotiating
his own supplemental and employment agreements. Plain‐
tiffs also allege that when UFT was considering buying Direc‐
tors and Officers (D&O) liability insurance in 2014, Fisher ad‐
vised Marlowe against it and did not fully inform Marlowe or
UFT of the liability protections afforded by D&O insurance.
In August 2016, Fisher left UFT on bad terms after negoti‐
ations with Marlowe over his contract renewal broke down.
In January 2018, to recover his unpaid wages from his years
at UFT, Fisher demanded arbitration before the American Ar‐
bitration Association. On January 2, 2019, an arbitrator found
that Fisher’s wages had been illegally withheld throughout
his employment because the Illinois Wage Payment and Col‐
lection Act, 820 ILCS 115/1 et seq., “imposes strict time limits
on when wages … must be paid.” Dkt. 7‐1, 8. The arbitrator
held UFT and Marlowe jointly and severally liable to Fisher
for unpaid wages and statutory penalties totaling $864,976.
The arbitrator also held UFT liable for an additional $366,460
because Fisher did not receive written notice of his contract
nonrenewal, which entitled Fisher to be paid for another
three‐year contract term, whether earned or not.
4 No. 20‐2012
Plaintiffs have not paid the arbitration award. Instead, in
an attempt to avoid these losses, the plaintiffs now point the
finger back at Fisher in this highly unusual lawsuit. Plaintiffs
sued Fisher in an Illinois state court alleging that Fisher’s own
legal malpractice caused them to take the actions that trig‐
gered their liability to him under the arbitration award. More
specifically, the plaintiffs allege that Fisher negligently failed
to advise them on (1) the legality and consequences of their
employment and supplemental agreements, and the manda‐
tory arbitration clauses therein; (2) Fisher’s conflict of interest
in executing his own supplemental agreement; (3) the benefits
of independent counsel when negotiating Fisher’s own agree‐
ments; and (4) the benefits of purchasing D&O insurance.1
1 It is rare but not completely unprecedented for an employer to sue
its own employee for negligent acts taken within the scope of his employ‐
ment. See Withhart v. Otto Candies, LLC, 431 F.3d 840, 845 (5th Cir.
2005) (maritime shipping employer allowed to sue employee for negli‐
gently causing property damage); Nordgren v. Burlington N. R.R., 101 F.3d
1246, 1253 (8th Cir. 1996) (Federal Employers Liability Act did not
preempt railroad’s state‐law counterclaims against employees for prop‐
erty damage); Stack v. Chicago, Milwaukee, St. Paul & Pac. R.R., 615 P.2d 457,
459 (Wash. 1980) (railroad had common‐law right to sue employees for
property damage); see generally Restatement of Employment Law § 8.01
(Am. L. Inst. 2015). The economics of such claims are rarely promising
(apart from counterclaims), and state laws often require employers to in‐
demnify employees for damages caused on the job even when the em‐
ployee acted negligently. See, e.g., Cal. Labor Code § 2802(a) (“An em‐
ployer shall indemnify his or her employee for all necessary expenditures
or losses incurred by the employee in direct consequence of the discharge
of his or her duties, or of his or her obedience to the directions of the em‐
ployer, even though unlawful, unless the employee, at the time of obeying
the directions, believed them to be unlawful.”).
Illinois’ employee indemnification law, however, first took effect in
2019 and does not cover negligent activity—meaning that the plaintiffs in
No. 20‐2012 5
Fisher removed the case to federal court under 28 U.S.C.
§ 1441(b) based on diversity of citizenship. (Fisher is a Geor‐
gia citizen; plaintiffs are Illinois citizens.) The district court
granted Fisher’s Rule 12(b)(6) motion to dismiss, finding that:
(1) any malpractice related to Fisher’s original employment
agreement was barred by Illinois’ statute of repose; (2) Fisher
owed no duty to plaintiff Marlowe because he formed no at‐
torney‐client relationship with her individually; (3) plaintiffs
did not sufficiently plead that Fisher’s legal advice proxi‐
mately caused them to use the supplemental agreements, re‐
fuse independent counsel, or forgo D&O insurance; and (4)
plaintiffs have not alleged any damages stemming from con‐
tracts with any employees other than Fisher. See UFT Com‐
mercial Finance, LLC v. Fisher, 2020 WL 2513097 (N.D. Ill. May
15, 2020). Together, these findings foreclosed all of plaintiffs’
malpractice claims.
this case still have an incentive to sue Fisher for malpractice. See 820 ILCS
115/9.5(a) (2019) (“An employer shall reimburse an employee for all nec‐
essary expenditures or losses incurred by the employee within the em‐
ployee’s scope of employment …. An employer is not responsible for losses
due to an employeeʹs own negligence….”) (emphasis added). Thus, depend‐
ing on state law and private agreements, it is at least possible for in‐house
counsel to face malpractice claims brought by their employers. See, e.g.,
Kaye v. Rosefielde, 432 N.J. Super. 421, 478–83 (App. Div. 2013) (allowing
malpractice claim by employer against its general counsel), revʹd on other
grounds, 223 N.J. 218 (2015). In fact, insurance companies offer “Employed
Lawyers” liability policies that cover such situations. See, e.g., Chubb In‐
surance Co., Employed Lawyers Professional Liability,
https://www.chubb.com/us‐en/business‐insurance/employed‐lawyers‐
professional‐liability.html (covering in‐house counsel’s “Defense of
claims brought by the organization”).
6 No. 20‐2012
II. Discussion
Plaintiffs’ appeal targets only two of the district court’s
findings. First, plaintiffs argue that Fisher owed a duty to
Marlowe, both as an individual client and as an intended ben‐
eficiary of his services to UFT. Second, plaintiffs argue that
they did not need to plead proximate cause as to the supple‐
mental agreements because Fisher’s advice to use such agree‐
ments was “in itself improper.” See Metrick v. Chatz, 266 Ill.
App. 3d 649, 654–55, 639 N.E2d 198, 202 (1994). Even if the
plaintiffs were correct on both issues, their claims still fail.
A. Duty to Marlowe
We review de novo, meaning without deference, the dis‐
trict court’s dismissal under Rule 12(b)(6), accepting the plain‐
tiffs’ factual allegations as true and asking only whether they
present “a claim to relief that is plausible on its face.” Bell At‐
lantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). In this diver‐
sity case, Illinois’ substantive law governing legal malpractice
applies. Great West Cas. Co. v. Robbins, 833 F.3d 711, 715 (7th
Cir. 2016), citing Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938).
The elements of legal malpractice in Illinois are “(1) the
existence of an attorney‐client relationship that establishes a
duty on the part of the attorney; (2) a negligent act or omission
constituting a breach of that duty; (3) proximate cause; and (4)
damages.” TIG Ins. Co. v. Giffin Winning Cohen & Bodewes, P.C.,
444 F.3d 587, 590–91 (7th Cir. 2006), citing Lopez v. Clifford Law
Offices, 362 Ill. App. 3d 969, 974–75, 841 N.E.2d 465, 470–71
(2005) (collecting Illinois cases). The client’s reasonable belief
rather than the attorney’s words or actions ultimately controls
whether an attorney‐client relationship has been formed. See
Morris v. Margulis, 307 Ill. App. 3d 1024, 1037, 718 N.E.2d 709,
No. 20‐2012 7
719 (1999), rev’d on other grounds, 197 Ill. 2d 28, 754 N.E.2d 314(2001); Restatement (Third) of the Law Governing Lawyers
§ 14 (Am. L. Inst. 2000). An attorney’s duty normally extends
only to the client, but “if a nonclient is an intended third‐party
beneficiary of the relationship between the client and the at‐
torney, the attorney’s duty to the client may extend to the non‐
client as well.” In re Estate of Powell, 12 N.E.3d 14, 20 (Ill. 2014).
The third party “must prove that the primary purpose and
intent of the attorney‐client relationship itself was to benefit
or influence the third party.” Id., quoting Pelham v. Gries‐
heimer, 92 Ill. 2d 13, 21, 440 N.E.2d 96, 100 (1982).
Plaintiffs argue that Marlowe was in fact Fisher’s client on
certain matters where he advised her personally and that he
otherwise owed her a duty as an intended beneficiary of his
attorney‐client relationship with the company, UFT. Plaintiffs
argue that Marlowe reasonably believed that Fisher was her
lawyer when he personally drafted and advised her on her
own supplemental agreement with UFT and when he advised
her to forgo D&O insurance. Plaintiffs further claim that
Fisher owed Marlowe a duty when drafting his own supple‐
mental agreement with UFT because Marlowe was the in‐
tended third‐party beneficiary of Fisher’s agreement.
Even if we assume for purposes of argument that Marlowe
was Fisher’s client regarding her own supplemental agree‐
ment and the D&O insurance decision, plaintiffs have failed
to plead any plausible malpractice claims arising from those
matters. On appeal, the plaintiffs have not challenged the dis‐
trict court’s separate finding that the complaint failed to plead
that forgoing D&O insurance proximately caused any loss
from the arbitration award. See UFT Commercial Finance, 2020
WL 2513097, at *7 (“Plaintiffs have failed to plead proximate
8 No. 20‐2012
cause with regards to … D&O Insurance….”). Plaintiffs also
do not challenge the finding that, since the arbitration con‐
cerned only Fisher’s unpaid wages, the complaint does not
plead any damages from UFT’s agreements with other em‐
ployees, including Marlowe. Thus, even if we assumed that
Marlowe was a client with respect to her own agreements
with UFT and the D&O insurance decision, the district court’s
other unchallenged findings on proximate cause and dam‐
ages foreclose any viable malpractice claims arising from
those matters. As to plaintiffs’ argument that Marlowe was an
intended beneficiary of Fisher’s supplemental agreement, we
explain next why, even if that were true, plaintiffs’ claims re‐
garding Fisher’s agreement still fail.
B. Proximate Causation Regarding Supplemental Agreements
The plaintiffs’ second challenge on appeal is that the dis‐
trict court erred in finding that the complaint failed to plead
proximate causation as to Fisher’s supplemental agreement.
The district court found that proximate causation had not
been pled because “Plaintiffs do not allege that they would
have opted against using the supplemental agreements …
had Fisher fully advised them.” UFT Commercial Finance, 2020
WL 2513097, at *7. Plaintiffs say they did not need to plead
causation as to the supplemental agreements because, under
Illinois law, causation is assumed if the attorney’s recom‐
mended conduct is itself illegal. See Metrick, 266 Ill. App. 3d
at 655, 639 N.E.2d at 202 (“[T]o establish the element of prox‐
imate cause, it is necessary for the client to both plead and
prove that had the undisclosed risk been known, he or she
would not have accepted the risk …. Such is not the case, how‐
ever, when the course of action the attorney recommends is in itself
improper under the circumstances presented.”) (emphasis added).
No. 20‐2012 9
But even if the plaintiffs are right about this legal rule, it could
help them only if Fisher in fact recommended illegal conduct.
He did not, and the arbitrator’s ruling puts that point beyond
reasonable factual dispute. We may consider the arbitrator’s
ruling on a motion to dismiss because it is so central to the
complaint. E.g., Williamson v. Curran, 714 F.3d 432, 435–36 (7th
Cir. 2013) (collecting cases and affirming dismissal based on
such documents); Bogie v. Rosenberg, 705 F.3d 603, 608–09 (7th
Cir. 2013) (same).
The plaintiffs contend that causation should be assumed
with respect to Fisher’s supplemental agreement because the
arbitrator found it was an illegal “deferred compensation
agreement” (DCA) under the Illinois Wage Payment and Col‐
lection Act. According to the plaintiffs, the agreement was il‐
legal because Fisher disclaimed his right to payment until the
company received more funding, which violated the Act’s
prohibition against “any release or restrictive endorsement
required by an employer as a condition to payment,” 820 ILCS
115/9. Plaintiffs also say that’s how the arbitrator read the
agreement.
Plaintiffs misread both the agreement and the arbitrator’s
award. The arbitrator most definitely did not find that Fisher’s
supplemental agreement was an illegal deferred compensa‐
tion agreement. On the contrary, he explicitly rejected that ar‐
gument. He found that the intent and effect of the agreement
were merely to confirm UFT’s accrued payment obligation to
Fisher:
Both Respondents admit that Fisher is due un‐
paid wages for the time he performed services
for UFT. However, they vigorously contend that
by executing the DCA [Deferred Compensation
10 No. 20‐2012
Agreement], Fisher agreed that the sole source of
payment for his 2014 and 2015 wages was to be
an infusion of outside capital.… There are sev‐
eral problems with this argument.
The document, itself, supported by Fisher’s tes‐
timony, shows from its title and subtitle that
Fisher’s purpose in creating it was to confirm
the amount of wages he was owed for 2014 and
2015. The DCA records the parties’ agreement
that UFT owed him $330,000 for those years.
The DCA further says that it was “… an ac‐
knowledgment of a payment obligation … and
constitutes an agreement as to the total amount
due to the Employee as of December 31, 2015”
and further, that it does not affect Fisher’s other
rights under the EA. Nothing in the document
suggests that it was intended by the parties to
be an amendment to the [original Employment
Agreement]. Also, by its clear language, the
DCA contemplated that Fisher’s compensation
could be “... earlier paid from any other source.”
Dkt. 7‐1, 10–11 (emphasis in original).
Fisher argues that this finding by the arbitrator deserves
issue‐preclusive effect. That is unlikely because arbitration
awards are not required by statute to have issue‐preclusive
effect in federal courts, Kremer v. Chem. Const. Corp., 456 U.S.
461, 477 (1982), and the Supreme Court has often denied the
need to judicially fashion rules to that effect. See McDonald v.
City of West Branch, 466 U.S. 284, 288–89 (1984) (in § 1983 ac‐
tion, federal courts should not afford claim‐ or issue‐preclu‐
sive effect to arbitration award), citing Alexander v. Gardner–
No. 20‐2012 11
Denver Co., 415 U.S. 36, 55–56 (1974) (same for Title VII action),
and Barrentine v. Arkansas–Best Freight System, Inc., 450 U.S.
728, 745–46 (1981) (same for Fair Labor Standards Act claims).
With or without issue preclusion, the arbitrator was
clearly correct on the merits. UFT violated the Act by failing
to pay Fisher as agreed. The supplemental agreement did not
aggravate or add to those violations. It merely memorialized
the parties’ agreement as to how much the company owed
him and the company’s commitment to pay him from any
new capital it could raise in an amount over $1 million. When
the parties entered into the supplemental agreement, Fisher
presumably had a slam‐dunk case under the Act but no po‐
tential defendant that he was willing to sue and that would
have been in a position to pay a judgment. The agreement
makes sense as an interim measure to forestall litigation by
acknowledging the obligation and committing the company
to one way to satisfy it, if it could raise new capital.
The agreement did not disclaim any right to payment. It
said instead that Fisher still could and should be “earlier paid
from any other source.” And the title of the agreement—
“Compensation Owed Richard Fisher (‘Employee’) for 2014‐
2015 under Employment Agreement dated October 1, 2013”—
helps to confirm that its purpose was to confirm the accrued
amount owed to Fisher.
As a result, we reject the plaintiffs’ assertion that proxi‐
mate cause can be assumed with respect to this agreement.
Rather, the plaintiffs needed to plead facts plausibly showing
that, if Fisher had not recommended the supplemental agree‐
ments, the plaintiffs would have taken a different course of
action that would have avoided their liability to Fisher. The
district court correctly found that the plaintiffs did not plead
12 No. 20‐2012
such facts. For instance, the plaintiffs have not pled that with‐
out the supplemental agreements they would have timely
paid Fisher’s wages during his employment or that they
would have fired him to prevent the accumulation of his
wages. The plaintiffs have thus failed to plead causation as to
the supplemental agreements. Plaintiffs also have not chal‐
lenged the court’s similar findings as to the D&O and inde‐
pendent counsel decisions. So the district court’s proximate
causation analysis remains unscathed: “Plaintiffs have failed
to plead proximate cause with regards to the supplemental
agreements, D&O Insurance, and independent counsel.” UFT
Commercial Finance, 2020 WL 2513097, at *7.
That failing, coupled with the unchallenged findings on
damages, forecloses all of plaintiffs’ malpractice claims re‐
garding the supplemental agreements, the original employ‐
ment agreements, and the D&O insurance decision. The judg‐
ment of the district court is AFFIRMED.