In 2013, the U.S. Commodity Futures Trading Commission initiated an action against Alphametrix, LLC (AML), a CFTC registered commodity pool operator and trading advisor, along with its parent company, for injunctive relief, disgorgement of misappropriated funds, and penalties. This action was due to AML failing to reinvest $2.8 million in rebates back into commodity pools in accordance with rebate agreements. Rather than reinvesting the funds, AML had transferred the funds into accounts held by its parent company which had never been registered with the CFTC. Due to the lawsuit, a receiver was appointed for AML and its parent. Eventually, the lawsuit against the officers was settled.
The receiver then brought a legal malpractice claim against the corporate law firm of AML for its failure to properly advise it of risks relating to amendments of promissory notes between the corporation and its managing member. From 2006 to 2012, the managing member of AML made numerous undocumented loans to himself which totaled over $1,000,000.00. However, in 2012, AML’s auditor became concerned over the amount of the receivable and that it was undocumented. To accommodate the auditor, the managing member had AML’s corporate attorney prepare a promissory note which required him to pay monthly installments of over $7,000 on the loan with a balloon payment in 2015.
Despite the loan repayments, the auditor became increasingly concerned with AML’s cash flow problems in subsequent audits and made the officers aware. The problems did not dissipate though and in February 2013, AML’s primary lender claimed it was in violation of certain loan covenants and it therefore received additional guaranties from AMG and its other related entities. AML’s corporate attorney was aware of the auditor’s apprehension to the situation as well as the re-negotiated financial terms with the primary lender. Nevertheless, when AML’s managing member requested that the law firm amend the promissory note terms, he obliged him. Critically, the amended notes eliminated the monthly payments to AML and also extended the due dates for the balloon payment to 2023. Furthermore, the amended notes also eliminated AML’s protection against default in the event that the managing member was subject to bankruptcy proceedings.
After the receiver was appointed, he brought a legal malpractice action against the corporate attorney for preparing the amended notes without first advising AML that the amendments would eliminate its ability to immediately demand payment of the loans in the event of a default. The corporate law firm then filed a motion to dismiss with its best arguments being standing and duty.
First, the firm argued that the receiver lacked standing because in the CFTC Action an order was entered stating that the primary lender’s security interest had priority over other general unsecured creditors. However, this argument was disposed of by the Court which noted that the order only related to the CFTC action and not the claims in the instant case. Further, it acknowledged that the primary lender entered into a settlement agreement with the primary lender which set out terms of what the primary lender would recover in the event the instant suit had a successful recovery. Lastly, it recognized that the claim could not be assigned to the creditor because it is well-established in Illinois that legal malpractice claims are unassignable.
With respect to lack of duty, the Court also swiftly struck down the law firm’s arguments. The Court noted that the law firm represented AMG and its subsidiaries from 2005 through 2013, and thus owed a duty to the entities and not the managing member. Citing Peterson v. Katten Muchin Rosenman, LLP, 792 F.3d 789, 790 (7th Cir. 2015), the Court further noted that the law firm had a duty to advise the corporation of the various risks in amending the notes.
The case is styled Driscoll v. Kins, 16-c-9359, (N.D. Ill. Sept. 18, 2017).
Alex and the Patterson Law Firm, LLC handle legal malpractice actions throughout Illinois and Indiana. If you have a matter you would like to discuss, you can contact him at (312) 750-1820 or apasso@pattersonlawfirm.com.