Peterson v. Katten Muchin Rosenman LLP
- Citation:
- Case No. 14-3632
- Tag(s):
-
- Ruling:
- The Seventh Circuit reversed the district court's order dismissing the bankruptcy trustee's legal malpractice complaint against Katten Muchin Rosenman LLP ("Katten"), holding that the trustee properly stated a claim for relief by alleging that the firm failed to advise its now-bankrupt client how best to maintain security for its loans. The Seventh Circuit identified three errors committed by the district court: (1) it based its opinion on events as described by Katten, not based on the actual allegations contained in the trustee's complaint, in violation of Rule 12(b)(6); (2) it ignored the trustee's main allegation -- i.e. that Katten failed to warn the debtor of the risks associated with the loan structure, which lacked a mechanism for verifying the purported source of loan repayment and underlying collateral; and (3) it mischaracterized the complaint as involving allegations regarding business advice -- not legal advice. The court concluded that Katten had no obligation to choose a loan structure for the debtor but that the trustee properly alleged that Katten did have a duty to advise the debtor regarding the risks associated with the loan structure at issue.
- Procedural context:
- Lancelot Investors Fund, Ltd. ("Lancelot") filed a voluntary petition for relief under chapter 7 of the bankruptcy code, and Ronald R. Peterson ("Peterson") was appointed as the chapter 7 trustee. Peterson filed a legal malpractice complaint in the United States District Court for the Northern District of Illinois against Katten. The district court dismissed the complaint. The Seventh Circuit reversed and remanded.
- Facts:
- Lancelot was a fund that invested in, among other things, entities that Thomas Petters managed for the stated purpose of financing Costco’s electronics inventory. Instead, Petters was running a Ponzi scheme, which ultimately collapsed in 2008. Petters induced Lancelot to invest in the scheme by falsely claiming that Lancelot's loans would be secured by (a) Costco’s inventory and (b) a “lockbox” arrangement under which Costco would make payments into accounts that Lancelot controlled (and that Petters and his entities would not control). Petters insisted that Lancelot not contact Costco (which would have allowed Lancelot to independently verify Costco's inventory), purportedly to ensure that Lancelot would not upset Petters' favorable business relations with Costco. In fact, Petters never did any business with Costco, and Costco never funded the lockbox account. To keep the scheme afloat, Petters funded the lockbox account with proceeds from new investors. When the scheme collapsed, so did Lancelot, which filed for chapter 7 bankruptcy protection. The chapter 7 trustee (Peterson) alleged that Katten, which advised Lancelot regarding its loans to the Petters entities, committed legal malpractice by not advising Lancelot of the risks associated with the loan structure and its lack of controls. The district court dismissed. The Seventh Circuit reversed.
- Judge(s):
- Easterbrook, Bauer, and Sykes
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