FTI v. Worden (continued)

Well now, this is just strange. As we mentioned the last time we looked in on this case, despite having taken hundreds of thousands in fees, the law firm has decided to stiff the client. It really is sad that the loyalty a true professional would be expected to show is subverted to mere pride.
Apparently not having any real defense to the lawsuit, the law firm has filed a rather bizarre motion. Before addressing that motion, some additional background is necessary. FTI had a rather substantial loan with Bank One, a local Rockford, Illinois bank. Worden had represented them when those loans were negotiated. In 2003, when the company was in financial trouble, due in part to not having recovered for the vandalism to the corporation, Jim Schanstra sought to borrow additional funds from the bank. The bank, however, had been sold and noticed that there was no personal guarantee for the outstanding loan. The bank wanted Schanstra to sign a cross-collateralization note before it would lend any money. A cross-collateralization note is a guarantee by the individual that he will pay the loans of another, in this case, the corporation. Schanstra absolutely did not want to guarantee the corporate note. Just before he was ready to finalize the loan, Worden told him that the law firm could no longer represent him with regard to the loan as the firm also represented the bank. Somewhat dumbstruck, Schanstra went to a new lawyer to whom the firm referred him and signed a note, which had a cross-collateralization clause. Thereafter, Schanstra was forced into personal bankruptcy. In his bankruptcy, he listed his ownership of the corporation, but did not list the assets of the debt as there is no way to do so on a bankruptcy form. The bank objected to his bankruptcy and Schanstra ultimately settled with the bank, paying a limited amount of money but also giving the bank his personal causes of action. The law firm is now claiming that since Schanstra gave his personal causes of action to the bank, that therefore he was also giving the corporations rights to the bank and that therefore the case should be dismissed.
That motion is stupid for a number of reasons:
1. Corporations are legal entities separate from their stockholders. If this were not true, any time a stockholder of a corporation assigned his interest in a personal cause of action that would also include every corporation in which he owned stock. Ignoring the possible anomalies that would arise when different shareholders assigned interests to separate people, the abolition of the difference between individuals and corporations would necessarily invalidate the protections that the corporate structure provides.
2 For a corporation to give anything away, it is necessary that the shareholders or president give it away in the corporate name, something which did not occur here.
3. Even if Schanstra’s ceding of his personal actions to the bank were to be seen as giving the corporate action to the bank, it is only the right to proceeds that is given not the ability to sue. Here then, the suit could not be dismissed, but the proceeds would go to the bank
We shall see if the judge can understand these basic rules.

FTI v. Oliver, Worden and Close in Rockford, Illinois

FTI International, Inc. is an Illinois corporation that faced several difficulties in 2001. It manufactured automatic assembly machines when the market was being manipulated by and taken over by China. Despite this pressure, FTI was managing to get by until an employee of its security company, for reasons best known to him, vandalized the company. The resulting damage included not only the physical plant, but a good deal of product, inventory and tools. The product which had been sold created the biggest problem for the company as not only was the needed cash flow now unavailable, but the delay in shipping product to major customers caused a rift that caused the loss of those customers. And those customers provided literally millions of dollars in revenue for the company. The company filed a claim against its insurance company. That claim was handled by the companies attorneys, Oliver, Close, Worden, Winkler & Greenwaldof Rockford, Illinois. The claim was for in excess of $500,000, of which the insurance company, Cincinnati Insurance, paid $90,000. Naturally, a lawsuit ensued. Not only was the lawsuit not promptly resolved, and a result of the loss of those proceeds combined with the loss of current and future revenue was that FTI closed its doors, but the law firm actually failed to properly prosecute the case and the case was ultimately dismissed because of that failure. Stunningly, a lawyer from the law firm actually represented to the Court that she wasn’t sure if the firm represented FTI. Sometime after that, Curt Worden, the lawyer from the firm who actually was the contact between FTI and the firm, suggested to Jim Schanstra, president of the corporation, that the case be settled for $150,000. Of course, no such offer was made by Cincinnati and Schanstra rejected the offer in any event. When Schanstra ultimately found out that the case had not been prosecuted, the corporation sued the law firm. Schanstra, not having any faith in the legal system, worries about what a judge might do.
The key to analyzing any case is determining the facts, figuring out what the issues are, finding the applicable law and then applying the law to the facts. We have set out the facts so the next step is to determine the issues are. To do that we determine what it is that the party wants, the issues tell us how to get there. This case is a simple legal malpractice case. The issue is whether the law firm is liable to FTI. In order to prove its case, FTI must establish that the law firm owed it a duty, that the firm breached the duty and that the corporation suffered damages as a result.
Applying the law to the established facts, the attorney client relationship has established the duty, the failure to prosecute the case is the breach of that duty and the failure to recover from the insurance company shows that there are damages.
Given the rather straight forward nature of the malpractice, and further given that FTI and its president, Jim Schanstra, have paid the firm literally hundreds of thousands of dollars, one might suppose that the firm would feel an obligation to fess up and make sure that compensation is promptly paid by its malpractice insurance carrier. One would be wrong.
We will monitor the case.