                            Illinois Official Reports

                                   Appellate Court



        Meriturn Partners, LLC v. Banner & Witcoff, Ltd., 2015 IL App (1st) 131883



Appellate Court        MERITURN        PARTNERS,     LLC,  MERITURN        FUND
Caption                MANAGEMENT, LLC, MERITURN FUND, LP, SSI INVESTORS,
                       LLC, and SSI HOLDCO, INC., Plaintiffs-Appellees and
                       Cross-Appellants, v. BANNER AND WITCOFF, LTD. and JOSEPH
                       BERGHAMMER, Defendants-Appellants and Cross-Appellees.



District & No.         First District, Second Division
                       Docket No. 1-13-1883


Filed                  April 28, 2015


Decision Under         Appeal from the Circuit Court of Cook County, No. 10-L-3985; the
Review                 Hon. William J. Haddad, Judge, presiding.



Judgment               Affirmed.



Counsel on             Donohue Brown Mathewson & Smyth LLC (Karen Kies DeGrand and
Appeal                 Matthew J. Hammer, of counsel), both of Chicago, for appellants.

                       Williams Montgomery & John Ltd., of Chicago (Michael C. Bruck,
                       Megan A. Rees, and Alyssa M. Reiter, of counsel), for appellees.



Panel                  PRESIDING JUSTICE SIMON delivered the judgment of the court,
                       with opinion.
                       Justices Neville and Liu concurred in the judgment and opinion.
                                              OPINION

¶1       This is a legal malpractice case in which a jury found that the plaintiffs were entitled to a
     judgment of $6 million. Defendants appeal arguing that they should be made to pay less;
     plaintiffs’ cross-appeal arguing that they are entitled to more. We affirm the judgment entered
     by the trial court.

¶2                                          BACKGROUND
¶3        Plaintiff Meriturn Partners, LLC, is a private equity company. Meriturn, together with
     other individuals and companies, invests in troubled businesses, attempting to turn them
     around for a profit. Defendant Joseph Berghammer is an attorney who specializes in the area of
     intellectual property and is employed by defendant Banner & Witcoff, Ltd., a law firm.
¶4        In 2005, Meriturn began to explore an investment in a company called Sustainable
     Solutions, Inc. Sustainable Solutions was in the business of repurposing industrial waste into
     usable products. Lee Hansen, one of the founders of Meriturn, took the most active role on the
     Meriturn side of the undertaking. After conducting a preliminary investigation into the
     sensibility of the investment, Meriturn and Sustainable Solutions agreed on a “term sheet” that
     outlined the general terms of the proposed transaction. However, a final decision on whether to
     invest was reserved until more thorough due diligence could be conducted. Meriturn retained
     Jeffrey Hechtman, an attorney, to structure and oversee the transaction. Because Sustainable
     Solutions’ business relied on a number of proprietary processes that were the subject of
     patents, Hechtman recommended that Meriturn retain counsel that regularly worked on
     intellectual property matters. Hechtman recommended Berghammer of Banner & Witcoff to
     Lee Hansen and introduced them to each other.
¶5        After an initial consultation, Berghammer agreed to perform due diligence on certain
     intellectual property issues involved in the proposed transaction. In a letter to Hansen,
     Berghammer memorialized the initiation of the representation and set forth the basic terms of
     the parties’ relationship. The letter refers only to the representation of Meriturn Partners, LLC.
     However, Meriturn’s typical investment strategy was to arrange and manage a transaction in
     which some of the money from its fund would be invested along with some of its individual
     clients’ money. For this particular transaction, Meriturn Fund was to commit $3 million of its
     money and the other $3 million was to come from an investor group represented by Walter
     McCormack and Cary Steinbeck. The structure of the transaction required the creation and
     utilization of multiple business entities. While due diligence was being performed by
     Berghammer, there were certain instances in which Berghammer communicated with the
     representatives of the investor group, such as on conference calls and via email. The parties
     dispute whether Berghammer was fully aware of the structure of the transaction and of the role
     played by the outside investor group. The main issue in this appeal is whether Berghammer
     and Banner & Witcoff represented only Meriturn in its portion of the investment or if they also
     represented the outside investor group.
¶6        Banner & Witcoff undertook the patent review, and the research into the patents was
     principally assigned to Paul Rivard, a partner at Banner & Witcoff. This transaction was
     Rivard’s first or second patent due diligence project. Eventually, Banner & Witcoff
     communicated to Meriturn that all of the patents at issue in the transaction were owned and
     controlled by Sustainable Solutions. Relying on this advice, Meriturn went forward with the

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       investment. A new business entity was formed that encapsulated Meriturn’s takeover of the
       previous iteration of Sustainable Solutions.
¶7         Lee Hansen became chairman of the board of the new iteration of Sustainable Solutions.
       Soon after the transaction was completed, it was learned that Joy Nunn, the owner of the prior
       iteration of Sustainable Solutions and the president of the new company, was engaged in
       double-dealing and other misdeeds. It was also soon learned that one of the patents, the '179
       patent, was owned by Nunn’s in-laws and not Sustainable Solutions, and that Banner &
       Witcoff’s legal advice was, therefore, erroneous. The company quickly faltered and lost a
       potential business opportunity with a company called SEM. Sustainable Solutions’ proposed
       venture with SEM would have purportedly included a $23 million investment by SEM
       resulting in multimillion dollar, internally projected royalties each year for Sustainable
       Solutions. However, plaintiffs allege that, upon learning that Sustainable Solutions did not
       own the '179 patent, the proposed venture fell apart.
¶8         This case followed. The case was tried to a jury that returned a verdict in the plaintiffs’
       favor for $6 million. Defendants appeal the judgment arguing that they only represented
       Meriturn and, therefore, that they are not liable for the $3 million loss incurred by the outside
       investor group. Defendants also argue that the investment was not totally lost and that there
       was undisputed evidence that some residual value of the investment remained. Plaintiffs’
       cross-appeal arguing that they are entitled to a new trial on the issue of lost profits because the
       negligent acts of defendants deprived them of the gains that would have been realized from this
       or another investment.

¶9                                             ANALYSIS
¶ 10        We must first determine whether the plaintiffs other than Meriturn Partners, LLC, itself are
       entitled to recover for legal malpractice committed by defendants. Defendants maintain that
       Banner & Witcoff agreed to represent Meriturn and Meriturn only. To prevail on a legal
       malpractice claim, a plaintiff must prove the existence of an attorney-client relationship with
       the defendant. USF Holland, Inc. v. Radogno, Cameli & Hoag, P.C., 2014 IL App (1st)
       131727, ¶ 53. To form an attorney-client relationship, both the attorney and the client must
       consent to its formation. Kensington’s Wine Auctioneers & Brokers, Inc. v. John Hart Fine
       Wine, Ltd., 392 Ill. App. 3d 1, 13 (2009). Consent can be express or implied. Zych v. Jones, 84
       Ill. App. 3d 647, 651 (1980). A client cannot unilaterally create the relationship, and the
       putative client’s belief that the attorney is representing him is only one consideration.
       Rosenbaum v. White, 692 F.3d 593, 601 (7th Cir. 2012). However, if an attorney knows that a
       person is relying on his performance of services and he performs for that person’s benefit
       without limitation, an attorney-client relationship can be found. Restatement (Third) of the
       Law Governing Lawyers § 14 (2000). Whether an attorney-client relationship exists, and thus
       whether the attorney owes a duty to a particular person, is a question of law. Blue Water
       Partners, Inc. v. Mason, 2012 IL App (1st) 102165, ¶ 38. However, findings of fact often must
       be made concerning the formation of the attorney-client relationship to, for example, resolve
       disputes concerning communications, acts undertaken, or the parties’ respective
       understandings. See, e.g., Hotze v. Daleiden, 229 Ill. App. 3d 301, 306-09 (1992).
¶ 11        The written retention agreement at issue in this case was expressly between Meriturn
       Partners, LLC, and defendants. Accordingly, the plaintiffs other than Meriturn were required
       to prove that defendants orally agreed to the representation or assented by other conduct.

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       Defendants argue that plaintiffs presented no evidence that Berghammer did anything to
       indicate he represented anyone other than Meriturn itself. Berghammer testified that he had
       never heard of the other named plaintiffs until this litigation began and that he never agreed to
       represent anyone other than Meriturn. Although there were conference calls and emails
       between Berghammer and individuals other than Hansen, Berghammer testified that he simply
       understood the other people to be part of Meriturn.
¶ 12       On the other hand, Hechtman, the lawyer leading the transaction, testified that he was fully
       aware that he represented Meriturn and the outside investor group and that he told
       Berghammer about the structure of the transaction. Hechtman testified that he notified
       Berghammer that defendants were providing representation for the entire transaction and that
       he gave Berghammer the background of some of the investors. Lee Hanson similarly testified
       that he explained the mechanics of the transaction to Berghammer and informed Berghammer
       that other investors were going to be involved. Hanson testified that Berghammer was retained
       to perform the intellectual property work for the entire transaction. Berghammer also gave
       legal advice on conference calls and in emails to the representatives of the outside investor
       group that were reportedly introduced to him as investors.
¶ 13       The evidence shows that Berghammer consented to perform services for the transaction as
       a whole, not just for Meriturn. He knew that other investors were going to be involved and
       knew that their investment was dependent on his work. Despite being told of the existence of
       other investors and their obvious interest in his performance of services, Berghammer never
       attempted to limit the scope of the representation to only Meriturn’s investment activity.
       Berghammer knew that there were investors on a conference call in which he gave legal advice
       and never expressed any concern about exchanging confidential information. Berghammer
       also claimed to have expertise in the area of intellectual property due diligence in the context of
       targeting companies so, considering the circumstances, when he was specifically advised
       about the structure of the transaction, he should have known that his legal advice was flowing
       to people outside of Meriturn. The trial court denied defendants’ motion to dismiss and their
       motion for a judgment notwithstanding the verdict on the basis that no attorney-client
       relationship existed. To the extent that it matters, it is clear that any factual disputes were
       resolved against defendants. The trial court did not err by finding that Berghammer owed a
       duty to the investors other than Meriturn.
¶ 14       Even if we had found that no attorney-client relationship existed between defendants and
       the outside investors, those plaintiffs could recover on the basis that they were known
       third-party beneficiaries to the undisputed attorney-client relationship between Meriturn and
       defendants. If a nonclient is an intended third-party beneficiary of the relationship between the
       client and the attorney, the attorney’s duty to the client may extend to the non-client as well. In
       re Estate of Powell, 2014 IL 115997, ¶ 14. The key consideration in determining whether an
       attorney owes a duty to a nonclient third party is whether the attorney is acting at the direction
       of or on behalf of the client to benefit or influence a third party. Id.
¶ 15       Here, because the aim of the representation was to provide advice about patent ownership
       for the entire transaction, defendants’ duty extended to the outside investors who were to
       directly benefit from defendants’ services. Defendants knew or should have foreseen that a
       breach of the requisite duty of care would result in a loss for both Meriturn and the outside
       investors. There was evidence introduced at trial that Berghammer even directly gave some of
       the outside investors legal advice. It is undisputed that defendants were retained to provide

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       legal services concerning the entire $6 million investment. Thus, defendants were at least
       acting at the direction of Meriturn for the benefit of the investors and, therefore, defendants
       have no legal basis to escape liability when, knowing the structure of the transaction, they
       performed services for the entire transaction without limitation.
¶ 16       Defendants also argue that the trial court erred when it did not reduce the jury award of $6
       million by the salvageable value of the company. Defendants maintain that there was
       undisputed evidence introduced at trial that demonstrated that the salvage value of the
       investment was $345,000. Plaintiffs, however, introduced evidence that the investment was
       completely lost. The jury heard defendants’ argument and the evidence defendants believed
       supported that proposition and the jury rejected it. A jury’s award of damages will not be
       disturbed unless it bears no reasonable relationship to the loss suffered. Newbrough v.
       Lockwood Dairy, 223 Ill. App. 3d 665, 669 (1992). In this case, the jury’s verdict reflects that it
       sided with the plaintiffs and found that the investment was a total loss. The jury resolved the
       proximate causation question of fact in plaintiffs’ favor–finding that the malpractice
       committed by defendants caused a $6 million loss. The jury was entitled to reject the evidence
       offered concerning the salvage value. Even if there was some residual value at the time the
       company began to deteriorate, it would not have been against the manifest weight of the
       evidence for the jury to project, based on the evidence presented, that the loss was ultimately
       everything that was invested. There was evidence to support the amount of the jury’s award
       and, thus, the trial court did not err by entering judgment in the amount of the jury verdict.
¶ 17       In a cross-appeal, plaintiffs contend that they are entitled to a new trial on the issue of lost
       profits. Plaintiffs presented two lost-profit theories in the trial court: an alternative investment
       theory and a sales projection theory. The trial court granted a motion in limine in defendants’
       favor concerning the sales projection theory which precluded plaintiffs from presenting that
       theory at trial. The trial court allowed plaintiffs to go forward on their alternative investment
       theory and, after presenting evidence on that theory at trial, the jury awarded plaintiffs no
       damages for lost profits.
¶ 18       The proper measure of damages in a legal malpractice case puts a plaintiff in a position he
       would have been had the attorney not been negligent. Gaylor v. Campion, Curran, Rausch,
       Gummerson & Dunlop, P.C., 2012 IL App (2d) 110718, ¶ 61. Recovery of lost profits cannot
       be based upon conjecture or speculation, and the evidence must afford a reasonable basis for
       the computation of damages. Drs. Sellke & Conlon, Ltd. v. Twin Oaks Realty, Inc., 143 Ill.
       App. 3d 168, 174 (1986). The plaintiff bears the burden of proving lost profit damages to a
       reasonable degree of certainty. SK Hand Tool Corp. v. Dresser Industries, Inc., 284 Ill. App.
       3d 417, 426 (1996). The existence and amount of damages in a legal malpractice case is a
       question for the jury, and great weight must be given to the jury’s determination. Union
       Planters Bank, N.A. v. Thompson Coburn LLP, 402 Ill. App. 3d 317, 356 (2010).
¶ 19       The alternative investment theory was predicated on the idea that, had defendants
       discovered Sustainable Solutions’ nonownership of the '179 patent, plaintiffs would not have
       invested in Sustainable Solutions and they would have made profits by investing the money
       elsewhere. In support of their alternative investment theory, plaintiffs offered the expert
       testimony of Lawrence Levine. Levine opined that the jury should award damages for lost
       profits in this case in an amount equal to Meriturn’s average rate of return over the history of its
       investments.


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¶ 20       The jury was entitled to reject plaintiffs’ theory that they would have made as much on this
       or another investment as they had made on previous investments. The jury was not required to
       find that, based on past performance, this or any other investment plaintiffs might have made
       would have made any money at all. Meriturn lost 51% on one of its investments and 87% on
       another. Some investments make money and some do not. There are countless things that
       could have gone right or wrong during the course of the new venture. Conditions vary with
       each endeavor and a trier of fact is not required to assume that a particular venture will be
       profitable. Drs. Sellke & Conlon, 143 Ill. App. 3d at 174-75; see also Resolution Trust Corp. v.
       Stroock & Stroock & Lavan, 853 F. Supp. 1422, 1429 (S.D. Fla. 1994) (holding that lost profit
       damages were not available to a client that received poor investment advice from his attorney
       because there was no basis for concluding what the client would have done as an alternative to
       the chosen investment and, therefore, there was no basis for predicting whether any such
       alternative investment would have produced greater or lesser returns than the chosen
       investment).
¶ 21       While average past investment returns might be related to the future returns on another
       investment in some cases, there is no rule that requires a jury to conflate the two. Scott Stringer
       testified as an expert on defendants’ behalf that Levine’s methodology was flawed. Stringer
       stated that, in the context of this case, the results of previous investments were not reliable
       indicators of the result of a future investment. Stringer testified that, for example, Levine
       totally failed to account for the economic downturn from 2007 to 2012, right at the time that
       this investment was made. When expert witnesses present conflicting opinions, it is the
       province of the jury to resolve the disputes. Matthews v. Aganad, 394 Ill. App. 3d 591, 599
       (2009). Evidence was also introduced from which the jury could have found that, while
       defendants’ malpractice caused the initial investment to be lost, it was not the proximate cause
       of any future losses. For example, the jury might have concluded the company would not have
       ultimately been profitable based on the double-dealing and other deceitful actions of Nunn
       rather than the nonownership of the patent. In 2007, the only year for which actual profits and
       losses were measured, Sustainable Solutions had nearly a $4 million operating loss. There is
       also evidence in the record that SEM, the company with which Sustainable Solutions was to
       partner and make millions of dollars per year, went bankrupt the following year. The jury was
       free to conclude that the malpractice caused the loss of the investment but that some factor
       other than defendants’ negligence justified a finding that lost-profit damages were not
       warranted.
¶ 22       The sales projection theory was predicated on the idea that had Sustainable Solutions
       actually owned the '179 patent, plaintiffs would have obtained profits from the operations of
       Sustainable Solutions. Plaintiffs claim that they should have at least been able to present
       evidence of their internally projected profits from the investment or of the projections for the
       proposed venture with SEM that deteriorated as a result of Sustainable Solutions not owning
       the patent.
¶ 23       Because the trial court ruled that plaintiffs could not recover under this theory as a matter
       of law, we review its decision de novo. McWilliams v. Dettore, 387 Ill. App. 3d 833, 844
       (2009). The trial court essentially relied on the “new business rule” to conclude that plaintiffs
       were not entitled to lost profits under this theory. The new business rule precludes expert
       speculation about possible lost profits where there is no historical data to demonstrate a
       likelihood of future profits. SK Hand Tool, 284 Ill. App. 3d at 427. The idea is that a business


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       must have been established before it is interrupted so that the evidence of lost profits is not
       speculative. Id.
¶ 24        Plaintiffs contend that neither Meriturn nor Sustainable Solutions was a new business. That
       is true, but the venture for which they seek profits was a new business. The result plaintiffs
       seek requires a number of assumptions to be made in their favor. In fact, the projections that
       plaintiffs claim support their right to lost profits are all future suppositions. They were
       possible. Not probable nor reasonably certain. This case deals with an unestablished venture
       that sought to go to market with an unestablished product using an unestablished process. The
       trial court did not err by precluding plaintiffs from presenting evidence on their sales
       projection theory.
¶ 25        Put simply, we will never know whether Sustainable Solutions would have been profitable
       had it simply owned the '179 patent. It never was. Perhaps it was a losing investment as others
       had been for Meriturn. There is no evidence that convinces us that it was reasonably certain
       that Sustainable Solutions would have been successful. The jury was charged with assessing an
       amount of damages that, in its estimation, it believed flowed from defendants’ negligence. We
       see no reason to disturb the result at which it arrived.
¶ 26        Accordingly, we affirm.

¶ 27      Affirmed.




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