                               In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________

No. 14-3632
RONALD R. PETERSON, as Trustee for the estate of Lancelot
Investors Fund, Ltd.,
                                       Plaintiff-Appellant,

                                 v.

KATTEN MUCHIN ROSENMAN LLP,
                                                 Defendant-Appellee.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
          No. 12 C 3393 — Harry D. Leinenweber, Judge.
                     ____________________

       ARGUED APRIL 16, 2015 — DECIDED JULY 7, 2015
                ____________________

   Before BAUER, EASTERBROOK, and SYKES, Circuit Judges.
    EASTERBROOK, Circuit Judge. As we discuss in Peterson v.
McGladrey LLP, No. 14-1986 (7th Cir.) (McGladrey II), also is-
sued today, the Trustee appointed to marshal the assets of
Lancelot Investors Fund and other entities in bankruptcy
(collectively “the Funds”) has filed multiple suits against
solvent entities that, the Trustee maintains, failed to detect
2                                                 No. 14-3632

the peril the Funds were in and help curtail their risks. See
also Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594 (7th
Cir. 2012) (McGladrey I); Peterson v. Somers Dublin Ltd., 729
F.3d 741 (7th Cir. 2013); Peterson v. Winston & Strawn LLP, 729
F.3d 750 (7th Cir. 2013).
   This appeal concerns the Trustee’s contention that Katten
Muchin Rosenman LLP committed legal malpractice during
the six years it advised the Funds how to structure their
transactions with entitles controlled by Thomas Petters. As
we recount in the other opinions we have cited, the Funds
loaned money to the Petters vehicles, which in turn suppos-
edly financed some of Costco’s inventory. Petters insisted
that the Funds not contact Costco; doing that, he said, would
upset his favorable business relations with it.
    Security for the Funds’ advances was supposed to come
in two forms: paperwork showing the inventory Petters fur-
nished and Costco’s undertaking to pay, and a “lockbox”
bank account into which Costco would deposit its payments
for the Funds to draw on, eliminating any risk that Petters
would put his hand into the till. That is how the Funds de-
scribed the arrangement to their own investors. Yet Costco
never put a penny into the account; all of the money came
from a Petters entity. Gregory Bell, who established and
managed the Funds, asserts that Petters told him that Costco
had insisted on paying one of Petters’s vehicles. As we ob-
serve in McGladrey II, however, Bell (and the Funds) lied to
investors about the arrangements and asserted that the mon-
ey came directly from Costco. The actual setup left the Funds
at Petters’s mercy—and he had no mercy, just as he never
had any dealings with Costco. When Petters’s Ponzi scheme
collapsed, so did the Funds.
No. 14-3632                                                    3

    The Trustee’s complaint contends that Katten violated its
duty to its clients by not telling Bell that the actual arrange-
ment (no checks with Costco, no money directly from Cost-
co) posed a risk that Petters was not running a real business.
Katten had been engaged to structure transactions, the Trus-
tee asserts, and part of that duty entails telling the client
what contractual devices are appropriate to the situation.
The complaint focuses on two periods: first, a time during
2003 when principal contracts were being negotiated and
signed; second, a time during 2007 when Petters fell behind
in payments to the lockbox (he asserted that Costco was late
paying him) and the Funds consulted Katten about what to
do. According to the complaint, in 2003 Katten did not ad-
vise the Funds to ask for additional protections—the Trustee
believes that Katten’s lawyers did not recognize the risk from
the combination of no contacts and no direct payments, plus
the potential that the paperwork purporting transactions
with Costco had been forged. The complaint also alleges that
in 2007 Katten advised the Funds to defer the due dates on
the payments, and that no other change was necessary, even
though the delay coupled with the other indicators should
have alerted any competent transactions lawyer to the possi-
bility of fraud, and the lawyer should have counseled the
client to obtain better security.
    The district court dismissed the complaint under Fed. R.
Civ. P. 12(b)(6) for failure to state a claim on which relief may
be granted. Instead of taking the complaint on its own terms,
the district court’s opinion narrates the events from the law
firm’s perspective. Katten maintains, and the opinion states,
that Bell knowingly bypassed verification with Costco in or-
der to obtain a higher interest rate from Petters. Thus the
4                                                  No. 14-3632

Funds knowingly took a risk and cannot blame a law firm
for failing to give business advice.
    There are three problems with this decision. First, it rests
on a factual view extrinsic to the complaint and therefore is
not an appropriate use of Rule 12(b)(6). The complaint alleg-
es that Bell attributed the Funds’ high return at least in part
to the lack of direct verification with Costco and that he told
some would-be investors about this tradeoff, but it does not
allege that Bell was indifferent to legal advice concerning
how to curtail risks given the no-contact constraint.
    Second, the decision does not engage the complaint’s
main contention—not that Katten was supposed to do some-
thing about Petters’s no-direct-contact edict, but that Katten
had to alert its client to the risk of allowing repayments to be
routed through Petters, drafting and negotiating any addi-
tional contracts necessary to contain that risk. As the com-
plaint depicts matters, Bell did not appreciate the difference
between funds from Costco and funds from Petters. A com-
petent transactions lawyer should have appreciated that the
former arrangement offers much better security than the lat-
ter and alerted its client. If a client rejects that advice, the
lawyer does not need to badger the client; but the complaint
alleges that the advice was not offered, leaving the client in
the dark about the degree of the risk it was taking.
   The third problem is that the decision does not identify
any principle of Illinois law that sharply distinguishes be-
tween business advice and legal advice. It is hard to see how
any such bright line could exist, since one function of a
transactions lawyer is to counsel the client how different le-
gal structures carry different levels of risk, and then to draft
and negotiate contracts that protect the client’s interests. A
No. 14-3632                                                              5

client can make a business decision about how much risk to
take; the lawyer must accept and implement that decision.
But it is in the realm of legal advice to tell a client that the
best security in a transaction such as this one is direct verifi-
cation with Costco plus direct deposits to a lockbox; the sec-
ond-best is direct deposits to a lockbox; and worst is relying
wholly on papers over which Petters had complete control,
for they may be shams with forged signatures by Costco
managers who have never heard of Petters. Knowing de-
grees of risk presented by different legal structures, a client
then can make a business decision; but it takes a competent
lawyer, who understands how the law of secured transac-
tions works (and who also knows what’s normal in the
world of commercial factoring that Petters claimed to prac-
tice), to ensure that the client knows which legal devices are
available and how they affect risks.
    The district court did not cite any Illinois statute or deci-
sion holding that a transactions lawyer never needs to sup-
ply a client with legal information that affects the degree of
business risk attached to a transaction. Nor does Katten’s
brief in this court. Our own search did not turn up any such
case. The district court relied principally on a federal district
court’s decision, Abrams v. DLA Piper (US) LLP, 2013 U.S.
Dist. LEXIS 82484 (N.D. Ind. June 12, 2013), based on Illinois
law. The district court quoted this passage:
   The Plaintiffs do not suggest that the Defendant breached a
   standard of care in the legal services it provided; rather, the
   Plaintiffs are alleging, in essence, that the Defendant should not
   have provided legal services at all because the transactions were
   disadvantageous to the Debtor, and because the Defendant rep-
   resented the Debtor. The Plaintiffs also allege, however, that the
   Debtor itself approved every legal action taken by the Defendant
   on behalf of the Debtor. The advice the Plaintiffs challenge, then,
6                                                            No. 14-3632

    is not the legal advice provided by the Defendant. Rather, the
    Plaintiffs are challenging the Defendant’s failure to give the
    Debtor business advice—specifically, the Defendant’s failure to
    advise the Debtor against engaging in the [transactions]. Such al-
    legations do not state a claim for legal malpractice.

Id. at *20–21. That may or may not be a correct statement of
Illinois law, but it has nothing to do with the Trustee’s
claims. The Trustee does not fault Katten for failing to advise
the Funds to refuse to do business with Petters. The Trustee
faults Katten for not advising the Funds about the value of a
direct-deposit lockbox and for not recognizing, even after
Petters fell behind in payments, that the existing arrange-
ments were insecure, compared with other arrangements
that could have been adopted. Advising clients how best to
maintain security for their loans using legal devices is a vital
part of a transactions lawyer’s job.
   The only other case on which the district court and Kat-
ten rely comes from the Supreme Court of New Jersey,
which wrote:
    Malpractice in furnishing legal advice is a function of the specific
    situation and the known predilections of the client. An attorney
    in a counselling situation must advise a client of the risks of the
    transaction in terms sufficiently clear to enable the client to as-
    sess the client’s risks. The care must be commensurate with the
    risks of the undertaking and tailored to the needs and sophistica-
    tion of the client.

Conklin v. Hannoch Weisman, P.C., 145 N.J. 395, 413 (1996).
    It’s awfully hard to see how Conklin helps Katten, wheth-
er or not it represents the law of Illinois—Conklin has been
cited by two Illinois decisions, but not for the point in the
quoted passage, see Lopez v. Clifford Law Offices, P.C., 362 Ill.
App. 3d 969, 975 (2005); Community College District No. 508 v.
No. 14-3632                                                     7

Coopers & Lybrand, 208 Ill. 2d 259, 272 (2003)—since the com-
plaint alleges that Katten did not advise its clients “of the
risks of the transaction in terms sufficiently clear to enable
the client to assess the client’s risks.” The complaint alleges,
indeed, that Katten did not advise the Funds at all about how
different legal devices for securing and collecting on loans
affect the risks to which the lenders (i.e., the Funds) are ex-
posed.
    Moreover, it is hard to see how Conklin’s principle could
be applied at the pleading stage. One part of Conklin that
Lopez endorsed is the proposition that legal advice “must be
… tailored to the needs and sophistication of the client.”
Lopez, 362 Ill. App. 3d at 975, quoting from Conklin. The
“needs and sophistication of the client” is a factual issue un-
suited to a motion under Rule 12(b)(6). The complaint does
not tell us how sophisticated Bell and the Funds were about
commercial factoring and the legal devices available for
lenders’ protection. Nor does it reveal what Katten was hired
to do—what kind of advice the Funds wanted, what kind of
advice Katten promised to provide. Without knowing these
facts, which are matters for summary judgment or trial, it is
not possible for the court to determine whether Katten per-
formed its undertaking negligently.
    We take the point that a transactions lawyer’s task is to
propose, draft, and negotiate contractual arrangements that
carry out a client’s business objective, not to tell the client to
have a different objective or to do business with a different
counterparty. See Behrens v. Wedmore, 698 N.W.2d 555, 572–73
(S.D. 2005) (a lawyer did not commit malpractice by oversee-
ing the closing of an unsecured loan to a borrower that be-
came bankrupt; as “experienced business people” the clients
8                                                   No. 14-3632

assumed the risk of the borrower’s default). A lawyer is not a
business consultant. But within the scope of the engagement
a lawyer must tell the client which different legal forms are
available to carry out the client’s business, and how (if at all)
the risks of that business differ with the different legal
forms. Even if Bell was determined to do business with Pet-
ters, the Fund’s lawyers still could have explained how to
structure the transactions in a less risky way, and if Petters
refused to cooperate then Bell might have reconsidered lend-
ing the Funds’ money to his operations. The Trustee alleges
that Katten did not offer any advice about how relative risks
correspond to different legal devices, and its complaint
states a legally recognized claim for relief. Whether the law
firm has a defense—and whether any neglect on its part
caused injury—are subjects for the district court in the first
instance.
   The judgment is reversed, and the case is remanded for
proceedings consistent with this opinion.
