7th Circuit rules in favor of attorneys in failed business investment

A group of investors suing attorneys who worked on the establishment of two business entities – which later failed – were unable to show the 7th Circuit Court of Appeals that the attorneys owed the investors any legal duty.

The federal appellate court upheld summary judgment in favor of Beau Jack White and James Beaman and their firm Johnson Beaman Bratch Beal and White LLP on the investors’ claims of RICO violations, conversion, securities fraud, civil conspiracy and legal malpractice.

Real estate investor Chad Seybold hired White and Beaman to help him create two business entities, one of which would be partially owned by a group of investors. At a seminar with potential investors, White explained the concept of limited individual liability afforded by an LLC structure. Seybold told the potential investors that White represented one of the new companies being formed, he’s looking out for the investors’ best interests, and White is working for Seybold and the investors. White never clarified or corrected Seybold’s statements that he was not the attorney for the investors.

Investors sank more than $1 million in Seybold’s plan; about a year later he informed investors he was filing for bankruptcy and that their investments were gone.

The plaintiffs alleged that they each established an attorney-client relationship with the defendants, and even if they didn’t, the defendants still owed them a duty under the Indiana Rules of Professional Conduct, most especially Rule 4.3 laying out a lawyer’s responsibility when dealing with unrepresented persons.

The only attorney-client relationship formed was with the two businesses, the 7th Circuit ruled, rejecting the investors’ claim that White’s presentation at the seminar implied existence of the attorney-client relationship with each investor. The judges also didn’t think Seybold’s comments during White’s presentation implied an attorney-client relationship with investors. They also rejected the claims that a duty was implied under the Rules of Professional Conduct.

“Further, several plaintiffs’ subjective beliefs demonstrate that they understood that the defendants were acting on behalf of the investors as a group, not individually, and that the defendants’ involvement in the investment plan did not last beyond the companies’ formation. And the disclaimer included in the operating agreement that each investor signed should have alerted a reasonable investor that the defendants were not representing them in their personal capacities,” Judge Daniel Manion wrote.

The 7th Circuit also found the investors couldn’t rely on the statements made at the seminar to support their securities fraud or actual fraud claims.

“We need not address the merits of each independent tort … because the plaintiffs have failed to demonstrate that the defendants acted in concert with Seybold to commit any unlawful act, or that they accomplished a lawful purpose through unlawful means,” Manion wrote.