Chapman must sort out contradictory orders in Wells Fargo, Fifth Third class action

Steve Korris Oct. 21, 2011, 1:50am



Madison County Associate Judge Thomas Chapman must decide whether former Circuit Judge Daniel Stack signed contradictory orders a week before he retired.

Wells Fargo and Fifth Third banks want Chapman to reconsider orders clearing them of most claims in a bond default but certifying a 37 state class action on a negligence claim.

Chapman took it under advisement on Aug. 30, after Wells Fargo argued at a hearing that findings in the first order should have defeated class certification.

Wells Fargo counsel Catherine Schroeder told Chapman, "The two orders were entered on the last week that Judge Stack was on the bench."

"Those motions were pending for over a year and I don't know if it was time constraint or what," she said.

"Overall, those two orders are inconsistent with each other."

Chapman asked plaintiff lawyer Fred Thompson, "As long as the ruling was consistent, the findings can be completely at odds as long as the rulings were not?"

Thompson said, "His order is illustrative on his thought process and his ruling or his holding is the determining part of the order."

Thompson, of Motley Rice in South Carolina, represents investors who bought municipal bonds for construction of nursing homes from 1995 to 1998.

They claim a non profit group in Chicago operated a Ponzi scheme using proceeds of new bond issues to meet obligations of previous bond issues.

Schroeder told Chapman, "This case started out in March of 2001, against 31 defendants, but here today you have four of us."

The other two, bond counsel Gilmore and Bell and accountant Blue and Company, showed up to plead that they can't tell if Stack included them in the class action.

Wells Fargo predecessor Norwest Bank was indenture trustee for bond issues in Wisconsin and Michigan.

A predecessor of Fifth Third filled that role for an Indiana bond issue.

Schroeder said Thompson's complaint relates to occurrences before the default.

"As an indenture trustee your duties are contractual pursuant to the trust agreement, and you don't reach that fiduciary level of responsibility until the bonds go into default."

"It is disingenuous for them to tell you that we have fiduciary duties when the law and the document itself were clear that we only have contractual duties."

For Blue and Company, Mark Bauman said the accountants and the lawyers weren't parties to the contract Stack mentioned in his orders.

"The contract does not give rise to any duties on the part of the accountants or the lawyers," Bauman said.

Schroeder said, "Judge Stack ruled that we had no duty to these plaintiffs. We had no duty to investigate, report or disclose to these plaintiffs.

"They talk about us marketing and selling and bringing the bonds to market but they don't take into account Judge Stack's ruling, that he said defendants played no role in selling, offering or marketing the bonds.

"Wells Fargo made no representations to plaintiffs."

Chapman asked if the class certification order was hopelessly contradictory.

Schroeder said, "I think it is."

Chapman said, "Is there any other way that they can get it to you other than the things he said you're not responsible for?"

Schroeder said, "No, judge, I don't believe that there is."

She said Stack applied Illinois law when 2.8 percent of the class resides in Illinois.

She said the Illinois Supreme Court disfavors multi state class actions.

In New York state alone, she said there were 821 transactions.

"The order just says Illinois law is going to apply, with no analysis, and that's because it's the plaintiffs' proposed order," Schroeder said.

She said the municipalities hired Wells Fargo.

Chapman said, "Your duty is to these municipalities, not to the purchasers?"

Schroeder said Stack stated that Wells Fargo owed no duty to the plaintiffs.

Chapman said, "I think that argument is an acceptable argument."

She finished and Thompson said, "These bonds were marketed to old people."

"These bonds were marketed as boiler room unrated bonds to unsophisticated people, and that is the three thousand people who are members of the class," Thompson said.

He said Stack's choice of law wasn't a choice as to what might be charged to a jury.

He said other defendants absconded.

"The most significant relationship is the state in which the bad actors organized themselves and carried out a bad scheme and were assisted in that scheme in an undeniable way by certain professionals, by certain folks who in the absences of these folks, the securities could not have been brought to market," Thompson said.

Chapman said, "So you're saying that whoever is left in the case, the court in the most significant relationship test can account for the factors by those who are in prison?

"They're not going to be here to put up a fight and the folks that are going to put up a fight, their relationship may be elsewhere?

"Is there any precedent for that thesis?"

Thompson said, "I happen to be in love with that argument but I can't cite you a case as I stand before you."

He quoted Stack's order that some of the bond offerings might not have been permitted if defendants had properly performed their duties.

Chapman said, "Is he saying that's causation?

"This might not have happened but for something somebody did?

"It's not very clear what he means."

Thompson said, "What he means is that for the purposes of showing material issue of fact, that there is a pre default duty.

"Without these guys, none of these bonds could have been marketed."

Chapman said, "You espouse the theory of, after the first one they should have done something?

"Okay, what's the case?

"The fact that they were doing it and it came up later doesn't necessarily spell liability for everyone involved."

Thompson said, "There is one deposition in one of the law firms who declined to continue to operate as -."

Chapman interrupted and said, "They got out of it because they didn't trust what was going on?"

Thompson said, "If you can, you're going to have to read between the lines."

Schroeder broke in and said, "That's not the testimony."

Thompson said he pleaded reckless negligence but Stack certified negligence.

"Any words beyond that that would give rise to punitive damages, I believe would be regarded as surplusage," Thompson said.

"I hate to give that away but that's the way I read his order."

For Fifth Third Bank, Michael Nester of Belleville asked Chapman to reconsider the matter or permit it to go to the appellate court.

Chapman said, "Wouldn't I look bad for setting them up for a question that said absolutely contradictory rulings don't make sense?"

Nester said he might draft issues that he could present to the appellate court.

He quoted Stack's order that, "There is no question that the named plaintiffs did not rely on anything that was said or done by these defendants."

Chapman asked Thompson, "Does that help your case?"

Thompson said, "I would love for my named plaintiffs to have alleged a representative from Norwest Bank came and induced them, but that's not the way this happened."

Chapman said, "If the summary judgment is valid on that point, is the certification valid on that point?"

Thompson said, "The reliance as an element of fraud is clear, and Judge Stack in his analysis said that there was no evidence that there was a direct reliance.

"But the recitals that he made are not complete.

"If these people worked completely in secret so that nobody ever knew they did something wrong, or that they did something negligently that caused harm, that doesn't defeat this person's right to sue them in negligence.

"Judge Stack found that these folks didn't rise to that issue."

"I don't agree with that but I'm eager to get to a trial for my clients after 10 years and so I am willing to live with the case as Judge Stack has presented it to us.

Thompson said Stack's sentences met as though he cut and pasted them from submissions but his ruling was not ambiguous.

"It is, I have seen enough that this case should go forward on this theory," Thompson said.

Chapman said, "I've seen enough and it's bad enough.

"It's a cut and paste job and internally contradictory."

Nester said, "Plaintiffs are going to have to prove causation. Judge Stack has already concluded that they can't do it."

For Blue and Company, Bauman said, "The duty of an accountant when they do the audit is to accurately reflect the financial condition of the entity that is being audited."

"It is not to warn unknown people that may somewhere down the line come along, that if you buy bonds you are taking a tremendous risk," Bauman said.

Chapman asked for the plaintiffs' theory and Bauman said, "That we were part of the deal and so we're somehow liable."

Thompson said Stack didn't list their failures because he didn't want to make his order 500 pages long.

Bauman said, "It's not even clear in judge Stack's order whether class certification even applies to Blue and Company."

He said it also wasn't clear with respect to Gilmore and Bell.

Thompson said a lawyer who furthers a scheme that causes harm has liability.

Chapman said, "Zealous representation is exclusively to the client, not to anyone else."

Thompson said, "There is an affirmative obligation to ensure that the fraud was not perpetrated on third parties."

Chapman said, "How could he then make that known without violating his obligation to keep his client's secret?"

Thompson said, "There would be a requirement that it be brought to the attention of people within the purview of the attorney client relationship and a clear and unequivocal withdrawal from any further work."

As of Oct. 19, Chapman had not ruled on the motion.

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