Seventh Circuit OKs stay of federal suits in ongoing Freed & Weiss dispute pending outcome of state court proceeding

Weighing in on a trio of actions stemming from a falling out between former partners at a Chicago law firm, the Seventh Circuit Court of Appeals on Tuesday affirmed a district judge’s decision to stay the pair of federal cases pending the outcome of state lawsuit.

The federal appeals panel said U.S. District Judge Gary Feinerman did not abuse his discretion in staying the cases, saying he was right to determine the state and federal cases were parallel and stay the suits under a doctrine intended to conserve judicial resources and prevent inconsistent results.

The ruling marks the latest decision in the battle that began about four years ago between former law partners Eric D. Freed and Paul M. Weiss over Complex Litigation Group LLC (CLG), formerly known as Freed & Weiss.

Freed, who now lives in Florida, alleges Weiss started taking steps in March 2011 to terminate his control of the Freed & Weiss firm in Chicago and create the CLG firm in Highland Park without him, but with the money he put into their practice.

Freed claims he provided “virtually all of” the operating capital for their firm through more than $12 million in loans. Under their partnership agreement, Freed’s loans were to be repaid before the firm could make distributions to other members.

But, Freed claims after he received a partial repayment in March 2011, Weiss moved their firm’s funds held by J.P. Morgan Chase Bank into other accounts that he didn’t have access to.

Freed then demanded that Chase freeze the funds, a request he asserts Chase relayed to Weiss, who then allegedly removed all of the funds with plans to transfer the money and the firm’s assets to his new company.

In December 2011, Freed, individually and on behalf of the firm, filed a lawsuit in state court against Weiss and his wife, Jamie Saltzman Weiss, an attorney who also works at CLG, alleging breach of fiduciary duties and breach of the partnership agreement between the two men.

His suit sought injunctive relief against Weiss and his wife in an effort to stop their alleged scheme to push him out and take the firm’s assets, as well as a request the court declare Weiss’ actions constituted a voluntarily termination of the firm under their partnership agreement.

Weiss responding by filing a counterclaim on behalf of himself and the firm, asking the court to expel Freed from the firm, issue an injunction to prevent him from holding himself out to be a member of the firm, and order him dissociated from the firm, if an allegedly improper withdrawal of funds he made in March 2011 didn’t already provide so.

In February 2012, Freed filed his second suit over the matter. This one was against Chase and alleged tortious interference with contractual rights and aiding and abetting Weiss’ breaches of fiduciary duties.

This suit was brought in state court, but removed to federal court by Chase, which then brought third-party claims against the firm, Weiss and his wife in case Freed was allowed to recover from the bank.

Freed brought his third suit in federal court in August 2012, on the same day he notified the firm of his voluntarily dissociation and filed a motion to dismiss the state court suit without prejudice.

The third suit named Weiss, Weiss’ father and the firm’s accountant, Ronald Weiss, and the firm as defendants. It sought to make the firm purchase Freed’s distributional interest in it and award damages against the father-son duo for their part in the alleged transfer and theft of the funds.

If he couldn’t get his distributional interest at the fair value price, Freed asked the court to dissolve the firm, supervise its closing and distribute its assets.

Joined by Chase, the defendants in the third lawsuit then asked the federal court to stay the two cases before it pending the outcome of the state suit under a doctrine dealing with stays laid out in Colorado River Water Conservation District v. United States (1976).

After their stay requests were made, the state court granted Freed’s motion to dismiss his state suit against Weiss and his wife. But, because Weiss filed counterclaims, the case couldn’t be closed.

Before supplemental briefs ordered by the federal court were due, Weiss filed a motion in state court seeking an immediate trial on the counterclaims. He requested the court to determine Freed dissociated from the firm in March 2011 based on his behavior, and Freed argued the counterclaims were moot because he formally dissociated himself in August 2012.

Convoluted background aside, the issue before the Seventh Circuit was whether the stays Feinerman issued were proper.

Freed argued on appeal that his two federal cases should be remanded and proceed to trial, claiming that Feinerman was wrong in determining the federal and state cases were parallel and that nine of the 10 factors in his Colorado River analysis favored stays.

In the 21-page opinion it handed down Tuesday, the Seventh Circuit did its own lengthy analysis and agreed with district judge’s decision to stay the two federal cases pending the outcome of the state court proceedings.

“In short, the claims in both federal cases are premised upon the scheme that is now before the state court,” the panel held. “A resolution in state court of two issues—when Freed dissociated from CLG and whether Weiss breached the partnership agreement or fiduciary duties owed to Freed—is necessary before either of the federal cases can be decided.”

Writing for the panel, Judge William Bauer explained “it was rational for the district court to determine that the ‘state court litigation will be an adequate vehicle for the complete and prompt resolution’ of the larger dispute between Weiss and Freed that rests at the heart of this appeal.”

Bauer said an essential part of Freed’s federal suit seeking distributional interest is his request the court find he voluntarily dissociated from the firm in August 2012, not in March 2011 as Weiss suggests.

“Thus, the Distributional Interest Lawsuit turns on the determination of when Freed dissociated under the partnership agreement; the precise subject of the counterclaims in the state court proceeding,” Bauer wrote. “The federal court cannot determine the value of Freed’s distributional interest until the claims brought in state court are resolved.”

Similarly, the panel states in its opinion, Freed claims in his suits that Weiss breached their partnership agreement, as well as fiduciary duties to him.

“The factual allegations and legal analyses in the cases largely overlap, and the issues will be resolved largely by referencing the same facts and evidence,” Bauer wrote. “Therefore, the issues in the two cases, while not identical, are substantially the same.”

In reaching its ruling, the panel rejected several of Freed’s arguments, including one in which he claimed the resolution of his distributional interest claims won’t fully be resolved in state court because that suit doesn’t name Weiss’ father as a defendant, while one of his federal suits does.

Not including Ronald Weiss as a defendant in the state court suit, however, “was entirely Freed’s choice,” Bauer said, noting that “Freed’s action against Ronald Weiss is derivative of his claim against [Paul] Weiss.”

The panel offered a similar explanation in regards to the fact Chase is also not a defendant in Freed’s state court suit, saying the absence of a party from one case doesn’t necessarily defeat parallelism between suits for two reasons.

“First, Freed actively chose to exclude Chase as a defendant in the state court proceeding when it could have been joined as a party,” Bauer wrote. “Second, the Chase Lawsuit claims are derived from the exact scheme and conduct Freed alleges in the state court proceeding.”

The Seventh Circuit held that in order for Freed to bring claims against the bank for allegedly aiding and abetting Weiss in transferring the firm’s funds, he must first show that Weiss breached their partnership agreement and his fiduciary duties.

“Only after the state court resolves whether Weiss violated obligations to Freed can Freed try to hold Chase liable for assisting in that wrongdoing,” Bauer said.

In analyzing one of the 10 factors under the Colorado River doctrine and why it favored a stay of the federal cases, the panel took the opportunity to cite the record in the state court proceedings.

The record, Bauer wrote, shows Cook County Circuit Court Judge Kathleen M. Pantle said “she was ‘very concerned about an abuse of process here and a manipulation of the system’ and concluded that Freed was ‘seeking to litigate matters at the heart of [the state court proceeding] before other judges in an attempt to evade” her rulings.

The panel adds, “In fact, Judge Pantle even initiated contempt proceedings against Freed based on what she believed to be instances of misconduct and unlawful litigation tactics.”

Freed appealed a ruling Pantle made in the suit that denied his request to compel arbitration on the basis he had previously denied Weiss’ arbitration demand. The First District Appellate Court affirmed Pantle’s holding in a December 2013 order.

Arguments over Freed’s appeal over the stays took place in November 2013 before Bauer and Judges Daniel Manion and Diane Sykes.

Court records show David B. Goodman of Greensfelder, Hemker & Gale PC in Chicago represented Freed before the panel;  Jeffrey A. Leon of Complex Litigation Group in Highland Park argued on behalf of Weiss, Weiss’ father and CLG; and Paul J. Ferak of Greenberg Traurig LLP in Chicago represented Chase.

Unrelated to this case, a panel of the Seventh Circuit recently removed Complex Litigation Group as class counsel in litigation involving window-maker Pella Corporation and overturned the approval of a multi-million dollar settlement, calling it “inequitable – even scandalous.”

Weiss is also facing potential discipline from the Illinois Attorney Registration and Disciplinary Commission over allegations he sexually harassed five former female employees, a neighbor and a stranger on the street.

A panel of the ARDC Hearing Board in April recommended he be suspended for 30-months. The Illinois Supreme Court has the final say in disciplining attorneys and has not done so in Weiss’ case.

Weiss was not charged with any crimes in connection to the ARDC complaint and is still authorized to practice. The attorney who represented Weiss before the Hearing Board said the allegations against his client were brought by “Weiss-haters” seeking to destroy him for personal reasons or to claim some of his money.