SPRINGFIELD - Attorney David Cates of Swansea must defend a $10 million fraud claim of former partner Ryan Mahoney in Madison County Circuit Court rather than arbitration, Fourth District appellate judges ruled on Aug. 6.
“We agree with Mahoney that none of his claims were subject to arbitration,” Justice Robert Steigmann wrote.
He and justices Peter Cavanagh and Amy Lannerd found Circuit Judge Sarah Smith committed error by denying arbitration of three claims and granting it for two.
Fourth Circuit judges heard the appeal because Cates’s mother, Justice Judy Cates, works at the Fifth District.
Cates and Mahoney formed the Cates Mahoney firm in 2013 and executed an operating agreement with 60% ownership for Cates and 40% for Mahoney.
They split profits 50-50 up to $400,000 and 60-40 above $400,000.
The agreement stated they would cooperate in every regard in winding up the firm’s affairs.
It provided that in a case resolved after dissolution the originating member would receive a third and they would divide the other two thirds in proportion to the work they performed.
In 2014, they filed a counterclaim on behalf of a client against lender LVNV Funding.
In 2015, they filed a complaint on behalf of a client against Blue Cross.
Both cases rolled along for years.
In 2020, Cates took a leave of absence and Mahoney oversaw all operations.
Mahoney appeared in court on Blue Cross, participated in phone conferences, and addressed discovery disputes.
Cates returned in 2021 and Mahoney continued working on Blue Cross.
When the parties agreed to engage in mediation, Mahoney worked on a statement and Cates participated in the mediation.
Cates provided Mahoney with updates of settlement positions until November 2021.
Cates dissolved the firm on May 27, 2022 and provided Mahoney with a list of all pending Cates Mahoney cases.
They met again on June 2 and reviewed cases that settled or were close to it, funds they anticipated from settlements, and distribution of Cates Mahoney funds.
Cates engaged in mediation with LVNV Funding on June 20 and they settled.
On June 23, Cates filed a motion in Blue Cross substituting Cates Law for Cates Mahoney.
Approval of the Blue Cross settlement in August provided almost $5 million for Cates Law.
“The approval motion did not mention Cates Mahoney even though Cates Law had been substituted into the case only six weeks earlier," Steigmann wrote.
Mahoney and Cates executed a separation agreement on Aug. 19.
Mahoney soon sued, claiming he obtained filings on Sept. 12 that revealed settlements generating more than $9.4 million that Cates had not disclosed.
He claimed Cates didn’t tell him that two days before the dissolution he participated in mediation with Blue Cross and the parties reached an agreement to settle.
He claimed Cates didn’t tell him that a day before dissolution LVNV Funding proposed to pay plaintiff lawyers $1.5 million for fees and costs.
He claimed he asked Cates for the most recent settlement proposal in LVNV Funding on June 30 and Cates said he was waiting on defendants to send a proposal.
He claimed he asked Cates if other settlements were pending or agreed in principle and Cates did not include Blue Cross or LVNV Funding among cases with pending settlements.
He claimed he asked Cates if LVNV Funding settled at mediation and Cates said it didn’t.
They executed their separation agreement on Aug. 19.
Mahoney alleged two counts of breach of fiduciary duty and single counts of fraud, constructive fraud, and breach of the separation agreement.
He sought to recover the entire amount of the fees as a sanction.
In 2023, Cates moved to enforce an arbitration provision in the operating agreement.
Mahoney responded that his claims arose from the separation agreement which did not contain an arbitration provision.
Smith held a hearing last March and issued an order this January, finding the operating agreement and the separation agreement concerned the same subject matter.
On that basis she concluded the arbitration provision covered the separation agreement.
She found the operating agreement specified arbitrable issues relating to a member’s duty in transferring assets and tampering with information in client files.
She concluded the first count of breach of fiduciary duty and the count of breach of the separation agreement were arbitrable matters contemplated by the parties.
She found the second fiduciary count and the counts of fraud and constructive fraud did not arise from or relate to either agreement.
“The operating agreement contained specific and detailed language as it relates to the duty of a member during dissolution," Smith wrote.
She found both agreements silent in relation to fraud or fraudulent concealment.
Mahoney appealed, claiming the operating agreement limited the scope of arbitration to claims that could be determined solely in accordance with terms of the agreement.
He argued his claims required determination under terms of the separation agreement.
He argued the separation agreement did not incorporate, modify, or expand the arbitration provision in the operating agreement.
Cates cross appealed, arguing the parties entered into a valid agreement to arbitrate any controversies arising out of or relating to the operating agreement.
He argued the separation agreement incorporated the arbitration provision.
“Cates has not demonstrated that the parties incorporated the operating agreement or its arbitration provision into the separation agreement,” Steigmann wrote.
He found the operating agreement and separation agreement were distinct.
“Specifically, the separation agreement states that it does not modify or amend the operating agreement and it controls in the event of any conflict," he wrote.
He found it equally important that the separation agreement did not include an arbitration provision and stated it would be governed by the laws of Illinois.
“And the separation agreement does not state that it incorporates the operating agreement or its arbitration provision by reference,” he wrote.
He found the parties could have included an arbitration provision or incorporated it by reference to the operating agreement.
He found arbitration agreements cannot be extended by construction or implication.
“The absence of an express incorporation provision in a contract executed by two experienced attorneys is significant,” he wrote.
“We decline to infer an incorporation by reference where none exists.”
Thomas Rosenfeld of Edwardsville represents Mahoney.
John Kurowski of O’Fallon represents Cates.