SPRINGFIELD - Supreme Court Justices denied leave for David Cates to appeal a ruling that he must defend a $10 million fraud suit of former partner Ryan Mahoney in Madison County rather than arbitration.
They acted on Dec. 2, four months after Fourth District appellate judges in Springfield found all five claims in Mahoney’s suit belonged in court.
Fifth District judges in Mount Vernon normally review Madison County cases but the presence of Cates’s mother Justice Judy Cates on the bench there disqualified the court.
The Fourth District broadened an order of Madison County Circuit Judge Sarah Smith denying arbitration of three claims and granting it for two.
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.
They stated they would cooperate in every regard in winding up the firm’s affairs.
They 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.
Cates dissolved the firm in May 2022 and provided Mahoney with a list of their pending cases.
They executed a separation agreement in August 2022.
Mahoney sued Cates in September 2022, claiming Cates hadn’t disclosed two settlements worth almost $10 million in fees.
He alleged two counts of breach of fiduciary duty and counts of fraud, constructive fraud, and breach of the separation agreement.
He sought to recover the entire amount of the fees as a sanction.
Cates moved to enforce an arbitration provision in their original operating agreement.
Mahoney responded that his claims arose from the separation agreement which did not contain an arbitration provision.
Smith held a hearing in March 2023 and issued an order this January.
She found one of the fiduciary counts and the count of breach of the separation agreement were arbitrable matters contemplated by the parties.
She found the other fiduciary count and the counts of fraud and constructive fraud did not relate to either agreement and would remain in her court.
Mahoney appealed and Cates cross appealed.
Fourth District justices Robert Steigmann, Peter Cavanagh and Amy Lannerd found Smith committed error.
“We agree with Mahoney that none of his claims were subject to arbitration," Steigmann wrote.
“Cates has not demonstrated that the parties incorporated the operating agreement or its arbitration provision into the separation agreement.”
He found the separation agreement did not include an arbitration provision and stated it would be governed by Illinois laws.
He found the separation agreement didn’t state that it incorporated the operating agreement or its arbitration provision by reference.
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.
Thomas Rosenfeld of Edwardsville represents Mahoney.
John Kurowski of O’Fallon represents Cates.