The U.S. Court of Appeals for the Seventh Circuit recently ruled in favor of a bank suing to recover for a fraudulent loan scheme, finding that the Illinois Limited Liability Company Act did not shield the closing agent company’s owner from liability in a fraud scheme because he was substantially involved in the fraud and the scheme would have failed without his individual participation.
A copy of the opinion in Fifth Third Mortgage Company v. Kaufman is available at: Link to Opinion.
Straw buyers submitted fraudulent loan applications to a bank. The participants in the scheme used an attorney to represent the sellers at the closing. The attorney owned the closing agent company, an Illinois limited liability company, which the participants used for the majority of the closings (“title company”). The closings took place at the attorney’s office.
The bank gave closing instructions to the title company “to notify the bank immediately of any misrepresentations that would influence the bank’s decision to make the loan” and to suspend the transaction when “the loan is owner occupied and the closing agent has knowledge that the borrower does not intend to occupy the property.”
The attorney failed to comply with either requirement. Instead, the attorney concealed the buyer’s misrepresentations from the bank and instructed “closing agents to complete closings even when buyers were purchasing multiple properties.”
The bank filed suit against the attorney in his individual capacity alleging multiple fraud claims. In particular, the bank alleged the attorney knew that the buyers were straw buyers in a fraud scheme that made false representations to the bank in their loan applications.
After conducting a bench trial, the trial court found that the attorney knew of the fraudulent scheme as the title company’s owner and as the attorney for the sellers in the transactions. The trial court also found that the attorney substantially assisted in the fraud scheme.
Accordingly, the trial court entered judgment in favor of the bank and against the attorney. This appeal followed.
The Seventh Circuit first noted that to prevail on an Illinois fraud claim, the plaintiff must prove: “(1) a false statement of material fact; (2) known or believed to be false by the person making it; (3) an intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from such reliance.” In addition, an Illinois aiding and abetting claim requires that “(1) the party whom the defendant aids performed a wrongful act causing an injury, (2) the defendant is aware of his role when he provides the assistance, and (3) the defendant knowingly and substantially assisted the violation.”
The Seventh Circuit examined the attorney’s argument that the trial court erred because the Illinois Limited Liability Company Act shielded him from liability. Under the Illinois LLC Act “the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.” 805 ILCS 180/10‐10(a).
The attorney individually participated in each closing as the seller’s counsel and personally directed the title company’s employees to conceal the fraud from the bank. Thus, the Seventh Circuit held that section 10-10 of the Illinois LLC Act does not shield the attorney from liability for participating in the fraud scheme because the judgment was based on his individual conduct, not his membership in the LLC.
The Seventh Circuit also rejected the attorney’s argument that as the seller’s attorney he cannot be personally liable for aiding and abetting the fraud because it is not possible for an agent and their principal to conspire under Illinois law. The argument failed because the attorney waived it and because it is contrary to Illinois law. In Illinois, there is no “per se bar that prevents imposing liability upon attorneys who knowingly and substantially assist their clients in causing another partyʹs injury. See, e.g., Thornwood, Inc. v. Jenner & Block, 799 N.E.2d 756, 768 (Ill. App. Ct. 2003).
Here, the attorney reviewed fraudulent closing statements, held the closings at his law office, and attended the closings. He knew about and was substantially involved in the fraud scheme. Thus, acting as the seller’s attorney in the transactions did not protect the attorney from liability for participating in the fraud.
Therefore, the Seventh Circuit affirmed the trial court’s order in favor of the bank and against the attorney.