The opinion
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF ILLINOIS
In Re )
) Case No. 24-40450
LPB MHC, LLC )
d/b/a Sam C. Mitchell & Assocs., )
) Chapter 11
Debtor. )
___________________________________ )
)
LPB MHC, LLC )
d/b/a Sam C. Mitchell & Assocs., )
)
Plaintiff, )
v. ) Adv. No. 25-04001
)
FARMERS STATE BANK )
OF ALTO PASS, )
)
Defendant. )
O P I N I O N
Before the Court is a motion for summary judgment filed by Farmers State
Bank of Alto Pass as to Counts IV and V of the complaint filed against it. For the
reasons set forth herein, the motion for summary judgment will be denied.
I. Factual Background
The Debtor, LPB MHC d/b/a Sam C. Mitchell & Associates, filed its
voluntary petition under Chapter 11 Subchapter V on November 5, 2024.
Relevant to the issues here, in subsequently filed schedules, the Debtor listed
Farmers State Bank as potentially having a secured claim against it in the
amount of $2.4 million. The debt to Farmers State Bank was scheduled as
secured by “inventory, chattel paper, accounts, equipment, general intangibles,
and fixtures.” The debt was also marked as disputed.
The Debtor is a law firm engaged in the practice of law concentrating in
personal injury and workers’ compensation cases. The firm was owned and
operated by member managers LPB Law, LLC, controlled by Attorney Lance P.
Brown, and MHC Law, LLC, controlled by Attorney Matthew H. Caraway, until
August 1, 2022. On that date, a revised operating agreement was signed adding
BJZ Law, LLC, controlled by Attorney Brandon J. Zanotti, as a new member
manager. Each of the LLCs was scheduled as owning a 33.33% interest in the
Debtor upon execution of the revised agreement. Documents included in the
filings of all parties reflect that BJZ Law paid $2.4 million for its interest in the
Debtor using a loan funded by Farmers State Bank of Alto Pass, a bank at which
Mr. Zanotti served on the board of directors. The $2.4 million payment was made
by BJZ Law on October 12, 2022. The loan from Farmers State Bank was secured
by Mr. Zanotti’s personal guarantee, an insurance policy on the life of Mr.
Zanotti, and certain real estate owned by SCM Real Estate LLC, a company
formed and managed by Mr. Brown, Mr. Caraway, and Mr. Zanotti; the loan was
also allegedly secured by a commercial security agreement signed by all three
members of the Debtor. As part of the transaction, Mr. Zanotti, who previously
served as Williamson County States Attorney, began practicing law with the
Debtor firm and was compensated accordingly.
In early March 2024, Mr. Zanotti disclosed to Mr. Caraway that the FBI
had approached him in September 2022 regarding a sale of real estate he had
been involved in and that he was being investigated for bank fraud and possibly
other crimes related to that sale. On March 21, 2024, Mr. Zanotti pleaded guilty
to federal felony charges. He was later sentenced to probation for two years. He
is currently subject to disciplinary proceedings brought by the Illinois Attorney
Registration and Disciplinary Commission. The Debtor has alleged that Mr.
Zanotti was terminated as an employee at a meeting held April 30, 2024, and
that BJZ Law was terminated as a member of the Debtor effective May 10, 2024.
After Mr. Zanotti’s guilty plea and employment termination, BJZ Law
defaulted on the loan. In an effort to collect on the obligation owed to it, Farmers
State Bank turned to the Debtor. The bank sent notices to a number of attorneys
representing defendants in cases in which the Debtor represented the plaintiffs.
The notices claimed that the Debtor had “entered into an Assignment of all of its
accounts and general intangibles” to Farmers State Bank. The notices directed
the defense attorneys to remit any money due or which might become due to the
Debtor to Farmers State Bank instead of the Debtor. The notices suggested that
any questions or requests for documentary proof of the assignment be directed
to Farmers State Bank’s attorney. According to the Debtor, several defense
attorneys who received the notices refused to issue settlement checks for the
Debtor’s clients without court order.
Farmers State Bank continued its collection efforts by sending a letter to
the Debtor on October 1, 2024, threatening to contact the Debtor’s clients
directly. After receiving a response letter from the Debtor’s attorney pointing out
potential problems with the Bank’s conduct, Farmers State Bank filed a lawsuit
in Williamson County, Illinois, seeking a declaratory judgment that it was
entitled to make the contacts that it had and that it was not tortiously interfering
with the Debtor. Not waiting to resolve either of those issues, within hours of
filing the lawsuit, the bank sought a temporary restraining order against the
Debtor and issued over 100 subpoenas to defense counsel involved in cases in
which the Debtor represented the plaintiffs. The Chapter 11 bankruptcy case
was filed to stop Farmers State Bank’s continuing contacts that the Debtor
believed interfered with its ability to represent its clients.
The Debtor filed its seven-count adversary complaint against Farmers
State Bank in January 2025. The complaint recites the history of the relationship
generally as set forth above in support of the relief requested. The first three
counts of the complaint object to the claim filed by Farmers State Bank on its
own behalf and to two claims that Farmers State Bank filed on behalf of BJZ Law
and Brandon Zanotti; each such count seeks a determination of the amount,
priority, and validity of each claim and any secured status asserted in such
claims.1 Count IV of the complaint purports to state a cause of action against
Farmers State Bank for “Libel and Other Tortious Conduct” based on Farmers
State Bank’s communication with defense counsel involved in Debtor’s cases.
Count V seeks to equitably subordinate any claim of Farmers State Bank that
might otherwise be allowed based on the alleged wrongful conduct. Count VI
seeks a declaratory judgment regarding the existence and validity of the secured
1 This Court currently has separate claim objections to the claims filed by Farmers State Bank on behalf of BJZ Law
and Brandon Zanotti under advisement. A separate opinion and order will issue in due course as to those matters.
claims filed by Farmers State Bank on its own behalf and for BJZ Law. Count
VII seeks a declaratory judgment regarding the value of any collateral supporting
Farmers State Bank’s secured claim as of the petition date.
Farmers State Bank filed a timely answer to the complaint and, one day
after answering, filed a motion for summary judgment asking that Counts IV and
V be dismissed with prejudice and that all other counts be dismissed without
prejudice to the filing of claim objections in the main case. The motion for
summary judgment contained no statement of material and uncontested facts
and wholly failed to comply with the local rules for such motions. The motion for
summary judgment was stricken due to that failure. In the order striking,
Farmers State Bank was admonished that the motion for summary judgment
appeared to be premature and was urged to exercise caution in refiling a similar
motion in the short term. Nevertheless, one week later, Farmers State Bank filed
another motion for summary judgment seeking judgment in its favor on Counts
IV and V. Farmers State Bank also filed its memorandum of law in support of its
motion. Because the newly filed documents generally complied with the local
rules, a briefing schedule was set.
After seeking one extension of time, the Debtor filed a response to the
motion for summary judgment requesting that summary judgment be denied;
the response includes both admissions and denials of the facts alleged to be
material and uncontested by Farmers State Bank. The response also includes
additional facts that the Debtor claims are material and uncontested. The Debtor
also filed a separate memorandum of law in support of its response. The filings
by the Debtor generally complied with the local rules. Farmers State Bank filed
its reply in which it did not specifically respond to the additional facts set forth
by the Debtor; the reply contains only argument, although some of the
arguments are about the facts. Notwithstanding the failure of Farmers State
Bank to fully comply with the local rules in the filing of its reply, this Court
considers the matters fully briefed and ready for decision.2
II. Jurisdiction
This Court has jurisdiction over proceedings “arising under title 11, or
arising in or related to cases under title 11” pursuant to 28 U.S.C. §1334. All
bankruptcy cases and proceedings filed in the Southern District of Illinois have
been referred to the bankruptcy judges. SDIL-LR Br1001.1; see 28 U.S.C.
§157(a). Matters concerning the administration of the estate and the allowance
or disallowance of claims against the estate are core proceedings. 28 U.S.C.
§157(b)(2)(A), (B).
Because actions for libel and other torts do not arise exclusively under the
Bankruptcy Code and do not strictly arise in a bankruptcy case—the same
causes of action often could be prosecuted under state law in a state court—this
Court is exercising “related to” jurisdiction in this proceeding, raising the
question of whether there is a constitutional impediment to the entry of a final
judgment. Exec. Benefits Ins. Agency v. Arkinson, 573 U.S. 25, 37-38 (2014);
2 After the briefing schedule was completed, Farmers State Bank filed two supplemental briefs without leave of court.
The Court has reviewed the supplements and found neither to be particularly helpful in resolving the issues.
Stern v. Marshall, 564 U.S. 462, 493 (2011); see 28 U.S.C. §157(c). Impediments
to the entry of a final judgment may be overcome by the knowing and voluntary
consent of the parties to final adjudication by a bankruptcy judge. Wellness Int’l
Network, Ltd. v. Sharif, 575 U.S. 665, 669 (2015). Consent may be implied,
requiring only that “the litigant or counsel was made aware of the need for
consent and the right to refuse it, and still voluntarily appeared to try the case”
before the bankruptcy judge. Jordan v. Pritchard (In re Pritchard), 633 B.R. 314,
325 (Bankr. E.D. Tenn. 2021) (quoting Roell v. Withrow, 538 U.S. 580, 590
(2003)).
Here, the Debtor’s complaint contains a generic statement that the Court
has jurisdiction over the matter “pursuant to 28 U.S.C. §§157(a) and 1334” and
that it “is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(K).” The allegation
does not contemplate that one or more of the causes of action asserted might be
non-core or merely “related to” the bankruptcy, but it is followed by a statement
that the Debtor “consents to the entry of a final order or judgment by the
Bankruptcy Court in this matter.” In its answer to the complaint, Farmers State
Bank “admitted” the Debtor’s allegation that the Court has jurisdiction over the
matter and that it “is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(K).” But
in response to the Debtor’s statement of consent to entry of final order or
judgment by the Court, the answer states that it “pleads a conclusion of law to
which no answer is required.” The motion for summary judgment now before the
Court also does not respond to the Debtor’s venue allegation, and neither
Farmers State Bank’s answer nor its motion for summary judgment contains a
separate statement of consent to entry of a final order or judgment by this Court
per Bankruptcy Rule 7012(b).
Farmers State Bank’s conduct in pursuing and defending against the
present proceeding without contesting this Court’s exercise of jurisdiction over
the issues presented leads the Court to believe that it consents to the entry of
final orders. It filed an answer that did not comply with Bankruptcy Rule 7012(b)
by including “a statement that the party does or does not consent to entry of
final orders or judgment by the bankruptcy court” and then filed its motion for
summary judgment asking the Court to enter judgment as a matter of law in its
favor on Count IV of the complaint for libel and other tortious conduct. In doing
so, Farmers State Bank has consented to entry of a final judgment on that count.
Maxwell v. Michael (In re Horizon Group Mgmt., LLC), 652 B.R. 764, 777-78
(Bankr. N.D. Ill. 2023); Reid v. Wolf (In re Wolf), 595 B.R. 735, 752-53 (Bankr.
N.D. Ill. 2018).
That said, resolving Farmers State Bank’s motion for summary judgment
does not depend on the parties’ consent to entry of final orders by the Court.
Section 157(c)(1) expressly authorizes bankruptcy courts to hear non-core but
related proceedings and limits only the court’s ability to enter final orders or
judgment. 28 U.S.C. §157(c)(1). Denial of summary judgment, however, is not a
final order. Davis v. CitiMortgage, Inc. (In re Davis), 2018 WL 587844, at *2
(Bankr. N.D. Ill. Jan. 25, 2018). Because Farmers State Bank’s motion for
summary judgment will be denied, the order to be entered here will not be a final
order for which consent of the parties is required. Id.; see also Paloian v. LaSalle
Bank Nat’l Assoc. (In re Doctors Hosp. of Hyde Park, Inc.), 463 B.R. 93, 100-01
(Bankr. N.D. Ill. 2011) (citing Gecker v. Flynn (In re Emerald Casino, Inc.), 459
B.R. 298 (Bankr. N.D. Ill. 2011)). There are no jurisdictional impediments to the
entry of this Opinion and the related order.
III. Legal Analysis
Motions for summary judgment are governed by Federal Rule of Civil
Procedure 56, which is applicable in this adversary proceeding pursuant to
Federal Rule of Bankruptcy Procedure 7056. See Fed. R. Civ. P. 56; Fed. R.
Bankr. P. 7056. Summary judgment is an encouraged method for resolving cases
and should be granted when there are no genuine disputes as to any material
facts and a party is entitled to judgment as a matter of law. Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23, 327 (1986). A party moving for summary
judgment has the burden of establishing that there are no material facts in
dispute. Id. at 323. The movant must also establish that controlling substantive
law supports a result in its favor. ANR Advance Transp. Co. v. Int’l Brotherhood
of Teamsters, Local 710, 153 F.3d 774, 777 (7th Cir. 1998). Unfortunately for
Farmers State Bank, it failed to establish that there are no genuine issues of
material fact in dispute or that it is entitled to judgment as a matter of law.
A. Material Issues of Fact in Dispute
Farmers State Bank’s list of uncontested facts set forth in its motion for
summary judgment consists largely of statements about the relationships among
the parties and the execution of the loan documents at issue in this proceeding.
In its response, the Debtor admits many of the basic statements of fact and
parses the language of others in order to deny those facts. Many of the additional
facts set forth by the Debtor in its response relate to the criminal charges and
plea involving Mr. Zanotti and complain about the failure of Farmers State Bank
to aggressively pursue Mr. Zanotti on the debt. Those facts and issues are
important to the overall Chapter 11 case but have little to do with whether
Farmers State Bank libeled the Debtor or otherwise tortiously interfered with the
Debtor’s business by sending notices to defense counsel. And such facts have
little, if anything, to do with whether Farmers State Bank’s claim, if otherwise
allowable, should be equitably subordinated. Farmers State Bank did not admit
or deny any of the Debtor’s additional facts in its reply and thereby, for whatever
it may be worth, allowed the facts to stand as uncontested for purposes of
considering the motion for summary judgment.
One disputed fact raised by the Debtor does stand out and is sufficient to
deny the motion for summary judgment. That disputed fact is whether two of the
representatives of the Debtor—Mr. Brown and Mr. Caraway—signed the
commercial security agreement.
In claiming that there is no dispute about the validity of the commercial
security agreement, Farmers State Bank relies on the affidavit of Michael J.
Hopkins, Community Bank President and Senior Lender, and the primary loan
officer involved in closing the BJZ Law loan from Farmers State Bank. In his
affidavit, Mr. Hopkins says that the commercial security agreement “was signed
by Lance Brown and Matthew Caraway on October 12, 2022, in the community
room on the first floor of their office in West Frankfort, Illinois.” Mr. Hopkins says
that he was present at the law office for the signing, but that Mr. Zanotti was
not. According to Mr. Hopkins, Mr. Brown and Mr. Caraway also signed two
mortgages and an account agreement to add Mr. Caraway and Mr. Zanotti as
authorized signatories on an account at Farmers State Bank held in the name of
the Debtor. Mr. Brown was apparently already authorized to sign checks on the
account. Mr. Hopkins says that he was instructed by Mr. Brown and Mr.
Caraway at their meeting to deposit into the Debtor’s account the $2.4 million
in loans proceeds for the purchase by BJZ Law of its interest in the Debtor.
According to Mr. Hopkins, later that same day both Mr. Brown and Mr. Caraway
came into the Marion, Illinois, branch of Farmers State Bank and processed
checks withdrawing the loan proceeds; Mr. Brown drew a check payable to LPB
Law, LLC, in the amount of $1.2 million, and Mr. Caraway drew a check payable
to MHC Law, LLC, in the same amount.
To dispute the validity of the commercial security agreement, the Debtor
cites the sworn testimony of Mr. Brown and Mr. Caraway at the creditors meeting
held in the main case on December 23, 2024.3 Under questioning by an attorney
for Farmers State Bank, Mr. Brown said: “I contest that commercial security
agreement. I do not have a specific recollection of signing such a document, nor
would I willingly do so, collateralizing and granting a security interest in the law
3 A portion of the transcript of the creditors meeting was included as an exhibit to Farmers State Bank’s motion for
summary judgment.
firm and in specific cases that the bank has outlined. I don’t think that’s proper
under the codes of ethics and would not have done so.” Notwithstanding those
comments, Mr. Brown agreed that that the signature on a copy of the commercial
security agreement appeared to be his. Likewise, Mr. Caraway denied ever seeing
the original commercial security agreement but agreed that one of the signatures
on the copy appeared to be his.
Farmers State Bank asserts that the testimony of Mr. Brown and Mr.
Caraway does not raise a genuine issue of factual dispute. It claims that their
testimony that they did not sign the commercial security agreement is mere
speculation and insufficient as a matter of law to defeat the motion for summary
judgment. See Flowers v. Kia Motors Fin., 105 F.4th 939, 946 (7th Cir. 2024).
Although it is true that mere speculation is not enough to defeat summary
judgment, the issues raised by Mr. Brown and Mr. Caraway are more than just
speculation. Mr. Brown, in particular, does not just say that he does not recall
signing the document; he says that he would not have signed the document if
asked to do so because of ethical concerns. Mr. Hopkins does not say that he or
anyone else at Farmers State Bank ever discussed the issue of the Debtor
pledging all its assets to secure the debt of BJZ Law with Mr. Brown or Mr.
Caraway. Rather, he says there was a discussion at the October 12 meeting
about the mortgages and real estate valuations and merely notes that no
questions were asked about the “loan documents.”
As will be discussed in more detail below, the taking of a security interest
in the accounts receivable and general intangibles of a law firm is a much more
nuanced transaction than the taking of a lien on the receivables of a typical
manufacturing or service business. Although the provisions of Article 9 of the
Uniform Commercial Code may apply to such law firm transactions, the
collection of funds from clients and parties to lawsuits being prosecuted on
behalf of clients are controlled not just by Article 9 but also, as Mr. Brown
pointed out, by the rules of professional conduct and other applicable state law.
Article 9 creates no exception for Farmers State Bank or attorneys with the
Debtor’s law firm from compliance with these other rules and laws. If, in fact,
Farmers State Bank had ever requested of Mr. Brown and Mr. Caraway that they
pledge the receivables and general intangibles of their law firm to secure the BJZ
Law debt, it seems very likely that they would have had a serious discussion
about how collection activities, if ever needed, might be carried out so as to avoid
ethical problems for the lawyers involved. Based on what has been presented so
far, it appears that discussion did not take place and therefore begs the question
of whether any discussion of the pledge of assets by the Debtor ever occurred.
Mr. Hopkins points to an email sent to him by Lance Brown on May 19,
2022, that says financial information is attached, as well as a text exchange
between the two around the same time in which Mr. Brown said he would have
his secretary work on getting financial information for the Debtor to Mr. Hopkins;
Mr. Hopkins claims that is proof that Mr. Brown and Mr. Caraway had agreed to
pledge the Debtor’s assets to secure the BJZ Law loan. Neither the email nor the
text messages, however, make any reference whatsoever to such a pledge.
Further, a document labelled “Regulation O Credit Approval” was issued by Mr.
Hopkins on May 31, 2022, recommending approval of the loan to Brandon
Zanotti’s “LLC to be named later” and detailing the collateral available to secure
the loan and the financial analysis made to determine if the collateral was
sufficient to support the recommended loan.4 The collateral listed includes Mr.
Zanotti’s anticipated 33% ownership interest in the Debtor, real estate for which
SCM Real Estate LLC subsequently executed mortgages in favor of Farmers State
Bank, and an assignment of life insurance. The list of collateral, however, does
not include the Debtor’s assets. The Debtor’s receivables and financials are
discussed in the document, but it is in reference to calculating the value of Mr.
Zanotti’s 33% interest and his ability to service the debt with his share of
expected distributions from the Debtor. Nowhere in the document is any
anticipated lien on the Debtor’s receivables or general intangibles mentioned.
Again, if such a lien was going to be given, a serious discussion of how
collection of such assets might be undertaken should have occurred before the
documents were signed. Based on the loan approval document dated May 31,
2022, if there was ever any discussion about a lien on the Debtor’s assets, it
almost certainly was not in the context of Mr. Brown providing financial
information per the May 17 text messages and May 19 email to Mr. Hopkins. Mr.
Hopkins’ assertion in his affidavit about why financial information was provided
by the Debtor as part of the loan approval process undercuts his credibility about
how the commercial security agreement was signed, if it was in fact signed, by
4 The document was attached as an exhibit to the Debtor’s response to the motion for summary judgment in support
of additional uncontested facts. Farmers State Bank made no response to the additional facts set forth in the Debtor’s
response and therefore would be deemed to have admitted the authenticity of the document.
Mr. Brown and Mr. Caraway. There is obviously more to the story, and summary
judgment cannot be granted without the obvious discrepancies being resolved.
Farmers State Bank says there is no admissible evidence that could be
presented to defeat the commercial security agreement. But Farmers State Bank
likely has not completed enough discovery to have learned what evidence might
be available. The limited evidence before the Court now creates an issue of
disputed fact, and the Court cannot weigh that potential evidence at this stage.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986); S.N.A. Nut Co. v.
Tulare Nut Co. (In re S.N.A. Nut Co.), 197 B.R. 642, 647 (Bankr. N.D. Ill. 1996).
There are many unanswered questions about what occurred here. Those
questions may well be answered through discovery and could certainly be
resolved in favor of Farmers State Bank. That is why the Court urged Farmers
State Bank to hold off and conduct more discovery before refiling its motion for
summary judgment. Farmers State Bank was not obligated to follow the Court’s
advice and chose not to do so. Having filed for summary judgment before
thorough examinations of Mr. Brown and Mr. Caraway could be taken to find
out the details of their defense, Farmers State Bank is now left with a genuine
issue of disputed fact having been raised that compels denial of its motion.
B. Controlling Legal Issues
The parties have briefed what they perceive to be the issues raised by the
motion for summary judgment but, in large measure, have been distracted from
the essence of the decisive issues. Farmers State Bank says that, because it has
a security interest in the Debtor’s accounts receivable and general intangibles,
it can take any and all collection actions with impunity and without regard to
other laws. In its arguments, Farmers State Bank ignores the rules of
professional conduct, Illinois law on settlement agreements, and Illinois law
regarding the implied covenants of good faith and fair dealing. Each of these legal
issues impact the decision here and will be discussed briefly.5
1. Illinois Rules of Professional Conduct
As attorneys licensed to practice law in Illinois, Mr. Brown and Mr.
Caraway, along with any other lawyers employed by the Debtor, are subject to
the Illinois Rules of Professional Conduct. Farmers State Bank does not contest
this obvious point, but it argues that it can compel compliance with the terms of
the commercial security agreement in ways that would result in the attorneys
breaching their ethical duties under the Rules. They refuse to concede that the
rights of Farmers State Bank might be constrained by the attorneys’ compliance
with their ethical duties. Although multiple rules are at issue here, a discussion
of just two issues should suffice to establish how misguided Farmers State Bank
was in its collection tactics.
A clear example of the problem relates to the attorneys’ duties to maintain
client confidentiality. Under the Illinois Rules, “[a] lawyer shall not reveal
5 The Debtor recently filed an amended Chapter 11 plan that includes treatment of Farmers State Bank’s claim in a
manner that may reflect settlement between the parties. If the parties have fully settled their disputes and the amended
plan is confirmed, this adversary proceeding will be dismissed. This Opinion is being issued notwithstanding the
apparent settlement to bring closure to several contentious issues and to provide guidance to the parties on certain
issues that may be helpful in their continuing relationship under the terms of the amended plan. A full-scale treatment
of all legal issues is, however, no longer necessary.
information relating to the representation of a client unless the client gives
informed consent, the disclosure is impliedly authorized in order to carry out the
representation, or the disclosure is permitted” by the other provisions of the
Rules. Ill. R. Prof’l Conduct (2010) R. 1.6(a) (eff. Jan. 1, 2010). Those other
provisions generally relate to disclosure necessary to prevent a client from
committing a crime or fraud or under circumstances where the client has made
a claim against the lawyer—all situations which do not exist in this case.
Farmers State Bank began its collection efforts by sending multiple letters
to the Debtor quoting the commercial security agreement and demanding that
the Debtor turn over “any and all documents evidencing or constituting the
collateral.” Compliance with the request would have required the Debtor to
provide Farmers State Bank complete copies of all client files. The Debtor
obviously could not comply because some of the information in the files would
be confidential and subject to privilege. When the entirety of the Debtor’s
documents were not turned over, as they could not be, notices were sent to
defense counsel demanding the turnover of funds. Farmers State Bank has since
doubled down on the demands through discovery in this proceeding, requesting
significant amounts of client information, including details of clients’ specific
damages and settlement negotiations.
Farmers State Bank suggests that some client information is public and
not subject to the privilege because it is contained in the public court files or
may have been provided to defense counsel without restriction. That may well be
true. But the privilege belongs to the client, not the lawyers, and only the client
may waive the privilege. In re the Marriage of Decker, 153 Ill. 2d 298, 313, 606
N.E.2d 1094, 1101 (1992). Thus, the question of whether the privilege has been
waived by public or other disclosure, and if so to what extent, necessarily
impacts the clients’ rights and cannot be resolved without the participation of
the client. Involving every one of the Debtor’s clients in the present parties’
disputes would be burdensome, would likely negatively interfere with the
relationship between the Debtor and its clients, and would serve no useful
purpose.
Farmers State Bank has suggested in discovery dispute motions that the
Debtor can produce privileged materials without client consent and without
adverse consequences simply by stamping the materials “FOR ATTORNEY EYES
ONLY.” Apparently, Farmers State Bank’s attorneys think that a lawyer can tell
a client’s secrets to another lawyer if the lawyer they tell promises to keep the
information secret—the same promise the first lawyer made but is breaking with
the disclosure. There is no authority for such a proposition; there is no legitimate
end run around the fundamental ethics rules governing the practice of law by
Mr. Brown, Mr. Caraway, and the other attorneys employed by the Debtor.
Farmers State Bank’s attorneys, also licensed in Illinois, should know better
than to even suggest cutting ethical corners.
As stated above, collecting a law firm’s receivables is a nuanced process.
Client confidentiality and privilege limit the information that the Debtor can be
compelled to provide as to any particular receivable or client file. Farmers State
Bank and its attorneys should have taken this into consideration before making
the loan and certainly as it began collection activities.6 Farmers State Bank’s
failure to account for these issues may result in liability, as will be explained
below.
A second example of Farmers State Bank’s failure to be alert to the
overriding impact of ethical rules involves the rules governing the payment of
fees and the required use of trust accounts by lawyers. In order to collect a
contingent fee from a client as the Debtor frequently does in personal injury
cases, a detailed written fee agreement is required. And when a case is resolved,
the attorney must provide a written statement to the client outlining the gross
amount of the settlement, the net amount to be paid to the client, and the
calculation for determining that net amount. Ill. R. Prof’l Conduct (2010) R. 1.5
(eff. Jan. 1, 2010). All client funds received by an attorney—including the funds
to be paid to the attorney for fees—must initially be safeguarded and deposited
into a trust account until disbursement is authorized and the attorney’s fees are
fully earned. Ill. R. Prof’l Conduct (2010) R. 1.15 (eff. Jan. 1, 2010). An attorney
must be authorized by the client to cash a settlement. In re Turner, 75 Ill. 2d
128, 132, 387 N.E.2d 282, 284 (1979) (quoting In re Stillo, 68 Ill. 2d 49, 54, 368
N.E.2d 897, 899 (1977)). An attorney’s right to payment of a contingency fee is
6 After the briefing schedule on the motion for summary judgment was completed, Farmers State Bank filed two
supplemental briefs. Both purported to address concerns this Court had raised about the impact of the Rules of
Professional Conduct on the matters at issue. Farmers State Bank cited a number of cases in its briefs. All the cases
held that, under a variety of circumstances, Article 9 security interests could be taken in law firm receivables. None
of the cases dealt with the ethical limitations that might occur if a creditor followed the path taken here of demanding
access to client files in order to recognize on the security interest. None of the cases dealt with or even mentioned the
Illinois Rules of Professional Conduct.
tied directly to his or her compliance with ethical obligations requiring a client’s
consent to cash a settlement check and disburse the proceeds.
Farmers State Bank could obtain from the Debtor no more than a lien on
the attorneys’ rights to the payment of fees after completing all tasks required
on behalf of the client. Farmers State Bank cites no authority, and this Court
finds none that would have allowed defense counsel or an insurance company
to direct a portion of a client’s settlement funds to Farmers State Bank without
written direction from the client. And as explained below, Farmers State Bank
could not have obtained such a direction without giving legal advice to the client
and without interfering in the provision of legal services by the Debtor to the
client. Farmers State Bank can make no credible claim that the commercial
security agreement transferred to it the right to step into the Debtor’s position
and complete its duties to its clients. Likewise, the Court does not believe that
the Debtor’s attorneys could have transferred their ethical obligations to Farmers
State Bank. Accordingly, there was no practical way for Farmers State Bank to
reach the Debtor’s interest in any contingent fee until the fee was fully earned
and in the Debtor’s trust account, and the client had authorized disbursement.
2. Illinois Law on Settlements
Under Illinois law, when parties have settled personal injury, property
damage, wrongful death or other tort actions based on claims for money
damages, the settlement may be enforced by the plaintiff by complying with the
statute on the settlement of claims. 735 ILCS 5/2-2301. Generally, compliance
requires that, upon settlement, a plaintiff must promptly tender a release of his
or her claims to the defendant and must also provide a release of any attorney’s
lien, along with releases of medical liens or alternative guarantees of payment of
such medical liens by the plaintiff’s attorney’s agreement to hold funds for
payment of such liens or an offer for the defendant to hold the funds for the lien
payments. 735 ILCS 5/2-2301(a), (c). Only after the plaintiff has fully complied
with the statutory requirements is the defendant obligated to pay the settlement
amount, and then that full amount is to be paid to the plaintiff. 735 ILCS 5/2-
2301(d). If timely payment is not made, a court may enter judgment against the
defendant. 735 ILCS 5/2-2301(e). Defendants do not have to require that all the
releases and documents be tendered, but it would be risky to pay out funds
without resolving all possible liens. Compliance with this provision tracks the
obligations of plaintiffs’ attorneys under the rules to provide a client with the
precise details of how their settlement proceeds will be disbursed. The Court
believes that substantial compliance with this statutory provision is routine in
the personal injury practice of law engaged in by the Debtor and the attorneys
employed by it.
The requirements of the statute pose a problem for Farmers State Bank
and its claim that it was acting within the law in making demands on defense
counsel to pay it a share of settlement proceeds directly instead of paying the
plaintiffs represented by the Debtor firm’s attorneys. Farmers State Bank could
not have drafted releases for the plaintiffs or even advised the plaintiffs on the
appropriate terms of such releases. Farmers State Bank cannot practice law, and
its attorneys could not talk to or otherwise interfere with the actual
representation of the Debtor’s clients by the Debtor. Likewise, Farmers State
Bank could not have drafted the releases for medical liens or advised the Debtor’s
clients about how such liens should be resolved. Farmers State Bank might have
been able to release the attorney liens of the Debtor but, absent the other
documents, the defendant in any particular case would still not have to pay the
settlement amount; and, again, even if all the documents were otherwise
provided, the statute provides that payment is to be made to the plaintiff, not to
the lien holders. Thus, it seems clear that the notices sent by Farmers State
Bank would never have resulted in direct payment by a defendant to Farmers
State Bank, and Farmers State Bank could not have had a realistic belief that
the notices would yield such a result. Interestingly, no assertion is made that
any of the notices sent resulted in a penny being collected by Farmers State
Bank.
The notices were obviously sent to get the Debtor’s attention. But issuing
notices as was done here, apparently for the purpose of embarrassing,
intimidating, or bullying an adversary without any legitimate belief that payment
would be forth coming, is not contemplated or condoned by Article 9 or the
documents purportedly signed by the parties. Further, sending the notices could
only serve to delay the issuance of payment to clients who owed nothing to
Farmers State Bank, which is exactly what the Debtor alleges occurred. Farmers
State Bank’s claim that it could not possibly have tortiously interfered with the
Debtor’s business contracts or expectancies or those of its clients is just not
accurate.
3. Implied Covenant of Good Faith and Fair Dealing
Illinois law implies a covenant of good faith and fair dealing in every
contract. J & B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 162 Ill. 2d 265, 278,
642 N.E.2d 1215, 1222 (1994); Martindell v. Lake Shore Nat’l Bank, 15 Ill. 2d
272, 286, 154 N.E.2d 683, 690-91 (1958). The Illinois Commercial Code
expressly adopts a similar rule for contracts by providing that “[e]very contract
or duty within the Uniform Commercial Code imposes an obligation of good faith
in its performance and enforcement.” 810 ILCS 5/1-304. The covenant does not
create independent duties that are separately actionable; rather, the covenant
serves as a guide for the construction of contracts. Echo, Inc. v. Whitson Co., 121
F.3d 1099, 1105-06 (7th Cir. 1997).
“‘Good faith’ is a compact reference to an implied undertaking not to take
opportunistic advantage in a way that could not have been contemplated at the
time of drafting, and which therefore was not resolved explicitly by the parties.”
Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357
(7th Cir. 1990). And although the covenant is referred to as a rule of construction
used to determine the parties’ intent, it is also appropriately described as a duty
imposed, in Illinois, on every contracting party, regardless of intent. Spadoni v.
United Airlines, Inc., 2015 IL App (1st) 150458, ¶31, 47 N.E.3d 1152, 1160.
To the extent Farmers State Bank used the notices it claims were
authorized by the commercial security agreement to embarrass, intimidate or
bully the Debtor, it violated its duty of good faith and fair dealing. Farmers State
Bank makes no assertion that its aggressive tactics were contemplated at the
time of drafting the commercial security agreement. If there was no legitimate
purpose to send the notices—and no credible purpose has been suggested—then
the duties discussed here affect the construction of Farmers State Bank’s rights
and responsibilities under the commercial security agreement and strongly
suggest that the sending of the notices was wrongful. The tactics must be
measured not only by the express terms of the commercial security agreement
but also by the standards of good faith and fair dealing. Under those standards,
Farmers State Bank falls short and the commercial security agreement is not an
absolute defense to the Debtor’s claims.
C. The Motion for Summary Judgment
The complaint filed by the Debtor begins with 55 paragraphs of allegations
common to all counts. As set forth above, the first 3 counts then consist of
objections to the claims filed by Farmers State Bank on its own behalf and on
behalf of Brandon Zanotti and BJZ Law; those 3 counts add 21 more paragraphs
to the complaint. Count IV, pleaded only against Farmers State Bank and
labelled “Libel and Tortious Conduct of Farmers Bank,” incorporates the
preceding 76 paragraphs of the complaint and adds 5 more. Count V, seeking
equitable subordination of the claims filed by Farmers State Bank on its own
behalf, begins by incorporating the same prior 76 paragraphs plus the 5
additional paragraphs added by Count IV. This style of pleading—incorporating
by reference everything in the complaint and prior counts whether or not what
is incorporated has anything to do with the cause of action attempted to be
pleaded in the particular count—is an unfortunately common practice. But the
practice of throwing all allegations into every count makes it difficult to
determine exactly what has been pleaded that might actually be relevant to the
particular count. Making a court weed through allegations that might be relevant
to something in the case but not to the count at issue is, quite frankly, an
annoying practice that does not benefit the pleader. Nevertheless, this Court has
made an effort to understand the counts at issue here, and, although the
draftmanship of the complaint as a whole is seriously lacking, Farmers State
Bank’s motion for summary judgment will not be granted.
In Count IV, the Debtor claims that it was libeled by Farmers State Bank
because Farmers State Bank published notices to defense counsel saying that
the Debtor had entered into an “Assignment” of all its rights in its receivables
and general intangibles. The Debtor says that the use of the term “Assignment”
is false and untrue. Although Count IV is labelled as pleading other tortious
conduct, no other tort is identified, and a footnote suggests that more discovery
is needed to fully identify all actionable tortious conduct of Farmers State Bank.
Farmers State Bank responded in its motion for summary judgment by
citing one nonprecedential case holding that the granting of a security interest
may properly be referred to as an assignment and claiming that, in any event,
the use of the term even if incorrect was not defamatory or libelous. It claims
that, because the commercial security agreement authorized it to collect on the
receivables and general intangibles, it could proceed as it had with absolute
impunity.
Had Farmers State Bank filed a motion to dismiss for failure to state a
claim upon which relief may be granted, it might well have prevailed as to Count
IV. Fed. R. Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012. More than “an unadorned,
the-defendant-unlawfully-harmed-me accusation” is required to state a
plausible claim and avoid dismissal. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(citations omitted). Count IV provides no more than a general allegation of harm;
it does not plead the elements of libel, and it does not even identify any other
tort it attempts to plead. But Farmers State Bank did not seek dismissal under
Rule 12(b)(6) by motion or in its answer. In the absence of any such request, the
relief will not be granted. See Fed. R. Civ. P. 12(b)(6), (h)(2).
Farmers State Bank asks for a final judgment that its conduct was, in all
respects, justified under the law. But it is clear from its own presentation of the
facts that is simply not true. It asks the Court to interpret the commercial
security agreement to allow conduct that likely would have interfered with the
Debtor’s client relationships and would have resulted in the attorneys employed
by the Debtor violating their professional obligations. Because the professional
obligations of Mr. Brown, Mr. Caraway, and the other attorneys working for the
Debtor are totally entwined with their right to payment of fees, there can be no
legitimate claim for payment of such fees without corresponding compliance with
and completion of all legal obligations due to their clients. Farmers State Bank
could not substitute itself for the attorneys with respect to such duties and
therefore could have had no reasonable expectation that, absent compliance with
such duties, a right to payment of fees would arise and be enforceable. Its notices
sent to defense counsel demanding direct payment therefore had no apparent
chance of success, and Farmers State Bank makes no credible claim that it
actually expected defense counsel to respond with payments. In the absence of
any such credible argument, it is clear that Farmers State Bank acted wrongfully
and is not entitled to summary judgment on Count IV notwithstanding the
inartful drafting of the complaint.
As to Count V, the Debtor lists a series of “inequitable” actions by Farmers
State Bank and claims that the conduct justifies equitable subordination of any
allowed claim of Farmers State Bank. Equitable subordination may be ordered
when a creditor’s conduct has been inequitable, resulting in harm to other
creditors with claims, and when the subordination would not otherwise
contradict the Bankruptcy Code. Off. Comm. of Unsecured Creditors of SGK
Ventures, LLC v. NewKey Group, LLC (In re SGK Ventures, LLC), 521 B.R. 842,
862-63 (Bankr. N.D. Ill. 2014) (citations omitted). Whether a claim should be
equitably subordinated is a highly subjective inquiry for which there are no clear
guidelines. In re Sentinel Mgmt. Group, Inc., 728 F.3d 660, 669 (7th Cir. 2013).
The list of alleged wrongful conduct by Farmers State Bank contained in
Count V is both sufficient to state a claim and sufficient to avoid summary
judgment. Farmers State Bank says that its conduct was not wrongful, but this
Court has already explained why that is not true.7 It also points out that there
are only a few other claims and contends that subordination of its claim is
therefore not meaningful. That may be true, but it is not a basis to grant
summary judgment. It should also be noted that in neither the original plan of
reorganization nor the amended plan currently pending confirmation is the claim
of Farmers State Bank treated as subordinated. Thus, the Debtor may not be
seriously pursuing this remedy. That remains to be seen. For the time being,
however, summary judgment must be denied.
IV. Conclusion
Summary judgment is only appropriate where the movant can show there
is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(a). Although motions for summary
judgment generally may be filed at any time until 30 days after the close of
discovery, they are typically only appropriate after all parties have had an
opportunity take discovery and gather evidence in support of claims and
defenses. That is why Farmers State Bank was encouraged to wait before refiling
its motion after the original was stricken. The lack of opportunity for discovery
is also a big part of why its refiled motion for summary judgment will be denied.
Without further development, the record before the Court shows a genuine
dispute about material facts. Perhaps the facts, fleshed out after a meaningful
7 Although the Court finds that Farmers State Bank acted wrongfully in its collection efforts, it makes no finding as
to whether liability and damages can be proven on the causes of action asserted by the Debtor or any others that might
be asserted.
opportunity for discovery, would support Farmers State Bank’s position. But
such a finding at this point would be premature. The Debtor raised a genuine
dispute about the material facts underlying its claims, and the motion for
summary judgment can be denied on that basis alone.
But Farmers State Bank also failed to show that it is entitled to judgment
as a matter of law. The legal issues raised by this litigation are more complex
than a strict reading of the commercial security agreement. The transaction must
still be analyzed under Illinois laws governing contracts, which implies a
covenant of good faith and fair dealing in every contract. The Illinois Rules of
Professional Conduct and Illinois law on settlement agreements are also relevant
given the nature of the purported security interest in the Debtor law firm’s
accounts and intangibles. Because Farmers State Bank did not address these or
any other relevant laws or authority, it has failed to establish its entitlement to
judgment as a matter of law.
This Opinion is to serve as Findings of Fact and Conclusions of Law
pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ENTERED: June 26, 2025
/s/ Mary P. Gorman
_________________________________________
UNITED STATES BANKRUPTCY JUDGE