Domanus et al v. Lewicki et al

Filing 520

MEMORANDUM Opinion and Order Signed by the Honorable Elaine E. Bucklo on 5/29/2012Mailed notice(ca, ).

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

)
)
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)
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)
)
)
)
)
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Plaintiffs,
)
)
v.
)
)
DEREK LEWICKI, KATARZYNA SZUBERT)
LEWICKI, RICHARD SWIECH, BOZENA
)
SANECKA-SWIECH, ADAM SWIECH,
)
SPECTRUM COMPANY, LTD., ORCHARD
)
MEADOWS HOMES, INC., ORCHARD MEADOWS )
HOMES, LLC, ORCHARD MEADOWS, LLC,
)
LAKE RIDGE TOWNHOMES CORP., LAKE
)
)
RIDGE, LLC, POLCON CONSTRUCTION
)
CORP., PROTORIUS, LTD., SAXELBY
)
ENTERPRISES, LTD., and ADR
)
ENTERPRISES, INC.,
)
)
Defendants,
)
)
and
)
)
KRAKOW BUSINESS PARK SP. Z O.O.,
KBP-1 SP. Z O. O., KBP-2 SP. Z O.O., )
KBP-3 SP. Z O. O., KBP-5 SP. Z O.O., )
)
KBP-6 SP. Z O.O., KBP-7 SP. Z O.O.,
)
KBP-8 SP. Z O.O., and KBP-11 SP.
)
Z O. O.
)
Derivative Defendants.
)
JAN DOMANUS and ANDREW KOZLOWSKI,
both individually and derivatively
on behalf of KRAKOW BUSINESS PARK
SP.Z O.O.,KRAKOW BUSINESS PARK SP.
Z O.O., KBP-1 SP. Z O. O., KBP-2 SP.
Z O.O., KBP-3 SP. Z O. O., KBP-5 SP.
Z O.O., KBP-6 SP. Z O.O., KBP-7 SP.
Z O.O., KBP-8 SP. Z O.O., and KBP-11
SP. Z O. O.

No. 08 C 4922

MEMORANDUM OPINION AND ORDER
Plaintiffs Jan Domanus and Andrew Kozlowski are shareholders
of a Polish corporation, Krakow Business Park SP. Z O.O. (“KBP”),
who

allege

that

certain

Defendants

looted

improperly wrested it from Plaintiffs’ control.

the

company

and

Plaintiffs have

named the corporation and its wholly owned subsidiaries (the “KBP
entities”) as derivative defendants in this action.

As explained

in my previous rulings in this case, Plaintiffs allege a complex
and on-going racketeering and fraud scheme that has spanned more
than 10 years.
Plaintiffs seek to disqualify counsel for the KBP entities,
arguing that they have violated the rule of corporate neutrality by
siding with the direct defendants in this litigation.

Counsel for

the KBP entities assert that they are appropriately trying to
protect the interests of the corporations, and seek leave to file
a cross-claim against Plaintiffs.

For the reasons stated, I grant

the motion to disqualify counsel and deny the KBP entities’ motion
to file a cross-claim.
I.
The facts underlying Plaintiffs’ complaint have been laid out
in an opinion denying Defendants’ motion to dismiss.

See Domanus

v. Lewicki, 779 F. Supp. 2d 739 (N.D. Ill. 2011).

However, an

overview of the complaint and the procedural posture of this case

2

is necessary to place the present motions in context.

In their

Third Amended Complaint(“Complaint”), Plaintiffs contend that the
direct defendants, led by Derek Lewicki, Richard Swiech and his
brother, Adam Swiech, have worked together and with corporations
under their control to loot the KBP entities of their assets. They
allege the direct defendants used the funds to finance real estate
developments in suburban Chicago. Defendants, according to the
Complaint, also put stolen funds back into the companies as
“capital contributions” by Adam Swiech, who then claimed to be the
majority shareholder of KBP.

These sham contributions diluted the

shareholdings of Domanus and Kozlowski, who contend that they are
the rightful majority shareholders of KBP, although they appear on
the books as minority shareholders.

The complaint outlines four

types of misconduct: (1) sham contracts and payments for inadequate
consideration; (2) self-dealing leases; (3) land misappropriation;
and (4) construction kickbacks.
As part of their suit, Plaintiffs have brought derivative
claims on behalf of the KBP entities, but seek no relief from these
entities.

The KBP entities sought to dismiss the Third Amended

Complaint on grounds of improper service and a lack of personal
jurisdiction, but I denied that motion.

See Domanus, 779 F. Supp.

2d at 750–52. Following the denial of that motion, counsel for the
KBP entities was given leave to withdraw from the case, and

3

attorneys from Locke Lord LLP were given leave to substitute as
counsel.1
On Feb. 8, 2012, Plaintiffs filed a motion to disqualify Locke
Lord in which it argued that the KBP entities had violated the
corporate neutrality rule by siding with the direct defendants on
the merits of the claims.

On March 8, 2012, while briefing on that

motion was pending, the KBP entities filed a motion for leave to
file a cross-claim against Plaintiffs, arguing in essence that the
actions taken by Plaintiffs in this litigation threatened to harm
the derivative defendants.
In April, I granted Plaintiffs’ motion for a preliminary
injunction preventing Defendant Adam Swiech from voting his shares
to approve any issuance of shares that would reduce Plaintiffs’
shareholdings below 25 percent. See Domanus v. Lewicki, --- F.
Supp. 2d ---, 2012 WL 1247102 (N.D. Ill. April 13, 2012).

In so

ruling, I noted that Plaintiffs had identified extensive evidence
supporting their claims of misconduct by the direct defendants.
Id. at *3–*4. The KBP entities opposed the preliminary injunction,
arguing it would block the KBP entities from raising funds for
their operations.

As I explained in my ruling, however, the

1

Locke Lord apparently represents Krakow Business Park
ZO.O (“KBP”), KBP-2 SP ZO.O., KBP-3 SP. ZO.O., KBP-5 SP. ZO.O.,
KBP-6 SP. ZO.O., KBP-7 SP. ZO.O., KBP-8 SP. ZO.O., and KBP-11 SP.
ZO.O. This list includes some, but not all, of the KBP entities
named in the complaint. The present motion does not address the
status of the remaining named KBP entity, KBP-1 SP. Z O.O.
4

injunction simply blocked the KBP entities from raising funds
through “one discrete avenue,” a capital call that would so dilute
Plaintiffs’ interest in the entities that they would be unable to
block a future merger.

Id. at *5.
II.

Although

the

corporation

is

nominally

a

defendant,

a

shareholder suit such as the one brought by Domanus and Kozlowski
is effectively brought by the corporation, with the shareholders as
its representatives.2
(E.D. Ark. 2006).
KBP entities.

Sobba v. Elmen, 462 F. Supp. 2d 944, 946–47

Any recovery Plaintiffs obtain would go to the

Id. at 947 (citing Bell Atl. Corp. V. Bolger, 2 F.3d

1304, 1307 n.4 (3d Cir. 1993)).

Because the corporation is the

real party in interest, the general rule is that a corporation may
not participate in a derivative action on the merits unless it
threatens rather than advances the corporate interest.

Id., see

Patrick v. Alacer Corp., 84 Cal. Rptr. 3d 642, 652 (Cal. Ct. App.
2009).
Sobba,

This is known as the rule of corporate neutrality, see
462

F.

Supp.

at

946,

and

neither

side

contests

its

applicability here.
Both sides agree that Locke Lord has a duty to protect the
interests of the KBP entities. See Cannon v. U.S. Acoustics Corp.,
398 F. Supp. 209, 216 (N.D. Ill. 1975), rev. in part on other
2

I note that Plaintiffs bring both individual and
derivative claims, but only their derivative claims are at issue
here.
5

grounds, 532 F.2d 1118 (7th Cir. 1976).

(“The interest of the

corporate client is paramount and should not be influenced by any
interest of the individual corporate officials.”).

The question

here is whether Locke Lord’s efforts in this litigation have been
unduly influenced by the direct defendants.

For the reasons that

follow, I find that they have.
III.
Locke Lord contends that
it

has

determined

that

after an independent investigation,

Plaintiffs’

actions

“threaten

the

profitability, business and the very existence of the companies.”
Mot.

by

KBP

Entities

for

Leave

to

File

Plaintiffs Instanter, at 3 (Dkt. No. 465).

Crossclaim

Against

To apply the rule of

corporate neutrality, at least as interpreted by Plaintiffs, would
render the corporations unable to protect their own interests, the
KBP entities contend. Plaintiffs, however, argue convincingly that
although the “actual” (i.e., the direct) defendants are nominally
represented in this case by Lucas Fuksa alone, the Locke Lord
attorneys are actively pursuing those defendants’ interests in
violation of the rule of corporate neutrality.
Plaintiffs cite the following circumstances and events in
support of their argument:
•

the management board of KBP includes no disinterested
directors, as it is composed only of Defendant Richard

6

Swiech, Defendant Bozena Sanecka-Swiech (Richard Swiech’s
wife), and Alicja Gostek-Swiech (the wife of Defendant
Adam Swiech);
•

Locke

Lord

attorneys

asserted

a

“common

interest

privilege” in objections to discovery requests Plaintiffs
propounded in pursuit of their claims against the actual
defendants;
•

Locke Lord attorney Mr. Jaszczuk advocated, during a
discovery hearing before Judge Nolan, for the position
that direct defendant Lewicki should not be required to
produce evidence of a bank account he had previously
concealed, arguing the account was not relevant;

•

Locke Lord attorney Mr. Schlessinger sent an informal
document request to the managing director of Kozlowski’s
employer, the law firm CMS Cameron McKenna, without
copying Plaintiffs’ counsel, indicating that he intended
to “adduce evidence at trial” relating to a transaction
between the KBP shareholders and a company called ORCO,
despite the fact that no KBP entity was a party to that
transaction;

•

Locke Lord attorneys provided work product to “their
client’s representative” in Poland — presumably Adam

7

Swiech — which Adam used in defending his Polish criminal
case.3
First,

that

the

management

board

disinterested directors raises a red flag.
the

directors

of

a

corporation

are

of

KBP

contains

no

In a situation where

accused

of

fraud,

it

is

imperative that the corporation make an independent determination
as to how to proceed.
(D.N.J. 1977).
for

the

Messing v. FDI, Inc., 439 F. Supp. 776, 782

The KBP entities cite Cannon, 398 F. Supp. at 220,

proposition

that

a

corporation

may

choose

its

own

independent counsel even if individual defendants serve on the
board of directors. It is true that in Cannon, a derivative action
involving the alleged misappropriation of corporate funds, the
court declined to appoint counsel for the corporation even though
the individual defendants served as the board of directors.

Id.

The court added, however: “Certainly new counsel will recognize
their duty to represent solely the interests of the corporate
entities.

And should difficulties arise, the parties or counsel

may apply to the court for additional relief.”

Id.

As the Cannon court recognized, the appointment of counsel for
a corporation run solely by directors accused of wrongdoing poses

3

Adam Swiech is facing criminal charges in Poland related
to his conduct in running the KBP entities. Defendants (and
notably the KBP entities) contend that these proceedings were
instigated by Plaintiffs in an effort to take over the
corporations, an allegation Plaintiffs deny.
8

the risk that the directors may seek to impose their will upon the
corporate counsel. There is no evidence before me to indicate that
the KBP directors took any steps to minimize the conflict inherent
in hiring (and presumably supervising) corporate counsel under
these circumstances.
F. Supp. at 783.

It was their duty to do so.

See Messing, 439

The fact that courts have typically declined to

appoint counsel for corporations named in derivative lawsuits
reflects

only

the

principle

that

it

is

for

a

corporation’s

directors “in the first instance to devise a method to accommodate
the need to continue the corporate enterprise while refraining from
participating in any corporate decision in which they might have a
personal interest.”

Id.

Here, there is evidence that the direct

defendants have influenced the KBP entities’ handling of this
matter.
For example, Locke Lord acknowledges that as part of its
investigation into whether to pursue a claim against Plaintiffs, it
obtained a LexisNexis report regarding Domanus’ assets.

That

report subsequently was used by Adam Swiech’s criminal lawyer in
Poland.

Locke Lord’s only explanation is that it shared this

report with its client’s representative in Poland (presumably Adam
Swiech, although counsel does not say), and that the first time
Locke Lord learned the report had been used by Adam Swiech in his
criminal case was when Plaintiffs’ counsel raised the issue. Given
that Adam Swiech is charged with defrauding the very clients that
9

Locke Lord represents, however, Locke Lord should have taken steps
to prevent its work product from being used by Adam Swiech in the
criminal proceedings.
Locke Lord’s document request to Kozlowski’s law firm is
similarly problematic.
and

Request

for

In the request, labeled “Litigation Hold

Information

and

Documents,”

Mr.

Schlessinger

requests information related to the failed sale of KBP to ORCO, a
Luxembourg-based real estate company.

See Michaels Decl. Ex. H.

Plaintiffs allege that the direct defendants scuttled the sale to
prevent ORCO from discovering evidence of their wrongdoing, and
that Plaintiffs suffered injury as a result.
In the document request, Mr. Schlessinger writes, “Given that
the Transaction is central to the Plaintiffs’ allegations, I wish
to adduce evidence at the trial of this matter of the role that Mr.
Kozlowski played in the negotiation of the Transaction.” Mr.
Schlessinger adds that he had reason to believe ORCO was a client
of Kozlowski’s law firm at or near the time of the transaction, and
so Kozlowski had access to confidential information about the
company.

The ORCO transaction is the subject only of Plaintiffs’

direct claims because it was a proposed stock sale between Orco and
the KBP shareholders themselves.

It is unclear why the KBP

entities, who were not parties to the transaction, would want to
adduce evidence of it at trial.

In its response, the Locke Lord

attorneys contend that their goal was merely to ensure that
10

important documents would be preserved.

This is a document

request, however, and the stated reasons for the request improperly
align the KBP entities with the direct defendants.
Locke Lord attorney Mr. Jaszczuk’s objection to Plaintiffs’
request that Lewicki be ordered to produce certain bank records is
similarly troublesome.

See Michaels Decl., Ex. G.

While the KBP

entities couch Mr. Jaszczuk’s objection as arising from a general
concern that the scope of discovery would be unduly broadened, Mr.
Jaszczuk specifically argued that the requested bank records were
irrelevant because the account was not opened until 2010, after the
date of the allegations in the complaint.
position as well.

This was Defendants’

But as Judge Nolan subsequently found in ruling

on Plaintiffs’ motion to enforce the discovery order, these records
are relevant to the alleged on-going scheme to defraud Plaintiffs
and the KBP Entities.

See Order on Mot. to Enforce, at 9–10. (Dkt.

No. 449). That counsel for the KBP entities would argue otherwise,
particularly in light of counsel’s other actions in regard to this
case, gives the appearance that the derivative defendants are
taking direction from the direct defendants.
Finally, Locke Lord does not deny that it has refused to
produce, in response to Plaintiffs’ discovery requests, documents
or

information

concerning

its

communications

with

the

direct

defendants or their counsel, objecting that such communications are
“privileged.”

Advised of plaintiffs’ position that “[b]y invoking
11

the

[attorney-client]

privilege,

Locke

Lord

is,

in

essence,

claiming that it has an attorney-client relationship with” the
actual defendants, see Michaels Decl. Ex. B at 3 (Dkt. No. 457-1),
Mr. Schlessinger stated that Locke Lord’s objection asserted not
the

“attorney

client

privilege,”

but

“the

common

interest

privilege.” Michaels Decl. Ex. C at 2.
But this putative distinction is contrary to the law, since,
as the Seventh Circuit has explained, “common interest” is not “a
privilege itself,” but rather “an exception to the rule that no
privilege attaches to communications between a client and an
attorney in the presence of a third person.”

U.S. v. BDO Seidman,

LLP, 492 F.3d 806, 815-16 (7th Cir. 2007) (“In effect, the common
interest

doctrine

extends

the

attorney-client

privilege

to

otherwise non-confidential communications in limited circumstances.
For that reason, the common interest doctrine only will apply where
the parties undertake a joint effort with respect to a common legal
interest,

and

the

doctrine

is

limited

strictly

communications made to further an ongoing enterprise.”).

to

those
In this

case, according to the KBP entities, the common legal goal between
the direct defendants and the KBP entities is “holding Plaintiffs
accountable for their actions” through the proposed cross-claim.
Resp. to Mot. to Disqualify, at 8.

The KBP entities argue that

there is a crucial distinction between working with the direct

12

defendants in order to establish the facts of the cross-claim, and
joining with direct defendants generally.
Plaintiffs’ discovery requests, among other things, sought
“documents that relate to any claim(s) or defense(s) asserted by
any party in [this] lawsuit” and shared between Locke Lord and the
direct defendants and their lawyers.
6.

See Michaels Decl., Ex. E, ¶

I note, first, that at the time Locke Lord responded to this

request, in December 2011, it had not yet sought leave to file its
proposed cross-claim.

Therefore, Plaintiffs’ request went only to

the claims and defenses actually asserted in this lawsuit. Although
Locke

Lord

might

have

been

investigating

a

claim

against

Plaintiffs, it made no attempt to limit its blanket assertion of
privilege to those claims or defenses in which the KBP entities had
a common interest with the direct defendants.
Further, even if the KBP entities’ argument that its assertion
of privilege went only to its intended cross-claim was well-taken,
it is important to note that the proposed cross-claim, at least in
part, reads very much like a defense of the direct defendants on
the merits.

See CrossClaim By the KBP Entities Against Kozlowski

and Domanus (Dkt. No. 465-1, Ex. A.). The introduction section
portrays Plaintiffs as wrongdoers who are trying to take over the
KBP entities from their rightful owners through the use of both
Polish criminal and civil courts and this very lawsuit.
6–12.

Id. at ¶¶

These actions are the basis for the KBP entities’ proposed
13

claim

in

Count

VI

of

tortious

interference

with

prospective

economic advantage and in Count VII and VIII of breach of the duty
of loyalty.
In their response to the motion to disqualify, the KBP
entities dedicate several pages to a summary of the allegations of
Plaintiffs’ misconduct stated in the cross-claim they have sought
leave to file, and argue that these show an “improper purpose”
behind the motion to disqualify.

Notably, however, even assuming

that Plaintiffs’ alleged misconduct is relevant to Plaintiffs’
current motion, the KBP entities submit no evidence that reasonably
supports their allegations, which, in some instances, are belied by
affirmative evidence in the record.4
4

Most of the allegations levied in response to the present
motion are supported only with citations to the proposed crossclaim. In the few instances of substantive citations, the cited
evidence does not support the allegation. For example, the KBP
entities claim that Plaintiffs “tried to sell their shares” of
KBP in violation of a shareholder resolution not to sell
individual shares. While the KBP entities attach a copy of a
shareholder resolution, they cite no evidence that plaintiffs
violated or attempted to violate it. Similarly, the KBP entities
affirmatively allege that a Polish court found, on the merits,
that plaintiff Kozlowski’s wife “was not entitled to additional
shares” in KBP held in defendant Adam Swiech’s name, attaching
the Polish court’s decision as support. On its face, however,
the decision held, “in relation to Adam Swiech, [this Court]
rejects the request to determine that the Plaintiff is entitled
to [the shares in question].” (Emphasis added). Jaszcuk Decl.,
Ex. D (Dkt. No. 464-4). That the KBP entities construe the text
of this decision as support for their allegation that the case
was adjudicated on the merits is puzzling, particularly in light
of affirmative evidence Plaintiffs previously submitted that the
court in fact decided the case on the ground that the plaintiff
had no remedy under the asserted article of the Civil Procedure
Code, and did not hear any testimony or review any documents
14

Simply put, the evidence brought forth by Plaintiffs shows
that the KBP entities are attempting to defend the suit on the
merits, an action they may take only when the derivative suit
threatens their corporate interests.
947.
to

Sobba, 462. F. Supp. 2d. at

While the KBP entities assert this is such a case, they fail

grapple

with

the

legal

standard

for

determining

when

a

derivative suit threatens the corporation’s interests. The test is
whether

the

complaint

seeks

corporation’s interests.

relief

Id. at 950.

that

is

adverse

to

the

Examples of such relief

include a request to enjoin the performance of any contract by the
derivative defendants, a request for a receiver, or attempts to
interfere with a corporate reorganization or internal management
absent allegations of bad faith.

Id. at 949.

Here, of course, the complaint is rife with allegations of bad
faith.

And while the KBP entities have expressed concern that

Plaintiffs would seek an injunction that would threaten their
ability to conduct business, they have not done so.5 In regard to
their derivative claims, Plaintiffs seek compensatory damages on
behalf of the corporation under the Racketeer Influenced and
Corrupt Organizations Act, and punitive and compensatory damages

before issuing its ruling.
(Dkt No. 309).

See Decl. of Karol Rutkowski,¶ 11

5

As noted above, the preliminary injunction I entered
limits Adam Swiech’s ability to vote his shares, but leaves other
options available should the KBP entities need to raise capital.
15

under state law, including the imposition of a constructive trust
for the benefit of the KBP entities.

None of these remedies will

harm the KBP entities. Either Plaintiffs can prove their claims or
they cannot, but the KBP entities lose nothing by their efforts.
See id.

Because the complaint does not seek relief adverse to the

derivative defendants’ interests, they cannot defend on the merits.
Although couched as a cross-claim, that is exactly what the KBP
entities seek to do in this case.
In some circumstances, a derivative defendant is allowed to
defend a suit frivolously brought against its directors. See
Messing, 439 F. Supp. at 782.

I note, however, that in granting

Plaintiffs’ request for a preliminary injunction, I found that
there was in fact substantial evidence showing that Plaintiffs were
likely to prevail on their claims.
at *3–*4.

See Domanus, 2012 WL 1247102,

I also note that while there may be circumstances in

which a cross-claim by a derivative defendant against a plaintiff
is appropriate, it is only appropriate where the corporation
remains neutral on the plaintiff’s claims against the actual
defendants, and where it is clear the derivative defendant is
acting independently and in its own best interests.

Based on the

record before me, this is not such a case.
IV.
For

the

reasons

stated

herein,

Plaintiffs’

Motion

to

Disqualify Locke Lord LLP As Counsel for the Derivative Defendants
16

(Dkt. No. 455) is granted.

In light of this ruling, the KBP

Entities’ Motion to File a CrossClaim Against Plaintiffs Instanter
(Dkt. No. 465) is denied.
ENTER ORDER:
____________________________
Elaine E. Bucklo
United States District Judge
Dated: May 29, 2012

17