## Facts

- A group of investment funds raised about $2.5 billion and invested heavily through entities controlled by Thomas Petters, who was running a fraud that collapsed in 2008.
- The funds’ manager structured loans to Petters entities around purported inventory-financing transactions involving Costco, including paperwork, a promised payment undertaking, and a “lockbox” account meant to receive Costco payments.
- In practice, Costco did not deposit money into the lockbox; deposits came from Petters-controlled entities, and Petters required the funds not to contact Costco.
- After the collapse, the funds entered bankruptcy; the trustee sued the funds’ transactional counsel, Katten Muchin Rosenman LLP, for legal malpractice.
- The trustee alleged Katten failed to advise that the actual structure (no direct Costco verification and no direct Costco payments) materially increased fraud risk and failed to recommend less risky legal structures or additional protections as problems emerged.
- The district court dismissed under Rule 12(b)(6), reasoning the funds knowingly assumed the risks of doing business with Petters.
- The trustee appealed.

## Issues

1. Whether a transactional lawyer’s alleged failure to advise how alternative legal structures allocate and reduce transaction risk can state a malpractice claim under Illinois law, rather than being non-actionable “business advice.”
2. Whether dismissal under Rule 12(b)(6) was improper because the complaint plausibly alleged breach and causation and the district court relied on matters beyond the pleadings to conclude the client assumed the risks.

## Decision

- The Seventh Circuit reversed the Rule 12(b)(6) dismissal and remanded.
- The court held the complaint plausibly stated a legally cognizable malpractice claim under Illinois law.
- The court rejected a categorical rule that advice about the risk characteristics of deal structure is merely “business advice” outside a transactional lawyer’s professional duty.
- The court concluded that questions about defenses and actual causation required a fuller factual record and were not suitable for resolution on a motion to dismiss.

## Legal Principles

- Transactional legal representation can include advising how different contractual and legal devices allocate, increase, or mitigate risk; a failure to provide such advice may support a malpractice claim.
- On a Rule 12(b)(6) motion, courts must accept well-pleaded factual allegations as true and draw reasonable inferences in the plaintiff’s favor; disputes about what the client knew, intended, or would have done typically are fact questions.
- Client sophistication or alleged misconduct does not automatically defeat malpractice claims at the pleading stage where the complaint plausibly alleges that competent legal advice could have changed transaction structure or client decisions.

## Conclusion

The Seventh Circuit held that the trustee plausibly alleged that transactional counsel failed to advise about the legal risk implications of the funds’ deal structure with Petters-related entities and that the district court improperly resolved contested factual matters at the pleading stage, requiring reversal and remand.


Peterson v. Katten Muchin Rosenman LLP, 792 F.3d 789 (7th Cir. 2015)