Clarifying Attorney Disclosure Obligations and Proximate Cause in Legal Malpractice: Signal Funding v. Sugar Felsenthal

Introduction

Signal Funding, LLC (“Signal”) is a pre-settlement litigation-funding company. One of its executives, Farva Jafri, resigned in September 2017 to launch a competing fund. While still employed at Signal, she solicited investors for her new venture and, immediately after leaving, sought legal advice from Signal’s outside counsel, Sugar Felsenthal Grais & Helsinger LLP (“Sugar Felsenthal”). Signal sued Sugar Felsenthal and four practitioners for legal malpractice, breach of contract, breach of fiduciary duty, and fraud/fraudulent concealment under Illinois law. The district court dismissed some claims on the pleadings and granted summary judgment on the rest. Signal appealed. The Seventh Circuit consolidated two appeals and, on May 2, 2025, unanimously affirmed every ruling.

Summary of the Judgment

The Seventh Circuit held that:

Fraudulent Concealment – There is no duty to disclose non-adverse representations of other clients, so Signal’s theory of fraudulent concealment fails as a matter of law. Any error in dismissing that theory alongside the viable fraudulent-misrepresentation claim was harmless.
Legal Malpractice & Breach of Contract – Signal could not prove proximate causation: it did not show that “but for” Sugar Felsenthal’s advice to Jafri, Signal would have obtained the investor funds instead. Summary judgment on malpractice and contract claims was therefore proper.
Fraudulent Misrepresentation – Signal waived any challenge to summary judgment on the remaining fraud theory (the misrepresentation that Sugar Felsenthal made no adverse representation of Jafri).
Discovery & Work Product – A document protected by the work-product doctrine need not be produced under Federal Rule of Evidence 612 unless the deponent’s testimony was actually refreshed by that document—and Signal failed to show any such effect.

Analysis

Precedents Cited

Bell Atlantic v. Twombly, 550 U.S. 544 (2007): plausibility standard under Rule 12(b)(6).
Fed. R. Civ. P. 9(b): heightened pleading for fraud.
BBL, Inc. v. City of Angola, 809 F.3d 317 (7th Cir. 2015): no piecemeal dismissals of parts of claims.
Connick v. Suzuki Motor Co., 675 N.E.2d 584 (Ill. 1996): fraudulent concealment requires a duty to speak.
Owens v. McDermott, Will & Emery, 736 N.E.2d 145 (Ill. App. Ct. 2000): proximate cause in legal malpractice.
Fed. R. Evid. 612 & work-product doctrine: tension between refreshment of recollection and protection of litigation materials.
Fed. R. Civ. P. 54(b): finality of judgments when multiple claims are pending.

Legal Reasoning

1. Fraud Claim as a Single “Claim”
The court explained that a plaintiff’s “claim” under Rule 12(b)(6) is a set of operative facts; legal theories are vehicles to pursue that claim. Once Signal stated a viable claim under a fraudulent-misrepresentation theory, the court need not—and should not—separately analyze and dismiss its fraudulent-concealment theory. Any error in doing so did not prejudice Signal.

2. Duty to Disclose and Illinois Professional Rules
Under Illinois Rule of Professional Conduct 1.7, attorneys must disclose and obtain “informed consent” before concurrent representation that is directly adverse to another client. Rule 1.6(b)(7) permits—but does not require—disclosure of otherwise non-conflicting representations. No duty exists to volunteer unconflicted client lists or work, so Signal’s fraudulent-concealment theory fails.

3. Proximate Cause in Malpractice & Contract
Illinois malpractice law demands proof that “but for” the attorney’s negligence, the client would have prevailed or avoided loss. Signal presented no evidence that investors like Matthew Eager or Brij Shah would have funded Signal had they known of Sugar Felsenthal’s advice to Jafri. Their choices were discretionary and not mutually exclusive with Signal.

4. Rule 612 vs. Work-Product Protection
A party may obtain a writing under Rule 612 only if the writing actually refreshed the witness’s memory. Sugar Felsenthal’s December 2017 memo was prepared in contemplation of litigation and protected as work product. Signal did not show that Jonathan Friedland’s deposition answers were influenced by reviewing that memo. The district court’s denial of production was well within its discretion.

Impact

Clarifies that no cause of action for fraudulent concealment lies where attorneys represent non-adverse clients, absent a rule or contract imposing disclosure.
Reinforces that legal-malpractice plaintiffs must prove but-for causation, particularly loss of investors or settlement proceeds.
Reaffirms the limited scope of Federal Rule of Evidence 612 when confronting work-product objections.
Underscores careful framing of complaints: a “claim” should be pleaded once, with alternative legal theories preserved but not separately litigated at the pleadings stage.

Complex Concepts Simplified

FRCP 12(b)(6) – A motion to dismiss for failure to state a claim; the court tests whether the complaint alleges enough facts to make the plaintiff’s right to relief plausible.
Rule 9(b) – Fraud claims must identify who made what false statement, when, where, and how it caused injury.
Fraudulent Misrepresentation vs. Concealment – Misrepresentation is an affirmative false statement; concealment is a failure to disclose when there is a legal duty to speak.
Proximate Cause in Malpractice – The “but for” rule: lawyers must show that their mistake directly prevented the client from winning or caused a quantifiable loss.
Work Product & Rule 612 – Lawyers’ work files are generally protected from discovery; Rule 612 allows production only if a document truly refreshed a witness’s recollection and influenced their testimony.

Conclusion

Signal Funding v. Sugar Felsenthal Grais & Helsinger clarifies several key points in Illinois legal ethics, malpractice, fraud pleading, and discovery practice. It confirms that attorneys have no duty to disclose non-conflicting representations, mandates rigorous proof of but-for causation in malpractice and contract claims, restricts fraudulent-concealment claims absent a disclosure duty, and reins in attempts to circumvent work-product protection under Rule 612. For practitioners, the decision serves as a roadmap for drafting fraud and malpractice complaints, evaluating client conflicts, and handling discovery disputes over privileged and protected materials.