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Ethics & Professional Responsibility FLASHPOINTS November 2019

November 15, 2019Print This Post Print This Post

Terrence P. McAvoy & Katherine G. Schnake
Lawyers for the Profession, Hinshaw & Culbertson LLP, Chicago
312-704-3000 | E-mail Terrence P. McAvoy | E-mail Katherine G. Schnake

Judicial Error Doctrine Rejected as Defense to Malpractice Claim Because Attorneys Failed To Appeal Judgment in Underlying Litigation

In American Inter-Fidelity Exchange v. Hope, No. 17 C 7934, 2019 WL 4189657 (N.D.Ill. Sept. 4, 2019), a federal district court in Illinois held that defendants, who were sued for malpractice after a default judgment was entered against their client in underlying litigation, could not invoke judicial error as an intervening, superseding cause, breaking the chain of causation in circumstances in which the defendant lawyers could have, but elected not to, appeal the allegedly erroneous judgment.

After a car accident, Joseph Hope sued Iurii Rypninskyi to recover for injuries he sustained. American Inter-Fidelity Exchange (AIFE), Rypninskyi’s insurer, retained Cassiday Schade, LLP, to defend him.

Rypninski failed to cooperate and appear at trial. The court issued an evidentiary sanction against him for not appearing. The trial court then found that Cassiday violated the sanction order, and, as a result, the court entered a default judgment against Rypninskyi as to liability. The jury later awarded damages to Hope in the sum of $400,000. Cassiday chose not to file an appeal.

AIFE then filed a declaratory judgment action in federal court seeking a finding that it owed no duty to indemnify Rypninskyi because of his failure to appear for trial. Rypninskyi then filed a third-party claim against Cassiday for legal malpractice, contending that its errors and omissions caused both his nonappearance at trial and the ensuing adverse judgment.

Cassiday moved for summary judgment, arguing that the judgment against Rypninskyi was proximately caused not by its professional negligence, but by the state court’s error in granting the default judgment on liability. This error by the court, according to Cassiday, was an intervening cause that broke any causal connection between its alleged negligence and Rypninskyi’s injury as a matter of law.

The court rejected Cassiday’s position and denied its motion. In the court’s view, an attorney accused of negligence who does not appeal a judgment the attorney contends resulted from judicial error, cannot then use judicial error as a defense to the malpractice claim. The court did note that the filing of an appeal is not a blanket requirement before invoking judicial error as a defense; in fact, when the failure to appeal an erroneous judgment is not the attorney’s doing, the attorney bears no responsibility for the harm to the client. The court concluded: “[B]ecause Cassiday Schade was responsible for failing to appeal, its contention that this court must decide that the judgment would have been reversed on appeal — if only an appeal had been filed — boils down to the nonsensical proposition that it cannot be held liable for trial malpractice in state court because it decided not to appeal.” 2019 WL 4189657 at *2.

Courts have held that a trial court’s error in the underlying litigation may constitute a superseding, intervening, cause of plaintiff’s claimed damages in legal malpractice actions, relieving the attorney of liability. See, e.g., Green v. Papa, 2014 IL App (5th) 130029, 4 N.E.3d 607, 378 Ill.Dec. 724; Huang v. Brenson, 2014 IL App (1st) 123231, 7 N.E.3d 729, 379 Ill.Dec. 891. Here, however, the court rejected the judicial error doctrine seemingly on the basis that the defendants were at least partially at fault for the trial court’s alleged error, and they, as opposed to the client, failed to appeal the erroneous judgment.

Case Dismissed: Illinois Appellate Court Holds Legal Malpractice Claims Were Time-Barred and Corporate Adverse Domination Tolling Doctrine Did Not Apply

In Shrock v. Ungaretti & Harris Ltd., 2019 IL App (1st) 181698, the First District Appellate Court in Illinois upheld the dismissal of a legal malpractice action brought by a limited liability company (LLC) and one of its individual members against the lawyers who had represented the LLC’s managing member based on the two-year statute of limitations. The court held that the individual’s claim was barred because pleadings in the underlying case established that he knew he was wrongfully injured more than two years before the malpractice action was filed. The court further held that the individual’s knowledge, motivation, and ability to sue defendants was imputed to the LLC and precluded reliance on the adverse domination doctrine to toll the limitations period.

The Underlying Action

The plaintiff, Baby Supermall, LLC (BSM), is an LLC with three members: Robert Meier, who owns 87.5 percent of the stock; Edward Shrock, who owns the remaining 12.5 percent of the stock; and Baby Supermall, Inc., a corporation. Under BSM’s operating agreement, Meier, as its managing member, was afforded “full, exclusive, and complete discretion, power, and authority” to operate and direct company affairs. 2019 IL App (1st) 181698 at ¶7.

The relationship between Meier and Shrock soured after Shrock rebuffed Meier’s offer to buy out his shares. Thereafter, Meier drastically reduced Shrock’s salary, increased his own, blocked Shrock from participating in any corporate decision-making, and, through so called “profit-sharing” agreements, purported to obligate BSM to paying Meier a higher percentage of profits. Additionally, at Meier’s instance, BSM then hired Meier’s wife and stepson, and paid them 20 percent and 10 percent of BSM’s profits, respectively.

Shrock sued Meier — who was represented by the defendants, Ungaretti & Harris, Ltd. — for breach of fiduciary duty. In 2010, Shrock successfully secured a court order in the underlying action enjoining Meier from (1) making any further payments to himself or his family members under the guise of profit sharing, and (2) paying himself, his wife, or his son salaries in excess of $350,000, $120,000, and $110,000, respectively. 2019 IL App (1st) 181698 at ¶15.

Shrock returned to court several times in the ensuing years, alleging Meier had repeatedly violated the 2010 injunction order. Each time, the defendants denied any misconduct by Meier and assured the court that Meier was not paying any money out.

In June 2013, Meier moved to modify the injunction, and swore he had not made any prohibited payments. Shrock opposed the motion in August 2013; he asserted that the prior assurances by the attorney defendants to the court that Meier had not paid out any money was false and soundly refuted by the Meiers’ own W-2s and other financial data, which demonstrated that the Meiers did, in fact, pocket the money. According to Shrock’s opposition, when confronted with this data, defendants “reversed [their] stance” and characterized the payments as bonuses and salary increases, not profit-sharing — assertions which were met with skepticism by the court. For these reasons, Shrock’s August 2013 opposition included a request for a rule to show cause and sanctions not only against Meier, but also against defendants. Ultimately, the underlying action against Meier went before a jury, which ruled in Shrock’s favor and awarded him $11,164,500.

On March 12, 2014, shortly after the jury verdict, Shrock filed yet another motion claiming breaches by Meier of the 2010 injunction order. Shrock’s March 2014 motion involved defendants’ discredited claim that Meier had not violated the 2010 injunction order and the evidence that belied it.

Meanwhile, the adverse $11 million jury verdict prompted a bankruptcy filing by Meier. The defendants attempted to file a claim in the Meier bankruptcy in July 2014. Shrock refuted the Ungaretti claim, contending that the attorney defendants were liable to him for conspiring with Meier to evade the injunction order and concocting Meier’s “merger” and “dissolution” strategies to divest Schrock of his membership interest in BSM.

On October 31, 2014, BSM filed a complaint against Meier in bankruptcy court based on substantially the same grounds alleged by BSM and Shrock in their legal malpractice action. On November 7, 2014, Meier answered and admitted to transferring over $16.3 million in contravention of the injunction order.

On November 18, 2016, BSM and Shrock filed their malpractice action against the defendants. They alleged the defendants were complicit in Meier’s wrongdoing, and had helped Meier circumvent the 2010 injunction order and deplete corporate assets. The defendants moved to dismiss based on the two-year statute of limitations, 735 ILCS 5/13-214.3, which requires all actions against attorneys arising out of an act or omission in the performance of professional services to be commenced within two years from the time plaintiff “knew or reasonably should have known of the injury for which damages are sought.” 2019 IL App (1st) 181698 at ¶45.

As to Shrock, the appellate court found ample evidence of requisite knowledge more than two years before suit was filed on November 18, 2016. The court noted that Shrock’s August 2013 opposition brief and March 2014 post-verdict motion, as well as his July 2014 objection to defendants’ bankruptcy claim, established that he knew long before November 18, 2014, that Meier, aided by the defendants, was violating the injunction to Shrock’s and BSM’s detriment. Certainly, by November 7, 2014, when Meier expressly admitted wrongdoing, Shrock’s knowledge was complete. He should have filed suit at that time. Instead, he waited until November 18, 2016, to do so. By then, his action was too late.

BSM tried to seek refuge behind the adverse domination doctrine. The doctrine typically tolls the statute of limitations for claims by a corporation against errant officers and directors, and those in cahoots with them, during the time the corporation is under their control. The rebuttable presumption is that the corporation does not “know” of the injury and is without any ability to act, as long as it is controlled by the wrongdoers.

The presumption, however, may be rebutted by evidence that someone other than the wrongdoing directors had knowledge of the cause of action and had both the ability and the motivation to bring suit. The appellate court concluded the presumption was rebutted here. Shrock had the motivation and knowledge to institute an action against the defendants. Shrock also had the ability to sue. Under §40-1 of Illinois’s Limited Liability Company Act (805 ILCS 180/15-1), a member can file a derivative action without waiting for authorization from the managing member when, as here, it would have been hopelessly futile to do so. The adverse domination doctrine thus did not toll the two-year statute of limitations as to BSM, and its claim was also time-barred.

The adverse domination doctrine is a variant of the discovery rule as it is applied to corporations. It is based on the notion that since corporations are legal entities which can act only through their officers, it may be legally impossible for a corporation to discover its cause of action where the requisite knowledge is under the control of wrongdoers acting adversely to it. This case demonstrates the limitations of the doctrine.

Pro Se Lawyers Can Recover Attorneys’ Fees Under Illinois Supreme Court Rule 137

In McCarthy v. Taylor, 2019 IL 123622, a case of first impression, the Illinois Supreme Court held that a court is authorized under Illinois Supreme Court Rule 137(a) to impose sanctions in the form of attorneys’ fees against a plaintiff to compensate a pro se attorney who successfully defends against a frivolous claim.

The facts of this case play out like a movie. The primary beneficiary of a trust learned after his friend committed suicide that his friend had secretly amended his trust to the substantial benefit of a new girlfriend. Jilted by this discovery — and after the trial court found the amendment to be valid — he sued the lawyer who informed him about the amendment, alleging tortious interference. The Illinois Supreme Court affirmed the dismissal of the frivolous claim and the award of attorneys’ fees for the attorney who defended himself.

When the grantor (Reynolds) first created the living trust, it was written such that if Reynolds’ then romantic interest (Coles) died before Reynolds, the plaintiff (McCarthy) would receive Coles’ 80 percent share following Reynolds’ death. Coles passed away before Reynolds, setting up McCarthy to receive the lion’s share of the trust at Reynolds’ death. A few years later, Reynolds committed suicide. The defendant attorney (Gray) contacted McCarthy after Reynolds’ death and notified him that Reynolds had amended the trust before his death to name a new romantic interest (Taylor) as the primary beneficiary. Pursuant to the amendment, McCarthy would now receive a much smaller 20-percent share of the trust.

McCarthy’s first attempt to invalidate the trust failed when the trial court found the amended trust was valid. Seeking another bite at the apple, McCarthy sued Gray, alleging breach of fiduciary duty and tortious interference. After the claims were dismissed, Gray filed a motion for sanctions under Illinois Supreme Court Rule 137(a), contending that McCarthy made false statements in his complaint, and that Gray and McCarthy did not have an attorney-client relationship. The trial court found that McCarthy’s cause of action against Gray was frivolous and therefore subject to Rule 137(a) sanctions in the amount of $9,907.98. The appellate court vacated the award, holding that a pro se attorney was not entitled to receive attorneys’ fees.

The Illinois Supreme Court initially discussed a basic summary of the sanctions rule: “The plain language of Rule 137 authorizes a court to impose sanctions against a party or counsel for filing a motion or pleading that is not well grounded in fact; that is not supported by existing law or lacks a good-faith basis for the modification, reversal, or extension of the law; or that is interposed for any improper purpose.” 2019 IL 123622 at ¶19.

McCarthy distinguished Hamer v. Lentz, 132 Ill.2d 49, 547 N.E.2d 191, 138 Ill.Dec. 222 (1989) (pro se attorney not entitled to attorneys’ fees for prosecuting a Freedom of Information Act action), and State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2018 IL 122487, 115 N.E.3d 923, 426 Ill.Dec. 1 (law firm not entitled to attorneys’ fees for prosecuting qui tam claim under the False Claims Act), because those matters involved a fee-shifting provision and the long standing “American Rule” that each side should bear its own litigation expenses. Other cases were distinguishable because they did “not involve Rule 137 sanctions to compensate a pro se attorney defending himself against frivolous claims.” 2019 IL 123622 at ¶28. Since the policy of Rule 137 sanctions is to “deter frivolous pleading and litigation,” the court noted that “it would be illogical to deny attorney fees to pro se attorneys defending themselves in such matters.” Id. The purpose of sanctions is to punish the party who abuses the judicial process. The court concluded: “under Rule 137, a court is authorized to impose sanctions in the form of attorney fees under Illinois Supreme Court Rule 137(a) (eff. July 1, 2013) against a plaintiff to compensate an attorney defending himself against a frivolous cause of action.” 2019 IL 123622 at ¶32.

Two justices dissented, in part. Justice Karmeier believed the majority fell short of addressing compensation for non-lawyers who defend frivolous actions as pro se defendants and proposed that a defendant’s loss of income (regardless of occupation) that was attributed to the time spent defending the action be considered in assessing appropriate sanctions. Justice Garman dissented for a number of reasons, “most importantly [because] the majority’s holding impermissibly carves out a special exception for attorneys.” 2019 IL 123622 at ¶60.

Illinois attorneys forced to defend themselves in frivolous actions may now seek attorneys’ fees as sanctions pursuant to Illinois Supreme Court Rule 137, which is essentially Illinois’ equivalent of Federal Rule 11.

For more information about ethics and professional responsibility, see ELEMENTS OF ILLINOIS LAW: PRACTICING ETHICALLY — 2020 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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