Bankruptcy

Law Firm Can Be Held Responsible for Malpractice Against an Insolvent Party

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World Marketing, LLC, World Marketing Atlanta, LLC, and World Marketing Dallas, LLC (together “World Marketing”) retained the law firm Crane, Heyman, Simon, Welch & Clar (“Crane”) and filed petitions for bankruptcy. A putative class of former World Marketing employees sued World Marketing for failure to serve timely notice of plant closings or mass layoffs. The matter was eventually settled and the liquidating trustee for the World Marketing Liquidating Trust (“Trustee”) sued Crane for failing to advise World Marketing of its obligations.

Crane moved for summary judgment, arguing that that only World Marketing’s creditors, not the Trustee, had suffered any actual damages. Crane explained that its alleged failure to advise World Marketing had no practical effect, as World Marketing was going out of business and the claim against it merely “added another unpayable liability onto [its] mountain of unpayable debts.” Id. at 2. Moreover, Crane insisted that in a legal malpractice action based on an attorney’s failure to properly prosecute a claim, “the plaintiff must plead and prove the existence of a solvent defendant in the underlying claim.” Id. at 1. The Court disagreed, explaining that Illinois courts distinguish between legal malpractice claims involving attorneys hired to prosecute rather than defend a claim. In the latter situation, an unpaid judgment constitutes proof of actual damages in a legal malpractice action. Thus, “an insolvent estate can be damaged by a judgment against it,” and the “very fact of entry of judgment constitutes damage and harm sufficient to permit recovery.” Id. at 3.

Crane also asserted that public policy supports its position because the Trustee and its law firm defended against the former employees’ claim in bad faith, which the Trustee denies. Even if that were true, the Court responded, the law provides other remedies in lieu holding that law firms may commit malpractice against insolvent defendants with impunity. Crane’s motion was therefore denied.

Newman as Tr. of World Mktg. Tr. v. Crane, Heyman, Simon, Welch, & Clar, 2020 WL 3250742 (N.D. Ill. June 16, 2020)

Illinois Legal Malpractice and Defense of Lawyers Blog — Novack and Macey LLP

(This is for informational purposes and is not legal advice.)

Tenancy by the Entirety not Exempt in Bankruptcy

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Laverne Williams (“Williams”) sued her former attorney Scott Jaffe (“Jaffe”) for legal malpractice.  She obtained a default judgment against him and recorded her judgment on a property that Jaffe and his wife owned as tenants by the entirety.   Jaffe then filed for chapter-seven bankruptcy, but his wife died before the proceedings were complete.  According to Illinois law, this converted Jaffe’s tenancy by the entirety to a fee-simple interest.  Jaffe insisted his property was exempt from the bankruptcy proceeding, as his interest had been a tenancy by the entirety when the bankruptcy commenced.  Williams responded that Jaffe’s property was not exempt even as a tenancy by the entirety because federal bankruptcy law “looks to state law to determine whether a tenancy property is exempt,” and Illinois “does not exempt contingent future interests” like Jaffe’s.  Id. at 605.  The District Court disagreed, and Williams appealed.

The Seventh Circuit disagreed with the District Court.  Illinois law, the Court explained, states that “judgment liens may attach to ‘real estate’ and defines ‘real estate’ broadly to include all lands, tenements, hereditaments, and all legal and equitable rights therein.”  Id. at 607.  Additionally, the Illinois legislature had “enumerated the precise interests tenants by the entirety enjoy individually, including the following contingent future interests:  (a) an interest as a tenant in common in the event of a divorce, (b) an interest as a joint tenant in the event that another homestead is established, and (c) a survivorship interest in the entire property in the event of the other tenant’s death.”  Id. at 605.  Therefore, the Seventh Circuit concluded that “contingent future interests” such as Jaffe’s “fall within the statute’s broad definition of ‘real estate,’” and so were subject to judgment liens.  Id. at 605.  Thus, the District Court’s decision was reversed and remanded.

In re: Jaffe, 932 F.3d 602 (7th Cir. 2019)

(This is for informational purposes and is not legal advice.)

Recent Illinois Case: Bay Industrial Safety Services, Inc. v. Robert Wilson

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The Southern District of Illinois held that the assignment of a malpractice claim that occurred when a plaintiff filed for bankruptcy did not violate the rule against assigning malpractice claims, and that the Chapter 11 debtor-in-possession maintained standing to prosecute the claim for the benefit of the bankruptcy estate.

Bay Industrial Safety Services, Inc. v. Robert Wilson, 2016 WL 3541389

(This is for informational purposes and is not legal advice.)

Recent Illinois Case: In re Jahrling

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The Seventh Circuit affirmed a holding that the defendant attorney’s malpractice constituted “defalcation in a fiduciary capacity” and, thus, was not dischargeable in bankruptcy.  The attorney and client did not share a common language, and the attorney relied on opposing counsel to translate in connection with a real estate transaction in which his client was defrauded.

(This is for informational purposes and is not legal advice.)

In re John C. Jahrling, 2016 WL 1073240