Breach of Contract

Legal Fees as a Measure of Damages

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Maria Freda (“Freda”) sued her attorney, Michael Canulli (“Canulli”), in connection with his representation of her during her divorce.  Canulli’s professional liability insurer, the Illinois State Bar Association Mutual Insurance Company (“ISBA Mutual”), initially agreed to defend him.  However, Freda amended her complaint to allege that “‘as a direct and proximate result’ of Canulli’s (1) professional negligence and (2) breach of contract, she had been damaged ‘in an amount in excess of $100,000 in that she has incurred attorney’s fees and costs for useless and unnecessary legal proceedings initiated by *** Canulli.’”  Id. at ¶24.  Per Canulli’s policy from ISBA Mutual, a plaintiff must seek damages against the insured in order to trigger a duty to defend, and legal fees are explicitly excluded from the policy’s definition of damages.  Id. at ¶23.  Consequently, ISBA Mutual filed a declaratory judgment action seeking a finding that it was not obligated to defend Canulli.  The circuit court found in ISBA Mutual’s favor.

On appeal, the Appellate Court of Illinois, First District, held that Freda’s damages were not fees.  It explained that Freda’s damages were “not a consequence of Canulli’s fees but a consequence of his alleged failure to handle [Freda’s] divorce proceedings expeditiously and appropriately—i.e., his negligence and breach of contract in representing her.”  Id. at ¶30, emphasis in original.  In other words, “Freda’s complaint stem[med] from the allegedly negligent way Canulli represented her in the divorce, and it is that negligent representation that caused her to expend more money than necessary.”  Id.

Illinois State Bar Ass’n Mut. Ins. Co. v. Canulli, 2020 IL App (1st) 190142

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

False Advertising and the Unauthorized Practice of Law

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Access Care MSO, LLC (“Access”) hired Oberheiden Law Group, PLLC (“Oberheiden Law”) to advise it with respect to medical compliance issues in Texas and Illinois. It chose Oberheiden Law based on the firm’s web-based advertisements which stated that the firm had both Texas and Illinois practices.  Despite these assertions, no Oberheiden Law attorney was licensed to practice in Illinois at the time Access retained the firm.  Access eventually terminated the representation and sued Oberheiden Law and its principal, Nick Oberheiden, on multiple counts.  The defendants filed a motion to dismiss, which the Northern District of Illinois granted in part.

To start, the court dismissed Access’ breach of contract claim. This is because “Texas courts have only allowed independent breach of contract claims against attorneys for excessive legal fees.”  Id. at 3.  It continued that Access “alleges only that […] Oberheiden Law did not provide” the agreed upon services, “which amounts to a legal malpractice claim” under Texas law.  Id.  Access’ claim for tortious interference with a contract was also dismissed.  The court held there that Access did not explain how the defendants’ actions affected its contractual relationship with various Texas medical practices.  Id. at 4.

Conversely, the Northern District declined to dismiss Access’ claim for violation of the Illinois Attorney Act (705 Ill. Comp. Stat. 205/1), which “prohibits an unlicensed attorney from advertising the provision of legal services in Illinois” and practicing law in the state without a license.   Id. at 2.   Here, Oberheiden Law’s website described the firm as “providing ‘Illinois health care fraud defense’” and Oberheiden as an “Illinois health care fraud defense attorney.”  Id.  Moreover, a non-attorney employee of Oberheiden Law and Oberheiden himself had personally provided legal advice to Access while in Illinois.  The court refused to dismiss Access’ claim of fraud as well. It noted that Access specifically set forth four allegedly false statements from Oberheiden Law’s website and sufficiently explained why it relied on them.  Id. at 5.

Access Care MSO, LLC v. Oberheiden Law Grp. PLLC, No. 18 C 7273, 2020 WL 1139257 (N.D. Ill. Mar. 9, 2020)

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




Withdrawal as Counsel on the Eve of Trial

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Vanessa Wereko (“Wereko”) retained The Law Office of Tiffany M. Hughes (the “Firm”) to represent her throughout her divorce proceedings.  One month before trial, the Firm withdrew as counsel for Wereko’s alleged failure to pay all of her bills and then sued Wereko for breach of contract.  Wereko filed counterclaims for breach of contract and negligence. The circuit court found in favor of the Firm and dismissed Wereko’s counterclaims.

On appeal, Wereko asserted with respect to the parties’ breach of contract claims that the retainer agreement only permitted the Firm to withdraw under specific circumstances. These circumstances included nonpayment, but Wereko explained that the Firm had billed her more often than was agreed upon thereby improperly triggering her obligation to pay.  The court noted however that “in her email communications with the firm, Wereko did not question the frequency of the invoices, but instead communicated her inability to fully pay the billed amounts.”  Id. at ¶32.  Moreover, “the retainer agreement did not expressly provide that the enumerated bases were the exhaustive bases for withdrawal.”  Id. at ¶30.  To that, the Firm asserted that Wereko refused to comply with certain of the Firm’s advice and had not maintained a valid credit card on file with the Firm as required by the agreement.  Id. at ¶¶34, 35. The court held therefore that “the withdrawal was consistent with the terms of the parties’ agreement and appears compliant with our supreme court rules.”  Id. at ¶33.

As for Wereko’s negligence claim, the court explained that “it would be unreasonable to expect the firm to foresee that its conduct would result in” the damages suggested by Wereko. Id. at ¶46. At their core, they were expenditures resulting from Wereko’s husband’s decision to dismiss his counter-petition and refile in a new county.  Id. at ¶46. The court also noted that “the [lower court] approved the firm’s withdrawal.” Id. Thus, it concluded that “Wereko failed to prove her counterclaims.”  Id. at ¶47.

Law Office of Tiffany M. Hughes v. Wereko, 2020 IL APP (1st) 190428-U

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

Breach of Contract May Be Plead in the Alternative to Legal Malpractice, but Punitive Damages are not an Option

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Signal Financial Holdings LLC and Signal Funding LLC (together “Signal”) accused a former Signal executive, Farya Jafri (“Jafri”), of misappropriating trade secrets while separating from Signal and using them to compete against Signal.  Signal sued Jafri as well as the law firm Sugar Felsenthal Grais & Helsinger LLP (“Sugar”) for allegedly aiding Jafri in this scheme.  Sugar moved to dismiss the various counts against it.  The United States District Court for the Northern District of Illinois granted the motion in part, and denied in part.  It denied the motion with respect to legal malpractice, explaining that “Signal alleges two clear incidents where a conflict was present” and “plausibly demonstrates that the Firm’s conflict of interest caused Signal’s injuries.”  Id. at 5.  It also allowed a breach of contract claim to stand exclusively in the alternative to the count for legal malpractice as “a complaint against a lawyer for professional malpractice may be couched in either contract or tort and… recovery may be sought in the alternative.”  Id. at 6.  Conversely, the Northern District granted dismissal of the count for breach of fiduciary duty, which was duplicative since “Illinois law prohibits claiming legal malpractice and breach of fiduciary duty based on the same facts.”  Id.  Lastly, the Court struck all claims for punitive damages because under Illinois law, “in all cases whether in tort, contract, or otherwise, in which the plaintiff seeks damages by reason of legal… malpractice, no punitive, exemplary, vindictive or aggravated damages should be allowed.”  Id. at 8, 735 ILCS 5/2-1115.

Signal Fin. Holdings LLC v. Looking Glass Fin. LLC, No. 17 C 8816, 2019 WL 6467323 (N.D. Ill. Dec. 2, 2019)

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

Disputing Fees and Disputing Performance

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Jonathan Waldman (“Waldman”) retained attorney Benjamin Edlavitch (“Edlavitch”) to prepare and file two patent applications in May, 2008.  For this, Waldman promised to pay Edlavitch $7,000 in advance, and signed attorney engagement agreement to that effect.  However, three months later, Edlavitch requested an additional $1,000.  Waldman agreed.  Two months after that, Edlavitch persuaded Waldman to give him another $530.  In December, 2008, Edlavitch contacted Waldman about yet more charges.  This time Waldman demanded that Edlavitch “honor the contract by completing performance without requiring additional fees.”  Id. at ¶9.  In response, Edlavitch threatened to send Waldman a termination letter and a bill, but never did so.

Nothing happened until September, 2017 when Waldman sued Edlavitch for anticipatory repudiation.  He claimed that Edlavitch had a duty to complete performance under the agreement for the “agreed flat fee of $7,000, or alternatively for the $8,000 or $8,530” he had paid, and that Edlavitch had “repudiated the contract by clear manifestation of intention that he would not complete the promised performance except on terms that went beyond the contract.”  Id. at ¶10.  Edlavitch moved to dismiss, arguing that Waldman’s complaint was barred by the two-year statute of limitations applicable to claims arising out of the provision of legal services.  The Circuit Court granted his motion.

When Waldman appealed, the Appellate Court had to consider which statute of limitations applied: ten years for breach of contract (735 ILCS 5/13-206) or two years for legal malpractice (735 ILCS 5/13-214.3(b)).  On one hand, it recognized that Waldman’s claim was “unquestionably an action for breach of contract.” Id. at ¶17.  On the other hand, Waldman’s claim also arose “out of an act or omission in the performance of professional services.”  Id. at ¶18.  The Appellate Court recognized that the language of the legal malpractice statute of limitations “indicates an intent by the legislature that the statute apply to all claims against attorneys concerning their provision of professional services.”  Id. at ¶19.  Moreover, it noted that “Waldman is not merely asserting that he should have been charged” a different amount and “wants the difference.”  Id. at ¶22.  Instead, “Waldman is saying that Edlavitch breached the contract, and he is thus entitled to a full refund of all money paid, $8,530, plus other consequential damages.”  Id. at ¶22.  According to the Appellate Court, “that is not a dispute over fees; that is a dispute over Edlavitch’s performance of legal services.”  Id. at ¶20.  Dismissal was therefore affirmed.

Waldman v. Edlavitch, 2019 IL App (1st) 181127-U

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


District Court Underscores the Importance of Suing the Correct Party in Action for Recovery of Distributional Interest

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In FW Associates LLC v. WM Associates LLC, 2019 WL 354953 (No. 18 C 5081) (N.D. Ill. Jan. 28, 2019), the United States District Court for the Northern District of Illinois held that a dissociated LLC member may not sue another member to recover his distributional share in a company, but that the appropriate party for such a suit is the LLC itself.  The court also dismissed the member’s conversion claim for his distributional interest because that interest was “intangible” and thus could not be converted.

This case arose out of a dispute between the owners of Smart Bar, a company that produces an automated cocktail dispenser known as the Smartender.  In 2012, William Metropulos and FW Associates, LLC (“FWA”) formed Smart Bar, USA, LLC and Smart Bar International, LLC (together, Smart Bar).  Before long, the parties began to experience friction in their relationship and, by 2013, found themselves in arbitration amid reciprocal claims of breach of the Smart Bar operating agreement and various acts of misconduct.  In April 2015, the arbitrator ordered Metropulos dissociated from Smart Bar and required him to pay several hundred thousand dollars in attorneys’ fees and expenses to FWA and Smart Bar.  The Circuit Court of Cook County confirmed the arbitrator’s award, and the Illinois Appellate Court affirmed.

Metropulos alleged that Smart Bar dissociated him on November 21, 2016.  This normally would mean that he was still entitled to receive distributions from the entities, but could no longer participate in management of them.  However, according to Metropulos, Smart Bar effectively extinguished his rights entirely by also purporting to take away his distributional interest in the company.  In addition, Metropulos had already transferred his interest in Smart Bar to WM Associates, a new entity Metropulos established after he was dissociated.

In 2018, FWA brought suit against Metropulos and WM (collectively “Defendants”), claiming that Metropulos had wrongfully transferred his interest in the Smart Bar entities to WM in an effort to avoid paying the arbitration judgment.  Defendants brought two counterclaims.  The first asserted that FWA had violated section 35-60 the Illinois Limited Liability Company Act (the “LLC Act”), by failing to buy out Metropulos’ distributional interest in Smart Bar upon his dissociation.  In addition, Defendants claimed that FWA had engaged in other conduct warranting their dissociation from the company.

FWA argued that Defendants’ counterclaims should be dismissed because FWA was not the proper party for Metropulos to sue to obtain recovery of his distributional interest. Instead, Defendants should have sued Smart Bar itself.  The court agreed, rejecting Defendants’ three arguments to the contrary.

First, Defendants claimed that section 15-20(a) of the LLC Act permitted a “member [of an LLC] to maintain an action against….another member” (emphasis added) to enforce its rights under the Act.  But the court pointed out that this provision no longer applied to Metropulos because he had ceased to be a member of Smart Bar upon his dissociation in 2016.  (See section 35-55(a)(1) of the LLC Act:  “Upon a member’s dissociation from the LLC, he ceases to be a member and is treated as a transferee.”)

Second, Defendants contended that, because they were seeking to dissolve Smart Bar due to FWA’s harmful or oppressive conduct, section 35-1(b) of the LLC Act gave the court power to provide relief other than dissolution, “including….a buyout of the applicant’s membership interest.”  Again, however, Defendants had to bring their claims against Smart Bar, not FWA, the member.  In fact, the court suggested that Smart Bar was a necessary party to Defendants’ action, because it had a present, substantial interest in the matter being litigated, which was its own potential dissolution.

Third, Defendants asserted that suing FWA was essentially the same as suing Smart Bar because FWA, as the purported 100% owner of the company, was Smart Bar’s “alter ego.” The court rejected this assertion because an “alter ego” exists between an owner and a company only if (1) there is a unity of interest and ownership that is so strong that the separate personalities of the corporation and the owner “no longer exist,” or (2) treating the company and owner as separate entities would promote injustice or inequity.  However, defendants failed to allege such circumstances.

In their second counterclaim, Defendants sought to have FWA dissociated from Smart Bar based upon various acts of oppressive or illegal conduct FWA allegedly perpetrated upon Metropulos, including attempting to take away his distributional interest in Smart Bar and moving the company’s headquarters to Nevada without legal authority to do so. Defendants asked the court to find that WM Associates was the owner of Metropulos’s distributional interest in Smart Bar or, alternatively, to award defendants damages for FWA’s conversion of that interest.

The court denied Defendants’ request to have WM declared the owner of Metropulos’s distributional interest, reiterating that FWA was not the proper entity to sue for such relief.  With regard to conversion, the court held that Illinois law does not recognize conversion claims based upon “intangible rights.”  Here, the distributional share allegedly converted by FWA was merely an intangible right of future payment, rather than a tangible or intangible thing that could be converted.  Accordingly, Defendants’ claim for conversion had to be dismissed as well.

FW Associates LLC v. WM Associates LLC makes it clear that any former LLC member seeking to recover his or her distributional interest must name the LLC itself as a party, not a fellow member and that a conversion claim may not be used a vehicle for recovery.

Dismissal of Duplicative Matters: Breaches of Contract and Fee Petitions

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Clarice G. Schmidt (“Schmidt”) filed a breach-of-contract claim against attorneys Audrey L. Gaynor and Richard D. Felice and the law firm Audrey L. Gaynor & Associates, P.C. (the “Defendants”).  She accused them of overbilling for their services during her ongoing divorce.  The Defendants moved to dismiss the breach-of-contract claim as duplicative under 735 ILCS 5/2-619(a)(3), since they had already filed fee petitions in Schmidt’s divorce case in order to address the legitimacy of their bills.  The trial court granted the motion and Schmidt appealed.

The Second District affirmed. Dismissal of a redundant matter under section 2-619(a)(3) requires two issues pending “between the same parties for the same cause.”  Id. at ¶9. The parties here were plainly identical. As for the causes of action, they are considered the same if they arise “out of the same transaction or occurrence” such that there is a “substantial similarity.”  Id.  The court noted that substantial similarity did not require “the legal theory, issues, burden of proof or relief sought” to be materially identical.

Here, the only allegations set forth in Schmidt’s breach-of-contract complaint were that the Defendants breached their attorney-client agreements by charging excessive fees. The Second District therefore concluded that the matters were the same, surmising that Schmidt “merely seeks to have a separate court perform another analysis as to the reasonableness and necessity of those same fees.”  Id. ¶12.  Schmidt asserted that her breach-of-contract claim was actually a legal-malpractice claim, but this argument was rejected.  “We are at a loss,” the court declared, “as to how plaintiff’s breach-of-contract suit transformed into one for legal malpractice, when she did not allege any of the elements of legal malpractice.”  Id. at ¶14.  Moreover, Schmidt tacitly acknowledged that she could obtain disgorgement in the divorce/fee-petition litigation because she included her breach-of-contract complaint as an affirmative matter therein.

Schmidt v. Gaynor, 2019 IL App (2d) 180426

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

Soverain Software, LLC v. Day, 2017 IL App (1st) 161913-U, appeal denied sub nom. Soverain Software, LLC v. Jones Day, 98 N.E.3d 58 (Ill. 2018)

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This unpublished opinion related to a suit between a former client and a law firm principally centered on past due fees.  The law firm brought a breach of contract claim for $10 million for past due fees and the client counterclaimed for a number of things, including breach of contract and legal malpractice.  The parties arbitrated the dispute and the arbitrator found in favor of the law firm for $1.5 million.  The trial court vacated the arbitration awarded finding that the arbitration panel exceeded its authority and created a compromise award.  The appellate court reversed and affirmed the arbitral award, finding that the award was grounded in the parties’ contract and the trial court improperly imposed its view in place of the arbitral award.

Soverain Software, LLC v. Day, 2017 IL App (1st) 161913-U

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

Hill v. Simmons

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In this unpublished opinion, the First District held that a complaint against a lawyer was properly dismissed as time-barred.   The court held that the plaintiff’s claims for fraud, aiding and abetting fraud, breach of fiduciary duty and conspiracy were properly subject to the two year attorney statute of limitations, and that the statute began to run when the plaintiff learned of the lawyer’s alleged misrepresentations.

Hill v. Simmons, 2017 IL App (1st) 160577-U

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

Recent Illinois Case: First American Title Insurance Co. v. Dundee Reger LLC v. Hallam

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The Northern District of Illinois addressed third-party claims against a law firm asserting legal malpractice and, in the alternative, breach of contract and promissory estoppel.  The third-party defendant moved to dismiss the breach of contract and promissory estoppel claims as duplicative of the legal malpractice claim.  The court held that, under Illinois law, duplicative breach of fiduciary duty claims should be dismissed but breach of contract claims, even if duplicative, may be plead in the alternative.  The motion to dismiss was denied.

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

First American Title Insurance Co. v. Dundee Reger, LLC et al. v. Peter G. Hallam, 2016 WL 1359374