Illinois Law Firm Recovers No Attorney’s Fees After Trial Court Concluded The Firm Breached Its Fiduciary Duties
Scot and Patricia Vandenberg (the “Vandenbergs”) retained the McNabola Law Group, P.C. (“MLG”) to represent them in a lawsuit against RQM, LLC (“RQM”), Brunswick Corporation, and Brunswick Boat Group (together “Brunswick”). The Vandenbergs promised to pay all of MLG’s expenses, plus a contingency fee. The Vandenbergs agreed that, if they dropped MLG as counsel, they would pay MLG an hourly rate or contingency fee for services rendered up to that point, whichever was greater. Id. at ¶5. Mark McNabola (“McNabola”) of MLG represented the Vandenbergs during the trial of their case.
While the jury deliberated, Charles Patitucci (“Patitucci”), a representative for Brunswick, presented a settlement offer to McNabola. The Vandenbergs instructed him to accept that same day at 3:40 p.m. Before McNabola could reach Patitucci, the judge’s clerk called McNabola at 3:52 p.m. to tell him that the jury had sent the judge a note asking if they could find fault with RQM alone. McNabola said the answer to the jury’s question was “no,” but to “hold-off, don’t do anything yet, I’m going to try to settle this.” Id. At 4:01 p.m., he called the clerk back to say that he still could not reach Patitucci. The clerk responded that the judge wanted all parties back in court. McNabola then called Brunswick’s lead counsel, John Patton (“Patton”), to get Patitucci’s cell phone number and did not mention the note. McNabola finally reached Patitucci at 4:03 p.m. and accepted the settlement offer, still not mentioning the note. McNabola informed Patton of the settlement at 4:11 p.m. At 4:19 p.m., the clerk called Patton to say that the judge wanted the parties to come to court to discuss the note. This was the first Patton or Patitucci had heard of it. At approximately 4:40 p.m., the judge informed the parties about the note which went out “at approximately 3:50 p.m.” Id. at ¶11. All counsel present viewed it. At 4:50 p.m., the settlement was entered on the record and the case was dismissed. The jury was still allowed to deliberate and reached a verdict in Brunswick’s favor at approximately 5:00 p.m. Patton then informed the judge that the settlement had occurred without him having knowledge of the jury’s note or the clerk’s call to McNabola. Brunswick therefore moved to vacate the settlement and for judgment to be entered on the jury’s verdict instead. A new judge did so on the grounds of fraud in the inducement, unilateral and mutual mistake, absence of due process, and public policy, noting however that the Vandenbergs had “clean hands.” Id. at ¶16. Moreover, the parties did not dispute that the Vandenbergs “formed this intent [to accept Brunswick’s settlement offer] prior to the 3:50 p.m. note.” Id.
Ultimately, the Circuit Court entered judgment in favor of Brunswick and against the Vandenbergs due to alleged misconduct by McNabola. Months later, the Vandenbergs discharged MLG and with new counsel moved to vacate and enforce the original settlement. A third judge did so, finding that prior to the settlement being entered, all parties were made aware of the content of the jury’s note and the time at which it was published and had an opportunity to participate in discussion as to how to respond to it. Brunswick appealed, but was unsuccessful. The Vandenbergs then moved to adjudicate any claimed attorney’s liens MLG had for fees and expenses. They argued that McNabola engaged in misdeeds that caused their initial loss of the settlement and that “to reward him with fees out of the reinstated settlement would be wholly unfair and contrary to public policy.” Id. at ¶20. MLG responded that it was entitled to one-third of the settlement plus interest and a deferred fee, but excluding the Vandenbergs’ current attorney’s quantum meruit. Id. at ¶21. The circuit court determined that McNabola breached his fiduciary duties to the Vandenbergs by violating the professional rules of conduct in eleven specific ways. In addition, it found that he “failed to provide any evidence of the total number of hours his firm engaged in the underlying case, thus failing to properly plead and prove Quantum Meruit fees for his hourly rate.” Id. at ¶22. The circuit court denied McNabola’s petition for fees and adjudicated his lien to nothing.
On appeal, MLG argued that the only proper award was the full contingency amount given how much work it had performed prior to being discharged, less the hourly fees earned by it’s successor counsel. The Appellate Court disagreed, explaining that contingency fee arrangement requires a firm “bear the full risk of loss” and “often bear[s] little relation to the true value of the time a firm has spent on a case.” Id. at ¶36. MLG also contended that the Circuit Court erred in denying fees based on the eleven alleged breaches of the firm’s fiduciary duty to the Vandenbergs, which can be broadly categorized as “improperly charging legal fees as expenses, failing to obtain the Vandenbergs’ consent for bringing in other lawyers, putting the $25 million settlement at risk, and putting the firm’s interests ahead of the Vandenbergs in the posttrial proceedings.” Id. at ¶38. The Appellate Court disagreed here as well, explaining that these were “serious breaches that the circuit court was entitled to consider.” Id . It continued that although “adjudication of a firm’s fees to zero dollars is relatively uncommon, […] this was an unusual case” in that the firm “had repeatedly breached its duty to the Vandenbergs throughout the attorney-client relationship.” Id. at ¶40. The fact that the Vandenbergs had clear cause for terminating their representation by MLG weakened the firm’s position. Ultimately, MLG failed to make any showing of the hours it spent in connection with the Vandenberg’s claims as expressly required in the parties’ contract. The Appellate Court did rule in MLG’s favor regarding litigation expenses, explaining that “to the extent that the circuit court might have had some discretion to deny these requested payments despite the contracts, the court provided no explanation for its actions,” which seemed “to be an abuse of any discretion the court might have had.” Id. at ¶55.
Scott Vandenberg and Patricia Vandenberg v. RQM, LLC, Brunswick Corporation and Brunswick Boat Group, 2020 IL App (1st) 190544, June 26, 2020
(This is for informational purposes only and not legal advice.)
District Court Underscores the Importance of Suing the Correct Party in Action for Recovery of Distributional Interest
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.
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.)