Fiduciary Duty

Illinois Law Firm Recovers No Attorney’s Fees After Trial Court Concluded The Firm Breached Its Fiduciary Duties

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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.)

Defendant May File Untimely Counterclaim if Plaintiff’s Claim Arose Before Counterclaim Was Barred

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Paul Abramson (“Abramson”) had hired attorney Alisa Levin of Levin Law, Ltd. (together “Levin”) in October, 2015, but terminated Levin after a dispute arose over the amounts billed.  In March, 2017, Abramson published a scathing review on Levin Law’s Yelp profile.  Levin published a response and sued Abramson for defamation and false light invasion of privacy.  Abramson then counterclaimed for legal malpractice, breach of fiduciary duty, and defamation. Levin moved to dismiss Abramson’s counterclaims.  Id. at 1.

Levin argued that Abramson’s counterclaims were time-barred and failed to state a claim. The Court disagreed as to timeliness, citing  735 ILCS 5/13-207, which “specifically states that the defendant in a lawsuit is permitted to bring a counterclaim that would otherwise be barred by the statute of limitations” provided the plaintiff’s claim arose “before the cause of action brought as a counterclaim was barred.”  Id. at 4.  With respect to Abramson’s claims for legal malpractice and breach of fiduciary duty, the Court held that even if their accrual had begun in December, 2015 when Levin’s representation of Abramson ended, the two-year statute of limitations for claims arising out of the provision of legal services would not have ended until December, 2017.  However, Levin’s claims arose when the Yelp review went up in March, 2017 and so were timely.  Id. at 5.  The court reached the same conclusion as to Abramson’s defamation claim.  Id. at 4.

Though not time-barred, the Court did conclude that Abramson had failed to state claims for legal malpractice and breach of fiduciary duty.  Specifically, Abramson’s claim for legal malpractice did “not explain how he lost the case or why Levin’s actions caused him to lose” nor did it explain how he “would have prevailed on the underlying claim in the absence of [Levin’s] missteps.”  Id. at 12.  His claim for breach of fiduciary duty likewise “fail[ed] to plausibly allege that this breach proximately caused any injury.”  Id. at 13.

Levin v. Abramson, No. 18-cv-1723, 2020 WL 2494649 (N.D. Ill. May 13, 2020)

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

Attorney Aiding and Abetting and Assignment of Malpractice Claims

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Rabbi Stanley Kroll (“Kroll”) had a thirty-year employment contract with his Synagogue. The contract included a deferred compensation plan (the “Plan”) to fund Kroll’s retirement.  The Synagogue was allowed to amend the Plan unilaterally, but not in any way that divested credits to the account or rights to which Kroll would be entitled if the Plan were terminated before an amendment took effect.  Id. at 1.  The Synagogue asked Kroll to retire six years early. Kroll agreed, but on his last day, a Synagogue officer told him that a tax issue had arisen, promising it would be resolved.  Kroll found out later that the issue had not been resolved, thereby subjecting his deferred compensation to heavy taxes and penalties.  Moreover, the Synagogue did not have sufficient funds to pay Kroll, and had amended the Plan to eliminate benefits to which Kroll would otherwise be entitled. Kroll sued the Synagogue, which settled and assigned to him all causes of action related to the Plan that it might have against the law firm it used to amend it: Cozen O’Connor (“Cozen”). Kroll then sued Cozen on multiple counts, but Cozen moved to dismiss. The motion was granted in part and denied in part.

To begin, the Court noted that legal malpractice claims may not be assigned in Illinois except under three exceptions.  However, none of these exceptions applied. It explained that “Kroll is a stranger to [the Synagogue] and Cozen’s attorney-client relationship and was owed no duty by Cozen.”  Id. at 4.  The Court also granted dismissal of Kroll’s aiding and abetting breach of fiduciary duty claim.  It said that no fiduciary duty existed between Kroll and the Synagogue, so Cozen could not have aided a breach of that duty. Id. at 7.  The Court dismissed Kroll’s fraudulent concealment claim as well, since Kroll did not allege facts sufficient to explain how a Cozen attorney used his position of superiority and legal knowledge to take advantage of Kroll’s trust and confidence in him, “especially given that [the attorney] represented the opposing party.”  Id. at 8, emphasis in original.

Conversely, the Court rejected Cozen’s argument that Kroll’s claims were barred by Illinois’ two-year statute of limitations for claims arising out of an attorney’s performance of professional services.  Here, it held that Kroll had demonstrated possible equitable tolling or estoppel when he asserted that a Synagogue officer misled him about resolving the tax issue and that a Cozen attorney misrepresented the enforceability of the Plan’s amendment.  Id. at 5.  Kroll’s claim that Cozen aided and abetted the Synagogue’s fraud was allowed to stand as well.  The Court, quoting an Illinois case, saw “no reason to impose a per se bar that prevents imposing liability upon attorneys who knowingly and substantially assist their clients in causing another party’s injury.”  Id. at 6. Here, the Court agreed that Kroll had pleaded facts sufficient to assert the Synagogue’s fraud and Cozen’s assistance therein.

Rabbi Stanley Kroll, Plaintiff, v. Cozen O’Connor, 2020 WL 919005

(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.)

Willful-and-Deliberate Standard Applies to Court-Appointed Receivers

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Nutmeg Group, LLC (“Nutmeg”) was the investment advisor and sole general partner for several investment funds.  Each fund was either an Illinois or Minnesota limited partnership.  In 2009, the SEC brought an enforcement action against Nutmeg and others for misappropriation of client assets and failure to maintain proper records.  The Northern District of Illinois appointed Leslie Weiss (“Weiss”) as receiver for Nutmeg.  Nutmeg’s former manager and limited partners from certain funds sued her and others for breach of fiduciary duties.  Weiss moved successfully to dismiss some claims, and then won summary judgment on the rest.

The Seventh Circuit affirmed, applying Illinois law.  It explained that because Illinois and Minnesota had both adopted the Uniform Limited Partnership Act and the plaintiffs had not identified any conflicts in those states’ interpretation thereof, “we would reach the same conclusions under Minnesota law.”  Id. at 1001.  However, the Seventh Circuit found no Illinois case addressing the standard of care applicable to a court-appointed receiver, and so had to discern what standard the Illinois Supreme Court would adopt if presented with the issue.  In so doing, the Court chose to apply the “willful and deliberate” standard.  It reasoned that, “if a receiver is burdened with having to defend against suits by litigants disappointed by his actions on the court’s behalf, his work for the court will be impeded.”  Id. at 1003.  This standard reflects “the reality that receivers are often appointed to take charge of entities with which they have had no prior involvement: imposing personal liability for mistakes in business judgment could discourage competent individuals from acting as receivers.”  Id. at 1003-1004.  Applying that standard, the Seventh Circuit held that “our ultimate conclusion—that no reasonable jury could find that Weiss engaged in a willful, deliberate, or even grossly negligent breach of a fiduciary duty—applies with equal force to the totality of the plaintiffs’ claims on appeal.”  Id. at 1007.  It highlighted at various points that, “the plaintiffs […] did not bring forth evidence to show that a jury could find that those decisions reflected a willful, deliberate, or grossly negligent breach of her fiduciary duties,” and that “a poor business decision falls well short of demonstrating either a willful and deliberate or even a grossly negligent breach.”  Id. at 1006.

Alonso v. Weiss, 932 F.3d 995 (7th Cir. 2019)

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

Cox as Trustee for Estate of Central Illinois Energy Cooperative v. Evans, 2018 WL 6706666

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A group of farmers formed a coop to construct and operate an ethanol facility.  Michael Evans (“Evans”) an attorney at Froehling, Weber, Evans & Schell, LLP (“FWES”), prepared the articles of incorporation.  He and his wife, Ginger, became shareholders in the coop, and Evans served as the it’s attorney and registered agent.  When the coop had trouble paying for construction, Evans and his partner, Nancy Schell (“Schell”) informed the coop board that Green Lion Bio-Fuels, L.L.C. (“Green Lion”) wanted to invest in the project.  Evans disclosed that Green Lion was one of FWES’ other clients and that various FWES employees and their family members had equity stakes in it.  However, he did not disclose that his wife’s stake in Green Lion was nearly 96%.

The chairman of the coop board signed a conflict waiver which referred to Ginger as a “minority” shareholder, and Green Lion loaned the coop $5 million to complete its project.  Id. at 2.  Pursuant to the loan, Green Lion would also purchase the coop’s grain handling facility, which the coop would still manage and eventually buy back.  Evans drafted the corresponding purchase and buyback agreements.  He gave copies of the agreements to Kenneth Eathington (“Eathington”), an attorney at Husch Blackwell, to review.  Eathington returned the agreements with his edits.  Schell circulated various revised agreements over the next week, until the coop finally executed the sale.  Six months later, the coop filed for bankruptcy.  Clay Cox (“Cox”), trustee for the coop, sued Evans, Schell, and FWES (collectively “Defendants”) for legal malpractice and breach of fiduciary duty through self-dealing.  Defendants moved for summary judgment.

Defendants allege that there was no attorney-client relationship between themselves and the coop such that they could be held liable for malpractice.  They argue that the coop’s general manger had retained Eathington as separate counsel for the coop.  Cox countered, and the Court agreed, that Eathington was merely additional counsel consulted by Evans.  Indeed, the coop’s general manager testified that he sent his questions about the agreements to FWES, not Eathington.  As for Cox’s breach of fiduciary duty claim, the Court agreed that there were genuine disputes of material fact.  For example, Defendants argued that they had made a full and frank disclosure of their interests in the sale of the holding facility, but the conflict waiver signed in this matter listed Ginger as a “minority” shareholder despite her 96% interest in Green Lion.  The court also held that there was a genuine dispute as to the adequacy of the consideration given for the grain handling facility and whether the coop received independent advice on its sale.  Evans argued that the coop had engaged Eathington for his independent advice, while the coop maintained that Eathington was only supplemental counsel, not separate.  With all of the above issues in dispute, the question of proximate causation was likewise in dispute.  Summary judgment was therefore denied.

Cox as Trustee for Estate of Central Illinois Energy Cooperative v. Evans, 2018 WL 6706666

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

Zombro v. Jones, 2018 IL App (4th) 170442-U

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The third-party plaintiff, Vicky Jones, sued the third-party defendant, attorney Kevin Hammer, for legal malpractice in a real estate transaction where Hammer had represented her.

Jones alleged that Hammer had grossly understated the price of her land in the contract he drafted, threw the contract at Jones during a meeting, and lambasted the deal in front of the buyers, thereby inducing Jones to sell her land for one eighth its supposed market value. Conversely, Hammer and the buyer alleged that Hammer had correctly stated the agreed-upon price in the contract, and that Hammer didn’t throw anything at Jones. Hammer also said Jones had read the final contract and asked him questions before signing.

The Trial Court granted summary judgment in Hammer’s favor. When Jones appealed, Hammer argued that he had not breached any duty to Jones, because he had technically performed the two tasks she had hired him to do. The Appellate Court rejected this “scope-of-engagement” argument, holding that Hammer, as Jones’ attorney and therefore his agent, was not merely obligated to perform certain tasks, but also owed Jones a fiduciary duty “to treat his principal with the utmost candor, rectitude, care, loyalty, and good faith—in fact to treat the principal as well as the agent would treat himself.” Id. at ¶41. This fiduciary duty extended to all tasks he was hired to perform and “all matters connected” with those tasks. Id.

Nevertheless, the Appellate Court found that there was no genuine issue of material fact with respect to one critical element of Jones’ claim: damages. Specifically, the deal Hammer allegedly ruined didn’t actually exist, since the deal Jones claimed she had hired Hammer to pursue differed from the deal the buyers believed they were entering into. In fact, the buyers swore that they could not have afforded the land at the price to which Jones believed they had agreed. Moreover, the Court explained that even if it were to assume “for the sake of argument, that Hammer did indeed bully Jones into selling the land for only $5,000, it appears she suffered no resulting harm, because […] Jones presented no admissible evidence that the land was worth more” and “the arm’s-length transaction […] is evidence of the highest rank to determine the true value of property.” Id. at ¶55. Summary judgment was therefore affirmed.

Zombro v. Jones, 2018 IL App (4th) 170442-U

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

 

 

Alonso v. Weiss, 301 F. Supp. 3d 885 (N.D. Ill. 2018)

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Limited partners in investment funds filed suit on their own behalf and derivatively on behalf of their funds against a court-appointed receiver, alleging she had violated the Investment Advisers Act and Securities and Exchange Commission Rules, breached her fiduciary duties and engaged in legal malpractice. Among other things, the plaintiffs asserted that the receiver had failed to pursue certain litigation opportunities or needlessly pursued others, all to the detriment of the receivership estate.

The primary issue in the case was whether the receiver had intentionally tried to harm the estate. In the Seventh Circuit, “an injured party can only ‘recover from the receiver when the receiver intentionally acts in clear contravention of duty,’ and the receiver will not be held liable for ‘exercise of poor judgment.’” Id. at 894, citing In re Kids Creek Partners, L.P., 248 B.R. 554, 560-561 (Bankr. N.D. Ill. 2000). With that in mind, the plaintiffs alleged that the receiver was motivated in part by malice toward a former manager of the funds’ general partner. They also claimed that she breached her duties in order to ingratiate herself with the SEC so it would give her more receivership work in the future.

The Northern District of Illinois granted summary judgment in favor of the court-appointed receiver. The court held that the plaintiffs failed to demonstrate that any of the receiver’s allegedly improper actions had been intended to harm the receivership estate.

Alonso v. Weiss, 301 F. Supp. 3d 885 (N.D. Ill. 2018)

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

Daily v. Greensfelder, Hemker & Gale, P.C. 2018 IL App (5th) 150384, appeal denied sub nom. Daily v. Greensfelder, Hember & Gale, P.C., 98 N.E.3d 39 (Ill. 2018):

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This case came to the Fifth District on a “friendly contempt” for failure to comply with a discovery order.  The Fifth District held that a breach of fiduciary duty claim put “at issue” a client’s communications with its attorneys because those communications were necessary to determine who contributed to the alleged breach of fiduciary duty and the relative contribution of each.

Daily v. Greensfelder, Hemker & Gale, P.C.

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

Barefoot Architect , Inc. v. Sabo & Zahn, 2017 IL App (1st) 162616-U

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In this unpublished opinion, the First District affirmed the dismissal of a legal malpractice claim on statute of limitations grounds and a breach of fiduciary duty claim resulting from a bankruptcy case where the plaintiff had hired attorneys other than the defendants to represent in those proceedings. The court held that, ordinarily, a cause of action for malpractice accrues when a court enters an adverse judgment against a malpractice plaintiff. Here, the statute of limitations had run even using the date the appellate court entered an adverse judgment against the plaintiff. The court held that the lawyers’ statements that the court had erred did not establish were insufficient to preclude application of the statute of limitations under theories of fraudulent concealment or equitable estoppel.

Barefoot Architect , Inc. v. Sabo & Zahn, 2017 IL App (1st) 162616-U

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