Denial of Motion to Disqualify Counsel Doesn’t Bar Later Legal Malpractice Suit- No Issue Preclusion (IL ND)

Eckert v. Levin, et al., 2015 WL 859530 (N.D.Ill. 2015), a case I featured earlier this week, gives some useful guidance on when collateral estoppel or “issue preclusion” bars a second lawsuit between two parties after a judgment entered against one of them in an earlier case.

The case’s tortured history included the plaintiff getting hit with a $1 million dollar judgment in 2012 as part of  a state court lawsuit after he breached a 2010 written settlement agreement orchestrated by the defendants – the lawyers who represented plaintiff’s opponent in the state court case.

In the state court case, the plaintiff moved to disqualify the lawyer defendant and later, to vacate the $1 million judgment.  Both motions were denied.

In the 2014 Federal suit, the defendants (the individual lawyer and his Firm) moved to dismiss the plaintiff’s legal malpractice claim.  They argued that the state court’s denial of the plaintiff’s motion to disqualify defendants as counsel was a tacit ruling that the defendants didn’t commit malpractice.  Defendants contended that the plaintiff was collaterally estopped from bringing a legal malpractice claim in the 2014 Federal case since he lost his earlier state court motion to disqualify defendants as counsel for the plaintiff’s opponent.

The court disagreed and denied the motion to dismiss.  It held that issue preclusion didn’t apply since a motion to disqualify involves different issues than a legal malpractice claim.

Issue Preclusion, Legal Malpractice, and Motions to Disqualify

Issue preclusion applies if (1) the issues decided in the before and after cases are identical; (2) there was a final judgment on the merits in the first case; (3) the party against whom estoppel is asserted was a party or in privity with a party to the first case; prior and (4) a decision on the issue must have been necessary for the judgment in the first case.

Collateral estoppel also requires the person to be bound must have actually litigated the issue in the first suit.  Like res judicata, the rationale for the issue preclusion rule is to bring lawsuits to an end at some point and avoid relitigation of the same issues ad nauseum.

In Illinois, to prevail on a legal malpractice suit, a plaintiff must show: (1) an attorney-client relationship giving rise to a duty on the attorney’s part; (2) a negligent act or omission by the attorney amounting to a breach of that duty; (3) proximate cause establishing that but for the attorney’s negligence, the plaintiff would have prevailed in the underlying action; and (4) actual damages.

A motion to disqualify counsel has different elements than a malpractice claim.  A disqualification motions require a two-step analysis: the court must consider (1) whether an ethical violation has occurred, and (2) if disqualification is the appropriate remedy.  The main rules of professional conduct that usually underlie motions to disqualify are Rules 1.7, 1.9 (conflict of interests to current and former clients) and 3.7 (lawyer-as-witness rule).

The court held that since the elements of a legal malpractice claim and a motion to disqualify don’t overlap, plaintiff’s legal malpractice wasn’t barred by the earlier motion to disqualify denial.

Non-Reliance Clause in Settlement Agreement

The court also rejected the defendants’ argument that the 2010 settlement agreement’s non-reliance clause (which provided that plaintiff wasn’t relying on any representations in connection with signing the agreement) defeated the legal malpractice case.  The reason was mainly chronological: the plaintiff’s central legal malpractice allegations stemmed from the attorney defendant’s conduct that occurred after the 2010 settlement agreement.  As a result, the non-reliance clause couldn’t apply to events occurring after the agreement was signed.

Afterwords:

– Issue preclusion doesn’t apply where two claims have different pleading and proof elements;

– a motion to disqualify an attorney for unethical conduct differs from the key allegations needed to sustain a legal malpractice suit;

– a non-reliance clause in a settlement agreement won’t apply to conduct occurring after the agreement is signed.

An Enigma Wrapped Inside A Conundrum: Suing the LLC in Federal Court – How Hard Can it Be?

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A limited liability company (LLC) is generally lauded as a flexible business entity that provides the limited liability of a corporation with the tax attributes of a partnership (flow-through, not double, taxation).

Flexibility is another oft-cited hallmark of the LLC form as its members can be one or more individuals, corporations, partnerships or even other LLCs. It’s common to see LLCs that have several other LLC members that are in turn comprised of (still more) LLC members.  With multiple layers of LLC members, tricky jurisdictional issues routinely abound.

When Federal subject matter jurisdiction is at stake, the question of whether a plaintiff can sue an LLC in Federal court quickly morphs from an academic, “fun” one, to an important strategic one.

Here are some useful bullet-points:

– A Federal district court has original subject matter jurisdiction over matters involving citizens of different states and the amount in controversy exceeds $75,000. 28 U.S.C. s. 1332(a)(1).

– There must be “complete diversity” between the parties: each plaintiff must be a citizen of a different state than each defendant.  The easily parroted rule becomes hard to apply the more parties are involved in a given lawsuit; especially where business entities are implicated in a case.

– A corporation is considered a citizen of the state where it has its principal place of business and where it is incorporated.  So, if Corporation X was incorporated in Texas but has its main office in Ohio, Corporation X would be considered a citizen of both Ohio and Texas.  28 U.S.C. s. 1332(c)(1).

– An LLC is considered a citizen of the state of its members;

– An LLC can have as members, partnerships, corporations and other entities;

– When an LLC has multiple members that have varied citizenships, a court must examine each member’s state of citizenship, as well as each member’s members’ citizenship, when determining whether it has jurisdiction over an LLC defendant.

A Case Illustration

Cumulus Radio Corp. v. Olson, 2015 WL 1110592, a case I’ve twice featured for its discussion of Federal TRO guidelines, illustrates the serpentine analytical framework involved with an LLC that’s made up of one or more LLC members.

There, the plaintiff broadcasting company was a Nevada corporation with its principal place of business in Georgia.  The defendant LLC was a Delaware-registered LLC based in Oregon.  The defendant LLC had but one member that happened to be another LLC.  That LLC (the sole member of the defendant LLC) had a single member – an individual who lived in Georgia.

Because the Delaware LLC’s sole member’s sole member was a Georgia resident, there was incomplete diversity between the plaintiff and defendant.  Normally, this would give the defendant a basis to move to dismiss the complaint for lack of subject matter jurisdiction.  The plaintiff would then have to sue the LLC defendant in state court in Delaware (where it was formed) Oregon (where it is based) or Georgia (where its member’s member lived).

While the court ultimately found that the Georgia resident wasn’t truly a member based on the LLC’s Operating Agreement, Cumulus provides a good illustration of the multi-layered jurisdictional analysis required with an LLC defendant that has several individual or business entity constituents.

Sources:

– Hicklin Engineering LC v. Bartell, 439 F.3d 346 (7th Cir. 2006);

– 28 U.S.C. s. 1332(a), (c).

– http://www.insidecounsel.com/2013/09/12/litigation-carefully-examine-the-layers-of-llc-cit (this is a good article from 2013 that lays out the applicable rules)

Computer Fraud Suit Based On Real estate Records Fails – Illinois Northern District

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The Northern District of Illinois (Fidlar Technologies v. LPS Real Estate Data Solutions, 2015 WL 1059007 (N.D.Ill. 2015) granted summary judgment for a defendant real estate analytics firm in a computer fraud case filed by a software firm who makes paper real estate records available on-line for various county recorders offices across the country.

The plaintiff developed a program called “Laredo” that computerized real estate records and made them available to viewers for a fee.  The plaintiff sued when it found out that the defendant was using a web harvester to bypass plaintiff’s software controls and capture the electronic records.  The defendant’s harvester allowed it to disguise the amount of time it was spending on-line and so avoid paying print fees associated with the electronic data. 

The Computer Fraud And Abuse Act Claim

On its Computer Fraud and Abuse Act, 18 U.S.C. s. 1030 (“CFAA”) claim, the Court found there was a lack of evidence of defendant’s intent to defraud based on defendant evading the printing fees.  The CFAA defines an intent to defraud as acting “willfully and with specific intent to deceive or cheat, usually for the purpose of getting financial gain for one’s self or causing financial loss to another.”

The court noted that defendant offered sworn testimony that printing real estate records was a minor part of its business and that it did pay the various counties the maximum monthly access fee for the real estate data.  The defendant also produced evidence that it used its “client” program (which could avoid the time tracking and printing charges) not only in fee-charging counties, but also in those that didn’t charge at all.  This bolstered its argument that the harvester’s fee-avoidance was an unintended consequence of the defendant’s program.

Siding with the defendant, the court applied the CFAA restrictively.  It found that the Act’s aim is to punish those who access computers with the intention of deleting, destroying, or disabling information they find.

Attempting to avoid paying for minutes and printing fees – the “damage” alleged to have been done by the defendant here – wasn’t the type of damage contemplated by the CFAA.  The mere copying of electronic information from a computer system isn’t enough to satisfy the CFAA’s damage requirement.  18 U.S.C. § 1030(e)(8).

Trespass to Chattels

The plaintiff’s trespass to chattels claim was also rejected.  Trespass to chattel is an archaic legal doctrine aimed at protecting the integrity of someone’s personal property.  To successfully claim trespass to chattels, a plaintiff i must show “direct physical interference.”

The plaintiff’s claim that the defendant’s web harvester commands “physically touched” plaintiff’s computers and “substantially interfered” with plaintiff’s computer network wasn’t supported by the evidence.

The court noted that any interference was plaintiff’s claimed loss of subscription revenue and loss of goodwill.  These losses didn’t equal a physical threat to the proper functioning of plaintiff’s servers.

Afterwords:

Fidlar represents a court narrowly applying the CFAA so that it doesn’t cover the type of economic loss (e.g. subscription fees, etc.) claimed here by the plaintiff.  The case also amply illustrates that a successful CFAA claimant must show that its computer equipment or system was physically damaged or its data destroyed.  Otherwise, the proper remedy lies in a breach of contract or trade secrets violation.