Possible Problematic Lien Notice Starts Limitations Clock in Lawyer ‘Mal’ Case

In Construction Systems, Inc. v. FagelHaber LLC, 2019 IL App (1st) 172430, the First District affirmed the time-barring of a legal malpractice suit stemming from a flubbed contractor’s lien filing.

Several months after a lender recorded its mortgage on a commercial project, the law firm defendant, then representing the plaintiff contractor, served a Section 24 notice – the Illinois mechanics’ lien act provision that governs subcontractor liens. 770 ILCS 60/24.  While the notice was served on the project owner and general contractor, it didn’t name the lender.  In Illinois, where a subcontractor fails to serve its lien notice on a lender, the lien loses priority against the lender.

After the contractor settled its lien claim with the lender’s successor, it sued the defendant law firm for malpractice. The contractor plaintiff alleged that had the law firm properly perfected the lien, the plaintiff would have recovered an additional $1.3M.

Affirming summary judgment for the defendant law firm, the First District agreed with the trial court and held that plaintiff’s legal malpractice suit accrued in early 2005. And since plaintiff didn’t sue until 2009, it was a couple years too late.

The Court based its ruling mainly on a foreboding February 2005 letter from plaintiff’s second counsel describing a “problematic situation” – the lender wasn’t notified of plaintiff’s subcontractor lien. The court also pointed out that plaintiff’s second attorney testified in her deposition that she learned of possible lien defects in February 2005; some four years before plaintiff filed suit.

Code Section 13-214.3(b) provides for a two-year limitations period for legal malpractice claims starting from when a plaintiff “knew or reasonably should have known of the injury for which damages are sought.” [⁋ 20]

A plaintiff’s legal malpractice case normally doesn’t accrue until he/she sustains an adverse judgment, settlement or dismissal. An exception to this rule is where it’s “plainly obvious” a plaintiff has been injured as a result of professional negligence.

The court rejected plaintiff’s argument that it never discovered the lien defect until 2007 when the lender’s successor filed its summary judgment motion (which argued that the lien was defective as to the lender). According to the court “the relevant inquiry is not when [Plaintiff] knew or should have known about the lack of notice as an actual defense, but when [Plaintiff] should have discovered [Defendant’s] failure to serve statutory notice of the mechanic’s lien on [the prior lender] prompting it to further investigate [Defendant’s] performance.” [⁋ 24]

The court again cited the above “problematic situation” letter as proof that February 2005 (when the letter was sent) was the triggering date for plaintiff’s claim. Another key chronological factor was the plaintiff’s 2005 payment of attorneys’ fees.

In Illinois, a malpractice plaintiff must plead and prove damages and the payment of attorneys’ fees can equate to damages when the fees are tied to a former counsel’s neglect. Since plaintiff paid its second counsel’s fees in 2005 for work she performed in efforts to resuscitate the lien’s priority, 2005 was the limitation period’s triggering date. [⁋ 25]

Construction Systems cites Nelson v. Padgitt, 2016 IL App (1st) 160571, for the proposition that a plaintiff does not have to suffer an adverse judgment to sustain legal malpractice injury. In Nelson, an employment contract dispute, the Court held that the plaintiff should have discovered deficiencies in his employment contract (it provided for the loss of salary and commissions in the event of for-cause termination) in 2012 when he sued his former employer, not in 2014 when the employer won summary judgment.

The Court also rejected plaintiff’s argument that its damages were unknown until the lien litigation was finally settled and that it couldn’t sue until the lien dispute was resolved. The court held that the extent and existence of damages are different things and that it’s the date a plaintiff learns he/she was damaged, not the amount, that matters.

Lastly, the court nixed plaintiff’s judicial estoppel concern – that plaintiff couldn’t argue the lien was valid in the underlying case while arguing the opposite in the malpractice suit. According to the court, the plaintiff could have entered into a tolling agreement that would suspend the statute of limitations pending the outcome of the underlying case.

Conclusion

Construction Systems reaffirms that a legal malpractice claim can accrue before an adverse judgment is entered or an opponent files a formal pleading that points out claim defects.  Moreover, the payment of attorneys’ fees directly attributable to a former counsel’s neglect is sufficient to meet the damages prong of a legal malpractice case.

This case and others like it also make clear that the limitations period runs from the date a plaintiff learns she has been injured; not when financial harm is specifically quantified.

To preserve a possible malpractice claim while a plaintiff challenges an underlying adverse ruling, practitioners should consider tolling agreements to suspend any statutes of limitation and guard against possible judicial estoppel concerns (taking inconsistent positions in separate lawsuits).

The ‘Procuring Cause’ Rule – Ill. Appeals Court Weighs In

The First District recently applied the ‘procuring cause’ doctrine to award the plaintiff real estate broker a money judgment based on a reasonable brokerage commission in Jameson Real Estate, LLC v. Ahmed, 2018 IL App (1st) 171534.

The broker provided the defendant with specifics concerning an “off market” car wash business and the land it sat on. The plaintiff later gave defendant a written brokerage contract for the sale of the car wash business and property that provided for a 5% sales commission.  The defendant never signed the contract.

After many months of negotiations, defendant orally informed plaintiff he no longer wished to buy the property and stopped communicating with plaintiff.

When plaintiff later learned that defendant bought the property behind plaintiff’s back, plaintiff sued to recover his 5% commission. The trial court directed a verdict for defendant on plaintiff’s express contract claims but entered judgment for plaintiff on his quantum meruit complaint count.  The money judgment was for an amount that was congruent with what a typical buyer’s broker – splitting a commission with a selling broker – would earn in a comparable commercial sale.

Quantum meruit, which means “as much as he deserves” provides a broker plaintiff with a cause of action to recover the reasonable value of services rendered but where no express contract exists between the parties.

A quantum meruit plaintiff must plead and prove (1) it performed a service to the benefit of a defendant, (2) that it did not perform the service gratuitously, (3) the defendant accepted the plaintiff’s service, and (4) no written contract exists to prescribe payment for the service.

The fine-line distinction between quantum meruit and unjust enrichment is that in the former, the measure of recovery is the reasonable value of work and material furnished, while in the unjust enrichment setting, the focus is on the benefit received and retained as a result of the improvement provided.  [¶ 61]

In the real estate setting, a quantum meruit commission recovery can be based on either a percentage of the sales price or the amount a buyer saved by excising a broker’s fee from a given transaction. [¶ 64]

Where a real estate broker brings parties together who ultimately consummate a real estate sale, the broker is treated as the procuring cause of the completed deal. In such a case, the broker is entitled to a reasonable commission shown by the evidence. A broker can be deemed a procuring cause where he demonstrates he was involved in negotiations and in disseminating property information which leads to a completed sale. [¶ 69]

The appeals court found the trial court’s quantum meruit award of $50,000, which equaled the seller’s broker commission and which two witnesses testified was a reasonable purchaser’s broker commission, was supported by the evidence. (Note – this judgment amount was less than half of what the broker sought in his breach of express contract claim – based on the unsigned 5% commission agreement.)

The Court rejected defendant’s ‘unclean hands’ defense premised on plaintiff’s failure to publicly list the property (so he could purchase it himself) and his lag time in asserting his commission rights.

The unclean hands doctrine prevents a party from taking advantage of its own wrong.  It prevents a plaintiff from obtaining legal relief where he is guilty of misconduct in connection with the subject matter of the litigation.  For misconduct to preclude recovery, it must rise to the level of fraud or bad faith. In addition, the misconduct must be directly aimed at the party against whom relief is sought.  Conduct geared towards a third party, no matter how egregious, generally won’t support an unclean hands defense.

Here, the defendant’s allegation that the plaintiff failed to publicly list the property, even if true, wasn’t directed at the defendant.  If anything, the failure to list negatively impacted the non-party property owner, not the defendant.

Afterwords:

In the real estate broker setting, procuring cause doctrine provides a viable fall-back theory of recovery in the absence of a definite, enforceable contract.

Where a broker offers witness testimony of a customary broker commission for a similar property sale, this can serve as a sufficient evidentiary basis for a procuring cause/quantum meruit recovery.

 

IL Supreme Court Expands on Shareholder Derivative Suits and Standing Doctrine in Att”y Malpractice Suit

Some minority shareholders in an LLC sued their former counsel for legal malpractice alleging the firm failed to file “obvious” breach of fiduciary claims against the LLC’s corporate counsel.

Affirming summary judgment for the defendant law firm in Stevens v. McGuirreWoods, LLP, 2015 IL 118652, the Illinois Supreme Court gives content to the quantum of proof needed to sustain a legal malpractice claim and discusses the type of legal interest that will confer legal standing for a corporate shareholder to sue in his individual capacity.

The plaintiffs’ central claim was that McGuirreWoods (MW) botched the underlying case by not timely suing Sidley Austin, LLP (Sidley) after the LLC’s majority shareholders allegedly looted the company.  Sidley got the underlying case tossed on statute of limitations grounds and because the plaintiffs lacked standing. minority shareholder plaintiffs lacked standing to individually sue Sidley since Sidley’s obligations ran squarely

The trial court in the legal malpractice suit granted summary judgment for MW due to plaintiffs’ lack of standing.  The court held that even if MW had timely sued Sidley, the claim still would have failed because they could not bring claims in their individual capacity when those claims belonged exclusively to the LLC. After the First District appeals court partially reversed on a procedural issue, MW appealed to the Illinois Supreme Court.

Result: Plaintiffs’ lacked standing to assert individual claims against Sidley.  Judgment for MW.

Rules/Reasons:

Some cases describe the legal malpractice suit as a “case-within-a-case.”  This is because the thrust of a legal malpractice claim is that if it wasn’t for an attorney’s negligence in an underlying case, the plaintiff would have won that case and awarded damages.

The legal malpractice plaintiff must prove (1) defendant attorney owed the plaintiff a duty of care arising from the attorney-client relationship, (2) the defendant’s breached that duty, and (3) as a direct and proximate result of the breach, the plaintiff suffered injury.

Injury in the legal malpractice setting means the plaintiff suffered a loss which entitles him to money damages.  Without proof the plaintiff sustained a monetary loss as a result of the lawyer defendant’s negligence, the legal malpractice suit can’t succeed.

The plaintiff must establish that he would have prevailed in the underlying lawsuit had it not been for the lawyer’s negligence.  The plaintiff’s recoverable damages in the legal malpractice case are the damages plaintiff would have recovered in the underlying case. [¶ 12]

Here, the plaintiffs sued Sidley in their individual capacities.  Since Sidley’s obligations flowed strictly to the LLC, the plaintiff’s lacked standing to sue Sidley in their individual capacity.

Under the law, derivative claims belong solely to a corporation on whose behalf the derivative suit is brought.  A plaintiff must have been a shareholder at the time of the transaction of which he complains and must maintain his shareholder status throughout the entire lawsuit.  [¶ 23]

Illinois’ LLC Act codifies this common law derivative suit recovery rule by making clear that any derivative action recovery goes to the LLC.  By contrast, the nominal plaintiff can only recover his attorneys’ fees and expenses.  805 ILCS 180/40-15.

A nominal plaintiff in a derivative suit only benefits indirectly from a successful suit through an increase in share value. The Court held that the plaintiffs’ missing out on increased share value was not something they could sue for individually in a legal malpractice suit.  Had MW timely sued Sidley, any recovery would have gone to the LLC, not to the plaintiffs – even though they were the named plaintiffs.  Since the plaintiffs could not have recovered money damages against Sidley in the earlier lawsuit, they cannot now recover those same damages under the guise of a legal malpractice action.

An added basis for the Court’s decision was that plaintiffs lacked standing to sue by divesting themselves of their LLC interests.  Standing means one has a real interest in the outcome of a controversy and may suffer injury to a legally recognized interest.

Since plaintiffs relinquished their LLC membership interests before suing MW, they lacked standing to pursue derivative claims for the LLC.

Afterwords:

This case illustrates in vivid relief the harsh results flowing from statute of limitations and the standing doctrine as it applies to aggrieved shareholder suits.

The case turned on the nature of the plaintiff’s claims.  Clearly, they were suing derivatively (as opposed to individually) to “champion” the LLC’s rights.  As a result, any recovery in the case against Sidley would flow to the LLC – the entity of which plaintiffs were no longer members.

And while the plaintiffs did maintain their shareholder status for the duration of the underlying Sidley case, their decision to terminate their LLC membership interests before suing MW proved fatal to their legal malpractice claims.